Articles on Compliance Strategies

Featured Health Business Daily Story September 14, 2007

CMS Opens Some Doors, Closes Others in its Third Regulatory Go-Round on the Stark Physician Self-Referral Law

Reprinted from REPORT ON MEDICARE COMPLIANCE, the nation's leading source of news and strategic information on false claims, overpayments, compliance programs, billing errors and other Medicare compliance issues.

In its third regulatory go-round of the Stark self-referral law, CMS made all kinds of moves — some modest and some more consequential for physician financial relationships with hospitals and other entities. Absorbing them will require providers and lawyers to go back and forth between the three sets of final rules and preambles that CMS has served up over the past six years to flesh out the 1993 Stark self-referral law known as Stark II (see box, below).

Some of the notable changes in the Stark final rule, which was published in the Sept. 5 Federal Register, include closing what CMS sees as a loophole involving indirect compensation; relaxing the physician recruitment exception; eliminating the fair-market-value compensation "safe harbor"; expanding the scope of the FMV exception; and making holiday events less stressful Stark-wise, lawyers say.

These and many more revisions and clarifications appear in what's known as Phase III of the Stark II law. The Stark law bans Medicare payments to entities providing designated health services (DHS) if patients were referred by physicians who have a financial relationship with the entity (unless an exception applies). Phase III finalizes the 2004 interim final rule known as Phase II of Stark II. Phase I, the first set of final regulations under Stark II, was issued in January 2001. The original 1989 Stark law, often called Stark I, banned self-referrals only to clinical labs.

"The Phase III regulation closes a very long saga that took the health care community through six-plus years of interpretive guidance of what is a very complicated and confusing statute that imposes great liability if not followed," says South Bend, Ind., attorney Bob Wade, who is with the law firm of Baker & Daniels.

Although CMS proposed more momentous Stark changes in July in a different regulation — the Medicare physician fee schedule — there are still important revisions here, Wade notes.

In Phase III, "CMS giveth, and CMS taketh away," says former senior HHS Office of Inspector General (OIG) attorney Howard Young, now with Sonnenschein, Nath & Rosenthal. "On the one hand, CMS liberalized and created additional flexibility with regard to some exceptions. On the other hand, CMS made some sweeping changes to the indirect compensation exception that will likely have a fairly dramatic effect on many existing compensation arrangements structured to comply with previous CMS interpretations of that exception."

Here are some of the key revisions in the new regulation, Phase III (of Stark II):

• Physicians and hospitals get a six-month grace period to negotiate new terms after personal services arrangements (PSAs) expire before self-referrals rise to the level of a Stark violation, Wade says. Phase II granted this six-month "holdover" to office-lease agreements so parties would not be out of compliance the minute a lease ended, as long as the rent continues to be paid at the same rate, he says. "Now CMS is giving PSAs the same degree of flexibility," he notes. However, to ensure credibility during the holdover period, Wade warns against last-minute PSA payment increases during the contract period with the goal of paying physicians more during the holdover. That will violate the PSA exception and raise eyebrows among CMS and enforcers, he notes.
• CMS cracked down on indirect compensation relationships between physicians and entities that provide DHS (e.g., hospitals). CMS drew the distinction between direct and indirect compensation in the Phase I regulation of Stark II. Direct compensation is clearly between the physician and the hospital (e.g., medical directorships), which means the arrangement must fit into a Stark exception to survive. However, indirect compensation involves an intervening party, such as a group practice, so CMS allowed it, under certain circumstances, not to constitute compensation under the law on the belief there was little risk of abuse. The problem with this exception from CMS's perspective was that "a lot of people were using the indirect compensation analysis to shield arrangements from full review under Stark," says Houston attorney Debbi Johnstone, who is with the law firm of Vinson & Elkins.

Phase III tries its hand at a remedy for potential abuses of the indirect compensation exception, she says. Providers will have to perform a new "stand-in-the-shoes" analysis to determine whether the indirect compensation exception applies. How does this work? "If you are an owner or an employee of a physician organization, you are viewed as standing in the shoes of the entity for purposes of a Stark analysis," she says. "Your indirect compensation relationship has morphed into a direct-compensation relationship. Then you have to find an exception under Stark" (e.g., for personal services arrangements or leases), or self-referrals between the physician and hospital will violate Stark.

As CMS itself says, "When a physician stands in the shoes of his or her physician organization, he or she will be deemed to have the same compensation arrangement.as the physician organization has with the DHS entity."

