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CMS ratchets back Stark exceptions

By William H. Maruca, Esq.

Like Mary Shelley’s Victor Frankenstein, U.S. Representative Pete Stark has come to have some second thoughts about his most famous creature, the Stark Physician Self-Referral law (“Stark Regrets: I Shouldn’t Have Written That Law,” David Whelan, Forbes blog, November 30, 2007).

And like Frankenstein’s monster, the law has created havoc and chaos its creator never intended. That may be as far as the analogy goes, since torches and pitchforks won’t tame this beast, and CMS continues to struggle to define, explain and implement it nearly 19 years since Congress first began regulating physician referral relationships under Pete Stark’s leadership. The latest attempts appear as a “Phase III Final Rule” and as further tinkering in the 2008 Medicare Physician Fee Schedule.

A quick review: the Stark Law prohibits physicians from making referrals for certain “designated health services (DHS) payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship (ownership or compensation), unless an exception applies; and (2) prohibits the entity from filing claims with Medicare (or billing another individual, entity, or third party payer) for those referred services. The DHS list includes clinical laboratory services; physical therapy services; occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial tomography scans and ultrasound services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment, and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. “Stark I,” enacted in 1989, covered lab services only, and the remaining DHS’s were added by Congress in 1995 as “Stark II”. Adding to the confusion, the Centers for Medicare and Medicaid Services (CMS) has issued three rounds of final rules interpreting the law and establishing and modifying its exceptions, designated “Phase I” ( 2001), “Phase II” (2004), and now “Phase III.” CMS also added Stark and related reimbursement changes to the 2008 Medicare Physician Fee Schedule (MPFS) and has signaled that more changes are in the works.

Physician practices and DHS entities are required to adapt quickly to these regulatory shifts or face serious consequences: Stark violations carry penalties of $15,000 per violation plus refund obligations and potential exclusion from Medicare and Medicaid. Although direct government enforcement has been spotty, Stark claims have become popular among qui tam relators/whistleblowers under the Federal False Claims Act. Relators stand to share in a percentage of the government’s recovery under these penalties.

Many of the most recent changes may impact arrangements which were carefully designed to meet the prior exceptions. Of particular concern to CMS was the growth of so-called “pod labs” which, while technically meeting the letter of the Stark “centralized building” exception, are seen as an abusive exploitation of a “loophole” that CMS is now attempting to close. Pod labs are individual cubicles or workstations in clinical or pathology labs leased to a referring practice on a 24/7 basis in a manner which CMS believes facilitates the referring practice billing for and inappropriately marking up the ancillary services.

The following is a list of some of the issues raised by the Phase III rule and the 2008 MPFS. It is not a comprehensive list, and is intended only as a tool to assist you in spotting potential problems. Providers should seek experienced health care counsel for the solutions:

Phase III Final Rule

Stand in the shoes. A physician associated with a “physician organization” (typically a practice entity such as a professional corporation) is deemed to stand in the shoes of the physician organization with regard to compensation arrangements. This means that a contract between a DHS entity and a physician’s practice will be evaluated as if it were a direct contract between the physician individually and the DHS entity. If an arrangement like this previously relied on the “indirect compensation” exception, it should get a fresh look to make sure it still complies when treated as a direct relationship.

Physician Recruitment and Retention. Some good news here for a change. Stark allows for some types of recruitment and retention payments when certain conditions are met. The Phase III rule broadened the circumstances under which recruitment payments may be made. It allows existing practices to accept financial help from hospitals even where the practice imposes some limited restrictions on the new physician such as limitations on moonlighting, prohibiting soliciting patients or staff, and some liquidated damages provisions. Most traditional non-competes are still off-limits. An income guarantee may now include some overhead in addition to the incremental cost of the new doctor’s salary and benefits. Hospitals in underserved areas, federally qualified health clinics and rural health clinics can also make retention payments to match an offer of employment or an income guarantee from a hospital, academic medical center, or physician organization.

