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All rights reserved, Phelps Dunbar LLP Health Law Update is published as a service to clients and friends of Phelps Dunbar LLP, and should not be construed as legal or professional advice or as opinion on specific fact.

Proposed Changes to Stark Regulations in Medicare Inpatient

Prospective Payment System Rule and FY 2009 Rate

May 6, 2008

On April 14, 2008, the Centers for Medicare and Medicaid Services ("CMS") posted on its website the proposed Inpatient Prospective Payment Systems ("IPPS") and Fiscal Year 2009 Rates (the "proposed rule"). The proposed rule was published in the Federal Register on April 30. Comments concerning the proposed rule are due no later than 5:00 p.m. EDT on June 13, 2008. Included were proposed changes to the physician self-referral ("Stark") rules confirming CMS's statements that it will continue to use the annual IPPS rule as a vehicle for announcing future Stark changes.

The purpose of this article is to describe CMS's proposed Stark changes.

1. Definitions of "Physician" and "Physician Organization"

CMS proposes revising the definitions of "physicians" and "physician organization" to clarify that (1) a physician and the professional corporation ("PC") of which he or she is the sole owner are always treated as one unit for purposes of applying the physician self-referral rules; and (2) a physician who stands in the shoes of his or her wholly-owned PC also stands in the shoes of his or her physician organization (if the physician or PC is a member of a physician organization) in accordance with the physician "stand in the shoes" provisions.

2. "Stand in the Shoes" Rules

1. Stand in the Shoes - Physician

In Stark II, Phase III, CMS introduced the concept of a referring physician "standing in the shoes" of his or her physician organization (the "physician SIS provisions"). Under this concept, when determining whether a direct or indirect compensation arrangement exists, CMS collapses the relationship between a referring physician and his or her physician organization, and the referring physician is considered to have the same compensation arrangements with the same parties and on the same terms as the physician organization. Thus, for example, if a hospital contracted with a physician organization to provide medical director services, and the physician organization employed or contracted with a physician to provide the services, the arrangement would be analyzed as a direct compensation arrangement between the hospital and the physician, rather than an as indirect compensation arrangement. The result is that many more hospital/physician relationships will have to meet the more stringent requirements of the direct compensation exceptions.

Following the publication of Phase III, CMS received comments from representatives of academic medical centers and integrated health care delivery systems concerning the application of the physician SIS provision to compensation arrangements involving support payments from parent organizations to subsidiary physician organizations. The commenters argued that prior to Phase III, the support payments did not implicate the Stark rule because they did not meet the definition of an indirect compensation arrangement. But, under the physician SIS provision, the support payments resulted in direct compensation arrangements between the parent entity and the physicians employed or contracting with the subsidiary physician organization. To provide CMS sufficient time to examine this issue, on November 15, 2007, CMS issued a final rule delaying the effective date of the physician SIS provision until December 4, 2008 with regard to compensation arrangements between a faculty practice plan and another component of the same academic medical center and compensation arrangements between an affiliated DHS entity and an affiliated physician practice in the same integrated section 501(c)(3) health care system.

In the proposed rule, CMS offers two alternative approaches to applying the physician SIS provision to support payments. Under the first alternative, for which CMS proposes regulatory text, a physician would not be deemed to stand in the shoes of his or her physician organization if the compensation arrangement between the physician and the physician organization meets the requirements of the bona fide employment exception, the personal services arrangement exception or the fair market value exception. Physician owners and investors would continue to stand in the shoes of their physician organizations, however, as would members of a group practice whose compensation arrangements fall under the in-office ancillary services exception.

Under the second alternative, for which no regulatory text is proposed, CMS would not revise the physician SIS provision, but would instead create a separate exception applicable to specific types of "nonabusive" support payments, subject to conditions necessary to protect against program and patient abuse. CMS solicits comments on how it should define such support payments, what criteria such an exception should include, and what types of parties should be permitted to use the exception.

2. Stand in the Shoes – DHS Entity

In the July 2007 proposed Medicare Physician Fee Schedule ("MPFS"), CMS proposed a requirement that, if an entity providing designated health services (a "DHS entity") owns or controls an entity to which a physician refers Medicare patients for DHS, the DHS entity would stand in the shoes of the subsidiary entity and would be deemed to have the same compensation arrangements with the same parties and on the same terms as the subsidiary entity (the "DHS entity SIS provision"). Commenters responding to this proposal argued that the standard was unclear and potentially overly broad, and requested guidance concerning the level of ownership or control that would trigger the application of the DHS entity SIS provision.

