• Home
• |
• Professionals
  • Attorneys
  • Management
• |
• Practice Areas
• |
• News
  • Firm News
  • Recent Cases
  • Upcoming Events
• |
• Resources
  • Publications
  • HIPAA Resources
  • Practice Technology
• |
• Diversity
• |
• Contact
  • Offices
  • Directions
• |
• Search

Publications

Print

• Publications
• Health Care Updates
• HIPAA Resources
• Practice Technology

Phase II of the Stark II regulations implementing the ban on physician referrals for designated health services was recently published in the Federal Register and will become effective July 26, 2004. The regulations clarify and amend Phase I of the Stark II regulations, effective January 2002, and address other areas of the law that were not covered in Phase I. "Stark II" is the federal law that prohibits a physician from referring Medicare patients for certain services (known as "designated health services") to entities with which the physician (or a member of the physician's immediate family) has a financial relationship, unless an exception exists. Stark II also prohibits an entity from billing for services provided as a result of the prohibited referral. Stark II applies to the following services: clinical laboratory services; physical therapy, occupational therapy and speech-language pathology services; radiology and certain other imaging services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. Following is an overview of some of Phase II's significant changes to the proposed regulations.

Percentage Compensation

The personal services, fair market value and academic medical centers exceptions all require that compensation paid to the referring physician be "set in advance." As this term was originally defined in Phase I, percentage based compensation would not pass the test. However, Phase II provides that percentage based compensation arrangements will satisfy the requirement as long as the percentage fee is specifically set in advance, is objectively verifiable, and is not changed over the course of the agreement based on the volume or value of referrals or other business produced by the referring physician.

Personal Services Arrangements

The Stark II statutory exception for personal services arrangements requires that the arrangement cover all of the services to be provided. The Phase II regulations permit multiple arrangements if they incorporate each other by reference or cross-reference a master list of contracts that is maintained centrally and made available to the Secretary of HHS on request. The regulations also specify that personal services may be provided through a physician's employees, a wholly-owned entity or locum tenens physicians. Personal services may not be provided through independent contractors under this exception.

Fair Market Value for Physician Services

The new regulations create a safe harbor for establishing fair market value payment for a physician's medical director or other services. The safe harbor provides that CMS will deem an hourly rate for physician services as fair market value if it is either: (1) equal to or less than the average hourly fee for emergency department physician services in the relevant market and there are at least three hospitals in such market that provide physician services; or (2) based upon an average of the 50th percentile national compensation level for physicians in the same specialty (or general practice if the relevant specialty is not listed in the surveys) in at least four of the six physician compensation surveys by companies listed by CMS.

Rental of Office Space or Equipment

Providers now have some greater flexibility in lease arrangements. Among the clarifications:

• Leases may be terminable without cause as long as the parties do not enter into a new agreement during the first year of the original term of the agreement
• Month-to-month holdovers are allowed under the same terms as the original lease for up to six months following a term that is at least one year
• Subleases are acceptable as long as neither the lessee nor the sublessee share the space with the lessor or anyone related to the lessor

Isolated Transactions (Sales and Purchases of Property or Practices)

The Phase II regulations permit an installment sale, provided that the sale is priced at fair market value, the price is fixed prior to the sale, and the sale is "secured" (as defined by the rule) and enforceable.

Physician Recruitment

The Phase II regulations specifically provide that recruitment payments may be made through existing group practices as long as the payments meet specified requirements, including restrictions on costs that may be allocated by the group to the recruited physician and a requirement that any remuneration in excess of costs must be passed through to the recruited physician. Group practices utilizing this exception may not subject the recruited physician to a non-compete. The Phase II regulations also clarify that "relocation" is tied to relocation of the physician's medical practice and not the physician's residence. Residents and physicians in practice less than one year can qualify for the exception regardless of whether the physician physically relocates.

Retention Agreements

The Phase II regulations contain a new, limited exception for retention payments to physicians currently practicing in a Federally Qualified Health Center (FQHC) or hospital's geographic service area. If a physician practicing in an underserved area receives a bona fide written offer from a facility located more than 25 miles from the geographic area of the facility where the physician currently provides services, the latter facility is allowed to offer the physician a retention bonus in an amount equal to the lesser of the amount required to match the other facility's offer or the reasonable cost of recruiting another physician. In addition, the retention agreement must include the same repayment and forgiveness terms of the recruitment offer, if any. Lastly, a hospital or FQHC and a physician may only enter into a retention agreement once every five years and the terms of the retention agreement cannot be changed during the term of the agreement.

In-Office Ancillary Services

Under the in-office ancillary services exception, designated health services must be furnished in the same building where the referring physician practices or in a group practice's centralized building. The new regulations redefine the "same building" requirements and permit referrals to offices used only part-time by a physician where some services other than the designated health services are provided from the subleased offices. These part-time offices, however, must be used by the physician on an exclusive basis for eight hours per week, and at least six of the eight hours must be devoted to performance of physician services.

