August 13, 2007

Proposed Stark Rules

Holland & Knight Alert
Michael R. Manthei

The Centers for Medicare and Medicaid Services (CMS) arranged for the publication in the July 12 Federal Register of proposed Stark anti-referral rules and commentary, as part of the 2008 Medicare Physician Fee Schedule (the Proposed Rule). If the Proposed Rule becomes final, it will significantly change the Medicare reassignment rules and the purchased diagnostic test rules. The Proposed Rule, which makes repeated references to the potential for abuse in connection with certain types of physician business and financial relationships, generally portends a retrenchment by CMS to a more conservative position regarding physician self-referral.

The Proposed Rule can be found at 72 Fed. Reg. 38121, 38179 (July 12, 2007). Comments on the Proposed Rule are due by 5:00 p.m. on Friday, August 31, 2007. It is scheduled to become effective on January 1, 2008. Detailed instructions for submitting comments can be found on the CMS website at

It is unclear how the Proposed Rule will affect the long-awaited (and long-delayed) Proposed Phase III Stark Regulations that reportedly are under internal CMS review.

The Stark statute (Section 1877 of the Social Security Act) prohibits certain referrals by a physician to an entity with which the physician has a financial relationship. In general, the statute provides that, with certain exceptions, if a physician (or an immediate family member of the physician) has a financial relationship with an entity, then (1) the physician may not make a referral to the entity for the furnishing of designated health services (DHS) for which payment otherwise may be made under Medicare, and (2) the entity may not present or cause to be presented a claim under Medicare, or a bill to any individual, third-party payer, or other entity for DHS furnished pursuant to a prohibited referral. The Stark statute and prior regulations include various exceptions to the referral prohibition. If it becomes final, the Proposed Rule will affect several of those exceptions.

Proposed Rule Changes

Purchased Diagnostics and Reassignments: Expansion of Anti-Markup Provisions

The proposed changes to the rules governing purchased diagnostic tests and reassignment of Medicare claims are perhaps the most significant aspects of the Proposed Rule. If they become final, these changes would preclude a physician or group practice from billing more than the net cost of the technical or professional component of a diagnostic test unless the test component being billed was performed by a full-time employee of the physician or group practice. The billing physician or group would not be permitted to mark up the cost of any component of a test that the physician or group purchased from an outside supplier, even if the amount paid to the outside supplier was below the applicable fee schedule. Also, the “net” cost paid by the physician or group would be deemed to exclude any amounts that reflect the cost of space or equipment leased to the supplier by the billing entity. These anti-markup provisions would not apply to independent labs that purchase the technical component of tests from other clinical laboratories.

Percentage Compensation and “Per-Click” Arrangements

In other major changes, the Proposed Rule would amend the Stark regulations to provide that percentage-based compensation arrangements are not “set in advance” unless they are based on revenue directly resulting from personally performed physician services. If this proposed amendment becomes final, arrangements under which a physician leases space or equipment to an entity in return for a percentage of the entity’s revenue would fail to satisfy the Stark exception for equipment or space rentals, and the physician would be prohibited from making DHS referrals to the entity. This amendment also would seem to invalidate any gainsharing arrangements involving DHS in which a physicians receive a percentage of savings resulting from their implementation of agreed upon procedures to make health care delivery more cost effective.

In a related change, “per unit” and “per service” rental charges for space and equipment leased by a physician to a entity that provides DHS (sometimes referred to as “per-click” arrangements) would not qualify for the exception for space or equipment rentals, to the extent that such charges were based on services provided to patients referred to the lessee entity by the physician. For instance, if a physician rents diagnostic imaging equipment to a hospital, the physician would be prohibited from referring patients to the hospital for the provision of Medicare-reimbursable diagnostic imaging services or other DHS (including inpatient and outpatient hospital services) if the hospital pays the physician a per-click rental charge for the use of the equipment to diagnose the patients referred by the physician.

