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In-office ancillary services under Stark II

By John W. Jones. Jr., Esq.

On January 4, 2001, the Health Care Financing Administration (HCFA) issued Phase I of the two-part final rule making process of the long awaited final Stark II Regulations (the Final Rule). The Final Rule relates to the Ethics in Patient Referral Act of 1989 (Stark I), as amended by the Omnibus Budget and Reconciliation Act of 1993 (Stark II), collectively, the Stark Law. The Final Rule differs substantially from the 1998 regulations proposed by HCFA. Of significant importance were changes made to the in-office ancillary services exception and group practice definition.

In-Office Ancillary Services Exception

The in-office ancillary services exception permits the furnishing of certain DHS that are ancillary to the referring physician’s professional services where certain supervision, location and billing requirements are satisfied.

Supervision requirements. To qualify for protection under the in-office ancillary services exception, the DHS must be furnished personally by the referring physician, a physician who is a member of the same group practice as the referring physician or an individual who is “supervised” by the referring physician or by another physician in the group practice, provided the supervision complies with all other applicable Medicare payment and coverage rules for the particular service.

Although, under the proposed regulations, HCFA planned to adopt the “direct supervision” definition contained in the Medicare “incident to” coverage rules, the proposal was abandoned and HCFA adopted the standard under applicable Medicare and Medicaid coverage or payment rules for the specific DHS. In its rationale for this change, HCFA indicates that Congress did not use the phrase “directly supervised” in any technical sense. Rather, it sought to establish a nexus between the referring physician and the individual performing the ancillary services in order to limit the exception to services that are truly ancillary to the referring physician’s medical practice.

Under the Final Rule, any physician who is “in a group practice,” including independent contractor physicians, may satisfy the supervision requirements of the exception. By allowing independent contractor physicians to provide the necessary supervision under the exception without having to be a “member” of the group, HCFA has provided groups greater flexibility in meeting the “substantially all” test (discussed more fully below).

Building requirements. The DHS must also be furnished in either the “same building” as non-DHS or a “centralized building.” Under the Final Rule, there are significant distinctions between the same building and centralized building requirements and their use. Under the in-office ancillary services exception, DHS may be furnished in the same building as non-DHS. The same building is defined as a structure with, or combination of structures that share, a single street address as assigned by the U.S. Postal Service excluding all exterior spaces (e.g., lawns, courtyards, driveways, parking lots) and interior parking garages. It does not include a mobile vehicle, van or trailer.

A number of requirements must be satisfied when utilizing the same building provision. First, the referring physician (or another physician who is a member of the same group practice) must furnish, in the same building, substantial physician services that are unrelated to the furnishing of DHS payable by Medicare or other payers. Second, the physician services that are unrelated to the furnishing of DHS must represent substantially the full range of physician services unrelated to the furnishing of DHS that the referring physician routinely provides or, in the case of a referring physician who is a member of a group practice, the full range of physician services that the physician routinely provides for the group practice. Finally, the receipt of DHS cannot be the primary reason the patient comes in contact with the referring physician or group practice. Therefore, a physician cannot furnish token physician services to patients in order to provide them with DHS under the exception.

Group practices that utilize the same building provision may share facilities where the arrangement complies with the supervision, location and billing requirements of the exception. Therefore, for example, two solo practitioners who share office space and jointly own a laboratory can continue to refer to that laboratory, where each physician furnishes substantial physician services unrelated to the furnishing of DHS in the building where the laboratory is located, provides the appropriate level of supervision, and bills for the services. Shared facilities would not qualify for protection under the “centralized building” provision (discussed more fully below) of the exception, since these arrangements would not satisfy the provision’s exclusive use requirement.

Under the in-office ancillary services exception, DHS may also, under certain circumstances, be furnished in a “centralized building.” A centralized building is defined as all or part of a building, including a mobile vehicle, van or trailer that is owned or leased on a full-time basis by a group practice and that is used exclusively by the group practice. Accordingly, in order for a group practice to furnish DHS in a centralized building, it must do so exclusively and on a full-time basis. Full-time basis means 24 hours per day, seven days per week, for a term of not less than six months.

Thus, although a “centralized building” includes a mobile vehicle, van or trailer, which distinguishes it from the “same building” provision, the full-time use obligation imposed by the definition essentially precludes the use of common part-time arrangements, such as short-term leases of MRI facilities. As such, group practices may lease or sublease DHS facility space on a part-time basis only where the same building requirements are satisfied. HCFA indicates that the statutory provision which allows group practices, with multiple office locations, to have “off-site” DHS locations does not eviscerate the “in-office” element of the exception. Additionally, since the space used for the provision of DHS qualifies for the exception only if it is utilized exclusively by the group, the sharing of space is prohibited.

Billing requirements. Under the Final Rule, the DHS must also be billed by the physician performing or supervising the service or the group practice of that physician, (including independent contractor physicians for this purpose), an entity that is wholly owned by the performing or supervising physician or by that physician’s group practice under that entity’s own billing number or under the billing number assigned to the physician or group practice, or an independent third party billing company.

