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The Center for Medicare and Medicaid Services (CMS) is in the process of conducting a review of financial relationships between hospitals and physicians pursuant to the physician self-referral statute and its implementing regulations (Stark Law). In furtherance of this process, beginning in September 2007, CMS will require hospitals to report on their relationships with physicians and their immediate family members. Initially 500 hospitals will be required to make disclosures in a mandatory "Disclosure of Financial Relationships Report." Later, reporting will be mandated for all Medicare participating hospitals. The information collected will be used to analyze the investment, ownership, and compensation relationships with regard to the hospitals and its physicians.

Recipients of the Report will be required to complete it in hard copy, certify its accuracy by the Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO"), or other senior officer of the hospital, and return it CMS within 45 days of receipt by email. Hospitals not responding within the prescribed period of time will be subject to civil monetary penalties of up to $10,000 for each day beyond the deadline established for disclosure. The mandatory disclosure process, authorized by Section 1877(f) of the Social Security Act and reporting requirements at 42 C.F.R. §411.361, follows on the heels of a voluntary survey instrument distributed to specialty and general hospitals last year pursuant to the Deficit Reduction Act of 2006 (DRA). Because CMS is unable to determine whether those hospitals that did not respond to the voluntary DRA Survey questions on financial relationships had "tainted relationships" or failed to respond for other reasons, the 290 hospitals that did not respond to the voluntary DRA Survey will be among the 500 hospitals to receive the mandatory Report this September. Therefore, hospitals who received the DRA Survey last year, but did not respond, may expect to be selected for reporting as one of the initial 500 hospitals required to complete the forthcoming Report. According to CMS, it is finalizing its list of 210 other prospective recipients of the Report. CMS, currently, is contacting the 210 hospitals in order to verify e-mail information prior to transmitting the Report. The data derived from the Report will be used to assist CMS in proposing a regular financial disclosure process that would apply to all Medicare participating hospitals.

The Disclosure of Financial Relationship Process

The Report, in its current format, consists of six detailed "worksheets" collecting information regarding:

• Worksheet 1 requests information describing the hospital's general characteristics
• Worksheet 2, consisting of three parts, requests information representing an overview of hospital ownership (e.g., cost of investment of all physicians, physician percent direct ownership, and payments made by physicians)
• Worksheet 3, consisting of two parts, requests information specifically describing individual physician ownership in the hospital (e.g., investment reconciliation and loans/loan guarantees by hospital on behalf of physician owners and investors). Separate worksheets must be completed for each physician-owner.
• Worksheet 4 consists of hospital ownership percentage calculations and a separate worksheet must be completed for each owner
• Worksheet 5 requests information describing leases or under arrangements. Specifically, Worksheet 5 requests information as to hospital/physician ownership in the land, buildings and structures in which the hospital operations are conducted, as well as the capital equipment used by the hospital.
• Worksheet 6 requests information describing compensation arrangements between hospitals and physicians (e.g., rentals, medical directorship agreements, coverage, on-call or personal service arrangements, physician recruitment, and "other types of compensation arrangements")

Hospitals should be aware that the Report requests the inclusion of supporting documentation such as copies of written agreements between the hospital and its physicians, and verification of fair market value of land and building leases

Exception to Mandatory Reporting

A hospital that furnishes 20 or fewer Part A and/or Part B services during a calendar year is excepted from the reporting requirement. Any hospital, selected to report, that believes it qualifies for the exception, must submit a written certification to CMS.

Publication of Results From the Report

The results of the Report may be shared with federal agencies and Congressional committees. However, CMS may not release to the public confidential business information except as permitted by law. CMS also intends to protect from public disclosure individual-specific information to the fullest extent permitted by law.

Conclusion and Recommendations

Hospitals expecting to receive a Report should immediately begin the process of locating hospital-physician contracts involving lease relationships, personal service agreements, physician recruitment agreements, and other types of compensation arrangements in preparation for the disclosure. Compensation and investment arrangements will also include physician-hospital joint ventures, medical directorship agreements, emergency room or on-call coverage agreements, independent contractor relationships and the like.

Because any compensation or investment relationship between a physician and a hospital may be a basis for a Stark violation, it is highly recommended that hospitals that have financial relationships with physicians conduct an audit of those relationships to ensure compliance with the Stark law, the anti-kickback statute and other applicable state or federal laws. Hospitals should evaluate their contract management systems and examine all contracts with physicians. Among other things, an audit of these relationships should review whether or not the relationships are pursuant to written agreements signed by the parties, whether those agreements are in effect and whether the compensation/financial terms are consistent with fair market value. In addition, as a general matter it is prudent to conduct compliance auditing activities under the supervision of legal counsel to retain the attorney-client privilege to the extent possible in connection with those activities. Hospitals should also take steps to protect the attorney-client privilege when submitting supportive documentation such as fair market value reports commissioned by hospital counsel. A hospital should advise CMS that it does not waive the privilege with respect to other protected information in the fair market value report not specifically requested.

Our firm has assisted numerous hospitals and physicians with the compliance audits and investigations. We can assist you in developing best practices for minimizing Stark self-referral prohibition and Anti-kickback law risks. If you require our assistance or have any questions, please contact Michael Dowell at mdowell@tocounsel.com or the lawyer in the firm who handles your health care legal matters.