On September 5, 2007, the Centers for Medicare and Medicaid Services (CMS) issued the long-awaited Phase III regulations to the federal Physician Self-Referral law (commonly referred to as the “Stark Law”). The Phase III regulations, which will become effective on December 4, 2007, clarify several Stark Law definitions and provide additional guidance on various “exceptions” used by physicians to permit referral relationships otherwise subject to the Stark Law restrictions. Phase III comes just two months after CMS issued its Medicare Physician Fee Schedule for Calendar Year 2008, which proposes additional (and arguably more significant) changes to the Stark Law (the “Proposed Rule”). If the proposals are adopted, they will prohibit many current healthcare arrangements and require significant restructuring of others, particularly “under arrangements” joint ventures, and percentage and “per-click” compensation models. Under the Proposed Rule, CMS has also solicited comments on the Stark Law “in-office ancillary services exception” and other Stark Law provisions to address perceived abuses.
All of these changes (final and proposed) are accompanied by a new audit protocol by CMS. By the time this article is published, CMS will have issued written questionnaires called Disclosure of Financial Relationship Reports (DFRR) to 500 hospitals to gather information on the hospitals’ compliance with the Stark Law. Hospitals that receive a DFRR have only 45 days to respond, with a fine of $10,000 per day for late responses. CMS has indicated that the DFRR will become an annual reporting requirement for hospitals.
While a complete summary of the Phase III regulations and the Stark Law changes in the Proposed Rule are beyond the scope of this article, following is an overview of the Stark Law, along with some key changes likely to impact Alabama physicians.
Overview
The Stark Law prohibits physicians from referring Medicare or Medicaid patients for certain designated health services (DHS) to entities with which the physician (or an immediate family member of the physician) has a financial relationship (either compensation or investment/ownership), unless an “exception” applies. The Stark Law also prohibits the entity from billing for services provided pursuant to a prohibited referral. The DHS covered by the Stark Law are clinical laboratory services, physical therapy, occupational therapy, speech-language pathology, radiology services (including, for example, X-ray, magnetic resonance imaging, computerized axial tomography and ultrasound), radiation therapy and supplies, durable medical equipment and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics and orthotics devices and supplies, home healthcare and outpatient prescription drugs, as well as all inpatient and outpatient hospital services.
Offering of DHS in a Physician’s Office
The in-office ancillary services exception is one of the most helpful exceptions under the Stark Law in that it applies to both compensation and investment/ownership arrangements. This exception is often used by individual physicians, as well as physician group practice owners and employees, to order and provide DHS from the physician’s own medical practice.
In the Proposed Rule, CMS expresses a concern that the in-office ancillary services exception has been improperly used by physician practices to provide DHS that are not sufficiently connected to the physician practice. Although CMS did not propose any changes to the exception in the Proposed Rule, it did solicit comments on: (1) whether certain services should not qualify for the exception (for example, any therapy services that are not provided on an “incident-to” basis, and services that are not needed at the time of the office visit in order to assist the physician in his/her diagnosis or plan of treatment), (2) whether changes should be made to the definition of “same building” and “centralized building,” which are terms used in the exception to define the site of service for the DHS, (3) whether nonspecialist physicians should be able to use the exception to refer patients for specialized services involving equipment owned by the nonspecialists and (4) any other restrictions on the ownership or investment in services that would curtail program or patient abuse.
While the Phase III regulations make no substantive changes to the in-office ancillary services exception, CMS does state that it is considering “whether certain types of arrangements, such as those involving in-office pathology labs and sophisticated imaging equipment, should continue to be eligible for protection” under this exception. CMS does not define what it considers to be “sophisticated imaging,” but one can speculate that MRI, CT and PET may fall within that category.
Unit of Service (“Per-click”) Space and Equipment Leases
The Proposed Rule would prohibit per-unit or per-click lease arrangements between a physician and a third party in which the third party uses the leased space or equipment provided by the physician to furnish services to patients referred by the physician. According to CMS, these types of per-click lease arrangements create an improper incentive for the physician-lessor to profit from the referral of patients. For example, the proposed change would prevent a physician from leasing ultrasound equipment to a diagnostic center on a per-click basis and referring Medicare or Medicaid patients to the diagnostic center for ultrasound scans. This proposed change is a reversal of the CMS position in prior Stark Law regulations, where it found that “Congress intended that time-based or unit-of-service based payments be protected.”
While the Phase III regulations do not specifically address per-click arrangements, CMS does provide commentary that strongly suggests that these types of arrangements cannot satisfy the exclusive use requirements contained in the equipment and office space rental exceptions to the Stark Law. These exceptions require, in part, that the equipment or space must be used exclusively by the lessee when being used by the lessee and not shared with any other person or entity. The Proposed Rule and the Phase III commentary taken together suggest that CMS will either eliminate all per-click leases, or, at the very least, take a harsh view of such arrangements.
Incident-to Billing
Under the Stark Law “group practice” definition, a physician can be paid a productivity bonus based directly on the volume or value of his/her personally performed services, including services provided “incident to” those personally performed services. The incident-to rules allow a physician to bill Medicare for the services of certain midlevel practitioners (i.e., nurses and medical assistants) if the services are provided “incident to” the physician’s care.
Until the release of the Phase III regulations, substantial ambiguity existed as to what types of services could be billed “incident to” and therefore included in a physician’s productivity bonus. Phase III, however, clearly states that incident-to services and supplies exclude items, such as X-rays or diagnostic imaging procedures, that have their own Medicare benefit category, except as otherwise expressly permitted by statute (for example, physical therapy services and outpatient drugs). Consequently, physician practices that bill for diagnostic procedures under the Medicare incident-to rules and allocate revenue from those procedures directly to the ordering physician will need to restructure those compensation models to distribute that income on an indirect basis as a share of the overall DHS profits of the group.
Services Furnished “Under Arrangements”
In a typical “under arrangements” model, physicians independently or with a hospital own a new entity (the “Selling Entity”) that “sells” DHS (often the technical component of imaging services) to a hospital. This type of arrangement is currently allowed so long as the compensation paid by the hospital to the Selling Entity (often a per-unit payment) is structured to meet a Stark Law exception for compensation arrangements. Citing a concern that these arrangements improperly allow physician investors in the Selling Entity to order DHS from the Selling Entity and profit from the referrals, CMS proposes to revise the definition of “entity” under the Stark Law so that the term not only covers the entity that submits a claim for DHS to Medicare (e.g., the hospital), but also the entity that provides the DHS (e.g., the Selling Entity). If this proposal is adopted, physician investors in the Selling Entity would be precluded from referring Medicare or Medicaid patients for DHS provided “under arrangements” with a hospital unless a Stark Law ownership/investment exception is satisfied. Unless the Selling Entity is located in a rural area, compliance with an ownership/investment exception is unlikely.
Physician Groups and Independent Contractors
It is not uncommon for a physician group practice to contract with a radiology group (or other type of provider) for the services of one or more radiologists to provide professional interpretations. As long as the radiologists are providing services in the group practice’s facilities, the practice can bill Medicare for those services in accordance with the in-office ancillary services exception. The Phase III regulations now require that the group practice have a direct contractual relationship with the independent physician and not the independent physician’s practice entity.
October 2007