Physician Productivity Bonuses

The Phase II regulations clarify that all physicians (independent contractors, employees, etc.) can be paid productivity bonuses based on work personally performed by the physicians.

Academic Medical Centers

A number of changes are made to this exception, including the following:

• The availability of the exception is expanded to include hospitals that sponsor four or more approved medical education programs
• The requirement that faculty practice plans be tax-exempt organizations is eliminated
• The regulations clarify that the majority of the physicians on the medical staff must be faculty and that aggregation of faculty from an affiliated medical school is permitted

Professional Courtesy Discounts

The Phase II regulations specify that professional courtesy means the provision of free or discounted health care items or services to a physician or immediate family member or office staff. To qualify for the exception, the professional courtesy must be offered to all physicians on the designated health service entity's medical staff or in the local community without regard to volume or value of referrals. Further, the health care items or services must be of a type routinely furnished by the entity. The entity's policy must be set out in writing and approved in advance by the governing body of the health care provider. The courtesy must not be offered to any physician (or immediate family member) who is a federal health care program beneficiary, unless there is a good faith showing of financial need. If the courtesy involves any whole or partial waiver of any co-insurance obligation, the insurer must be informed in writing of that reduction. Lastly, the courtesy arrangement must not violate the anti-kickback statute or any billing or claims submission laws or regulations.

Charitable Donations by a Physician

The Phase II regulations impose new limitations on this exception. The donations must be made to an organization exempt from taxation under the IRS Code (or to an exempt supporting organization, such as a foundation). The donation may not be solicited or made in any manner that reflects the volume or value of referrals or other business generated from one party to the other. Lastly, the donations must not violate the anti-kickback statute or any billing or claims submission laws or regulations.

Exception for Risk-Sharing Arrangements

The Phase II regulations clarify that this exception applies in a broad manner to all risk-sharing compensation paid to physicians by a managed care plan or IPA, including payments by an entity that is downstream from a managed care plan or IPA.

Non-Monetary Compensation and Medical Staff Incidental Benefits

Both of these exceptions, which were created in the Phase I regulations, are revised in the Phase II regulations to index the relevant monetary limits for inflation. The "on campus" requirement of the medical staff incidental benefits exception is also revised to permit provision of technology, such as internet access and pagers, used away from the campus to access hospital information or personnel, and to permit identification of the medical staff on hospital web sites or other advertising. Further, this exception is expanded to apply to entities other than hospitals that have bona fide medical staffs.

Compliance Training

This exception is expanded in the Phase II regulations to be available to all entities that provide designated health services, not just hospitals. It is also modified to permit training of physicians' office staff and to include compliance training addressing the requirements of any federal, state or local law or rule governing the entity.

Conditioning Compensation on Referrals

The application of the exception created in the Phase I regulations permitting a physician's compensation to be conditioned on referrals to specified providers is narrowed. Under the Phase II regulations, this exception applies only when the required referrals are related to the services the physician performs under the arrangement, such as when an employer requires specified referrals while the physician is acting within the scope of his/her employment or when a managed care organization requires referral of its enrollees to network providers.

Temporary Noncompliance

Previously compliant arrangements that fall outside an applicable exception for reasons beyond the parties' control will now find protection for up to 90 days in a new "temporary noncompliance" exception. The parties must act quickly to remedy the non-compliance, and this exception may be used only once every three years with respect to the same referring physician.

Reporting Requirements

The Phase II regulations require reporting of financial relationships only upon the request of CMS or the Office of Inspector General. Regular, periodic reporting (which was included in the 1998 proposed regulations) is not required.

New Exceptions

The Phase II regulations also create new exceptions for the following arrangements:

• Referral services that meet the anti-kickback safe harbor for such services
• Obstetrical malpractice insurance subsidies that meet the anti-kickback safe harbor for such services
• Intrafamily referrals in rural areas where there are no other available providers of the designated health services in the area and other specified conditions are met
• Community-wide health information systems that are available to all providers, practitioners and residents of the community

While Phase II provides greater flexibility, physicians and providers must keep in mind that they cannot ignore Stark as nearly every financial relationship between physicians and entities that furnish designated health services implicates Stark. Violations of the law have substantial financial consequences for all parties involved, regardless of the intent of the parties. In light of the Phase II reporting and documentation requirements, which are incorporated throughout the various exceptions, all providers would be well advised to integrate the various requirements into their existing contracts and compliance programs. The complexity of the Stark II rule coupled with the requirements of other state and federal laws governing physician compensation, joint venture and referral arrangements make it imperative for health care providers to work closely with legal counsel when establishing physician contractual arrangements.

If you require our assistance or have any questions please contact Michael Dowell at mdowell@tocounsel.com or the lawyer in the firm who generally handles your health care legal matters.