Johnstone notes that in making this revision, CMS introduced two new regulatory "terms of art": a "physician organization," which the rule defines as a physician practice, group practice or professional corporation; and a "stand-in-the-shoes" analysis, which means a physician is interchangeable with its physician organization.

• "CMS liberalized the physician recruitment exception somewhat," Young says. "It's an example of welcome additional flexibility." CMS basically changed its tune on what constitutes a "reasonable" practice restriction when physician groups recruit a new physician. Before Phase III, Wade says, the only restriction that physician groups could impose on recruits related to quality of care. Now, CMS says, certain restrictions on physician recruits are reasonable and permitted: moonlighting restrictions; bans on soliciting patients and/or employees; requiring recruited doctors to repay losses absorbed by the group practice; mandating that recruited physicians shell out reasonable damages if the physician quits the practice; and limited, reasonable, non-compete clauses, Wade says. There are six other changes to the recruitment exception, he notes.
• CMS gave providers compliance breathing room with the annual $329 cap on hospital gifts to physicians. While the number stays the same (with adjustments for inflation), Phase III has served up a method for physician repayments when the cap has been inadvertently exceeded. "The $329 monetary compensation exception now recognizes continued compliance even if gifts and benefits exceed the limit as long as it's by no more than 50%, and the physician repays the excess," Wade says.

So, for example, if a hospital showers a physician with $450 worth of goodies over a year but then realizes its mistake, there's no harm, no foul if the physician returns the extra $121 by the end of the calendar year or within 180 days after receiving the gift, he says.

• As a corollary, "CMS says you can throw one medical staff appreciation event per year, and the costs associated with it won't get thrown into the $329 bucket," Young says. "The Stark law won't be implicated as long as the invitation to the event is extended to all medical staff members," he adds. That means holiday parties are permitted under Phase III without having to divide the costs into the number of medical-staff members or invitees and deducting the per-physician amount from the $329 Stark allows hospitals (and other DHS entities) to give to physicians in noncash gifts every year.
• CMS killed the FMV "safe harbor" created by Phase II within the FMV definition, Wade says. The safe harbor accorded automatic FMV status to hourly compensation provided that either the compensation was equivalent to the average hourly compensation paid to emergency department physicians as long as the market had at least three emergency departments; or hourly compensation is calculated by averaging the 50th percentile benchmarked compensation from at least four national benchmark sources, divided by 2,000 hours, Wade says.

Wade is surprised by the deletion of the safe harbor, but he says it's not that big a deal because providers have other ways to assess and document FMV. And CMS emphasizes in Phase III that the safe-harbor criterion is still a "prudent" method for calculating FMV, he notes.

• Phase III also expanded the scope of the FMV exception in a way that will make it harder for physicians to use, Young says. "Significantly, Phase III changes the fair-market-value compensation exception, which now will apply to payments by a physician for items and services and not just to payments to a physician for services, thereby rendering the somewhat more flexible 'payments-by-a-physician' exception ( 411.357(i)) largely useless because that exception may only be used in the absence of another applicable exception."
• CMS modified the definition of a physician in a group practice in terms of independent contractors, Johnstone says. Until now, independent-contractor physicians could supervise a group practice's in-office ancillary services without signing individual contracts with the group. They just had to meet the definition of "physician in a group practice," she says. Under Stark III, an independent-contractor physician now also must have a direct contract with the group.

Suppose a rural Texas primary care physician group contracts with a Houston orthopedic practice to provide services part-time. Before Phase III, the orthopedic practice could sign one contract. Now each orthopedic surgeon will have to sign a direct contract individually with the primary care physician group, Johnstone says. "CMS believes for each independent contractor to legitimately be part of the group practice, there needs to be a direct contract in order to create a real nexus between the group and the independent contractor," she says.

View the Stark Phase III rule at www.cms.hhs.gov/PhysicianSelfReferral/Downloads/CMS-1810-F.pdf.

Top Five Changes Related to Stark III

Attorney Bob Wade cites some of CMS's major revisions to the Stark physician self-referral law's regulations.

(1) Personal service arrangements will now have a six-month "holdover" period.

(2) The physician recruitment exception has substantial revisions, the most important of which is that reasonable practice restrictions can be imposed on the recruited physicians, including covenants not to compete.

(3) The $329 non-monetary compensation exception now recognizes continued compliance even if gifts and benefits in excess of the limit are exceeded by no more than 50% as long as the physician repays the excess.

(4) Hospitals can sponsor one formal event (i.e., Christmas party) for their medical staff members per year without having to track expenses under the $329 non-monetary compensation exception.

(5) The fair-market-value "safe-harbor" definition has been eliminated.

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