CMS did not finalize this standard in the final 2008 MPFS. Rather, CMS is now re-proposing the DHS entity SIS provision with some modifications. Under the new proposal, a DHS entity would be deemed to stand in the shoes of an organization in which it has a 100 percent ownership interest. In contrast to the proposed MPFS proposal, the new proposal would require that the DHS entity stand in the shoes of any wholly-owned organization regardless of whether that organization provides DHS.

CMS requests comments as to whether the standard should apply to other organizations in which the DHS entity holds less than a 100 percent ownership interest and, if so, what amount of ownership should trigger application of the DHS entity SIS provision. CMS also seeks comments on whether a DHS entity should stand in the shoes of an organization it "controls" (defined as having the power, directly or indirectly, significantly to influence or direct the actions or policies of the organization), and on what level of control should trigger application of the standard.

3. Application of Both "Stand in the Shoes" Provisions

In addition to refining its "stand in the shoes" provisions, CMS proposes to follow the following "conventions" in applying these standards to a chain of financial relationships:

• Generally, in analyzing a chain of financial arrangements, CMS would first apply the physician SIS provision to the relationship between the physician and his or her physician organization.
   

• However, if applying the physician SIS provision would result in only one financial relationship between the DHS entity and the "collapsed" physician/organization and that relationship is an ownership interest, CMS would not apply the physician SIS provision. Rather, CMS would first apply the DHS entity SIS provision.
   

• If applying the physician SIS provision results in more than two links remaining in the chain of financial relationships, CMS would then apply the DHS entity SIS provision.

CMS is not currently proposing regulation text with regard to these conventions. When the provisions are finalized, CMS will amend the regulatory text as necessary to codify these conventions.

3. Period of Disallowance

In response to the Phase II rule, several commenters questioned what the time period would be for which a physician could not refer patients for DHS to an entity and for which the entity could not bill Medicare if a financial relationship between a referring physician and a DHS entity failed to satisfy a Stark exception (the "period of disallowance"). CMS is proposing to establish outer limits in certain cases for the period of disallowance depending on whether failure to meet a Stark exception is (1) not related to compensation, (2) related to excess compensation or (3) related to insufficient compensation.

Where the reason a financial relationship does not meet a Stark exception is not related to compensation (e.g., signature is missing on a contract), the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the arrangement was brought into compliance. CMS is proposing that where the reason a financial relationship does not meet an applicable Stark exception is related to the payment or receipt of excess compensation (e.g., a medical director is paid an hourly rate above fair market value), the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the excess compensation (including interest on the excess compensation) was returned by the party receiving it to the party that provided it and all other requirements of the applicable Stark exception are met. Where the reason a financial relationship does not meet an applicable Stark exception is related to the payment or receipt of compensation that is insufficient to satisfy the requirements of a Stark exception (e.g., physician pays hospital lessor a rental rate for office space that is below fair market value), CMS is proposing that the period of disallowance would begin on the date the arrangement first was out of compliance and ends no later than the date the shortfall was paid to the party to which it is owed, and all other requirements of the applicable Stark exception are met. The "shortfall" would be the amount (including interest) necessary to bring the arrangement into compliance from the date of its inception. Although CMS is proposing specific rules for determining the period of disallowance, CMS emphasized that certain arrangements would still have to be analyzed on a case-by-case basis.

CMS notes in its proposed rule that it is only placing outside limits on the period of disallowance for making referrals and billing the Medicare program in the case of certain noncompliant financial relationships. CMS expressly states that these periods of disallowance do not address whether the Anti-Kickback statute is implicated and/or whether civil monetary penalties under the physician self-referral statute are potentially applicable due to noncompliant financial relationships.

4. Gainsharing Arrangements

Gainsharing programs are designed to provide incentives to physicians to assist hospitals in controlling hospitals' costs of patient care by financially rewarding physicians with a share of saved costs. Incentives provided to physicians under a gainsharing arrangement are considered a financial relationship for Stark purposes, and thus, would prohibit a physician from referring a patient to an entity for the furnishing of a DHS unless the financial relationship meets the requirements of a specific Stark exception.

Although recognizing the numerous favorable OIG gainsharing advisory opinions, CMS and Congressionally approved demonstration projects and the value gainsharing arrangements could bring to the Medicare program through reduced program costs, CMS declined to issue a specific exception to Stark for gainsharing arrangements in the proposed rule. The Stark statute grants CMS the authority to issue additional exceptions, but only if such exceptions create no risk of abuse to patients or the Medicare program.

CMS announced, however, that it is interested in receiving comments regarding an exception for gainsharing arrangements addressing (1) what types of requirements and safeguards should be included in any exception, and (2) whether certain services, clinical protocols or other arrangements should not qualify for the exception.

