United States: Major Changes to Stark Regulations - 2009 Inpatient Prospective Payment System Final Rule

The Centers for Medicare and Medicaid Services ("CMS") recently released its final 2009 Hospital Inpatient Prospective Payment System (the "IPPS Final Rule"). The IPPS Final Rule contains, among other things, a number of revisions to the federal physician self-referral prohibitions, or "Stark Law," regulations. Under the Stark Law, if a physician or a member of a physician's immediate family has a financial relationship with an entity, the physician may not make referrals to that entity for the furnishing of "designated health services" ("DHS") to be reimbursed by Medicare, unless an exception applies.

The IPPS Final Rule adopts many significant changes to the Stark regulations which will have a dramatic effect on commercial arrangements which have developed in recent years between referring physicians and entities that furnish DHS ("DHS Entities"). Certain of these changes will become effective as of October 1, 2008. Others changes do not become effective until October 1, 2009, in order to provide DHS Entities and physicians time to restructure or dissolve these arrangements to comply with these new requirements.

"Under Arrangements" Joint Ventures (Effective Date - October 1, 2009)

Services provided "under arrangements" are DHS that are performed by one person/entity and billed by another person/entity. A primary example of an "under arrangements" relationship is one in which a hospital contracts with a company owned by referring physicians (or a company owned jointly by the hospital and such physicians) to provide a particular type of outpatient hospital service. This physician-owned company would provide these services to the hospital "under arrangements," and the hospital would bill Medicare for such services. "Under arrangements" hospital-physician joint ventures have been used to furnish a wide variety of services to hospitals, including diagnostic imaging, ambulatory surgery and cardiac catheterization services, among others.

Prior to the IPPS Final Rule, a referral for DHS furnished "under arrangements," as described above, did not violate Stark because CMS defined "entity" to include only the entity that actually billed Medicare for the DHS (i.e., the hospital). Under the IPPS Final Rule, however, CMS has expanded the definition of "entity" to include both the person or entity that bills for the services and the person or entity that furnishes the service to be DHS Entities.

CMS expressed concern regarding such arrangements in the 2008 Medicare Physician Fee Schedule proposed rule ("2008 Proposed Rule"). CMS was concerned that such arrangements could be viewed as circumvention schemes to permit physicians access to additional revenue streams, particularly those in which the services provided by the joint venture were, prior to the formation of the joint venture, furnished directly by the hospital prior to the formation of the joint venture (i.e., without such an "under arrangements" structure in place). The preamble to the IPPS Final Rule states that CMS felt compelled to take these actions because Congress, under the Stark Law, did not intend to allow physicians to have an ownership interests in a service company to which the physician referred patients if that company billed Medicare directly for those services.

Under the IPPS Final Rule, once it is determined that the joint venture is a DHS Entity, any referrals by physician owners to this DHS Entity would need to meet a Stark exception. There are very few Stark exceptions for ownership interests, none of which can be used with respect to these "under arrangements" joint ventures, except perhaps if the entity is located in a rural area (and thus could possibly satisfy the requirements of the Stark "rural provider" exception). As such, many hospital-physician owned joint ventures that provide services "under arrangements" to hospitals will need to be restructured or completely unwound by October 1, 2009 to avoid violating Stark.

The portion of the IPPS Final Rule dealing with services provided "under arrangements" and the expanded definition of entity also included CMS commentary that dealt with the following issues, which will have a significant effect on existing hospital-physician relationships:

• CMS' new definition of "entity" is not limited to "under arrangements" relationships. Specifically, the regulatory text provides that any "entity" that performs DHS will be considered a DHS Entity under the new definition. In situations where that entity provides services to a physician group and the physician group bills for the DHS, there are now two financial relationships that must satisfy a Stark exception. First, the physician group will need to meet the requirements of the "in-office ancillary services" exception for the DHS which it bills. Secondly, the financial relationship between the referring physician group and the DHS Entity performing the service for the physician group will need to satisfy a Stark exception.
  