Physician/Hospital Joint Ventures and the Definition of “Entity Furnishing DHS”

CMS proposes to revise the definition of “entity furnishing DHS” to include both the billing entity and the person or entity performing the DHS (if different). Previously, the “entity furnishing DHS” was defined only as the entity billing and receiving payment from Medicare. This change places in jeopardy all arrangements between physicians and hospitals for the provision of imaging services and other DHS under which the hospital contracts with a physician-owned entity or a physician/hospital joint venture entity to provide the actual service (Service Provider), but where the hospital bills Medicare for the service in accordance with the “under arrangement” rules (Billing Entity).

Under the current regulations, because the Service Provider does not bill for DHS, it is not an “entity furnishing” DHS. Therefore, a referral by a physician/owner to the Service Provider would not be within the reach of the Stark regulations. CMS is concerned that these arrangements do nothing more than allow physicians to profit from DHS referrals to hospitals. CMS also is concerned patient services under many of these arrangements are provided in less medically intensive settings (such as ambulatory surgical centers and independent diagnostic testing facilities), but are operated as “provider based” services and therefore qualify for reimbursement under the hospital outpatient prospective payment system rather than lower ambulatory surgical center rates or other lower rates applicable to less medially intensive settings.

As a result of the proposed change, the Service Provider would be considered an “entity furnishing DHS,” and the physician/owner of the Service Provider would be prohibited from making referrals to the Service Provider unless a Stark exception applied. In many cases, there would be no applicable exception.

Burden of Proof

CMS proposes to add a provision to the Stark regulations that shifts the burden of proof in administrative appeals of denied claims. The party seeking payment for DHS would be required to prove that the item or service in question was not furnished pursuant to a prohibited referral. If this change is adopted, it will make appeals more costly and difficult to win.

Ownership or Investment Interests in Retirement Plans

The Stark regulations currently exempt from the definition of “financial relationship” an “ownership or investment interest in a retirement plan.” As a result, a physician may make referrals for DHS to an entity that is owned by the physician’s retirement plan. CMS proposes an amendment to clarify that this exception to the definition of “financial relationship” is intended to extend only to the relationship between the physician and the entity offering the retirement plan and not to any entity owned by the retirement plan. Under the revised exception, an interest, by virtue of employment, in the retirement plan of entity “A” would not create an ownership or investment interest in entity “A” itself. If the retirement plan purchases an interest in entity “B,” which provides DHS, the physician or immediate family member would have an ownership or investment interest in entity “B.” If made final, this change would require physicians and group practices to divest themselves of DHS provider entities owned by their retirement plans unless another Stark exception applies to the relationship.

Requests for Comments

Alternative Criteria for Satisfying Certain Exceptions

In addition to implementing specific proposed changes to the Stark regulations, the Proposed Rule asks for comments on a number of changes for which CMS has not yet proposed an actual amendment. Rather, CMS has proposed the concept for a change and is asking affected parties to submit comments suggesting how CMS might best frame a rule effectuating the concept. The most significant request for comments involves the idea of creating “alternative criteria” for satisfying certain exceptions.

This request for comments is in response to numerous, prior comments observing that even innocent or trivial violations of the Stark rules can result in huge penalties. For example, the failure of a hospital to obtain all required signatures on a lease or personal services agreement with a physician would result in the hospital being subject to substantial fines. It also would require hospitals to repay Medicare for all services for which it billed Medicare as a result of the prohibited referrals by the physician. To address this and similar situations, CMS is considering, and has requested comment on, alternate methods to satisfy the exceptions appearing Sections 411.355 (general exceptions to both ownership/investment and to compensation) and 411.357 (exceptions related only to compensation).

