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2008 Physician Fee Schedule Proposes A Host of Stark Law Revisions - And It Isn’t Even Phase III…


CMS issued the Proposed CY 2008 Medicare Physician Fee Schedule on July 2, 2007 (the “Proposed Rule”). Not only does this Proposed Rule establish several physician payment reforms, it also proposes to dramatically revise the Stark Regulations in several significant ways. The timing and extent of the somewhat confusing combination of a) proposed changes, and b) requests for comment on whether certain other changes ought to be proposed, is somewhat surprising given CMS’s delay in issuing the long-awaited Stark II, Phase III regulations. Nonetheless, the suggested revisions set forth in the Proposed Rule, if implemented, will have physicians and health care entities scurrying to re-structure many longstanding relationships previously thought to be acceptable under Stark.

The Proposed Rule will be published in the Federal Register on July 12, 2007. CMS will accept public comments on the Proposed Rule through August 31, 2007. Please read further for our analysis of the key provisions.

1. CMS’ Otherwise Comprehensive Imposition of Anti-Markup Provisions on Diagnostic Tests Warrants No Change to Stark Definition of “Centralized Building” at this Time; Comments Solicited

CMS has for some time been concerned about ways in which the general Medicare rule prohibiting markups on the technical component of certain diagnostic tests may be avoided through a) the use of reassignment under contractual arrangements and b) group practices billing for the services of a contracted physician providing services in a Stark-defined “centralized building.” CMS believes that a physician group’s ability to profit through contracting for diagnostic testing services at one price, while billing Medicare a higher price, not only leads to higher reimbursement, but could induce over-utilization and other abuses as well.

In the Proposed Rule, CMS has proposed specific anti-markup provisions related to the professional and technical components of diagnostic tests. These provisions would in effect eliminate the opportunity for any physician group to earn revenues based on the difference between the price it pays under contract for those services and the reimbursement it is then paid by Medicare as the billing entity.

At this time, CMS is only seeking comments on a proposal to apply anti-markup rules to technical component billings for the services of a group’s part-time or leased employees performing services in a “centralized building,” where there is no reassignment or purchase of service relationship. Should those comments convince CMS that anti-markup concerns also lurk in these relationships, CMS anticipates that changes to the “centralized building” definition could help eliminate markup possibilities in these circumstances as well.

If such changes are deemed appropriate, CMS is likely to revisit its own previously proposed modifications to the “centralized building” definition. Specifically, CMS had previously proposed that to qualify as a “centralized building” the building would need to a) consist of at least 350 square feet (unless no more than three group practices owned or leased space in the building and shared the same “physician in the group”) and b) contain on a permanent basis all the necessary equipment for performing the designated health services at issue. In other words, the centralized building would need to demonstrate more substance and a more bona fide connection to its host practice. Other alternatives may also be considered, based upon comments received.
To be clear, however, at this time no changes to the Stark Law’s “centralized building” definition are proposed. Given the tenor of CMS’ anti-markup concerns, however, it would not be at all surprising at all, however, to see this issue addressed with specific changes to this definition in the near future.

2. Burden of Proof

CMS proposes to add a new paragraph to the Stark regulations (at 411.353(g)) “clarifying” that if CMS determines a claim should be denied because it was the product of a prohibited referral, the burden of proof falls on the entity submitting the claim to show that the service was not furnished pursuant to a prohibited referral. While a seemingly benign proposition, this could be an important battle for CMS to win (and how could it not?) in order to squelch otherwise troublesome litigation challenges to its enforcement authority, especially to the extent a litigant could argue that CMS’ own broad “referral” definition may not square with the narrower statutory prohibition on referrals. CMS has also recently taken the litigation posture that a physician identified on Medicare claims forms as the “attending” physician is the “referring” physician for Stark purposes. Defense of this position, too, may be buttressed by the new burden of proof standard.

