HEALTH INDUSTRY ONLINE - A Review Of The CMS's Proposed Changes To The Stark Rules

On July 2, 2007, the Centers for Medicare & Medicaid Services (CMS) proposed a number of revisions to the Stark Law regulations. If adopted, the proposed rules would prohibit certain per-click and percentage-based compensation arrangements, curtail joint ventures involving services provided under arrangements and limit use of the in-office ancillary services exception.

The Stark Law generally prohibits a physician from making referrals for “designated health services” (DHS) payable under Medicare or Medicaid to be furnished by an entity with which the physician has a direct or indirect financial relationship. The Stark Law has a number of exceptions that permit referrals by physicians to entities with which the physicians have financial relationships so long as certain safeguards are met.

PER-CLICK ARRANGEMENTS

CMS’s proposed Stark revisions, in part, aim to preclude the use of certain compensation arrangements referred to as per-click arrangements. A per-click lease arrangement is one in which the rental charge is based on a per-use basis. The typical per-click situation may involve a physician who leases equipment to a hospital and then refers these patients to the hospital for use of that equipment. The current CMS regulations pertaining to the Stark Law allow such a referral provided that “the payment per unit is at fair market value at inception and does not subsequently change during the lease term in any manner that takes into account designated health services referrals.” The new proposed rules would prohibit unit-of-service based payments to physician lessors in space and equipment leases for DHS furnished by an entity to patients who were referred by the physician. In proposing the new regulations, CMS noted that “such arrangements are inherently susceptible to abuse because the physician lessor has an incentive to profit from referring a higher volume of patients to the lessee.”

Notably, the current proposal only applies where the physician is the lessor and is making referrals to the lessee. CMS has requested comments on whether it should extend the prohibition to include arrangements where a physician is the lessee and rents space or equipment from a hospital or other entity on a per-click basis. CMS is accepting comments on these proposals through August 31, 2007. If adopted, these changes could become effective as early as January 1, 2008, and would require physicians and hospitals to restructure or terminate any per-click equipment or space lease arrangements that involve the furnishing of services subject to the Stark Law.

PERCENTAGE-BASED COMPENSATION ARRANGEMENTS

CMS has additionally proposed changes to address perceived abuses of the Stark percentage-based compensation provisions, particularly in equipment and office space leases. A common requirement under the Stark exceptions is that compensation must be “set in advance.” The proposed rules would only allow percentage compensation arrangements for payment of personally performed physician services. Under the proposed change, percentage-based compensation must be based on the revenues directly resulting from the physician services. Compensation may not be based on some other factor, such as a percentage of a hospital department’s savings.

UNDER ARRANGEMENTS

Another change proposed by CMS targets services provided under arrangements to hospitals and other providers. As grounds for its proposal, CMS has reasoned that “there appears to be no legitimate reason for these arranged for services other than to allow referring physicians an opportunity to make money on referrals for separately payable services. Many of the services furnished by the joint venture were previously furnished directly by the hospitals, and in most cases, could continue to be furnished directly by the hospitals.”

To address this issue, CMS has proposed changing the definition of “entity” for Stark purposes to include not only the person or entity that submits the claims to Medicare, but also the person or entity that actually performs the DHS. Under the current regulations, a physician may order a test or service from a joint venture in which he has an ownership interest without making a “referral” to the joint venture; instead, the referral is made to the hospital, which bills for the service. Under the proposed regulations, the physician in this situation would be deemed to have made a referral to the joint venture as well as the hospital. This change would curtail the viability of many hospital/physician under arrangement joint ventures.

IN-OFFICE ANCILLARY SERVICES

In the process of formulating its proposed rules, CMS solicited comments on a number of possible changes to the in-office ancillary services exception under the Stark Law. The exception currently provides that DHS may be furnished to patients in the same building where the referring physicians provide their regular medical services, or, in the case of a group practice, in a centralized building provided certain conditions are met. The purpose of these requirements is to ensure that the DHS qualifying for the exception are truly ancillary to the physician’s core medical office practice and are not provided as part of a separate business enterprise. CMS has expressed concern that the in-office ancillary services exception is being abused, and has suggested that some services provided under the exception are not as closely connected to the physician practice as the statute intended. At this time CMS has declined to issue a specific proposal for amending the in-office ancillary services exception but has asked for comments on certain issues, including: (i) whether to exclude certain services from the exception, (ii) whether to revise the building requirements under the definition, (iii) whether non-specialist physicians should be allowed to use the exception to refer patients for specialized services involving the use of equipment owned by the non-specialists, and (iv) whether any other restrictions should be imposed to curtail abuse.

Importantly, these changes to the Stark regulations have only been proposed, so there is no immediate impact on existing arrangements. It is not yet known whether these proposed changes will become final and, if so, when. However, those contemplating an arrangement involving any of the issues addressed in the proposed rule changes are well-advised to consider ways to limit the potential impact on the arrangement if and when the proposed changes become final. Furthermore, a party to any current arrangement that would be affected by these proposed rule changes may wish to analyze their arrangement now and consider alternatives which could be implemented should any of the proposed changes be ultimately enacted.

Should you have comments or concerns about the proposed changes, you may submit a formal comment letter to CMS, or ask that such a submission be made by an association of which you are a member.