September 16, 2008

Final Rule Implements Significant Changes to Stark Law

Holland & Knight Alert
Michael R. Manthei

On July 31, 2008, the Centers for Medicare and Medicaid Services (CMS) released its final rule and response to the 2008 Medicare Physician Fee Schedule Proposed Rule. CMS published this final rule, entitled Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2009 Rates Rule (the “Final Rule”), in the August 19, 2008 Federal Register. The Final Rule implements significant and, in some cases, sweeping changes to the Stark law. It clarifies CMS’ position on percentage compensation and “per-click” arrangements, redefines the concept of the “entity” providing Designated Health Services, clarifies the application of Stark to services provided “under arrangements” and articulates a new “stand in the shoes” doctrine.
The Stark statute (Section 1877 of the Social Security Act) prohibits referrals by a physician for “designated health services” (DHS) that are reimbursed by Medicare to an entity with which the physician has a financial relationship. With certain significant exceptions, when 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 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 that permit certain direct and indirect fair market value compensation arrangements and ancillary billings by physician group practices.
Percentage Compensation and “Per-Click” Arrangements
Per click arrangements with physician groups are invalidated even if supported by a “fair market value” appraisal – effective October 1, 2009.
Under the lease exceptions to the Stark Law, entities furnishing DHS and referring physicians can enter into leasing arrangements if the rent, among other requirements, is “set in advance.” The Final Rule reverses long-standing guidance and announces that percentage-based lease payments for equipment and space no longer will be deemed to be “set in advance.” The result is that the new rules not only will prohibit future percentage-based lease agreements but also will require existing arrangements to be restructured before the effective date of October 1, 2009.
For now, percentage-based compensation for personal services still can qualify as set in advance. The compensation may be calculated as a percent of revenue generated from services the physician personally performs and also as a percent of some other measure, such as savings generated. Thus, the final rules will continue to permit a variety of “gainsharing” arrangements.
CMS confirmed that it intends to continue monitoring compensation formulae in arrangements between DHS entities and referring physicians. If appropriate, it may restrict further percentage-based formulae in future rulemaking. Also, CMS is exploring additional exceptions specifically for gainsharing arrangements and other arrangements aimed at incenting physicians to achieve efficiency and quality goals.
In a related change, the Final Rule adopts the Proposed Rule to prohibit “per unit” and “per service” payments (sometimes referred to as “per-click” arrangements) to physician lessors of space or equipment to entities providing DHS. CMS argued in its commentary that such arrangements are inherently susceptible to abuse, over utilization and anticompetitive effects. For instance, if a physician rents diagnostic imaging equipment to a hospital on a per click basis, the physician now is prohibited from referring patients to the hospital for the provision of Medicare-reimbursable DHS, including inpatient and outpatient hospital services.
The prohibition against per-click payments for space or equipment applies regardless of whether the physician himself or herself is the lessor, or whether the lessor is an entity in which the referring physician has an ownership or investment interest. The prohibition also applies where a lessor is a DHS entity that refers patients to a physician lessee. The effective date for the amendments to these space and equipment lease exceptions is delayed until October 1, 2009, in order to afford parties adequate time to properly restructure arrangements. All leases have a continuing obligation to comply with fair market value and commercially reasonable requirements as these mandates remain a large focal point for federal regulators.
CMS authority under the Social Security Act to impose these restrictions for space and equipment leases may be challenged. Moreover, many comments submitted in response to the Proposed Rule also advocated that per-click arrangements promoted certain efficiencies and increased beneficiary access by permitting expensive new technology equipment to be utilized by multiple parties. CMS, in anticipation of a legal challenge to these policy positions, argued that although the statute does not forbid such per-click payments, it does prohibit taking into account volume or value of referrals or other business generated between two parties.

Physician/Hospital Joint Ventures and the Definition of “Entity Furnishing DHS”
Many “Under Arrangement” ventures may need to be restructured.
CMS adopted its proposal to revise the definition of “entity furnishing DHS” to include both the billing entity and the person or entity performing the DHS, if different (“Service Provider”). Previously, the “entity furnishing DHS” was defined only as the entity billing and receiving payment from Medicare. Expansion of the definition to include the Service Provider will require physicians and hospitals to re-examine and restructure all ventures in which a physician-owned entity provides DHS “under arrangement” to a hospital that subsequently bills Medicare for the DHS.
Under the old definition, the Service Provider offering DHS services “under arrangement” to a hospital was not an “entity furnishing” DHS because it did not bill for the DHS. Therefore, physicians with a financial interest in the Service Provider could refer patients for the DHS service and share the resulting Medicare payment with the hospital. CMS was concerned that not only did these arrangements allow physicians to profit from DHS referrals to hospitals, but also that DHS services provided “under arrangement” frequently are operated as “provider based” and therefore qualify for greater reimbursement under the hospital outpatient prospective payment system than otherwise would be available to the Service Provider if it were not affiliated with a hospital.
For instance, a hospital might contract with a urologist-owned radiation oncology center to provide certain prostate cancer treatments to hospital outpatients. Under the old rule, the hospital would bill for the service and therefore was deemed to be the entity furnishing DHS. Because the center itself was not considered to be the DHS entity, the physician owners freely could refer their patients to the center and, through the contractual arrangement with the hospital, claim a share of the resulting Medicare reimbursement.
Under the new regulations, both the hospital (billing entity) and the center (Service Provider) are considered the “entity furnishing” DHS. Now, the physician owners cannot refer their own patients to the center unless a Stark exception applies. Depending on individual circumstances, there may be no applicable exception and the physicians either would need to divest their interest in the center or simply rely on outside referrals to support it.