Group Practice Criteria and Payment Methods. The group practice definition is one of the most complex concepts under Stark, and the Phase III changes do little to dispel the fog. Among the changes are a clarification that paying profitability shares based on services rendered “incident to” a physician’s services was inconsistent with the general prohibition on group practice compensation, while such services can be taken into account for productivity-based pay. Next, a “physician in the group practice” who is not an employee of the group must have a direct contractual arrangement with the group. CMS further clarified that independent contractors are only “physicians in the group” when they are performing services on the group’s premises. Leased employees will not qualify as physicians in the group. (“Physician in the group” status may be critical in determining whether a practice meets the group practice definition and which physicians may order and supervise the performance of DHS.)

Fair Market Value. CMS dropped a controversial provision under which locally-prevailing emergency room hourly rates were deemed to be fair market value for other physician specialty services. In the absence of that standard, parties must be able to demonstrate that the pay rates are consistent with the going rate for the services provided.

Shared Facilities. CMS took a shot at common arrangements for shared space, and indicated that many existing per-use or concurrent arrangements will not meet the requirement that physicians sharing a DHS facility must control the facility and the staff at the time the DHS is furnished to the patient. CMS stated that, as a practical matter, this likely necessitates a block lease arrangement for the space and equipment used to provide the designated health service. Shared facility arrangements should be reviewed and amended accordingly.

2008 Fee Schedule Changes

The proposed fee schedule published in July, 2007 included a number of controversial, far-reaching changes to the Stark law. Most of these changes did not appear in the final version published on November 27, 2007, but CMS noted that those changes remained under consideration and would be the subject of a forthcoming final rule.

Anti-Markup Provisions. The fee schedule imposes an anti-markup provision on both the technical and professional components of all diagnostic tests (not just DHS items) that are ordered by a billing physician or other supplier if they are purchased from an outside supplier or if performed at a site other than the office of the billing physician or other supplier. This rule expands an existing prohibition against marking up purchased technical services. Originally scheduled to take effect on January 1, 2008, this provision has been delayed for one year except for certain pathology arrangements. The technical service anti-markup rule remains in place, and may create its own problems: if the technologist and diagnostic testing equipment are not located in the office where the practice regularly conducts patient office visits, there can be no markup of the technical component. Note: if implemented in its current form in 2009 as scheduled, the professional service anti-markup rule may eliminate the economic viability of many arrangements which are otherwise compliant with the Stark law.

IDTF Changes. CMS tightened a number of rules pertaining to Independent Diagnostic Testing Facilities (IDTFs). Such facilities (except mobile and hospital based entities) may not (i) share a practice location with another Medicare-enrolled individual or organization, (ii) lease or sublease operations or space to another Medicare-enrolled individual or organization, or (iii) share diagnostic testing equipment used in the initial diagnostic test with another Medicare-enrolled individual or organization. Although not directly changing the Stark rules, this change may spell the end of otherwise compliant arrangements under which a physician practice shares space and equipment with an IDTF, even under a block lease.

Issues deferred for future rulemaking include: prohibiting “per-click” payments in lease arrangements; limiting percentage-based compensation arrangements to those that result from personally-performed physician services; expanding the stand-in-the-shoes provisions beyond physician organizations which would substantially limit the availability of the indirect ownership/compensation exceptions; and revising the definition of DHS “entity” to include any person that causes a claim to be presented, which would eliminate the popular “under arrangements” model under which referring physicians invest in and lease equipment and facilities to hospitals.

CMS clearly hasn’t stopped tinkering with what has become a Frankenstein monster of a regulatory scheme. If your practice has any arrangement in place with a provider of DHS items or services, you should have it reviewed carefully by a knowledgeable health care attorney, and don’t rely on any analysis that is older than November 27, 2007. Also, keep watch for future changes CMS has promised later this year.

William H. Maruca, Esq., is health care partner with the Pittsburgh office of Fox Rothschild LLP.

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