Group Practice Definition

Satisfying the definition of a group practice is a requirement for achieving protection under the in-office ancillary services exception. Perhaps the most problematic provision of the proposed regulations, the “group practice” definition has been considerably modified in the Final Rule.

Single legal entity. Under the Final Rule, a group practice must consist of a single legal entity formed primarily for the purpose of being a physician group practice. Any organizational form recognized by the State in which the group achieves its legal status may qualify as a single legal entity. A group practice does not include separate group practices under common ownership or control through a physician practice management company or hospital or healthcare system.

Additionally, the Final Rule also requires the group practice to have at least two physicians who are members of the group. Therefore, a solo practitioner would qualify only if the solo practitioner employs at least one other physician on a full-time basis. Since independent contractors and leased employees are not considered “members” of a group for purposes of the definition of group practice, their contractual arrangement with a group would not satisfy this test.

Range of care. To be considered a group practice, each physician who is a member of the group must furnish substantially the full range of patient care services that the physician routinely furnishes, including medical care, consultation, diagnosis and treatment, through the joint use of shared office space, facilities, equipment and personnel. The Final Rule expands the definition of patient care services to include any tasks performed by a physician in the group practice that address the medical needs of a specific patient or patients in general, regardless of whether they involve direct patient encounters, or generally benefit a particular practice. These activities could include time which a physician spends consulting, training staff members or performing administrative tasks.

Services furnished by group practice members. Under this requirement, “substantially all” of the patient care services of the physicians who are members of the group must be furnished through the group and be billed under a billing number assigned to the group. This means that at least 75 percent of the total patient care services of the group practice members must be furnished through the group.

Under the Final Rule, the substantially all test is now easier to satisfy since independent contractor physicians are not considered members of the group for purposes of this measurement. In measuring patient care services, group practices may use any measure that is reasonable, fixed in advance of the performance of the services being measured, uniformly applied over time, verifiable, and documented.

Alternatively, group practices may use the default provision in the Final Rule and simply measure the actual time spent by each member on patient care services, which is documented by any reasonable means such as time cards, appointment schedules or personal diaries. All of the patient care services that each of the group’s members provides, both inside and outside of the practice, must be aggregated in determining whether 75 percent of the total patient care services is furnished through the group. Thus, for example, a two-member physician group has satisfied the substantially all test where both of its physicians practice 60 hours per week and each spends 45 of her hours on patient care services for the group practice.

Distribution of expenses and income. To satisfy the group practice definition, overhead expenses of, and income from, the practice must be distributed according to pre-determined methods. Accordingly, compensation methods which are retroactively adjusted fail to satisfy this requirement. This does not prohibit a group practice from adjusting its compensation methodology prospectively, as long as the practice complies with the restrictions on the distribution of revenue from DHS.

Unified business. The group practice must be a unified business. The purpose of the unified business test is to ensure that group practices are substantially integrated business operations and that such integration is reflected in the allocation of group expenses and income to members of the group. In order to qualify as a unified business, a group practice must have a centralized decision-making body that maintains effective control over the group’s assets and liabilities, such as compensation, budgets and salaries. The group practice must also have consolidated billing, accounting and financial reporting, as well as centralized utilization review. Under these rules, group practices may now maintain separate cost centers for different practice locations or specialties with respect to revenues derived from non-DHS, and also from DHS where other requirements of the rule are satisfied.

Volume or value of referrals. This element requires that no physician member of a group practice may receive, directly or indirectly, compensation based on the volume or value of referrals except as permitted under the newly adopted rule regarding profit shares and productivity bonuses. Under this new rule, compensation methodologies which are only indirectly related to the volume or value of DHS referrals are permitted.

Physician-patient encounters. This element requires that each member of a group practice personally conduct no less than 75 percent of the physician-patient encounters of the group. HCFA indicates that patient encounters should be measured “per capita, not by time.” Again, for purposes of this requirement, independent contractors and leased employees are not considered members of the group.

Profit Shares and Productivity Bonuses

The Final Rule permits a physician in a group practice to be paid a share of the group’s overall profits or a productivity bonus based on services that the physician personally performed or services “incident to” the personally performed services. Group practice compensation methodologies which are only indirectly related to the volume or value of referrals of DHS are permissible. HCFA has adopted methodologies for distributing profits and productivity bonuses which it deems to be only indirectly related to the volume or value of referrals of DHS. A group practice may, however, utilize any other methodology for distributing the overall profits of the group or paying productivity bonuses so long as the profits or bonuses are divided in a reasonable and verifiable manner that is not directly related to the volume or value of referrals of DHS.

Phase I of the Stark Law will have a significant impact on the operation and organization of physician group practices as well as their financial arrangements. HCFA has attempted to broaden the in-office ancillary services exception through the liberalization of the supervision requirements, easing the criteria for qualifying as a group practice, and permitting separate cost centers within a group. Notwithstanding the significant strides made from the proposed regulations, the Final Rule continues to be quite complex and burdensome on physician practices.

John W. Jones, Jr., Esq., is a member of the Health Care Services Group at Pepper Hamilton LLP in Philadelphia, Pa.

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