Most notably, CMS finalized revisions to the physician "stand in the shoes" provisions as well as its proposals to restrict so-called "under arrangements" transactions, per unit space and equipment lease transactions, and percentage-based lease arrangements.

On July 31, 2008, the Centers for Medicare and Medicaid Services (CMS) released the final 2009 inpatient PPS rule (Final Rule), to be published in the Federal Register on August 19, 2008. The Final Rule includes several important revisions to the Stark regulations. Most notably, CMS finalized revisions to the physician "stand in the shoes" provisions, and, with certain modifications, finalized its proposals to restrict so-called "under arrangements" transactions, per unit (click) space and equipment lease transactions, and percentage-based compensation arrangements. The Final Rule's provisions prohibiting certain "under arrangements" transactions, and per unit and percentage-based leasing transactions, are not effective until October 1, 2009, to give the parties to these arrangements time to unwind or restructure. The other Stark provisions are effective October 1, 2008. The following is a brief summary of the Final Rule's Stark provisions.

Physician "Stand in the Shoes" Provisions

Under the Final Rule, a physician who has an ownership or investment interest in a physician organization is deemed to stand in the shoes of his or her physician organization; however, a physician who has only a compensation arrangement—or one with only "titular" ownership interest, as is commonly the case in captive PCs—need not be treated as standing in the shoes. (CMS defines titular ownership interest as where the physician is not able or entitled to receive any of the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale or similar return on investment.) For such physicians who are not required to be treated as "standing in the shoes," an entity may nevertheless elect to apply "stand in the shoes" on a relationship-by-relationship basis.

In the Final Rule, CMS provided that SITS does not apply to arrangements that satisfy the requirements of the academic medical center (AMC) exception, but it otherwise declined to finalize a separate exception for compensation arrangements involving mission support payments or similar payments in the context of academic medical centers or integrated delivery systems. CMS stated that it is not its intention, "now or in the future, to regulate financial relationships between DHS entities and referring physicians by making exceptions to rules or exceptions within existing exceptions simply in response to the complaints or concerns of the industry." CMS also declined to finalize its proposal regarding compensation arrangements between physician organizations and AMC components for the provision of services required to satisfy the AMC's obligations under the Medicare graduate medical education rules. CMS also declined to extend the SITS moratorium applicable to AMCs and integrated health care delivery systems beyond its December 4, 2008, deadline. Nevertheless, the revisions to the SITS rule, effective October 1, 2008, should allow an indirect compensation analysis of many such arrangements to be preserved.

Finally, CMS did not finalize its proposed rule to apply SITS to owners of DHS entities beyond physician organizations; however, CMS may revisit this issue in future rule-making.

Physician Investment in Entities that Perform, but Do Not Bill Medicare for, DHS

Under current law, only entities that bill Medicare for DHS are DHS entities. The Final Rule expands the regulatory definition of "entity" to include entities that perform services that are in turn billed as DHS by another entity. Because this change will require the unwinding or restructuring of many so-called "under arrangements" transactions, CMS delayed the effective date of the change until October 1, 2009.

CMS declined to define "perform services that are billed as DHS," stating that its common meaning provides the industry with enough clarity. However, CMS's response to certain comments provides some guidance on how CMS interprets the term. First, CMS states that an entity performs services that are billed as DHS if it does the "medical work" for the service and could bill for the service. Second, CMS states that it does not mean for this billing test to imply that an entity "can do substantially all of the necessary medical work for a service," but avoid being a DHS entity by arranging for the billing entity or some other entity to complete the service. Finally, CMS states that it does not consider an entity that leases or sells space or equipment used to perform the services; or furnishes supplies (not separately billable) used in the performance of the services; or provides management, billing services or personnel to the entity performing the service, to perform services that are billed as DHS. Left unclarified is whether an entity that does some, but not substantially all, of the "medical work" for the service (not enough to bill for the service), or an entity that furnishes more than one of the "inputs" for the service that is billed as DHS, is a DHS entity.

Also, for the reasons indicated in the next section, such entities that provide space or equipment on a per service (per click) or percentage-of-revenue basis, even if not deemed to be DHS entities, may no longer be able to meet a Stark Law exception.

