ABA Health eSource
 September 2007 Volume 4 Number 1

Over A Decade Later, The Third And Final Phase In The Rulemaking Of The Stark Regulations Is Finally Here!
by Andrew Wachler and Adrienne Dresevic, Wachler & Associates, PC, Royal Oak, MI

Andrew WachlerOn August 27, 2007, The Centers for Medicare and Medicaid Services (CMS) released the long-awaited third and final phase of the rulemaking that amends the Stark regulations (Stark). This phase III final rule (Phase III) was published on September 5, 2007 and will be effective 90 days later. Phase III responds to comments on Phase II, and addresses the entire regulatory scheme. Although CMS states that Phase III is flexible and favorable to the healthcare industry, Phase III is not the last piece in the puzzle addressing changes to Stark. That is, recently there have been significant proposals, pending legislation, and a CMS mandate regarding disclosures of hospital-physician financial relationships--all of which may lead to more changes to Stark and may have a profound impact on the healthcare industry. This article, however, will focus on the highlights of Phase III, which is detailed below.

Adrienne DresevicSafe harbor for fair market value is eliminated. As part of Phase II, CMS created a voluntary "safe harbor" provision within the definition of "fair market value" applicable to hourly payments to physicians for their personal services. Due to numerous commenters' concerns that the "safe harbor" was impractical and infeasible, Phase III eliminates the "safe harbor". CMS emphasized, however, that it will continue to scrutinize the fair market value of arrangements. Parties to a transaction may calculate fair market value using any commercially reasonable methodology that is appropriate under the circumstances and otherwise fits within the definition of fair market value for purposes of Stark.

A physician in the group practice must have a direct relationship with the group and provide services in the group's facilities. CMS has modified the definition of "physician in the group practice" to make clear that an independent contractor physician must furnish patient care services for the group practice under a direct contractual arrangement with the group, and not between the group practice and other entity, such as a staffing entity. CMS also reiterated its position that an independent contractor physician is only considered a "physician in the group practice" when he or she is performing services in the group's facilities, and thus has a true nexus with the group's medical practice.

Definition of referral- CMS clarifies the few, if any, situations in which a physician would personally furnish DME. In Phase II, CMS stated that the definition of "referral" excludes services personally performed by the referring physician. In response to several commenters who requested clarification on whether certain types of services can be personally performed by the referring physician, eliminating the need to meet a Stark exception, CMS noted that there are few, if any, situations in which a referring physician could personally furnish durable medical equipment (DME), because doing so would require the physician to be enrolled in Medicare as a DME supplier and personally perform all of the duties of a supplier. CMS believes that it is highly unlikely that a referring physician would meet the criteria for personally performed services when dispensing DME, including continuous positive airway pressure equipment (CPAP). CMS also notes that CPAP is DME that does not qualify for the in-office ancillary services exception.

CMS makes changes to the group practice definition making clear that productivity bonuses can be based directly on "incident to" services but upon further reflection, CMS now states that overall profit shares cannot relate directly to "incident to" services. Due to confusion expressed by many commenters, in Phase III CMS revised the definition of group practice to make clear that productivity bonuses can be based directly on "incident to" services that are incidental to the physician's personally performed services, even if those "incident to" services are otherwise designated health service (DHS) referrals. For example, a physician can be paid a productivity bonus based directly on physical therapy services provided "incident to" his or her services. However, the productivity bonus cannot be directly related to any other DHS referrals, such as diagnostic tests. Further, although in Phase II CMS stated that overall profit shares could relate directly to "incident to" services, upon further reflection, CMS now states that its previous interpretation is inconsistent with the statutory language, which includes "incident to" services only in the context of productivity bonuses. Accordingly, under Phase III, profits must be allocated in a manner that does not directly relate to DHS referrals, including any DHS billed as an "incident to" service.

Physicians "stand in the shoes" of their group practices. Phase III includes new provisions addressing compensation arrangements in which a group practice (or other "physician organization" as newly defined in Phase III) is directly linked to the physician in a chain of financial relationships between the referring physician and a DHS entity. For purposes of determining whether a physician has a direct or indirect financial relationship with a DHS entity to which the physician refers, under Phase III the physician will "stand in the shoes" of his or her physician organization. CMS is mindful of many existing arrangements which have been properly structured to comply with the indirect compensation arrangements exception and is exempting existing indirect compensation arrangements that were entered into prior to the publication date of Phase III and that met the indirect compensation arrangements exception at the time of the Phase III publication date from this new so called "stand in the shoes" doctrine. Such exempted arrangements may continue to use the indirect compensation arrangement exception during the original or current renewal term of the agreement. After that, arrangements must meet a direct exception.