“Stand in the Shoes”
The Final Rule provides that a physician with ownership or investment interests in a physician organization is deemed to “stand in the shoes” (SITS) of the physician organization for purposes of complying with the physician self-referral law and therefore is deemed to have the same compensation relationships as the physician organization. The Final Rule will revise §411.354(c) by specifying that physicians with mere titular ownership (who do not receive the benefits of ownership or investment) are not deemed to stand in the shoes of the physician organization. These physicians, however, may stand in the shoes of the physician organization, if they choose to do so.
The net effect of this change will be reduced reliance on the “indirect compensation” exception to Stark. Previously, when a physician entity, like a group practice, contracted with a DHS entity (for instance, a hospital) the individual physicians in the group could have only an indirect financial relationship with the DHS entity (i.e., physician ->group practice ->DHS entity). These physicians could rely on the fairly lenient “indirect compensation” exception to Stark.

Under the new rules the physicians will stand in the shoes of the group practice. So, it will be as if the physician is contracting directly with the DHS entity. The indirect compensation exception will not be available and the physician will have to meet one of the relatively more stringent exceptions such as the personal services exception.
The proposed rules also raised many concerns for academic medical centers (AMCs) and integrated tax-exempt health care delivery systems. AMCs were concerned that, if physicians were forced to stand in the shoes of an AMC-affiliated faculty practice plan, certain “mission support payments,” by their nature, could not satisfy the requirements of any available exceptions. Specifically, AMCs were concerned that, because support payments are not linked to specific physician services, they would not satisfy the fair market value requirement included in many exceptions.
CMS declined a proposal to create an exception for support payments, believing the exception would complicate rather than simplify SITS rules. Under the Final Rules, CMS clarified that AMCs may still utilize the exception for services provided by an AMC [42 C.F.R. § 411.355(e)]. The SITS provisions of §411.354(c)(1)(ii) and (c)(2)(iv)(A) do not apply when §411.355(e) is satisfied. In this way, CMS continues to protect support payments.
The 2009 Final Rule does not finalize the DHS Entity version of SITS. CMS had proposed deeming a DHS entity to stand in the shoes of an organization in which it has a 100 percent ownership interest. Because it felt that the revised SITS provisions would clarify relationships between DHS entities and referring physicians, CMS did not believe it necessary to finalize the DHS entity rules at this time.
These revised SITS rules will be effective October 1,2008. Compensation arrangements, except as provided in §411.354(c)(3)(iii), must comply with these requirements on that date.

Other Significant Changes
Other clarifications and modifications in the new rule, which will be effective October 1, 2008, include the

  • expansion of obstetrical malpractice insurance subsidy arrangements to retain the current exception and add a new section that allows hospitals, federally qualified centers and rural health clinics (but not other entities) to provide obstetricians a subsidy when their practice is in a primary care health professional shortage area (HPSA), rural area or area with demonstrated need as determined by an advisory opinion or 75 percent of whose patients reside in a medically underserved area or are part of a medically underserved population; note that existing anti-kickback safe harbors are not affected and CMS failed to extend exceptions to other specialties
  • limiting the retirement plan exclusion to a physician’s interest in his or her employer through the employer plan but precluding a physician’s or his or her spouse’s retirement plan from investing in a DHS
  • clarification of the period of disallowance caused by a physician’s referral to a DHS entity as beginning when the financial relationship fails to satisfy all criteria for an applicable exemption and ending when the financial relationship satisfies all exemption requirements and placing a 90-day outside date for obtaining the signature requirement when the failure was inadvertent and a shorter 30-day requirement when the failure to comply was not inadvertent; these grace periods may be used only once every three years by a physician
  • clarification that the DHS has the burden of proof as to denied claims in Medicare claims administrative appeals, these rules not being applicable to penalty or other proceedings
  • confirmation of CMS intent to request a disclosure of financial relationships report to 500 specialty and general hospitals (this number is subject to potential further reduction based on the response to its revised Paperwork Reduction Act submission); the timeframe to respond has been increased to 60 days with notice and an opportunity to extend for good cause before
    any civil penalties can be assessed

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