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Satisfying Stark II group practice regs

By Michael R. Burke, Esq.

On January 9, 1998, the Health Care Financing Administration (HCFA) published the long-awaited proposed Stark II regulations, which may be found at 63 Fed. Reg. 1659 1728 (Proposed Regulations). The Proposed Regulations interpret and clarify the Stark II legislation. Stark II is a statute that prohibits a physician from referring Medicare or Medicaid patients for the furnishing of certain “designated health services” (DHS) to an entity with which the physician or an immediate family member of the physician has an ownership interest or compensation arrangement. In August, 1995, HCFA issued the Stark I regulations as a partial interpretation of the Stark II legislation, which were issued in final and which are currently effective. The Proposed Regulations, however, are only proposed and therefore are not yet effective. HCFA is soliciting comments on the Proposed Regulations and will respond to those comments, along with comments previously made to the Stark I regulations, in the (hopefully near) future.

Although there are many important issues raised in the Proposed Regulations, this article will focus on the key proposals in the Proposed Regulations that affect physician group practices.

Clarification of the Group Practice Definition

The Proposed Regulations have attempted to build upon the Stark I regulations in terms of defining which groups of physicians can meet the all important “group practice” definition. The reason why being a group practice is so important is that every group of physicians that provides DHS and in which more than one of the physicians is an owner most likely will have to meet the in-office ancillary services or physicians’ services exceptions to Stark II in order to protect intra-group referrals of DHS. Satisfying the definition of a group practice is necessary for a group of physicians to qualify for these exceptions.

A group practice must be a legally organized entity like a professional corporation or a partnership, and not just a group of physicians who hold themselves out as a group, but who are not legally organized. A group practice must be one legal entity, but now can be composed of owners who are individual professional corporations for tax or benefits reasons. This changes HCFA’s prior interpretation, which stated that only individuals could be owners of a group practice.

Only physician employees and owners are considered “members” of a group practice under the Proposed Regulations. Independent contractors are no longer considered members of a group practice. This impacts the group practice definition in two ways. First, independent contractors can no longer be used to supervise DHS. Thus, if a group engages an independent contractor to read x-rays and supervise the provision of those x-rays, this will no longer satisfy the in-office ancillary services exception because the referring physician or a “member” of the group has to directly supervise the provision of those services. In addition, members of the group must personally conduct no less than 75 percent of the total physician-patient encounters of the group practice. Since independent contractors are no longer considered to be members of the group, this standard may be met only by the physician employees and owners of the group.

The Stark I regulations had previously established that the members of the group must provide, on average, 75 percent of their patient care services through the group. Since independent contractors are no longer members of the group, this percentage test may be easier to satisfy. That is, in doing the 75 percent calculation for the group, it will no longer be necessary to include the lower percentages of time that independent contractors may have spent in performing services for the group. In addition, HCFA has, in the Proposed Regulations, expanded the definition of “patient care services” to include not only time spent with patients, but also administrative time spent serving the needs of patients or addressing the needs of the group practice.

In another concession to reality, HCFA has indicated that a physician group may have more than one billing number so long as all billing is done in the name of the group. For example, groups may obtain multiple billing numbers for different specialty divisions as long as those numbers are all tied to the single group tax identification number.

Division of Income Within a Group Practice

Some of the most important clarifications in the Proposed Regulations came with regard to the distribution of profits within a group and the payment of productivity bonuses to group members. The Stark II legislation states that a group practice must distribute revenue and expenses in accordance with methods previously determined by the group. In the Proposed Regulations, HCFA states that a group practice must have an established plan for distribution, rather than making ad hoc decisions. In addition, group practice income and expenses must be distributed to indicate that the group practice is a unified business. The methods must reflect centralized decision making, a pooling of expenses and revenues, and a distribution system that is not based on each satellite office acting as a separate enterprise. HCFA representatives publicly stated that the prototypical “group practice without walls,” whereby each office location of a group practice operates as its own “profit center,” would not comply with this provision.