Per Unit (Click) and Percentage-of-Revenue Lease Arrangements

CMS finalized its proposal from the proposed 2008 Physician Fee Schedule update to prohibit per-unit (click) fee payments in space and/or equipment leases when the payments reflect services provided to patients referred between the parties. CMS also followed through on its proposed restriction on percentage-based compensation. However, the Final Rule makes certain important changes and clarifications in these final rules, effective October 1, 2009. First, CMS broadened the "click" fee prohibition to apply not only to direct compensation exceptions, such as the space lease and equipment lease exceptions, but also to the indirect compensation exception. This clarifies that the prohibition on "click" fees is not limited to space and/or equipment leases between physician-owned medical practices and DHS entities (which must be analyzed under a direct compensation exception), but also applies to leases between physician-owned leasing companies and DHS entities (which must be analyzed under the indirect compensation exception). Second, CMS finalized its prohibition on percentage-based compensation in space and equipment leases, paralleling its treatment of per unit fees in space and equipment leases. The prohibition, added to both the direct compensation exceptions (i.e., space lease, equipment lease and fair market value exceptions) and the indirect compensation exception, bars use of "a formula based on . . . [a] percentage of revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated" in the space or through the use of the equipment. Notably, this prohibition on percentage-of-revenue compensation, read literally, is not limited to arrangements where the compensation fluctuates based on referrals between the parties. However, the prohibition on percentage leases was not included in the indirect compensation arrangement definition, and as a result such arrangements may survive these recent changes. Finally, CMS clarifies that the prohibition on per "click" and percentage-of-revenue compensation in space and equipment leases between a referring physician (or his or her physician organization) and a DHS entity applies regardless of which party, the DHS entity or the referring physician (or physician organization), is the lessor or the lessee, or the source of the patient referrals.

The "Set in Advance" Requirement and Amendments to Compensation Terms

In the preamble to the Final Rule, CMS modifies its prior interpretation of the "set in advance" requirement as applied to an amendment of the compensation terms in a space lease, equipment lease or personal services agreements. CMS's new position is that amendments to the compensation terms of an agreement between a DHS entity and a physician (or physician organization) during the term of the agreement will not cause the agreement to fail the "set in advance" requirement provided that: (1) all of the requirements of an applicable compensation exception are satisfied; (2) the amended rental charges or other compensation (or the formula for the amended rental charges or other compensation) is determined before the amendment is implemented and the formula is sufficiently detailed so that it can be verified objectively; (3) the formula for the amended rental charges does not take into account the volume or value of referrals or other business generated by the referring physician; and (4) the amended rental charges or compensation (or the formula for the new rental charges or compensation) remain in place for at least one year from the date of the amendment. This application of the "set in advance" requirement applies to all compensation exceptions requiring a term of at least one year. Importantly, CMS also noted that the "set in advance" requirement, where it appears, does not in and of itself require that signatures be present.

Period of Disallowance for Non-Compliant Arrangements

In the proposed 2009 inpatient PPS rule, CMS proposed to define the period of time in which an entity could not bill Medicare for DHS rendered pursuant to referrals by a physician because the financial relationship between the referring physician and the DHS entity failed to satisfy all of the requirements of a Stark exception (the period of disallowance). In the Final Rule, CMS finalized these period of disallowance proposals but clarified that these periods of disallowance only define the outside period of disallowance, after which the physician and the DHS entity can be assured that the physician's referrals and the entity's claims for DHS rendered pursuant to such referrals are permitted. These provisions are not intended to prevent the parties from arguing that the period of disallowance ended earlier than the prescribed outside period of disallowance on the theory that the financial relationship ended at an earlier time. The prescribed outside period of disallowance begins at the time the financial relationship fails to satisfy the requirements of an applicable exception and ends no later than: (1) where the noncompliance is unrelated to compensation, the date that the financial relationship satisfies all of the requirements of an applicable exception; (2) where the noncompliance is due to the payment of excess compensation, the date on which all excess compensation is returned to the party that paid it and the financial relationship satisfies all of the requirements of an applicable exception; (3) where the noncompliance is due to the payment of compensation that is of an amount insufficient to satisfy the requirements of an applicable exception, the date on which all additional required compensation is paid to the party to which it is owed, and the financial relationship satisfies all of the requirements of an applicable exception.

