The Stark Law regulations prohibiting physician self-referrals have been revised yet again this year. The 2009 final hospital Inpatient Prospective Payment System (IPPS) Regulations (the IPPS Rule), published in the Federal Register on August 19, 2008, enact several long anticipated regulatory changes, many of which may require restructuring a substantial number of existing arrangements. Specifically, providers, particularly hospitals, that provide services to their patients “under arrangements” with physician-owned entities likely will have to unwind these arrangements by October 1, 2009. Similarly, various types of prevalent “per click” and percentage compensation arrangements will be prohibited for space and equipment rentals, and thus will have to be revised or eliminated as of October 1, 2009 as well.

Nevertheless, many in the health care industry will welcome the fact that the “stand in the shoes” provision, which effectively requires many arrangements to fit a detailed Stark Law direct compensation arrangement exception, has been narrowed to some extent. In addition, a new rule protecting arrangements involving temporary noncompliance with certain signature requirements has been enacted, as well as a broader exception for obstetrical malpractice insurance subsidies. These latter regulatory revisions go into effect on October 1, 2008. The IPPS Rule also contains various other Stark regulatory changes, including provisions relating to the period of disallowance, physician ownership in retirement plans, the burden of proof with respect to claims denials, and a Disclosure of Financial Relationships Report. In light of their complexity, we have briefly described below some of the more significant new Stark regulatory provisions.

Certain “Under Arrangements” Transactions Prohibited

The Stark Law prohibits physicians (and members of their immediate families) from having an ownership interest in most health care providers to which they refer patients for certain types of designated health services (DHS), unless the arrangement meets an exception to the prohibition. However, Medicare allows certain providers to furnish services “under arrangements,” e.g., the hospital bills for services that essentially are furnished by another contracted entity under the hospital’s oversight. Under the previous language of the Stark regulations, physicians generally were able to invest in entities which provided services “under arrangements” to hospitals because the physician did not have an ownership interest in the hospital that was billing for the service. Citing concerns about abuse related to over-utilization and anti-competitive conduct, the IPPS Rule essentially prohibits physician-owned entities from providing services “under arrangements” by changing the definition of “entity” in the Stark regulations. Effective, October 1, 2009, an “entity” subject to the Stark prohibitions will include the person or organization that has: (i) billed for the DHS; or (ii) performed the DHS.  CMS does not define what it means to “perform” a service, but does indicate that an organization is not performing a DHS if it only leases or sells space or equipment, furnishes supplies that are not separately billable or provides management, billing services or personnel to the entity performing the service. Thus, while a physician-owned LLC likely could not provide radiology services to a hospital by operating the radiology department under arrangements (unless the transaction could quality for a Stark ownership exception such as the exception for rural providers), a physician-owned LLC may be able to rent space, equipment or personnel, or provide certain management services to the radiology department of a hospital if the arrangements are appropriately structured.    

There are numerous existing “under arrangements” transactions with physician-owned entities that will have to be unwound before the effective date of the change. Some under arrangements transactions may be able to be restructured as lease agreements with a significantly limited scope.  However, the compensation methodology that can be used for space and equipment rentals going forward will be much more limited as described below.

Most “Per Click” and Percentage Compensation Prohibited for Space and Equipment Rentals

There has been a great deal of controversy over “per unit of service” or “per click” compensation under the Stark Law. CMS has frequently expressed concerns that this compensation methodology could result in abuse while supporters have pointed out that this type of compensation is prevalent throughout the health care industry, and was mentioned with approval by Congress in the Stark Law’s legislative history. The IPPS Rule attempts to reconcile these positions by outlawing unit of service rental charges to the extent these charges reflect services provided to patients referred between the parties.  Thus, the IPPS Rule is even broader than the proposal contained in the proposed 2008 Physician Fee Schedule which only restricted per click compensation when the physician was the lessor. CMS notes in the preamble to the IPPS Rule that the “per click” prohibition applies whether the lessor is the referring physician or an entity in which the referring physician has an ownership interest. The prohibition also applies if the lessor is a DHS entity that refers patients to a physician or physician organization lessee. CMS points out that not all per click compensation is prohibited, but notes that per click payment for services provided to patients who were not referred by the lessor can implicate the anti-kickback statute.

