United States: "Under Arrangements" Transactions Likely To Be Illegal In The Future

On July 2, 2007, the Centers for Medicare and Medicaid Services (CMS) released its proposed 2008 Medicare Physician Fee Schedule. The proposed rule and the preamble to the rule are vast in their reach. In addition to proposing updates to the Physician Fee Schedule, the Rule proposes to severely limit the availability of many Stark exceptions, and also addresses several areas of diagnostic imaging supervision and reimbursement. Included among the more significant changes are the following:

"Under arrangements" refers to the practice of a hospital contracting with an outside entity to supply certain hospital services under contract. Under arrangements deals have proliferated in recent years because the current Stark Law allows a physician-owned entity to provide services "under arrangements" to hospitals as long as the services are provided pursuant to a contract that meets the elements of the Stark indirect compensation exception. The Stark Law currently treats such "under arrangements" contracts as creating only a Stark indirect compensation financial relationship between the referring physician and the hospital. The proposed rule would revise Stark in such a way that most of these "under arrangements" transactions would be considered as creating Stark ownership financial relationships between the physicians and the hospital. The indirect compensation exception would no longer be available to the physician owners of the under arrangements entities.

CMS's proposed tightening of the exception widely used for under arrangements transactions reflects CMS' growing concern that these arrangements are proliferating unchecked and may lead to over-utilization or be an improper means of sharing hospital outpatient revenue with referring physicians. CMS appears to be gathering information for further restrictions on under arrangements transactions. On May 18, 2007, CMS announced that it will be sending a comprehensive survey to certain Medicare participating hospitals, with plans to expand the survey to other hospitals in the future. The survey is extensive and detailed, and asks many probing questions about the number and nature of each hospital's under arrangements transactions. A more detailed discussion of CMS's hospital survey is available at www.wallerlaw.com.

Although not a part of the official proposed rule, the preamble to the proposed rule addresses CMS's concern about high OB malpractice insurance rates. CMS is soliciting comments on whether the Stark Law should be revised to expand the exception allowing facilities to provide OB malpractice insurance subsidies.

CMS is proposing to revise the Stark Law to prohibit per click space and equipment leases between a physician lessor and billing entity/lessee if the physician lessor makes referrals to the lessee.

CMS proposes to clarify that percentage compensation arrangements may only be used to pay for personally performed physician services and must be based on the revenues directly resulting from the personally performed physician services and not on some other factor.

More detailed information on the Stark revisions addressed by the proposed Rule is available at www.wallerlaw.com.

CMS has long prohibited physicians from purchasing the technical component of diagnostic tests from outside suppliers and marking up the costs of those tests to Medicare. There is no current restriction, however, on a physician or independent diagnostic testing facility (IDTF) purchasing physician interpretation or "read" services for less than the amount the physician or IDTF bills the "reads" to Medicare. The new rule proposes to expand the anti-markup provision to apply to interpretations that are furnished by a physician who is not a full-time employee of the IDTF or other billing entity.

The current rule also proposes a number of significant changes to the operations and governance of IDTFs. A more detailed description of these changes is available at www.wallerlaw.com.

CMS is soliciting comments on the proposed Stark Law revisions until Oct. 31, 2007. CMS has not set a definite date for finalizing the Stark revisions, nor has CMS indicated how long it will give parties to unwind transactions that may be rendered illegal by the final Stark revisions or by the upcoming Stark III regulations (currently under review by the Office of Management and Budget and rumored to be released to the public in the very near future). Given the capital involved in many under arrangements transactions, it is reasonable to expect that CMS will provide some period of time for parties to unwind those deals, similar to the several month lead time that CMS provided when it made nuclear medicine a designated health service.

The proposed 2008 Medicare Physician Fee Schedule can be found on the CMS web site at this link. CMS has requested comments on these proposals and will consider comments received by 5 p.m. on August 31, 2007. Waller Lansden is soliciting comments on the proposed rule, and we will provide these comments to CMS.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.