ABA Health eSource
September 2008 Volume 5 Number 1

New CMS Stark Regulations Tighten Referral Rules October 2008 Compliance Deadline for "Stand in the Shoes"
by Lawrence A. Manson and Leeanne R. Coons, Krieg DeVault LLP, Carmel, IN

Lawrence A. Manson and Leeanne R. CoonsNew Stark Law regulations posted in the August 19, 2008 Federal Register by the Centers for Medicare and Medicaid Services ("CMS") revise and expand the prohibition on physician referrals for designated health services ("DHS") to entities with which they have financial relationships. 1 Some of the new final rules will be effective on October 1, 2008, while implementation for other rules will be deferred until 2009. This short article will review the highlights of the new rules.

The new Stark Law regulations are part of the hospital inpatient prospective payment systems ("IPPS") rate regulations for fiscal year 2009. The new Stark Law modifications have been long-debated between CMS and health care industry interests through proposed regulations, industry comments, and CMS responses. Some of the new final regulations have been greatly modified from earlier proposals. Most of the changes further restrict physicians' abilities to maintain investment interests and compensation arrangements with entities to which they make DHS referrals.

The following sections review the major changes of the new Stark Law regulations:

Physician Owners to "Stand in the Shoes" of their Physician Organizations in Relation to DHS Entities

CMS has long been concerned that the prohibition on referrals by physicians to entities with which they have financial relationships may be circumvented by routing compensation through other entities between the physician and the DHS entity. To remedy its concerns, CMS proposed adding "stand in the shoes" provisions to both the physician's relationship with his or her physician organization, as well as to the DHS entity. In September of 2007, CMS promulgated a final rule specifying that physicians "stand in the shoes" of their physician organizations for purposes of compensation arrangements under the Stark Law. 2 However, after industry outcry, CMS delayed implementation of this rule to December 4, 2008 with respect to compensation arrangements between a faculty practice plan and another component of the same academic medical center, and with respect to compensation arrangements between an affiliated DHS entity and an affiliated physician practice in the same integrated section 501(c)(3) health care system. 3

In the proposed 2009 IPPS regulations, CMS sought comment on two alternative proposals for the "stand in the shoes" concept to be applied to physicians and their physician organizations. One of these options involved limiting the "stand in the shoes" concept to owners of the physician organization. This option is now adopted by CMS. The new rule provides that a referring physician with an ownership interest in a physician organization will "stand in the shoes" of that organization with respect to its financial relationships with a DHS entity. 4 This rule will be effective on October 1, 2008, although there are grandfathering exceptions for arrangements already in place in reliance on the earlier regulatory scheme.

The principal impact of the new "stand in the shoes" rule is that compensation provided by a DHS provider such as an academic medical center (" AMC") (or hospital in a health system) to a physician group may more likely be "direct compensation" to the referring physician, and thus will need to meet a Stark Law exception for a direct financial relationship. Previously, such compensation schemes could qualify for "indirect compensation" treatment, and thus escape the more rigid rules applicable to direct compensation.

AMCs and integrated health delivery systems had asked for a "mission support" exception that would allow medical center payments to physician organizations without triggering the referral prohibition. CMS announced such an exception as one of its proposed alternatives, but it has now emphatically rejected that approach. 5 It notes that AMCs have an existing Stark Law exception, although industry commentators object to the strictures of the exception. However, CMS made no provision for integrated health delivery systems that do not qualify for the AMC exception. Many such systems must now promptly review support arrangements between a medical center and related physician organizations prior to the October 1, 2008 effective date.

At this time, CMS is not adding a "stand in the shoes" provision for DHS entities. The proposal previously published would have mandated that for Stark Law purposes, a DHS entity would "stand in the shoes" of any entity in which it had a 100% ownership.

Per-Click Payments Prohibited for Lessor Referrals to Lessee DHS Providers

CMS has changed its position several times on the issue of whether unit-of-service ("per-click") payments are permissible for a physician lessor who leases space and equipment to a lessee that performs DHS for patients referred by the physician lessor. CMS has now promulgated final rules that prohibit such per-click payments, although the implementation of the final rule is delayed until October 1, 2009. 6 CMS believes this delayed effective date will provide time to restructure or unwind noncompliant leases, and is not grandfathering existing per-click arrangements.

