CMS Issues Phase III Stark Regulations

It is hard to believe, but it has been nearly 13 years since the "Stark Law" came into being. Over the course of these last 13 years, the Center for Medicare and Medicaid Services (which, during this period of time, changed its name from the Health Care Financing Administration) issued a series of regulations along with a number of technical corrections, which has finally culminated in the promulgation of the long awaited Phase III regulations. The Phase III regulations, aside from serving as an overview of the statutory and regulatory history, seeks to clarify a number of issues, provide additional flexibility in response to comments received from the health care industry, and close perceived loopholes. The Phase III regulations also serve as a warning to the health care industry that certain arrangements are being monitored by CMS and may, in the future, be deemed non-compliant with the statutory and regulatory scheme.

In the Phase II Regulations, CMS created a safe harbor provision within the definition of fair market value for hourly payments to physicians for their personal services. The safe harbor consisted of two methodologies for calculating hourly rates that would be deemed fair market value. The first methodology looked to hourly payments for emergency room physician services in the relevant market. The second methodology involved the averaging of the 50^th percentile national compensation for physicians in the same specialty using at least four of six specified salary surveys and dividing the result by 2000 hours to establish an hourly rate. Based on comments that many of the surveys are no longer available or not accessible, CMS eliminated this safe harbor. While CMS noted that it believed that it was still prudent to rely on independently published salary surveys, "ultimately, the appropriate method for determining fair market value for purposes of the physician self referral law will depend on the nature of the transaction, its location and other factors." CMS went on to note "...although a good faith reliance on an independent valuation (such as an appraisal) may be relevant to a party's intent, it does not establish the ultimate issue of the accuracy of the valuation itself..." In other words, although an appraisal may save a client from prosecution under the anti-kickback statute, it may not do the same under a strict liability statute like Stark.

Incident To Services-Under the Stark statute itself, group practices utilizing the "in-office ancillary services" exception are permitted to pay physicians in the group a share of the overall profits or a productivity bonus based on services either personally performed by the physician or services that are "incident to" such personally performed services, provided that the profit share or bonus is not determined in any manner that is directly related to the volume or value of that physician's referrals. The Phase III regulations make clear that only those services that do not have their own separate and independently listed benefit category may be billed as "incident to" a physician service. In an effort to conform the self referral regulations to the Medicare coverage and payment rules, and to avoid any confusion in the Phase I or Phase II regulations which did not address the furnishing of supplies "incident to" a physician's services, CMS revised the definition of "incident to" services to make clear the term includes both services and supplies. However, it appears that supplies that are ordered and dispensed by a physician in a group practice may only be counted toward that physician's productivity where such supplies are provided "incident to" the physician's services and where there is not a separate benefit category associated with the provision of such supplies (although there is an exception for PT services and outpatient drugs). CMS has noted that a somewhat different analysis applies in the case of a physician who personally furnishes DME and supplies (in that the physician must be enrolled in Medicare as a DME supplier and personally perform all of the duties set forth in the DME supplier standards).

Physician in the Group Practice-CMS has modified (although CMS refers to it as a clarification) the definition of physician "in the group practice" to require that an independent contractor physician must furnish patient care services for the group under a contractual arrangement directly with the group. Based on this somewhat innocuous language, it is likely that many practices will be forced to either revise or renegotiate arrangements with "entities" providing services so that the individual physician or physicians who are providing such services are parties, in their individual capacities, to such arrangements. In addition to this issue and in response to a comment that the definition of physician in the group practice be revised to omit the requirement that the physician's services be provided on the group's premises (consistent with the revision to the reassignment requirements per the Medicare Prescription Drug, Improvement and Modernization Act of 2003 which allows independent contractor physicians to reassign for services performed off premises), CMS flatly declined to make such a change, noting that nothing in MMA required it to do so. According to CMS, physical presence is the only way to ensure that an independent contractor physician has a clear and meaningful nexus to the group's medical practice. CMS also made clear that compliance with the statutory and regulatory scheme of Stark does not negate or override compliance with other rules, such as the rules on reassignment and purchased diagnostic tests. In this regard, CMS cited to an example of an independent contractor physician who furnishes DHS in a centralized building of a group practice and where the various requirements of the in-office ancillary services exception have been satisfied noting that "...the anti-markup rules would nonetheless apply if the service at issue is a diagnostic test of the type that is covered under the [purchased diagnostic test provisions] and the physician and the group have effected a valid reassignment..."

Stand in the Shoes-The Phase III Regulations add a provision to the regulatory scheme whereby a referring physician will be deemed to "stand in the shoes" of a group practice and certain other physician organizations for purposes of applying the rules that describe direct and indirect compensation arrangements. According to CMS, this was designed to close a perceived and unintended loophole in the definition of indirect compensation arrangement (that is, that certain arrangements arguably fall outside the definition of an indirect compensation arrangement and, therefore, outside of the scope of the statute). The change was also designed to ease compliance by simplifying the analysis under such arrangements. CMS has, however, grandfathered those arrangements which were originally structured to satisfy the indirect compensation arrangement exception, but only during the original or current renewal term of such arrangements.

Personal Service Arrangements - The Phase III regulations made a minor modification to permit a holdover personal service arrangement (comparable to what is permitted for space and equipment leases under the Phase II regulations). Accordingly, month to month holdovers are permitted for up to six months immediately following the expiration of an agreement of at least one year that meets the other exceptions of the personal services exception.

Malpractice Insurance Subsidies - Although CMS made no changes to the regulatory exception for obstetrical malpractice insurance subsidies, in response to a comment received regarding malpractice insurance subsidies for other specialties, CMS stated: We see no reason why the fair market value compensation exception in §411.357(I) cannot be used to offer medical staff assistance with malpractice insurance, provided that the value of the assistance is fair market value for services actually provided by the staff and the other requirements of the exception are satisfied.

