New proposed regulations recently published by the Health Care Financing Administration, the federal agency responsible for administering the Medicare program, will affect virtually every hospital-physician arrangement and physician self-referral arrangement in the United States.
Every health care provider will need to scrutinize its financial arrangements with physicians, its ownership structure and its compensation systems as a result of the proposed regulations.
The proposed regulations will implement federal legislation, known as Stark II, which prohibits physician self-referrals to health care businesses with which the referring physicians have financial relationships. Stark II and the proposed regulations are designed to reduce or eliminate the incentives for physicians to over-refer Medicare patients for services to health care businesses in which the physicians are financially interested.
The Omnibus Budget Reconciliation Act of 1993 (Stark II) expanded an earlier prohibition on self-referrals by extending the ban from only clinical laboratory services to 10 additional designated health services, and by including Medicaid patients within the statute's coverage. The designated health services include physical and occupational therapy, radiology services, durable medical equipment and supplies, prosthetics, home health services, out-patient prescription drugs, and inpatient and out-patient hospital services, among others.
The Stark II has a few exceptions to the general prohibition against physician self-referrals. These exceptions allow physicians to continue to refer patients to businesses with which they have a financial interest, provided that such financial relationships meet specific requirements aimed at preventing fraud, waste and patient abuse. Examples of permitted financial relationships include investments in publicly traded securities and mutual funds, ownership interests in hospitals, fair-market rental of office space and equipment, and certain group practice arrangements.
The Office of Inspector General of the Department of Health and Human Services enforces the provisions of Stark II and imposes civil sanctions against persons and businesses violating the statute. Such sanctions include civil money penalties, reimbursement of Medicare and Medicaid payments and exclusion from Medicare and Medicaid programs.
The proposed regulations are designed to clarify certain ambiguities and interpret certain key terms contained in Stark II. Here are some of the highlights of the revisions and clarifications:
Designated health services. HCFA has provided a detailed description of specific health services that fall within the definition of designated health services.
Generally, definitions of such services will be based on existing definitions under the Medicare program and, unless otherwise provided, the definitions will be based upon how Medicare covers the services for reimbursement under Medicare Part B.
HCFA indicates that services will be considered designated health services even if they are billed as some other service or are bundled with other services for billing purposes.
Financial relationship. HCFA provides a detailed explanation of the types of financial relationships with health care covered by Stark II.
The definition includes any indirect ownership or investment interest no matter how many levels removed from a direct interest. "Ownership or investment interest" includes stock options and other "nonvested" interests.
Entity. The "entity" with which the physician has a financial relationship under Stark II has also been clarified to include any physician's solo practice or any practice of multiple physicians that furnishes a designated health service. This makes it clear that if an individual physician or group of physicians refer among themselves, those physicians will have made a prohibited referral unless an exception applies.
The definition of entity includes those that contract to provide designated health services under an arrangement with another provider. Therefore, when a physician owns an entity furnishing services to a hospital, and the physician refers patients to the hospital. HCFA will view such arrangements as being within the scope of the Stark II ban.
Referral. HCFA explains which services may not be referred by physicians. The regulations clarify the definition of referral to pertain only to items and services that are designated health services for which payment may be made under Medicare Part B.
The regulations expand the definition of referral to include a request for comparable services covered under a Medicaid state plan.
HCFA acknowledges that the proposed regulations contain potentially controversial interpretations of Stark II. Although HCFA attempts to clarify the meaning of certain ambiguities, substantial questions remain about the statute's scope and exceptions. HCFA solicited comments on its proposed regulations, and they were due May 10. It may take HCFA up to four years to analyze the comments and publish final regulations. In the meantime, the burden is on health care providers to comply with the Stark II law, complex, controversial and onerous though it may be. In most situations, compliance means following the guidance given in the proposed regulations.
Robert Pomper and Joel Leander are attorneys at Womble Carlyle Sandridge & Rice, PLLC, and practice in the firm's health care law section. This article was published in the June 1, 1998 issue of "The Business Journal" of Charlotte.