CMS notes that the use of per-click arrangements increases the potential for overutilization, the steering of patients to particular providers, and anticompetitive effects resulting from hospitals effectively being coerced into leases with physicians for fear that if they contract with non-physicians, "their referral stream will dry up." 7 Accordingly, CMS is modifying the Stark regulations to provide that per-click rental charges are not allowed to the extent that such charges reflect services provided to patients referred by the lessor to the lessee. This prohibition on per-click payments for space or equipment used in the treatment of a patient referred to the lessee by a physician applies regardless of whether the physician is the lessor or whether the lessor is an entity in which the physician has an investment. The prohibition also applies where the lessor is a DHS entity that refers patients to a physician (or physician organization) lessee. CMS notes it is not prohibiting per-click arrangements involving non-physician lessors to the extent that such lessors are not referring patients for DHS, nor is it prohibiting per-click payments to physician lessors for services to patients who were not referred to the lessee by the physician lessor. 8

CMS accomplishes this regulatory policy through changes to the space and equipment lease exceptions, the indirect compensation exception, and the fair market value exception. All changes to these exceptions provide that compensation may not be based on a formula that uses per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties.

CMS notes that it "may be possible" for parties to structure an arrangement whereby a physician-lessor would receive per-use fees for services referred by others, but would receive compensation calculated on some other basis for services that were rendered to patients who were referred by the physician lessor(s). 9 CMS cautions that such arrangements may implicate the Anti-Kickback Stature, and are subject to the fair market value and commercial reasonableness tests.

CMS admits that, over time, it has changed its policy on per-click arrangements. CMS has also changed its views about whether Congress specifically authorized per-click payments, stating that the legislative history of the space and equipment lease exceptions led it to its earlier conclusion that Congress clearly intended to permit leases that included per-click payments, even for services provided to patients referred by the physician lessor. CMS notes, however, that upon further analysis of the legislative history, it no longer believes that its earlier, adopted interpretation is the only reasonable interpretation of the statute and legislative history. Litigation over this revised interpretation by CMS is likely.

CMS cautions that leases of space and equipment must be: (1) fair market value (now excluding any per click formula) and (2) commercially reasonable. This latter term is interpreted by CMS to mean that if a lessee, such as a hospital, performs a high volume of business on equipment leased from a referring physician or physician entity, such a lease may not be considered commercially reasonable if the lessee (e.g., hospital) could more profitably purchase the equipment outright.

CMS also briefly addresses block-time rental arrangements. In response to commenters who recommended that CMS prohibit all block-time leases, CMS asserts that block-time leases can be proper if they do not take into account any volume of referrals, if they are based on fair market value, and if they are commercially reasonable. However, CMS notes that its concerns for abuse may well occur in block-time leases, especially in those "in small blocks of time" and in those "for a very extended time." 10

Percentage-Based Compensation Prohibited for Office Space and Equipment, but Allowed for Physician Services

In a surprising development, CMS narrowed the scope of the percentage-based compensation prohibition contained in its proposed regulations. In the final regulation, CMS limited the percentage-based compensation prohibition in what it calls a "narrow, targeted approach" directed only at office space and equipment rentals. Therefore, the changes to the regulations prohibit percentage-based revenue agreements in the office space exception, the equipment exception, the fair market value compensation exception, and the indirect compensation exception. The prohibition applies only as to percentage-based revenues "earned, billed, collected, or otherwise attributable to the services performed or business generated" in the office space or by use of the equipment. 11 The final rule restricting the use of percentage-based compensation formulae for determining rental charges for the lease of office space or equipment is effective on October 1, 2009.

CMS continues in its belief that the use of percentage-based compensation formulae to determine rental charges for office space or equipment poses a heightened risk of program and patient abuse. As an example, CMS notes that lease payments based on a percentage of revenues earned by the lessee provide an incentive for the lessor to increase referrals for DHS to the lessee so as to potentially increase the rental payment under the lease. In addition, CMS is concerned that entity lessees, such as hospitals, may enter into percentage-based office space and equipment leases instead of flat-rate compensation lease arrangement because they are afraid of losing the referral stream from the physician lessor. CMS also has concerns in the context of indirect compensation arrangements, noting that compensation based upon a percentage of collections may not result in fair market value received by a referring physician. 12

CMS is not extending, at least for the time being, the prohibition on the use of percentage-based compensation formulae to arrangements for any non-professional services, such as management or billing services. CMS issues a cautionary note that it intends to continue to monitor compensation formulae in arrangements between DHS entities and referring physicians, and that they may further restrict percentage-based formulae in future rulemaking. 13 In addition, CMS also clarifies that it does not interpret the revisions as prohibiting a lessor from charging a lessee a pro rata share of expenses incurred that are attributable to that portion of the space or equipment that is leased by the lessee. Further, CMS clarifies that it is not finalizing any new prohibitions or limitations on the use of percentage-based compensation formulae to pay physicians for physician services. 14