3. In-Office Ancillary Services Exception

In the Proposed Rule, CMS expresses some significant concern that the in-office ancillary services exception (“IOAE”) may have gotten out of hand. CMS observes that the exception no longer covers only services closely connected geographically and/or operationally to the core services of the group practices taking advantage of this broad Stark exception. CMS describes situations, for example, where a group practice may refer its pathology services to a distant location, where services are supervised by a physician connected to the practice only by contract, and where the technical services themselves may be provided by some other entity entirely. CMS suggests “such arrangements may be nothing more than enterprises established for the self-referral of DHS.”

CMS relates other examples of instances where it has been advised via comments to previous regulations that the exception may lead to “abuse”: the use of multiple “centralized facilities” by a single group practice; the usurpation of independent physical and occupational therapy practices by physician groups; the ability of group practices to order and perform numerous ancillary services without referring to an outside specialist.

In the previously-published CY 2007 PFS Proposed Rule, CMS zeroed in on one of the above-referenced concerns, e.g., where group practices contracted with a physician specialist located in a centralized building, who then reassigns his/her right to payment out to the group practice. Presumably, the anti-markup component of this Proposed Rule will assist in addressing this “lack of connection to the group” problem. In this publication, however, CMS goes further, and signals its intent to now look within the group practice itself for other potential abuses of the IOAE, specifically at the migration of complete, ready made laboratories and sophisticated and expensive imaging or other equipment into physicians’ offices. “Turn key” operations being marketed over the Internet are explicitly identified by CMS as an area of concern.

To be clear, CMS proposes no changes to the IOAE at this time. Instead, CMS solicits comments regarding the question of whether the in-office ancillary services exception has been abused and should be modified, and specifically whether: 1) some DHS should not qualify for the exception (e.g., those that are not “incident to” a physician’s services, not needed at the time of the visit, etc.), 2) changes should be made in the “centralized” or “same building” definitions, 3) non-specialists should be able to refer for specialized services using equipment owned by the non-specialist and 4) any other restrictions on ownership or investment in services that could curtail abuse.

4. Obstetrical Malpractice Insurance Subsidies

CMS indicated a willingness to expand the scope of the exception for subsidies of physicians' obstetrical malpractice insurance premiums, based on accounts of patient difficulty accessing obstetrical care and physicians' willingness to move their practices to states with lower malpractice insurance premiums. Currently, the exception merely incorporates the language of the Federal health care program anti-kickback statute's according regulatory safe harbor for such subsidies. Without proposing regulatory language, CMS has requested comment on how such programs may be subject to greater fraud and abuse risk should a broader exception accommodate more flexible "locational" requirements, e.g., whether the subsidizing entity, the physician, and the patients served must each be located within a HPSA or MUA, or whether the patients must be part of an MUP.

5. Unit-Of-Service (Per Click) Payments in Space and Equipment Leases

Signaling its intent to retract its previous stance on the permissibility of "per-click" rental and equipment leases, CMS has now proposed to prohibit certain types of “per-click” leases, or components thereof. Specifically, CMS has proposed to prohibit "per-click" rental and equipment leases in situations where (a) the physician is the lessor, (b) the DHS entity is the lessee, and (c) the entity's "per-click" payment to the physician is for the use of the physician's space and/or equipment in (d) the entity's rendering of services to a patient referred by the physician-lessor to the DHS entity-lessee. CMS indicated its belief that such "per-click" lease arrangements pose too much risk of overutilization and incentive for profit.

In addition, CMS has requested comment on whether the reverse scenario should be similarly prohibited, i.e., whether "per-click" leases should be prohibited where (a) the DHS entity is the lessor, (b) the physician is the lessee, and (c) the physician's "per-click" payment to the entity is for the use of the entity's space and/or equipment (d) in the physician's rendering of services to a patient sent by the entity to the physician. At first blush, this latter scenario would appear to encompass a greater number of existing market relationships than the former scenario; however, many such arrangements may not come within the ambit of a proposed prohibition, to the extent that the DHS entity-lessor does not "send" patients to its physician-lessees.