The proposal and request for comments is intended to address only inadvertent violations resulting from the failure to meet a so-called “form” requirement of an exception. It is unclear exactly what CMS means by “form” requirements, but it is clear that they do not include requirements related to fair market value, to volume and value of referrals, or to set-in-advance requirements. CMS asks for comments on whether to adopt an alternative compliance method, and, if an alternative method is adopted, the exceptions to which the policy should apply; the conditions that must be met to obtain a determination of “alternative compliance”; the method of obtaining such a determination (for example, an advisory opinion); whether there should be a time limit within which the party must discover the inadvertent non-compliance and seek an alternative compliance determination; and whether after having received a favorable determination of “alternative compliance,” an entity should be precluded for a period of time from receiving another determination in connection with an arrangement involving the same non-compliance that was entered into after the date of the arrangement receiving the favorable determination.

As an initial matter, CMS proposes the following criteria for a determination of alternative compliance:

1. the facts and circumstances of the arrangement are disclosed to CMS by the parties to the arrangement

2. CMS determines that the arrangement satisfies all but the “form” requirements of the exception at the time of the prohibited referral

3. the failure to meet all of the criteria of the exception was inadvertent

4. the referral of DHS and the subsequent submission of a claim for payment to CMS were made without knowledge that one or more of the requirements were not met

5. the parties have brought the arrangement into complete compliance

6. the arrangement did not pose a risk of program or patient abuse

7. no more than a set amount of time had passed between the time of the original non-compliance and the self-disclosure of the non-compliance under the “alternative compliance” rule

8. the arrangement is not subject to an ongoing federal investigation or other proceeding

Obstetrical Malpractice Insurance Subsidies

CMS is concerned that the existing exception for obstetrical malpractice insurance subsidies is overly restrictive. Currently, this exception merely incorporates by reference the requirements of the federal anti-kickback statute safe harbor for obstetrical malpractice insurance subsidies. CMS proposes to create its own criteria that are less restrictive than the anti-kickback statute safe harbor and seeks comments on what those criteria should be. It provides a laundry list of criteria for consideration and comment.

Period of Disallowance

CMS seeks comments on how exactly to determine the period within which DHS referrals would be prohibited where a financial relationship between a physician and a DHS entity does not meet an exception to the self-referral prohibition. Typically, the period would begin on the date the financial relationship failed to meet an exception and end on the date that it comes into compliance or the date on which the relationship ends. However, CMS seems to think that in some instances, it may not be clear when the financial arrangement ends.

CMS gives the example of a situation in which an entity leases space to a physician at below fair market value rent. CMS suggests that the below-market rent might be an inducement not only to referrals during the term of the lease, but also for a period of time after the lease expires. CMS is soliciting comments on whether, in this type of situation, it should employ a case-by-case approach, or deem “certain financial arrangements” (which are not defined) to continue for a prescribed period of time, regardless of whether the relationship in fact has terminated. It also seeks comments on whether any prescribed period could be shortened if the prohibited compensation (not the prohibited Medicare payments) is returned.

CMS seems to suggest that, even though a financial relationship, by its own terms, has ceased, the relationship continues indefinitely based on the presumed intent of the parties. This seems inconsistent with the Stark statute. Under the statute, the circumstances underlying an arrangement that cause a physician’s referrals to be prohibited do not include the intent of the parties to the arrangement. By expanding the duration of a financial relationship beyond the term specified in the written contract between the parties, CMS essentially would expand the reach of the Stark statute to prohibit conduct based on the presumed intent of the parties.

“Stand in the Shoes”

This request for comments addresses the distinction between direct and indirect compensation relationships. CMS seeks input on whether to collapse certain indirect relationships into direct relationships by having the DHS entity at the end of the indirect compensation chain “stand in the shoes” of the non-DHS entity that has the direct compensation relationship with the referring physician. For example, a hospital would stand in the shoes of a medical foundation that it owns and controls. If the foundation employed a physician to provide services at a clinic or other facility that the foundation owned, the hospital would be deemed to stand in the shoes of the foundation for purposes of applying the Stark law. The employment agreement thus would need to meet the employment or personal services exception rather than the indirect compensation exception.

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