CMS Limits "Under Arrangements" Services by Including Entities that "Perform" DHS under Stark Law Coverage

Addressing yet another longstanding concern, CMS seeks to limit referring physician investments in entities that do not themselves bill for DHS services, but provide them to hospitals "under arrangements." Heretofore, such entities were not covered under the Stark Law as "entities" furnishing DHS because they performed the DHS services, but did not bill for such services. In its revised regulation, effective October 1, 2009, the Stark definition of an "entity" that is "furnishing" DHS is expanded by CMS to include the person or entity that has performed services that are billed as DHS or that has presented a claim for Medicare benefits for the DHS. 15 CMS notes that it believes that where a physician has an ownership or investment interest in an entity that performs DHS, the application of the Stark Law should not be avoided simply by having another entity bill Medicare for the DHS.

CMS expresses great concern and disapproval of "under arrangements" services that have escaped the Stark prohibition because the entity performing the DHS services has not been considered to meet the Stark Law statutory requirement of being an entity that "furnishes" DHS. Now, CMS has equated "performing" with "furnishing," a definitional construction it has previously not required. It is important to note, however, that CMS is not outright prohibiting services furnished "under arrangements." 16

CMS has declined to define the word "performs" in spite of calls for it to do so and in spite of assertions that it will lead to over-inclusive interpretations. CMS intends for "perform" to have its "common meaning," and states that entities that solely lease equipment used for services, or that provide management, billing services, or personnel to the entity performing the service, are not performing the DHS. CMS notes that a physician service provider cannot escape the reach of the Stark Law by doing substantially all of the necessary medical work for a service, and arranging for the billing entity or some other entity to complete the service. 17

One element of the CMS proposal on the definition of "entity" was not adopted. CMS had proposed to include as a covered "entity" a person or entity that "causes claims to be submitted." CMS has now decided that such a concept is subject to much dispute as to meaning and CMS regulatory authority, and such determination must be made, through adjudication, on a case-by-case basis. 18

Other Provisions Adopted by CMS or Deferred for Future Consideration.

In addition to the revisions discussed above, CMS finalized certain other provisions, is revising other provisions, and has decided not to undertake certain regulatory modifications at this time. These include:

  • CMS declined to issue a revision to its "in-office ancillary exception," but reveals it is still considering significant revisions;
  • CMS revised regulations regarding ownership or investment in retirement plans, burden of proof, and periods of disallowance. These will be effective October 1, 2008; and
  • Revisions to the exception for obstetrical malpractice insurance subsidies were finalized and are effective October 1, 2008.

1 73 Fed. Reg. 48,434, 48,688 (Aug. 19, 2008).
2 72 Fed. Reg. 51,012, 51,026 (Sep. 5, 2007).
3 72 Fed. Reg. 64,161, 64,161 (Nov. 15, 2007).
4 A physician who is just a titular owner or a physician who is only an employee of the physician organization is not required to be considered standing-in-the-shoes of the organization, but may elect that designation for purposes of qualifying for a Stark Law exception. See new 42 CFR ยง 411.354(c)(iii).
5 73 Fed. Reg. 48,434, 48,695 (Aug. 19, 2008).
6 73 Fed. Reg. 48,434, 48,714 (Aug. 19, 2008).
7 73 Fed. Reg. 48,434, 48,713 (Aug. 19, 2008).
8 73 Fed. Reg. 48,434, 48,719 (Aug. 19, 2008).
9 73 Fed. Reg. 48,434, 48,720 (Aug. 19, 2008).
10 73 Fed. Reg. 48,434, 48,720 (Aug. 19, 2008).
11 73 Fed. Reg. 48,434, 48,710 (Aug. 19, 2008).
12 Id.
13 Id.
14 73 Fed. Reg. 48,434, 48,712 (Aug. 19, 2008).
15 73 Fed. Reg. 48,434, 48,721 (Aug. 19, 2008).
16 73 Fed. Reg. 48,434, 48,728 (Aug. 19, 2008).
17 73 Fed. Reg. 48,434, 48,726 (Aug. 19, 2008).
18 73 Fed. Reg. 48,434, 48,727 (Aug. 19, 2008).

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