5. Physician-Owned Implant and Other Medical Device Companies

CMS's request for comments regarding whether the Stark rule should address physician-owned implant and medical device companies (POCs) reflects a rising concern regarding physician investment in these manufacturing, distribution and purchasing companies. Physicians' financial incentives from ownership, according to CMS, may "foster an anti-competitive climate, raise quality of care concerns and lead to over-utilization of the device or other product to which the physician is linked."

Regulators' concern as to physician investment in POCs was earlier evidenced in the OIG's October 6, 2006 letter on the same topic and, more recently, when CMS proposed to revise the definition of "entity" in its CY 2008 Physician Fee Schedule proposed rule. When CMS proposed to include in the definition an entity that "causes" a claim to be submitted to Medicare, commenters questioned whether a physician-owned implant or other medical device company would be considered a "entity," as arguably, a manufacturer could be considered an "entity" using that definition.

In the proposed Stark rules, CMS requests comments concerning whether Stark should address POCs and other physician-owned companies or whether these organizations could be addressed through False Claims Act enforcement, the Anti-Kickback law, other public laws and through federal, state and local regulations. CMS specifically asks: (i) whether physician ownership in POCs and other organizations presents risks of over-utilization, substandard care and increased costs to Medicare beneficiaries or whether the risk is limited to anti-competitive behavior; and (ii) if the answer to (i) is "yes," CMS asks for suggestions of specific actions to take, including whether POCs should be considered DHS entities under particular circumstances, whether physician investors in POCs who influence a hospital's ordering of medical devices should be considered to have a direct compensation relationship with the hospital and whether certain investment interests should be excepted from Medicare coverage.

6. Financial Relationships between Hospitals and Physicians; Disclosure and Enforcement

Stark requires DHS entities to provide the Secretary with information concerning a DHS entity's ownership, investment and compensation arrangements. CMS has been working on a form for the required reporting since the 1991 Stark I final rule. In the 2004 Stark II Phase II final rule, CMS removed all references to a prescribed form and required DHS entities to provide the required information only upon request.

The IPPS proposed rule does not propose to revise the current Stark rule. In the preamble, however, CMS unveils its proposed new information collection instrument, the Disclosure of Financial Relationships Report ("DFRR").

The genesis of the DFRR dates back to the Deficit Reduction Act of 2005, which required CMS to develop a plan to address certain issues relating to physician-owned specialty hospitals. In its report to Congress with information gathered from a survey of 130 specialty hospitals and 220 competitor hospitals, CMS announced its plan to require all hospitals to provide information on a periodic basis about physicians' investment interests in and compensation arrangements with the hospitals. CMS has created the DFRR as part of its implementation of that disclosure process.

CMS proposes to send the DFRR to 500 hospitals, which is between 8 and 10 percent of all Medicare-participating hospitals. CMS will use the information from the DFRRs to determine hospitals' compliance with Stark and to assist CMS in any future rulemaking regarding reporting requirements and other Stark provisions. The DFRR also may assist CMS in deciding whether to propose a rule requiring an annual, or other periodic, disclosure by all hospitals.

CMS proposes that the DFRR be completed, certified by the appropriate hospital official and received by CMS within 60 days. Although Stark gives CMS the authority to impose a civil monetary penalty of up to $10,000 for each day a report is past due, CMS will not seek to invoke this authority, but will work with hospitals to comply with the reporting requirements.

The proposed DFRR can be found in Appendix C of the proposed IPPS rule. In addition to information about physician investors, all hospitals must disclose information about compensation arrangements with physicians. Worksheet 7 requests information about the following compensation arrangements: rental of office space, rental of equipment, personal service arrangements and physician recruitment. The information requested in Worksheet 8 includes isolated transactions with a physician, charitable donations and "any non-monetary compensation and/or medical staff incidental benefits granted to a physician that exceeded published limits." It should be noted that the proposed DFRR requests information from a hospital’s cost reporting period ending in 2006.

7. Conclusion

CMS has stated that it intends to use the annual IPPS rule as a vehicle for future changes to the Stark regulations, reflecting a change from its prior practice of issuing large scale changes to the regulations in separately published documents, such as the Stark II Phase III rule issued in September 2007. Although likely to result in significant impact to the relationships between DHS entities and physicians, the regulatory changes proposed in the proposed IPPS rule are more limited in scope than previous issuances. Interestingly, the proposed rule does not refer to the majority of Stark changes proposed in the CY 2008 proposed MPFS but abandoned in the final MPFS, indicating that hospitals and other health care providers may see additional changes to the Stark rules in the coming year.

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