Look for possible additional changes in 2008

On September 5, 2007, the Centers for Medicare and Medicaid Services (CMS) published the Phase III Final Rule to the Federal Physician Self-referral Prohibition Statute, commonly known as “Stark.” These regulations become effective on Dec. 4, 2007. Although titled the “Final Rule,” they are likely anything but the last word on Stark.

The Proposed Medicare Physician Fee Schedule Rule for 2008 includes additional changes to Stark that are wholly separate from the Final Rule. If adopted, these changes would dramatically alter the landscape of Stark. If improper use of motorcycles, skateboards, and trampolines helps keep orthopaedic surgeons in business, the continuing evolution of Stark regulations does the same for healthcare attorneys.

Although Stark III does include substantive clarifications, it contains no new exceptions for physicians, hospitals, and others implementing business and referral arrangements. It primarily provides clarification of previously published regulations; however, there will be significant impact on how Stark regulations are enforced going forward.

Defining financial relationships
Stark defines the criteria for determining whether a financial relationship exists between a physician and a “designated health service” (DHS) entity and, if so, how that relationship should be classified for determining which exception may be used to protect that arrangement. Under current Stark regulations, physicians may not refer a DHS entity to entities with which they have financial relationships, unless an exception applies.

Financial relationships may be either direct (no intervening entity between the DHS entity and the referring physician) or indirect (one or more intervening entities) and may involve either a compensation arrangement or an ownership or investment interest. Stark has created exceptions that are available depending on whether a relationship is direct or indirect and/or whether the relationship involves a compensation arrangement or an ownership/investment interest. Exceptions for direct compensation arrangements include employment, personal service arrangements, and leases.

A physician has an indirect compensation arrangement with a DHS entity if the following three conditions are met:

1. an unbroken chain of at least one other individual or entity that has a financial relationship with the DHS entity (such as the physician’s group practice) exists between the physician and the DHS entity;
2. the physician receives aggregate compensation from the interposing entity in the chain with which the physician has a direct financial relationship that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS; and
3. the DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with, or takes into account, the volume or value of referrals.

Closing a loophole
One of the most critical portions of the Phase III regulations closes a loophole that was created by the Phase II regulations. Under the Phase II regulations, if a physician’s practice had a contract with the DHS entity, the exception applicable to indirect arrangements would apply. The regulations also included an exception specifically applicable to indirect compensation arrangements that focused on the compensation arrangement closest to the referring physician. The exclusion created a loophole that allowed compensation relationships through professional entities that would violate Stark if conducted directly with the physician.

In Phase II, CMS sought comments concerning whether a physician should “stand in the shoes” of his or her group practice for purposes of determining whether he or she had a direct or indirect compensation arrangement with a DHS entity. CMS has indicated its concern that the definition of “indirect compensation arrangement” was interpreted too narrowly and that resulted in the determination that arrangements fell outside the scope of Stark altogether.

In seeking to close the loophole, the Phase III regulations deem a physician “stands in the shoes of” his or her physician organization for the purposes of Stark. CMS further defines “physician organization” to mean a physician (including a professional corporation of which the physician is the sole owner), a physician practice, or a group practice that meets the requirements of Stark.

Under the Phase III regulations, a physician will be deemed to have a “direct compensation arrangement” with a DHS entity if the only intervening entity between the physician and that DHS entity is the physician’s “physician organization” (ie, the contract is between the DHS entity and the physician’s group, which subsequently pays the physician). Any such arrangements that were previously determined to be either “indirect compensation arrangements” or falling outside the scope of Stark must now comply with an exception for “direct compensation arrangements.” All parties will need to review these arrangements.

CMS does have a “grandfather clause” for arrangements that are still under the original term or an existing renewal term of an arrangement that met the preexisting requirements for the “indirect compensation” exception. Any arrangements that, prior to Phase III, were determined not to create either a direct or indirect compensation relationship and therefore were not covered under Stark, are not protected. Hospitals and group practices that structured medical director or office lease agreements so they did not fall under Stark will have to revisit these agreements.

More to come
This is only one example of the changes to Stark as a result of Phase III. Healthcare attorneys are already debating what physician entities might fall outside of a “physician practice.” Although Stark defines the terms “physician” and “group practice,” “physician practice” is left open to interpretation. What physician entities might fall outside of the definition of a “physician practice”? Another outstanding question is whether physicians employed by a medical school should “step into the shoes” of their employer?

It has been noted that the term “physician organization” (the umbrella term under the regulations for a “physician,” “group practice,” and the undefined “physician practice”) does not include a limited liability company (LLC), limited partnership, corporation, or other entity that may be wholly owned by physicians, but that does not function as a physician practice. Examples include an LLC used by a group of physicians to invest in a medical office building, diagnostic testing center, clinical laboratory, leasing company, or management company. The 2008 Medicare physician fee schedule final rule could clarify this situation.

The issue of direct or indirect compensation relationships with hospitals and physicians might be an even more timely issue. CMS is requiring certain hospitals to prepare and submit information on physician ownership and compensation arrangements to determine whether they are in compliance with Stark. The selected hospitals must submit a Disclosure of Financial Relationships Report for relationships as of Dec. 31, 2006. The updated form requires disclosure of physician compensation relationships that fall under various direct compensation exceptions, but does not require information on indirect compensation arrangements through physician groups. Hospitals must track these financial relationships and be prepared to report them on request.

Future issues of AAOS Now will continue to examine the changes in the Stark regulations and their impact on orthopaedic practices.

Michele M. Zembo, MD, MBA, is a member of the AAOS Practice Management Committee. The information in this article is not intended as legal advice; consult your attorney if you have specific questions.

A Stark history
Most physicians are familiar with “Stark” in a broad sense but not with the actual regulatory details. Stark has been a “work in progress” for almost 20 years. Stark I was enacted in 1989 to address the perceived abuses of physician self-referral of patients for laboratory services to entities in which they had a financial interest. It went into effect on Jan. 1, 1992.

The Stark ban on referrals was expanded in 1993 (Stark II) to include Medicaid beneficiaries and additional “designated health services” (DHS) considered to be particularly susceptible to overutilization due to physicians’ financial interests in them. Stark II also prohibited entities from making a claim for payment under the Medicare or Medicaid programs for the provision of DHS furnished pursuant to a prohibited referral. Stark II went into effect on Jan. 1, 1995.

Even though Stark I went into effect in 1992, final regulations were not published until August 1995. Proposed regulations for Stark II were issued in January 1998. Phase I of the Stark II final regulations came out on Jan. 4, 2001, and Phase II of the regulations were released on March 26, 2004.

The latest regulations (Stark II, Phase III) respond to comments on Phase II. According to the Centers for Medicare and Medicaid Services (CMS), all three phases are intended to be read as a unified whole to get a complete picture of how the agency will enforce the self-referral prohibitions. CMS has also stated that the intent of Phase III is to expound on previous discussions—not to change the scope or meaning of Phases I or II.