6. Period of Disallowance for Noncompliant Financial Relationships

CMS has also requested comment on how it should prescribe the "period of disallowance" (or the “period of taint”) of claims that would otherwise be properly submitted to Medicare, pertaining to financial relationships that do not satisfy a statutory or regulatory exception. CMS provided an example of a space lease initially set at below-market rent but that later is "corrected" to reflect a fair market value rental payment. CMS questions whether the "period of disallowance" should run only from the first day of the lease to the date of correction, or whether referrals subsequent to the date of correction should also be prohibited (forever?), based on the assumption that such referrals were also incentivized by the previous, below-market rent requirement and, if so, how long the period of disallowance should extend.

CMS has also solicited comments on how it should prescribe periods of disallowance in instances where it is more difficult to ascertain the start and end dates of impropriety. CMS specifically inquired as to whether it would be appropriate to "disqualify" parties from using statutory or regulatory exceptions that they otherwise would have met. For instance, if an entity provides non-monetary compensation to a physician in the amount of $900 (the regulatory exception contains a $300 cap), should the parties be disqualified from utilizing the pertinent exception for two additional years, i.e., until the parties "spend down" three years' worth of $300 payments? Should such a "spend down" feature be adopted, it is unclear if CMS would then view as permissible a hospital's non-monetary donation to a physician of a $900 piece of equipment, if no donations were made to that physician in the subsequent two-year period.

7. Ownership or Investment Interest in Retirement Plans

The existing Stark rules exclude, as ownership and investment interests, “an interest in a retirement plan.” 42 CFR § 411.354(b)(3)(i). Under the proposed rule, this exception would be modified such that the only “retirement plans” to which the exception would apply would be retirement plans offered by an entity to a physician (or immediate family member) as a result of the physician’s or immediate family member’s employment with the entity. CMS has proposed this restriction out of concern that “some physicians are using retirement plans to purchase DHS entities to which they refer patients for DHS,” an activity CMS says is “contrary to our intent.” Under the revised rule, this type of investment interest would no longer be free from scrutiny under Stark. <

8. “Set in Advance” and Percentage-based Compensation Arrangements

Over the years, CMS has struggled to implement statutory and regulatory exceptions that require compensation to be “set in advance” (or “fixed in advance”). Past efforts to define the term have been publicly criticized as overly restrictive, particularly as applied to percentage compensation arrangements. In the latest wrinkle, CMS expresses its concern that, “[d]espite our intent,” percentage-based compensation is being incorporated into equipment and office space leases and other arrangements. As a result, CMS now proposes to clarify that percentage compensation arrangements (1) may only be used for paying for personally performed physician services, and (2) must be based on the revenues directly resulting from the physician services. This limitation would rule out an exclusion for a payment arrangement based, e.g., on the percentage of the savings by a hospital department (that is, “gainsharing” arrangements).

9. Standing in the Shoes of Another Entity

The concept of an entity “standing in the shoes” of another entity has been raised previously by CMS in the Stark context with regard to whether physicians may stand in the shoes of their group practices. This confusion remains vexatious to CMS because of its inartful establishment of the “indirect compensation arrangement” definition and its exception. For now, CMS deals only with the DHS entity, not the physician group, and will probably be addressed in Phase III. CMS proposes to treat a DHS entity as “standing in the shoes” of an entity that the DHS entity owns or controls. The DHS entity is thus deemed to have the same compensation arrangements with the same parties and on the same terms as does the entity it owns or controls.

CMS cites, as an example, a situation where a hospital owns or controls a medical foundation that contracts with a physician to provide services at a clinic owned by the medical foundation. Under the proposed approach, the hospital in this instance would be deemed to have a direct compensation relationship with the physician. CMS is soliciting comments as to whether and how it should employ a “stand in the shoes” approach to this and other financial relationships potentially subject to Stark.