CMS implements this restriction on per click compensation through amendments to the exceptions for space and equipment rentals, fair market value compensation arrangements, and indirect compensation arrangements. The use of percentage compensation based on a percentage or revenue raised, earned, billed collected or otherwise attributable to the services performed or business generated in the leased space, or to the services performed or business generated through the use of the equipment is similarly prohibited. CMS also warns that while the use of percentage compensation for  non-professional services, such as billing or management services, is not currently restricted, they will continue to study this issue. 

The situation with regard to time-based leasing arrangements is less clear. CMS declines to completely prohibit this compensation methodology but also states that they are continuing to study “block time” leasing arrangements and may propose future regulations in this area.  

Certain Physicians “Stand in the Shoes” of their Physician Organization

The IPPS Rule finalizes the so-called physician “stand in the shoes” provision, so as to provide that physicians who have an ownership or investment interest in a physician organization (e.g., a group practice) that enters into a financial relationship with an entity that furnishes a DHS will stand in the shoes of the physician organization for purposes of analyzing the financial arrangement under the Stark Law. If a physician stands in the shoes of his/her physician organization, the physician generally will have to satisfy a stringent direct compensation arrangement exception with regard to financial arrangements between the physician organization and an entity, such as a hospital, lab or diagnostic facility, to which the physician refers. Prior to the Stark III regulations, such arrangements might have evaded Stark requirements altogether because they would not have fit the definition of an indirect compensation arrangement. However, the Stark Phase III regulations stated that all physicians stood in the shoes of their physician organization.

Thus in a step back from Phase III, the IPPS Rule clarifies that the stand in the shoes provision does not apply to non-owner physicians, e.g., those who have only a compensation arrangement with the physician organization or “titular” ownership (which CMS describes as an interest where the physician does not have the ability or right to receive any financial benefits of ownership, e.g., profit distributions, sale proceeds, or investment returns).  CMS also carves out an exception for physicians participating in financial arrangements that satisfy the Stark exception for academic medical centers, and grandfathers a very limited group of arrangements that previously satisfied the Stark exception for indirect compensation arrangements.

CMS elected not to finalize a proposed rule that would have deemed a DHS entity as standing in the shoes of an organization in which it has a 100% ownership interest. The proposed rule was intended to combat business arrangements designed to evade Stark Law restrictions through the use of “shell” companies interposed between the DHS entity and a referring physician. CMS cautioned, however, that these arrangements remain highly suspect under the fraud and abuse laws and will be subject to strict scrutiny.

Period of Disallowance Set for Certain Stark Violations

CMS finalized proposed revisions concerning the period of time for which a physician may not refer a patient to an entity for DHS and the entity may not bill Medicare or Medicaid because the financial relationship between the parties does not comply with the Stark Law. CMS refers to this as the “period of disallowance.” CMS states that with respect to arrangements deemed noncompliant for reasons other than compensation, the period of disallowance will last no longer than the date when the arrangement is brought into compliance. However, when an arrangement fails to meet a Stark Law exception because the compensation is above or below fair market value, the period of disallowance could last up to the date on which the entire disparity between paid compensation and fair market value has been resolved. Accordingly, the period of disallowance could last until, as applicable, a receiving party returns all excess compensation or a paying party pays all additional compensation.

