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Path cleared for aggressive Stark enforcement

By William H. Maruca, Esq. & David S. Sokolow, Esq.

Ending years of anticipation by the health care community, the Centers for Medicare and Medicaid Services (CMS) published the long-delayed “Phase II” final rule under the Stark Law on March 26, 2004. The new Phase II regulations, which are set to take effect on July 26, 2004, contain several welcome improvements and new exceptions, although other aspects of the Phase II rule have the effect of narrowing other exceptions under the Stark Law in a way that may jeopardize existing arrangements. The new rule may be most noteworthy (and ominous) because it removes the final barrier to unleashing the government enforcement process and may help private whistleblowers assert claims based on Stark Law violations.

The Stark Law prohibits providers from billing Medicare or Medicaid for certain designated health care services (DHS) referred by physicians with financial relationships with those providers. The Designated Health Services are clinical laboratory services; physical therapy, occupational therapy and speech-language pathology services; radiology and certain other imaging services; radiation therapy services and supplies; durable medical equipment and supplies; home health services; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; outpatient prescription drugs; and inpatient and outpatient hospital services. It has been the law of the land since 1992 for clinical laboratory services and 1995 for the remaining designated health services. Proposed rules were released in 1998 to a firestorm of criticism. A “Phase I” final rule was published in January 2001, addressing only some of the complex issues raised by the Stark Law, deferring others and seeking comment. In the interim, government enforcement efforts have been spotty and those cases that have arisen out of the Stark Law primarily have been brought under the False Claims Act by private individuals acting as whistleblowers.

Phase II Highlights

Rules Tightened on In-Office Ancillary Services & Shared Facilities. The critical In-Office Ancillary Services Exception, which allows physicians and group practices to provide most DHS to patients in their offices, has been tweaked to define when the service is provided “in-office” where the practice shares a facility with others. Compliance with this important exception may now be harder to achieve because of stricter tests for when DHS will be considered furnished in the “same building” as the practice.

Responding to comments seeking a bright-line test, CMS adopted three alternative tests that, while offering flexibility to some arrangements, will be difficult for other arrangements to satisfy. These tests prescribe varying minimum hourly requirements for practice site staffing and regular hours of business operation to ensure that some level of non-DHS related physicians’ services are also being furnished there and the qualifying DHS are truly ancillary to the physician or group’s core medical office practice.

Physician Recruitment & Retention. Various forms of financial aid paid by hospitals to recruited physicians have proliferated despite the fact that official government guidance has been skimpy and inconsistent. Phase II allows payments to be made to a recruited physician who relocates his or her practice (not residence) to the hospital’s geographic area, and residents/fellows and physicians in practice for less than one year may be recruited without requiring “relocation.” Even more significantly, CMS now explicitly permits “co-recruitment” arrangements by which a hospital may offer financial support to an existing medical group that adds physicians to join the hospital’s service area.

However, the new recruitment rules place significant limitations on the use of physician income guarantees as well as on the recruiting group’s ability to impose restrictive covenants on the recruited physician. The Phase II rule also creates a new, limited exception for physician retention payments, allowing a facility to match a written bona fide offer from another hospital or Federally Qualified Health Center. This exception is only available in Health Professional Shortage Areas (HPSAs) or other areas that can satisfactorily demonstrate need. CMS invites the submission of Stark advisory opinion requests for non-HPSA retention activities.

Flexibility in Physician Compensation & Other Contracting Terms. In a departure from the Phase I rule, the new rule eliminates restrictions on most types of percentage-based compensation formulae, and expands upon the permissibility of per-unit-of-service compensation arrangements such as “per click” payments or hourly payment rates. Significant restrictions remain regarding the need for the compensation methodology to be “set in advance” and not to “take into account the volume or value of any referrals or other business generated between the parties.” New regulatory clarifications also explicitly permit “at will” contract terminations, as long as the parties refrain from entering into any substantially similar arrangement for the duration of the initial year of the contract term.

