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ABA Health eSource
 January 2008 Volume 4 Number 5

Stark II, Phase III - Same Old Shoes?
by Mark S. Hedberg and Matthew D. Jenkins, Hunton & Williams LLP, Richmond, VA

Mark S. HedbergAny proper analysis of multi-tiered, multi-party financial relationships under the Stark Law and its three phases of implementing regulations commences with a sharp number 2 pencil and several sheets of blank paper for scratching out the various compensation arrangements requiring consideration. Some attorneys might use more than one colored pencil in an effort to keep it all straight. This past September, with the publication of the long-awaited Stark II, Phase III Final Rule, many observers thought the task of analyzing certain support relationships common to academic medical centers and integrated delivery systems would become increasingly problematic as of December 4, 2007 in the wake of efforts by the Centers for Medicare and Medicaid Services ("CMS") to close what was described as an "unintended loophole" that caused compensation arrangements between DHS entities and "physician organizations" to be viewed as "outside the application of the statute." See 72 Fed. Reg. at 51028 (Sept. 5, 2007).

Matthew D. JenkinsSimply stated, the loophole closure was effected by causing physicians to "stand in the shoes" of their "physician organization" that has a compensation arrangement with a DHS entity. Thus, instead of viewing the financial relationship between such physicians and DHS entities as indirect relationships, at most, the new provision deems such relationships "direct compensation arrangements" thus requiring them to fit within an applicable exception to avoid the referral and billing prohibitions attaching to un-excepted financial relationships. See 42 C.F.R. ยง411.354(c)(1)(ii) and CMS commentary at 72 Fed. Reg. at 51028-29.

Evidently, not long after the September publication of the Final Rule, CMS received further comment that its new deeming provision would have a significant impact on academic medical centers and integrated delivery systems that included physician organizations in the mix of subordinate entities comprising the overall enterprise. According to CMS, after it promulgated the Phase III regulations, commenters addressed the application of the Phase III "stand in the shoes" provisions in the context of support payments that are often made between components of an AMC or an integrated section 501(c)(3) healthcare system and which likely would not satisfy any exception under the Stark Law or regulations. Id. at 64,161. Happily (at least for such entities) CMS quickly stepped up to the plate to remove the immediate concerns that myriad such arrangements might otherwise have faced on December 4th.

On November 15, 2007, "CMS" published a Final Rule entitled "Delay of the Date of Applicability for Certain Provisions of Physicians' Referrals to Health Care Entities With Which They Have Financial Relationships (Phase III)." 72 Fed. Reg. 64,161-62 (Nov. 15, 2007). This rulemaking delays for one year (until December 4, 2008) the effective date of the new "stand in the shoes" rule contained in the Stark II, Phase III regulations, but only for certain compensation arrangements taking place within an academic medical center ("AMC") or an "integrated section 501(c)(3) healthcare system."

CMS said that it understood the commenters' concerns, and that the purpose of this targeted delay was to "evaluate fully the impact of the Phase III 'stand in the shoes' provisions on remunerative relationships within AMCs and nonprofit integrated healthcare systems that, prior to Phase III, did not trigger application of the physician self-referrals laws."

The definition of an "integrated section 501(c)(3) healthcare system" set forth in the Final Rule (that is "a nonprofit integrated healthcare system in which each affiliated organization qualifies for exemption from federal income taxation under section 501(c)(3) of the Internal Revenue Code"), initially raised concerns because it could be read to require each and every affiliated company within a nonprofit health system to be a 501(c)(3) tax-exempt entity. Under this restrictive interpretation, the delay arguably would not have applied to many non-profit integrated healthcare delivery systems that had even one taxable controlled affiliate on their organizational chart.

CMS representatives have clarified this definition publicly on several occasions since the delay of the rule was publisjed, noting that so long as the DHS entity and the physician organization that are parties to the support payment in question were both 501(c)(3) organizations, then CMS intended for the delay rule to apply. This clarification was provided during a November 30, 2007 teleconference sponsored by the American Health Lawyers Association and also at the recently-held Washington Health Law Summit sponsored by the ABA's Health Law Section. Importantly, CMS representatives have confirmed that the presence of a taxable affiliate in a nonprofit integrated healthcare system will not deprive such asystem's ability to rely on the delay of the new "stand in the shoes" rule. So, until December 4, 2008 (or such earlier time as CMS may address this issue through further rulemaking), physicians in physician organizations of academic medical centers and integrated section 501(c)(3) healthcare systems will be wearing the same old shoes.