The Phase III Regulations made a number of amendments to the existing regulatory scheme concerning physician recruitment. These changes included:

• Permitting more generous income guarantees in situations where a physician is recruited to replace a deceased, retiring or relocating physician.
• Permitting group practices to impose certain practice restrictions (such as reasonable non-competes).
• Exempting from the relocation requirement, a physician who, for the 24 months prior to the recruitment arrangement, was employed by certain federal agencies.
• Clarifying that the recruitment provisions apply to any type of income guarantee, whether gross income, net income, revenues or some variation that involves a cost to the hospital subsidizing the arrangement and a benefit to the recipient physician.
• Permitting rural health clinics to avail themselves of the recruitment exception and permitting hospitals in rural areas to use an alternative test to determine their "geographic areas."
• Treating the geographic area served by a hospital to be comprised of all contiguous zip codes from which the hospital draws inpatients when the hospital draws fewer than 75% of its patients from contiguous zip codes.

In terms of the changes to this exception, the most far reaching are the substantial relaxation of the previous regulatory provisions that restricted practices from imposing post termination restrictions. CMS acknowledged that categorically prohibiting physician practices from imposing non-compete provisions may have had the unintended effect of making it more difficult for hospitals to recruit physicians (because the practices themselves may be reluctant to hire additional physicians who, after leaving the practice, may become competitors). Accordingly, the regulations have been amended to state that physicians and physician practices may not impose restrictions that unreasonably restrict a recruited physician's ability to practice medicine in the geographic area served by the hospital. Among the restrictions and prohibitions that CMS did not consider unreasonable are:

• Restrictions on moonlighting
• Non-solicitation provisions concerning patients and employees
• Confidentiality clauses
• A hold harmless for losses of a practice that are in excess of recruitment payments
• Liquidated damage clauses that do not require significant or unreasonable payments

Although the Phase III Regulations made no substantive changes to this exception, CMS's responses to a number of comments provide a great deal of insight into CMS's likely application of the existing regulatory scheme. For example, in response to a question regarding the "same building" requirement and the amount of physician services that would be considered unrelated to the furnishing of DHS for purposes of satisfying the requirement that at least "some" physician services furnished in such building be unrelated to the furnishing of DHS, CMS offered the following:

Creating a satellite office that appears to satisfy the "same building" requirement, but in fact is merely a sham arrangement, will result in claims denial. For example, renting office space part-time in a freestanding imaging facility purportedly to provide physician services unrelated to DHS at the facility location would be considered a sham if few or no such services were actually contemplated or provided. In addition, a part-time arrangement cannot meet the centralized building test. As we have noted in other contexts, the operation of an arrangement, not its form on paper, is determinative.

Yet another commenter asked for guidance in the context of physicians who provide DHS to their patients in a shared space in the same building and whether physicians could simultaneously use the facilities (imaging, laboratory or physical therapy) and simply share the costs and administration of the DHS without having to separately lease the facilities for specific blocks of time determined in advance. Again, and in response to this comment, CMS offered the following:

A physician sharing a DHS facility in the same building must control the facility and the staffing (for example, the supervision of the services) at the time the designated health service is furnished to the patient. To satisfy the in-office ancillary services exception, an arrangement must meet all the requirements of §411.355(b), not merely on paper, but in operation. 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 must be carefully structured and operated (for example, with respect to billing and supervision of the staff members who provide DHS in the facility). We note that common per-use fee arrangements are unlikely to satisfy the supervision requirements of the in-office ancillary services exception and may implicate the anti-kickback statute.

Other commenters objected to satellite DHS facilities set up to capture ancillary services revenue, and specifically identified condominium pathology labs that rent space to urology practices. Here, CMS offered the following:

Section 1877 of the Act permits group practices to furnish DHS in a centralized building. However, we recognize that part-time, shared, off-site facilities are readily subject to abuse. To address this obvious potential for abuse, the Phase I final rule included the requirement that a centralized building be used on an exclusive basis (66 FR 881). In the CY 2007 update to the physician fee schedule, we proposed additional requirements for the centralized building test (71 FR 49056-49057). We will address those proposals in a separate rulemaking. In the meantime, we caution parties to arrangements such as those described by the commenters that, as with shared facilities in the same building, off-site arrangements must fully comply with the in-office ancillary services exception in operation, not only on paper. In other words, compliance is required with respect to every DHS claim filed. "Condominium" arrangements are particularly vulnerable to non-compliance, and staff and operations at the off-site facility should be closely monitored. For example, a supervising physician who is an independent contractor of a group practice must be in the group practice's specific premises at the specific time a designated health service is furnished (and supervised) for a group practice patient. Moreover, these arrangements raise substantial concerns under the anti-kickback statute.

Throughout the discussion in the Phase III regulations, CMS identified a number of areas where it indicated its intention to address certain issues in future rulemaking:

Arrangements structured so that referring physicians own leasing, staffing and similar entities that furnish items or services to entities that are in turn furnishing DHS which CMS indicated were highly suspect under the anti-kickback statute. CMS also indicated that it intends to study these arrangements further and possibly address these arrangements through a separate rule making.

The length of time a DHS would be precluded from submitting claims for DHS referred by a physician with whom the DHS entity had a financial relationship which failed to qualify for an exception and for which the inadvertent termination provisions may not be applicable.

Any type of arrangement involving in-office pathology laboratories or sophisticated imaging equipment and the extent to which such arrangements should continue to be eligible for protection under the in-office ancillary services exception.