  
• In the IPPS Final Rule, CMS has taken the position that an entity that leases space or equipment used in the performance of DHS or that provides management, billing or personnel to an entity performing DHS is not, in and of itself, "performing" the DHS. Based upon this statement, it is anticipated that many providers will move toward space and equipment leases and management and billing services. As discussed below, by prohibiting percentage-based and "per click" payment arrangements for space and equipment leases in the IPPS Final Rule, CMS has effectively prevented "under arrangements" commercial relationships from being restructured as equipment leasing arrangements that would provide the same degree of financial benefit to the hospital-physician joint venture partners. To secure these protections under the IPPS Final Rule, CMS has prohibited the use of percentage-based and "per click" payment methodologies under the following exceptions: (i) the space and equipment lease exceptions; (ii) the fair market value exception; and (iii) the exception for the indirect compensation arrangements.
  
  

Percentage-Based Compensation Arrangements (Effective Date - October 1, 2009)

In the 2008 Proposed Rule, CMS expressed concern that physicians were using percentage-based payment methodologies for types of arrangements not contemplated by CMS in earlier rulemakings, i.e., percentage-based compensation arrangements for office space or equipment leases and other services arrangements had become prevalent in the industry. CMS noted in the 2008 Proposed Rule that it had only intended to permit percentage payments in arrangements for physician professional services. The IPPS Final Rule, effective October 1, 2009, continues to permit percentage-based payments for physician professional services, but prohibits percentage-based payments for office space and equipment leases. The IPPS Final Rule, however, did not prohibit percentage compensation arrange-ments in certain other types of arrangments, i.e., management and billing services arrangements. CMS considers these amendments regarding the prohibition of percentage-based compensation to be a "narrow, targeted approach to address [the] most significant concerns with percentage-based compensation formulae." CMS acknowledged, however, that it will continue to review arrangements for non-professional services that are based on a percentage of revenue attributable to a physician's professional services, and warned that it may impose additional restrictions on percentage- based payments in the future if such arrangements are found to be abusive.

Unit-of-Service ("Per Click") Payments in Space and Equipment Leases (Effective Date - October 1, 2009)

The IPPS Final Rule prohibits unit of service (or "per-click") payments in connection with space and equipment leases. CMS stated that arrangements involving a physician-lessor and an entity lessee under which the physician receives per unit of service or per- click payments are inherently susceptible to abuse because the physician has an incentive to profit from referring a higher volume of patients to the lessee.

CMS makes it clear that the prohibitions on per-click payments for space and equipment used in the treatment of a patient are applicable regardless of whether the physician or the DHS Entity is the lessor or the lessee, and regardless of whether the lessor is an entity in which the referring physician has an ownership or investment interest.

In the commentary to the IPPS Final Rule, in response to an inquiry relating to space and equipment lease arrangements involving non-DHS (i.e., lithotripsy), CMS stated that a lessor/lessee relationship between a physician and an entity creates a compensation arrangement regardless of whether the lease involves the provision of DHS, non-DHS, or no services at all. In other words, even non-DHS entities that provide space or equipment on a per-click basis will likely no longer be able to satisfy an exception under the Stark Law. In addition, the IPPS Final Rule included a reminder for all parties to per-click leasing arrangements that the space and equipment lease exceptions include the requirement that the financial terms of the leasing agreement be consistent with fair market value and that the arrangement must be commercially reasonable even if no referrals were made between the parties.

Physician "Stand in the Shoes" Provisions (Effective Date - October 1, 2008)

The IPPS Final Rule revises the physician "stand in the shoes" provisions of the Stark Phase III regulations. The physician "stand in the shoes" provisions, under the IPPS Final Rule, require only those physicians who have an ownership interest in their physician organization to stand in the shoes of their organizations. Physicians with only a "titular" ownership interest (i.e., those without the ability or right to receive the financial benefits of ownership or investment, including but not limited to, the distribution of profits, dividends or proceeds from any sale of the entity) are permitted, but not required, to stand in the shoes of their physician organizations.

The Phase III regulations deemed all physicians who are "part" of a physician organization (i.e., owners, employees, independent contractors) to have the same financial relationships with DHS Entities as their physician organization. The Phase III regulations had a dramatic impact by requiring any financial arrangements directly between physician organizations and DHS Entities to satisfy one of the Stark "direct compensation" exceptions, instead of the "indirect compensation" exception. The consequence of CMS' approach to the physician "stand in the shoes" provisions in the Phase III regulations was that many academic medical centers and nonprofit integrated health delivery systems, where "mission support" and other payments are commonplace among and between the components of the systems, were unable to comply with the Phase III requirements. CMS recognized this problem shortly after the issuance of the Phase III regulations and, in November 2007, announced a one-year delay in the implementation of the physician "stand in the shoes" provisions for academic medical centers and nonprofit integrated health delivery systems.