Physicians can have a security interest in equipment that was sold to a hospital. CMS has revised the regulatory text defining what constitutes an ownership interest for purposes of Stark's application to exclude a security interest held by a physician in equipment sold by the physician to a hospital and financed through a loan from the physician to the hospital. In the past, this security interest would have created an ownership interest in part of a hospital, and thus would have been considered a prohibited financial relationship. Under Phase III, this security interest will be considered a compensation arrangement between the physician and hospital.

In-office ancillary shared services arrangements must be carefully structured and operated to satisfy the in-office ancillary services exception. In response to commenters who wanted further guidance on physicians who provide DHS to their patients in a shared space in the same building, in Phase III CMS states that physicians sharing a DHS facility in the same building must control the facility and the staffing at the time the DHS is furnished to the patient. As a practical matter, CMS points out that this necessitates a block lease for the space and equipment used to provide the DHS. CMS also notes that common per-use or per-click fee arrangements are unlikely to satisfy the supervision requirements of the in-office ancillary services exception and may implicate the anti-kickback statute. Further, CMS opines that part-time, shared, off-site facilities (such as "condo" pathology laboratories) are readily subject to abuse. CMS will be addressing this potential for abuse in a separate rulemaking. In the meantime, however, CMS cautions parties involved in shared arrangements in the same building and in off-site buildings that the arrangements must fully comply with the in-office ancillary services exception in operation, not just on paper.

Academic medical centers exception clarified. Phase III revises language in the academic medical exception to clarify that the total compensation from each academic medical center component to a faculty physician must be set in advance and not determined in a manner that takes into account the volume or value of the physician's referrals or other business generated by the referring physician within the academic medical center. Additionally, language was added to the exception to provide that for purposes of determining whether the majority of physicians on the medical staff of a hospital affiliated with an academic medical center consists of faculty members, the affiliated hospital must include or exclude all individuals holding the same class of privileges at the affiliated hospital.

Intra-family rural referrals exception modified to include an alternative distance test. In Phase II of the rulemaking, CMS created a new exception for certain referrals from a referring physician to his or her immediate family member or to a DHS entity with which the physician's immediate family member has a financial relationship. In part, the exception requires that the patient reside in a rural area and that there is no other person or entity available to furnish the referred DHS in a timely manner, at the patient's residence, or within 25 miles of the patient's residence. Phase III modifies the exception to include an alternative distance test based on transportation time (45 minutes) from the patient's residence. This new alternative test requires a case-by-case analysis of the conditions that exist at the time of the referral (for example, in the winter there may be snow blocking access to roads). CMS recommends that physicians choosing to rely upon this 45-minute alternative transportation test should maintain documentation (e.g., Mapquest and published weather reports) of the information used for determining transportation time.

Holdovers now permitted in personal service arrangements. Phase III modifies the personal service arrangements exception to include a provision which permits a holdover personal service arrangement (services provided after the term of the contract expires) for up to six months for personal service arrangements that otherwise meet the requirements of the personal services exception. This new holdover concept is similar to the holdover provisions which are permitted in the exceptions for office space and equipment leases.

Physician recruitment exception relaxed. The most significant changes to the Stark regulations contained in Phase III are changes to the physician recruitment exception. Phase III makes a number of changes that relax the exception. The physician recruitment exception is designed to protect certain remuneration that is provided by a hospital to a physician as an inducement for the physician to relocate his or her medical practice into the "geographic area served by the hospital". Several changes were made to the exception, as follows:
  • Modifying the exception to allow group practices to impose practice restrictions if they do not "unreasonably restrict" the recruited physician's ability to practice in the "geographic area served by the hospital".
  • Adding a special option rule for rural hospitals in which the "geographic area served by the hospital" may also be the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 90 percent of its inpatients. If the hospital draws fewer than 90 percent of its inpatients from all of the contiguous zip codes from which it draws inpatients, the "geographic area served by the hospital" may include noncontiguous zip codes.
  • Adding a provision allowing groups in a rural area or a health professional shortage area (HPSA) that recruit a physician to replace a retired, deceased, or relocated physician to either allocate the costs attributed by the recruited physician based upon (1) the actual additional incremental costs or (2) the lower of a per capita allocation or 20 percent of the practice's aggregate costs.
  • Adding a provision that allows rural hospitals to recruit physicians into an area outside of the "geographic area served by the hospital" if the Secretary determines in an advisory opinion that the area has a demonstrated need for the physician.
  • Amending the recruitment exception to now apply to rural health clinics in the same manner as it applies to hospitals and federally qualified health centers.
  • Adding provisions exempting certain physicians from the relocation requirement. Recruited physicians will be exempt from the relocation requirement if they were employed full time by a federal or state bureau of prisons (or similar agency), the Departments of Defense or Veterans Affairs, or facilities of the Indian Health service. The new exemption only applies if the physician did not maintain a separate private practice in addition to the full-time employment. Physicians may also be exempt from the relocation requirement if the Secretary deems in an advisory opinion that the physician has not established a medical practice.