Alternative Method for Compliance with Signature Requirements Created

CMS also finalized a special rule regarding arrangements that fail to comply with a Stark Law exception because the requisite written agreement has not been signed. Under the IPPS Rule, an arrangement will be considered compliant under the Stark Law (without regard to whether referrals or payments have been made) if: (i) the failure to comply with the signature requirement was inadvertent, and the relevant documents are signed within 90-days of the commencement of the financial relationship; or (ii) if the failure to obtain the necessary signatures was not inadvertent, and the entity rectifies the deficiency within 30-days of the commencement of the financial relationship. CMS points out that the commencement of the financial arrangement may not coincide with the date of the written agreement. In any case, the arrangement at issue must comply with all the other criteria of the applicable Stark Law exception.

Exception for Obstetrical Malpractice Insurance Subsidies Expanded

CMS retains and expands the Stark exception for obstetrical malpractice insurance subsidies. A new provision permits certain entities to provide obstetrical malpractice insurance subsidies to a physician who meets numerous detailed standards and regularly engages in obstetrical practice as a routine part of a medical practice that is: (i) located in a primary care Health Professional Shortage Area (HPSA), rural area, or area with a demonstrated need, as determined by the HHS Secretary in an advisory opinion; or (ii) is comprised of patients at least 75 percent of whom reside in a medically underserved area (MUA) or are part of a medically underserved population (MUP). CMS limits the new provision to hospitals, federally qualified health centers and rural health clinics, noting that the previous obstetrical malpractice insurance subsidy exception, which has been retained, applies more broadly to a “hospital or other entity.” CMS declines to expand the exception to include malpractice insurance subsidies for other physician specialties, noting that the exceptions for fair market value, employment, or personal services arrangements may suffice in these situations.

Disclosure of Financial Relationships Report Required for Up to 500 Hospitals

Under the IPPS Rule, CMS finalized a proposed financial disclosure requirement under which CMS would require 500 acute care and specialty hospitals to complete a one time Disclosure of Financial Relationships Report (DFRR). Specifically, hospitals that receive the DFRR will have to provide CMS with detailed information about their ownership, investment, and compensation arrangements with physicians (The DFRR is now projected to take 100 hours to complete rather than the originally projected 31 hours). Accordingly, CMS may decrease the number of hospitals required to complete the DFRR based on comments received in response to a revised Paperwork Reduction Act notice to be separately published in the Federal Register.   

Proposals on Retirement Plans and the Burden of Proof Finalized

CMS finalizes the proposed rule which limits the exception granted to certain physician ownership interests in retirement plans. The IPPS Rule also adopts the proposed rule’s provision stating that the burden of proof remains on the claimant throughout an appellate proceeding while the burden of production may shift to the government or its contractor during the proceedings.

Related Provisions Allow Compensation Terms to be Amended and Enact Physician-Owned Hospital Disclosure Requirements

The IPPS Rule resolves concerns created in the preamble to the Phase III Stark regulations which had defined the common requirement in many Stark exceptions that compensation be "set in advance" so as to prohibit parties from amending the rental charges or compensation terms in leases and personal services agreements during the first year of their term. CMS now states that such amendments are acceptable if they meet various specified criteria, including the requirement that the amended rental charges or compensation must remain in place for at least one year from the date of the amendment.  Further, in a related development, the IPPS Rule finalizes several proposals related to certain disclosure requirements imposed on physician-owned hospitals. 

Conclusion

A number of the changes in the IPPS Rule will require major modifications to certain existing arrangements, and CMS gave providers an additional year to comply with several of the more dramatic regulatory changes. Although additional significant Stark regulatory changes are expected to be published in November 2008 as part of the 2009 final Physician Fee Schedule, these changes are most likely to relate to the anti-markup rule and a new gainsharing exception, and thus should not significantly impact the arrangements that need to be modified under the IPPS Rule. Therefore, providers should take steps now to identify which arrangements need to be modified so they can begin the process of bringing such arrangements into compliance. If you have questions or need additional information on the Stark Law’s application or operation, please contact us.

Linda A. Baumann
baumann.linda@arentfox.com
202.857.6239

Richard S. Liner
liner.richard@arentfox.com
202.857.8972

Alana Wexler
wexler.alana@arentfox.com
202.828.3463