A group practice is not permitted to pay its members based on the “volume or value” of their referrals to the group. HCFA has defined referrals to only apply to referrals for DHS, not just referrals for Medicare Part B services in general. Physician members of a group are, however, permitted to receive a share of the group’s overall profits or a productivity bonus based on services personally performed or services incident to a physician’s personally performed services. HCFA indicates in the preamble to the Proposed Regulations that a group practice can distribute profits from non-DHS in any way that it sees fit, subject to other applicable laws (such as the Anti-Kickback Statute). However, for Medicare and Medicaid DHS, the referring physician may only receive a portion of the overall pool of profits generated from these services, so long as the group does not share these profits in a manner that relates directly to who made the referrals. Acceptable methods of dividing these profits include equal division, a division based on the number of hours worked or division based on seniority.

A physician should not receive extra, specific compensation from the group for referring a designated health service that he or she referred to the group, regardless of whether or not he or she actually personally performed the service. The overall profits of the group should be divided in a manner that ignores such referrals. The overall profits of the group to be distributed to its members should be overall pooled profits, not profits that belong to a particular specialty or subspecialty group or location; the more that profits are narrowed to a particular specialty or location, the more likely it is, according to HCFA, that these profits relate to the use and referral of DHS.

Prior to the Proposed Regulations, it was thought that a physician could be compensated through a productivity bonus if he or she referred DHS to the group and then either directly provided such services or directly supervised the provision of such services within the group. However, in a significant departure from prior interpretations (and from reality), the Proposed Regulations provide that, for purposes of a productivity bonus (as is the case with the sharing of profits), a physician cannot be credited for any referrals of any DHS referred by the physician, even if the physician personally performs or directly supervises those services. HCFA states that a physician would have an incentive to overutilize those services if his or her compensation was directly related to such referrals. However, it is acceptable for a productivity bonus to include DHS that are not Medicare or Medicaid services or that are referred by other members of the group practice.

Clarifications to the In Office Ancillary Services Exception

Several important clarifications were made to this exception in the Stark II regulations. DHS must always be provided by a member of the group or under the direct supervision of a member of the group. HCFA has loosened the reins a bit on the definition of “direct supervision,” although a physician still must be present in the office suite in which the services are being furnished at the time that they are being furnished. However, HCFA now allows brief unexpected absences and routine absences of a short duration (e.g., lunch breaks), so long as they occur during periods in which the physician is otherwise scheduled and expected to be present in the office and such supervision does not conflict with coverage (payment) regulations that set forth requirements for the level of supervision. Routine and unexpected absences do not include scheduling DHS for times during which a physician is doing hospital rounds or before or after regularly scheduled office hours.

Presence in an office suite that consists of a group of contiguous rooms is most likely sufficient to satisfy the direct supervision requirement. However, HCFA will evaluate on a case by case-by-case basis situations where the DHS are being provided on one floor and the physician is present on another floor.

In-office ancillary services must be furnished in certain locations to qualify under the exception for such services to the Stark II legislation. HCFA has defined “furnishing” in such a way that the service must actually be performed on the patient at the location or the patient receives or begins using an item at that location. If any item is given to a patient that is meant to be used or taken at home, this has not been “furnished” in the physician’s office or a centralized location.

HCFA has also clarified the requirements as to where DHS must be provided. DHS may be provided in a building where services unrelated to DHS are provided; this means that the group provides any amount of physician services other than DHS at that building. In addition, a group practice has a centralized location providing DHS if such location services more than one of a group practice’s offices and if it furnishes one or a combination of DHS. Please note, however, that while a group practice can have more than one centralized location, it would have to have a physician member (an employee or owner, not an independent contractor) present in the centralized location to perform or directly supervise the performance of DHS.


The Proposed Regulations have both clarified the Stark II legislation and raised many new questions about the interpretation of the Stark II legislation. HCFA has confirmed some ideas that commentators have espoused for some time, while taking other positions that may create debate, such as the provisions related to the division of income and the payment of productivity bonuses within group practices. Despite the fact that the Proposed Regulations are only proposed, they provide us with an indication of HCFA’s position on the interpretation of the Stark II legislation. As such, when structuring future arrangements and reviewing and revising existing ones, it would be wise to attempt to comply with these regulations because we do not know how long it will take HCFA to respond to comments on the Stark II legislation. It would be wise for you to consult a knowledgeable health care attorney prior to making any decisions in structuring or implementing transactions designed to ensure compliance with the Stark II legislation.

Michael R. Burke, Esq., is an associate attorney with Kalogredis, Tsoules and Sweeney, Ltd., a health care law firm located in Wayne, Pennsylvania.

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