In addition to the above modifications and amendments, CMS also clarified that the provisions of the recruitment exception that apply to recruitment arrangements involving physicians who join an existing practice do not apply when the recruited physician is just co-locating or sharing space with an existing practice and does not join the practice.

Inadvertent excess nonmonetary compensation can now be cured. In Phase I of the rulemaking, CMS established an exception to protect non-monetary compensation provided to physicians up to $300 (adjusted annually for inflation). Phase III makes two substantive changes to the exception by: (1) allowing physicians to repay certain excess nonmonetary compensation within the same calendar year to preserve compliance with the exception; and (2) allowing entities without regard to the $300 dollar limit to provide one medical staff appreciation function (such as a party) for the entire medical staff per year. In order to take advantage of the excess nonmonetary repay provision, the value of the excess compensation cannot be more than 50 percent of the annual limit and the physician must return the excess amount by the end of the calendar year in which it was received or within 180 days after received, whichever is earlier. Further, this new provision only applies to situations in which the entity inadvertently provides excess nonmonetary compensation to the physician.

Fair market value exception expanded to cover compensation from a physician. Phase III amends the exception for fair market value to permit application of the exception to arrangements involving fair market value compensation to physicians from DHS entities, as well as to arrangements involving fair market value compensation to DHS entities from physicians. CMS notes that the expansion of the fair market value exception will require parties to use the fair market value exception rather than the payments by a physician exception (which cannot be used if another exception applies and which CMS believes is less transparent) for payments by physicians when payments by a physician to a hospital are, for example, for equipment leases of less than one year. CMS also notes that the fair market value exception is not applicable to arrangements for the rental of office space. Such office space arrangements must be structured to meet the rental of office space exception.

Compliance training exception expanded. Phase III amends the compliance training exception to cover compliance training programs that involve CME credit so long as the compliance training is the primary purpose. CMS states that the revised exception does not protect traditional CME content under the guise of compliance training.

Professional courtesy exception revised to delete notification requirement . Phase III modifies the professional courtesy exception by deleting the requirement that an entity notify an insurer when the professional courtesy involves the whole or partial reduction of any coinsurance obligation. Notwithstanding the deletion, CMS does state that it believes it is a prudent practice to provide such notification, and, in fact, insurers may require such notification. Phase III also modifies the exception to clarify that it applies only to hospitals and other providers with formal medical staffs, and not to suppliers, such as laboratories or DME companies.

Retention payments in underserved areas exception modified in several respects. Phase III modifies the exception for retention payments in underserved areas in several respects, including expanding the exception by permitting certain retention payments in the absence of a written recruitment offer, adding flexibility for retention payments to physicians who serve underserved areas and populations, and allowing rural health care clinics to make retention payments. Among other changes, Phase III makes the following changes to the exception:

  • Phase III revises the exception to permit a hospital, rural health clinic, or federally qualified health center to offer assistance to a physician who does not have a bona fide written offer of recruitment or employment if the physician certifies in writing that he or she has a bona fide opportunity for future employment which would require relocation of his or her medical practice at least 25 miles to a location outside of the geographic area served by the hospital, rural health clinic, or federally qualified health center. In circumstances in which the physician provides written certification instead of a bona fide written offer, the retention payment may not exceed the lower of: (1) an amount equal to 25 percent of the physician's annual income; or (2) the reasonable costs the hospital would otherwise have to expend to recruit a new physician. If on the other hand the physician has a written offer, the hospital, rural health clinic, or federally qualified health center may match the offer.
  • Phase III further expands the exception to permit retention payments that otherwise satisfy the requirements of the exception when: (1) the physician's current medical practice is located in a rural area, a HPSA, or an area or demonstrated need determined by the Secretary in an advisory opinion; or (2) at least 75 percent of the physician's patients either reside in medically underserved area or are members of a medically underserved population. The location of the hospital in a HPSA is no longer a requirement under the exception.

The Stark II Phase III final rule is the third and final phase in the rulemaking process. Phases I, II, and III, are intended to be read together as a unified whole. Although Phase III appears to be flexible and less restrictive than earlier versions, there are significant proposals on the horizon which are contained in other legislation that may ultimately amend the Stark regulations in a more narrow and restrictive fashion. For example, limitations on per-click equipment and space leases, narrowing of the in-office ancillary services exception, and modifications to the whole hospital exception. These potential changes could have a profound impact on many common healthcare arrangements. The Stark II Phase III final rule is available on the CMS website at www.cms.hhs.gov.

Related Links:

  • Medicare Program; Physicians' Referrals to Health Care Entities With Which They Have Financial Relationships (Phase III); Final Rule