Office Space & Equipment Rental Exceptions have been revised to permit month-to-month holdover arrangements for up to six months following the expiration of the stated contract term. The Isolated Transactions Exception has been modified to permit installment payments, provided that adequate security is in place, and reasonable post-closing adjustments within six months of closing. The Personal Service Arrangements Exception has been revised to remove the requirement that a single document encompass the entirety of the arrangements between the parties, although separate arrangements must be specifically incorporated by reference or recorded on a cross-referenced, centrally maintained and updated master listing of all contracts.

Clarification of Indirect Financial Relationships. In an attempt to resolve the considerable confusion arising from the Phase I rule over the intended treatment of indirect ownership interests and indirect compensation arrangements, Phase II clarifies the definitions and accompanying “exceptions” for qualifying arrangements. The net result is that more arrangements may be initially brought within the ambit of the Stark Law. Note, however, that many of these arrangements can likely be structured in a manner that ultimately complies with one of the available exceptions.

Reduced Reporting, Increased Documentation. DHS providers should be pleasantly surprised to see the new Phase II rule’s elimination of the previously proposed mandatory reporting obligations regarding all financial relationships with physicians and their immediate family members. However, the new rule requires most service providers to report such financial relationship information to CMS or the OIG promptly upon request, meaning this will impose a significant ongoing documentation requirement upon service providers to maintain comprehensive information concerning virtually all ownership, investment and compensation relationships with physicians, including names and UPINs, and the nature of their Stark-covered services and financial relationships.

Moreover, several provisions within the new Phase II rule appear to impose, either directly or indirectly, an affirmative duty on physicians, medical groups and DHS providers to develop and maintain various types of documentation to memorialize their continuous compliance with the Stark Law, including: documentation of compliance with the requirements for qualifying group practices and in-office ancillary services “location” tests, documentation of “set in advance” compensation methodologies, documentation of actual physician recruitment costs, master listing of all Stark-implicated contracts, etc.

Other Notable Phase II Developments

Other generally positive developments in the Phase II rule include new and/or favorably modified “exceptions” for:

· Professional courtesy.

· Charitable donations.

· Obstetrical malpractice insurance subsidies (in limited circumstances).

· Grace periods for certain temporary lapses in compliance.

· Community-wide health information systems.

· Intra-family rural referrals.

· Public company investments.

· Academic medical centers.

Among the handful of increased restrictions in Phase II are the virtual emasculation of the Remuneration Unrelated to the Furnishing of DHS Exception (now renamed the Certain Arrangements with Hospitals Exception), and the Congressionally-directed 18-month moratorium on most physician investments in specialty hospitals (previously permitted under the “Whole Hospital” exception).

Deadline for Compliance

Physicians, medical groups, hospitals and other providers of DHS should immediately review their outstanding business and financial relationships with other providers and referral sources. Non-Stark-compliant arrangements must be restructured or unwound before July 26, 2004. Given the numerous revisions contained in the nearly 100 pages of governmental small print regulatory text and agency commentary for the Phase II rule, the relatively short time frame in which to achieve compliance, and the anticipated great number of contracts and arrangements that will need to be amended, renegotiated or unwound within the coming weeks, “organized chaos” may well become the industry watchword as parties scramble to ensure compliance by the upcoming deadline.

Although compliance with the Stark Law and the new Phase II rule will cause inconvenience and aggravation to some, the potential costs of non-compliance are sure to dwarf all other concerns in most cases. These may include claims denials, civil monetary penalties in excess of $10,000 per day for inadequate financial relationship reporting and $15,000 for each non-compliant service, penalties in excess of $100,000 for alleged circumvention schemes, Medicare and Medicaid program exclusions, and potentially even greater financial liability and exposure from government-initiated or whistleblower lawsuits under the False Claims Act.

The prevailing liability standards under the False Claims Act and other legal authorities essentially dictate that every hospital, physician and other provider of DHS should have in place a formalized process of reviewing their outstanding business arrangements and financial relationships in order to ensure Stark compliance. Even if full compliance is not achieved by the deadline, every affected provider should take immediate steps to review these arrangements and relationships with qualified health counsel and remedy any deficiencies as soon as possible.

William H. Maruca, Esq., and David S. Sokolow, Esq., are partners with the regional law firm Fox Rothschild LLP with offices in Philadelphia, Pittsburgh, Bucks County, Chester County, Montgomery County, Princeton, NJ, Atlantic City, NJ and Wilmington, DE.

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