Accommodation for Temporary Noncompliance with Signature Requirements

A number of important Stark compensation exceptions include a signature requirement. This has created significant exposure for hospitals, in particular, because they usually have many agreements with physicians that, if not signed, do not fall within a Stark exception. The Final Rule adds a new paragraph to the Stark regulations (§411.353(g)) that effectively forgives a failure to meet the signature requirement of a compensation exception if the other requirements of the exception were met and the failure to comply with the signature requirement was (1) inadvertent, and the parties obtain the signature(s) within 90 days following the date on which the compensation arrangement becomes noncompliant (without regard to whether any referrals have occurred or compensation has been paid during such 90-day period); or (2) not inadvertent, and the parties obtain the required signature(s) within 30 days following the date on which the compensation arrangement becomes noncompliant (without regard to whether any referrals have occurred or compensation has been paid during such 30-day period). Importantly, this accommodation for temporary noncompliance with the signature requirements of a compensation exception may only be used once every three years with respect to a particular referring physician.

Alternative Exception for Obstetrical Malpractice Insurance Subsidies

Stark regulations currently include an exception for obstetrical malpractice insurance premium subsidies that meet the anti-kickback safe harbor for such subsidies. Responding to concerns that this exception is too narrow and limits access to obstetrical care in underserved areas, CMS includes in the Final Rule an alternative exception for subsidies of obstetrical malpractice insurance premiums. This new exception protects a subsidy paid by a hospital, federally qualified health center or rural health clinic (but not other entities) if 10 requirements are met, including the requirement that: (1) the physician's medical practice is located in a primary care Health Professional Shortage Area, rural area or area with a demonstrated need for obstetrical services as determined by the Secretary in an advisory opinion; or (2) at least 75 percent of the physician's obstetrical patients reside in a medically underserved area or are part of a medically underserved population.

Carve-Out for Investment Interests in Retirement Plans Clarified

Stark regulations currently carve out of the definition of "ownership or investment interest" interests in a retirement plan. The Final Rule modifies this exception to clarify that the carve-out only applies to an interest in an entity arising from a retirement plan offered by that entity to the physician (or the physician's immediate family member) through the physician's (or immediate family member's) employment with that entity. That is, the exception does not apply to investment interests in DHS entities other than the retirement plan sponsor that arise from the physician's (or immediate family member's) participation in the employee retirement plan.

Burden of Proof in Appeals of Stark-Based Payment Denials by CMS

The Final Rule, with some modification, finalizes CMS's proposed rule placing the burden of proof in appeals of Stark-based payment denials on the entity appealing the denial. If CMS denies payment on the basis that the claim is for services rendered pursuant to a prohibited referral, and the claimant appeals, the claimant carries the ultimate burden of proving, at each level of appeal, that the services were not rendered pursuant to a prohibited referral. This burden is consistent with the burden of proof on Medicare providers and suppliers appealing payment denials based on other reasons, such as a failure to meet a condition of coverage. The burden of production (or burden of going forward with evidence), at each level of appeal, is on the claimant initially; however, this burden can shift to CMS or its contractors and back to the claimant during the course of the proceeding depending on the sufficiency of the evidence presented by the claimant and CMS or its contractors on the issue in dispute. CMS disagreed with many commenters' concern that this allocation of the burden of proof is especially problematic on the issue of fair market value because experts can disagree on what is fair market value. Noting that fair market value is usually expressed as a range, CMS states that claimants that establish compensation based on a valuation methodology that is reasonable under the facts and circumstances, and that document the determination of fair market value, "should not face significant difficulty in establishing fair market value."

Disclosure of Financial Relationships Report (DFRR)

The Final Rule announces that CMS is proceeding with its proposal to send the DFRR to 500 hospitals (both general acute care hospitals and specialty hospitals), although this number could be reduced (but not increased) based on further review and comments on the Paperwork Act Reduction package to be published separately by CMS in the Federal Register. The DFRR is designed to collect information concerning the ownership and investment interests and compensation arrangements between hospitals and physicians, including financial relationships that the hospital has determined qualify for a Stark exception. Hospitals will have 60 days to complete the DFRR, and although a hospital may be subject to civil monetary penalties of up to $10,000 per day for each day the DFRR submission is late, CMS would not impose a civil monetary penalty in any amount before issuing a letter to tardy hospitals. Further, a hospital may, upon a demonstration of good cause, obtain an extension of time to submit the information. CMS also announced that the DFRR would only be used as a one-time information collection effort, and CMS is not, at this time, instituting a regular, ongoing reporting or disclosure process for hospitals. Finally, CMS emphasizes that if, based on the results of the DFRR, CMS does not initially determine that the Stark law has been violated by a hospital, the government would not be estopped from later determining there is a violation based on further review of the DFRR results or additional different information.

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