The IPPS Final Rule version of physician "stand in the shoes" provides the flexibility to allow providers to continue to use the indirect compensation exception for non-owner physicians (i.e., employees, independent contractors, or "titular" owners) of physician organizations. The IPPS Final Rule does not require the application of the "stand in the shoes" analysis to arrangements that satisfy the Stark "academic medical center" exception. In addition, by excepting titular owners from the "stand in the shoes" analysis, CMS effectively provided for the continued use of "captive" or "friendly" PC structures for physician organizations, which are often used in states with "corporate practice of medicine" restrictions, which prohibit physicians from being employed by hospitals or other non-physician owned entities.

It is important to note that the entity "stand in the shoes" provisions were not finalized as part of the IPPS Final Rule. While acknowledging that introducing both sets of "stand in the shoes" provisions in the IPPS Final Rule would likely have proven cumbersome and confusing, CMS noted that, while opting not to issue final entity "stand in the shoes" regulations at this time, it is still concerned about the abusive business structures that were intended to be addressed by the entity "stand in the shoes" provisions – namely, the use of wholly-owned shell organizations as interposing parties between the DHS entity and the referring physician. Consequently, these arrangements will be subject to continued scrutiny on a going-forward basis.

Other Changes - Effective Date: October 1, 2008

The IPPS Final Rule contains numerous other changes to the Stark Law regulations that we also expect to be of significant interest to the provider industry. The following is a listing of the Stark regulations that became effective October 1, 2008:

• The Stark exception for payment of obstetrical malpractice insurance subsidies has been broadened to provide increased flexibility for hospitals, federally qualified health centers and rural health clinics to address shortages in obstetrical providers and to maintain and enhance access to such providers in their service areas.
  
  
• When a physician's (or immediate family member's) employer-sponsored retirement plan purchases or invests in a DHS Entity, the Stark exception for physician's (or immediate family member's) ownership interest in a retirement plan will not extend to the ownership interest in the DHS Entity. This revision will require physicians and the entities which employ them to exercise additional care in scrutinizing the investments made by their retirement plans.
  
  
• Hospitals will be required to disclose to patients, upon request, whether any physicians have ownership interests in the hospital. Furthermore, physician-owned hospitals must require medical staff members to disclose their ownership interest in writing to all patient whom they refer at the time of the referral. Failure to comply with these disclosure requirements permits CMS to terminate the hospital's Medicare provider agreement.
  
  
• CMS intends to require a selected group of no more than 500 general acute care and specialty hospitals to report all financial relationships with physicians in a "Disclosure of Financial Relationships Report." CMS will use this collected information to determine their compliance with the Stark Law and to assist in developing future regulations.
  
  
• A new exception for technical non-compliance with signature requirements of the Stark exceptions has been created that provides physicians and DHS Entities with protection, for a maximum period of 90 days, from instances of inadvertent failure to obtain signatures giving rise to Stark Law violations.
  
  
• CMS made limited technical modifications to the definition of the "period of disallowance." The new definition creates an outside limit, under certain circumstances, on the time period during which a physician would be prohibited from referring patients to a DHS Entity, and for which a DHS Entity would be prohibited from billing Medicare if a financial relationship between the DHS Entity and the physician failed to satisfy a Stark Law exception.
  
  
• CMS has clarified that the burden of proof for establishing that DHS are not furnished in violation of the Stark Law is on the DHS Entity, i.e., once CMS denies a claim for payment based on an alleged Stark violation, providers will have to prove that they were operating in compliance with an exception to the Stark Law. This clarification failed to provide any guidance in terms of evidentiary requirements for a provider in such circumstances, which will require providers to put more emphasis on proper document retention and recordkeeping practices. In addition, given that many Stark exception require compliance with the anti-kickback statute, providers will face a difficult challenge in "proving a negative" under the intent-based criminal statute.
  
  

In conclusion, these new regulations will have far reaching implications with respect to commercial relationships between physicians and DHS Entities (i.e., hospitals). We recommend that health care providers take affirmative steps in assessing and ensuring compliance with these important regulatory changes.

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