10. Alternative Criteria for Satisfying Certain Exceptions

In an important and potentially helpful response to several comments asserting that trivial and innocent violations of the Stark Law may result in huge penalties to entities submitting claims to Medicare, CMS is seeking comments regarding its proposal to amend certain exceptions to provide an alternative method for satisfying the exception. While noting that it does not have the discretion or authority to waive violations of the statute, CMS’ proposal to provide for “alternative methods for compliance” signals a recognition that the statute’s potentially severe sanctions are perhaps too draconian to apply to certain inadvertent or minor violations.

The “alternative method for compliance” approach would provide that, if an arrangement does not meet all the existing prescribed criteria, it would nonetheless meet the exception if certain factors were present. For example, the non-compliance a) would need to be self-disclosed to CMS, b) the arrangement would need to satisfy all but the “procedural or form” requirements of the exception, c) the failure to so comply must be inadvertent (the parties must be unaware of the non-compliance at the time DHS referrals are made), and d) no more than a set amount of time would need to have passed since the non-compliance occurred. CMS notes that if alternative method for compliance provisions were added to the regulations, they would “complement” and not replace the existing exception for arrangements involving temporary non-compliance.

CMS is soliciting comments as to whether such alternative method for compliance provisions should be adopted, and if so, to what exceptions should they apply and under what circumstances.

11. Services Furnished “Under Arrangements”

In the Proposed Rule, CMS once again expresses its historical concern over the proliferation of hospital /physician joint ventures pursuant to which a hospital contracts with the joint venture to provide a service, i.e. diagnostic imaging, “under arrangement” to the hospital, where the physician joint venturers are in a position to refer patients to the joint venture for the service. CMS notes that under these arrangements, the physician joint venturers can have an incentive to over-utilize the services of the joint venture entity directly furnishing the DHS service, yet the Stark law may not be implicated because the joint venture is not the entity ultimately billing Medicare for the service.

CMS proposes to address its concerns over these arrangements by amending the definition of the term “entity” to include both the person or the entity that “performs” the DHS, as well as the person or entity that submits claims to Medicare for the DHS. CMS also seeks comments on whether it should implement an alternative approach to eliminate these referral incentives proposed by MedPac in a report to Congress in 2005. MedPac’s recommendation was to expand the definition of “ownership interest” to include interests in an entity that derives a “substantial portion of its revenue from a provider of DHS.

12. Independent Diagnostic Testing Facility (“IDTF”) Standards – Shared Space Prohibited

Although not directly Stark-related, the proposed changes to the IDTF performance standards, first issued in the 2007 Physician Fee Schedule final rule, will cause IDTFs to revisit the lease arrangements many of them have entered into with physician groups and other entities. CMS proposes to formalize the “interpretive guidance” it issued and then rescinded earlier this year regarding the standard that requires IDTFs to “maintain a physical facility on an appropriate site.” The interpretive guidance suggested that in meeting this standard, “IDTFs may not share space with another active Medicare supplier.” Because IDTFs routinely engage in arrangements that involve sharing space and/or equipment with other suppliers, block lease or per click arrangements, the guidance caused considerable controversy in the IDTF community. In response, CMS rescinded the guidance.

In an apparent effort to demonstrate its ongoing concern about these shared space arrangements, CMS takes its “guidance” a step further and proposes to add a new performance standard which will require that a fixed base IDTF “does not share space, equipment, or staff or sublease its operations to another individual or organization.” CMS states that it believes that allowing IDTFs to commingle office space, staff (including supervising physicians and non-physician personnel), or equipment through sublease arrangements “may allow an IDTF to circumvent Medicare enrollment and billing requirements.” The public comment on this proposed new standard is sure to be substantial and heated.


The Proposed Rule is confusing in several procedural ways, notably the relationship the publication will have to the still-anticipated Phase III rules, and CMS’ reliance on a fuzzy combination of “proposed” rules, “anticipated to be proposed” rules and “requests for comments.” What is clear from the publication, however, is that CMS intends to address historically-acknowledged problem areas in the Stark regulations. Those problem areas have presented both broad opportunities and frustrations in the past. When CMS follows through on its planned revisions, a more balanced construct of the Stark Law, its prohibitions, and its exceptions may well result.

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