Final Stark Regulations, Phase 1

On Thursday, January 5, 2001, HCFA issued "Phase I" of its final Stark Regulations. Phase II is expected shortly, which we estimate to be within 90-180 days. Phase I Regulations cover most of the Stark issues faced by medical practices.

Although the Regulations improved the ability of physicians to control their own destiny, they also increase concern in other areas. The Regulations have a one-year deferred effective date. The original Stark II law was effective January 1, 1995, and is self-actuating, which means it is in effect without regulatory interpretation; however, to the extent the Final Rules provide guidance, they should be followed.

On a positive side, the definition of "referrals" has been limited; thus, a physician who orders one of the 13 designated health services ("DHS") is not making a referral if the physician actually provides the service himself or herself; however, if another physician or an employee of the practice provides the service, the physician is making a referral. Thus, most laboratory work, done by staff personnel, will remain in the status of referred DHS. However, if the physician personally provides the service, such as injecting a pulmonology drug, then the DHS will not be considered a referred service. If a staff member injects the drug when the physician is not present, it appears that Stark regulates the physician referral to the staff member. The Final Rules also address some difficult issues when physician husbands and wives work for different practices and refer to each other. There will be increased flexibility.

The Final Regulations also allow more flexibility in profit center, or location-based accounting, which was prohibited in the proposed regulations (and is also restricted in the sale of interest in a practice safe harbor under the kickback law). However, compensation programs cannot be ad hoc, or decided after the practice has received payment for services. Thus, compensation formulas remain required.

The Regulations do not allow independent contractors to be considered group practice members; however, independent contractors who are "in the group" can supervise group practice DHS. Apparently, physicians employed as leased employees will be considered independent contractors and not group members unless they are also owners of the practice. The proposed regulations required that one physician only own any professional corporation member. The Final Regulations allow more than one physician owner of a professional corporation member under certain circumstances; however, the group practice must be a bona fide single entity.

The Final Rules allow increased flexibility in paying physicians productivity compensation from the DHS revenues personally performed. However, Florida law may have to be modified to allow physicians to be compensated from DHS revenues (over-turning the Medical Board decision in the Crow case). Five or more physicians in a group practice sub-specialty can constitute a profit center for purposes of sharing DHS profits, and if the DHS revenues are less than 5% of a physician’s income, increased freedom in using the revenues as part of his or her compensation is granted. Unclear, however, is the standard practice of paying physicians their revenues less allocated expenses. Examples are included of allowable compensation formulas (such as compensation based on RVU’s), but there is some negative language about what is probably the industry standard method of compensation. The explanation at 66 FR 878 states that "Percentage compensation that is determined by calculating a percentage of a fluctuating or indeterminate amount, such as revenues, collections, or expenses, is not fixed in advance." We continue to study the complexities of the Final Regulations and have not reached a final conclusion on the extent of the application of these comments.

One narrowing aspect of the Final Regulations involves the limitation on the use of part-time space and personnel. The Comments provide at 66 FR 889: "Part-time centralized DHS arrangements are precluded."

Thus, the practice of day-renting an MRI facility, radiologist and staff, for example, appears prohibited. The use of mobile units are restricted, but not totally prohibited.

The prior requirements that a physician be in the office when DHS services are provided has been lifted; however, remember that the physician who is not in the office is not considered to be the provider of the DHS services for compensation purposes since he or she is not personally providing the services.

For a group practice to be recognized as a group, it must be a "unified business." The Final Regulations simplify the tests and conclude that there are three elements: centralized decision-making, such as a board of directors; consolidated billing, accounting and financial reporting; and centralized utilization review. Furthermore, the government will consider the methodology of distributing income from all sources, not just DHS, to indicate whether or not the business is in fact unified. For example, if only DHS income is shared on a group basis, there would be an indication that the business is not a unified business.

The prior proposed requirement that group practices must certify their status each year has been dropped.

This memorandum is intentionally a very brief review of a lengthy and complex regulation and commentary. We will provide a more detailed review in the near future; but we thought this brief commentary would be helpful.