On Jan. 9, 1998, the Health Care Financing Administration (HCFA) proposed the long-awaited Stark II regulations governing physician self-referrals. These regulations, when finalized, will supersede the earlier "Stark I" regulations that applied only to clinical lab services.
As currently proposed, the regulations offer new protection for arrangements that HCFA feels do not create a risk of improper self-referrals. On the other hand, the accompanying comments make it clear that some arrangements previously thought to be acceptable will now have to be revised. The following is an overview of significant issues covered by the proposed regulations.
Arrangements Between Hospitals and Physicians
Because hospital inpatient and outpatient services are among the designated health services covered by the Stark Law, any financial relationship between a hospital and physician must meet special requirements before the physician can refer Medicare or Medicaid patients to the hospital for treatment. The proposed Stark II regulations and accompanying regulatory comments specifically address a number of common financial relationships between physicians and hospitals.
Physician Ownership in a Chain of Hospitals: According to the regulatory comments, ownership in a chain of hospitals can qualify under an exception that allows physicians to have ownership in a "whole hospital." As long as the physician's interest is not limited to a specific division or type of service provided by the hospital or hospital system, the physician may refer patients for hospital inpatient and outpatient services. The physician must be authorized to perform services at the hospital to which he or she is referring the patient.
Home Health Services: Additional limitations have been placed on the ability of a physician to refer patients to a home health agency with which the physician has a financial relationship. The comments specifically state that hospital-based home health services do not qualify for protection under the "whole hospital" exception. Moreover, home health services cannot qualify for the "in-office ancillary services exception" because the services are furnished in the patient's home rather than in the physician's office.
Lithotripsy Services: Although lithotripsy services, by themselves, are not designated health services, when provided by a hospital they are considered hospital services and thereby become designated health services. HCFA declined to create special protection for such services, stating, "[W]e have learned of situations in which urologists...invest in lithotriptors, then require that hospital outpatient departments use the physicians' equipment if they want to receive any urology referrals."
Loans: Loans from a hospital to a physician are generally considered compensation, and the loan and each repayment by the physician must meet a compensation exception (such as the new exception for fair market value compensation, discussed below).
If the physician lends money to the hospital, on the other hand, for example by accepting a secured promissory note for purchase of his practice, the physician may be deemed to still have an ownership interest in the practice. Thus, if the practice is being operated as a hospital outpatient clinic, or if the practice includes radiology equipment or other designated health services, the physician would not be able to make referrals to the practice unless one of the ownership exceptions is met.
New Exception for Fair Market Value Compensation: The proposed regulations establish an important new exception for certain compensation arrangements that are for fair market value and that comply with the anti-fraud and abuse laws. To qualify under the new exception, the compensation arrangement must:
New 'De Minimis' Exception
Under this new exception, non-cash gifts and incidental benefits are allowed as long as they do not exceed a value of $50 per gift and $300 in the aggregate (presumably per physician) per year, and as long as similar gifts or benefits are given to similarly situated physicians without regard to referrals. Examples include free samples, coffee mugs, training, and similar items or services.
Now that specific "de minimis" limits have been established, any gifts or benefits that exceed these values may deemed to be in violation of the Stark law unless they meet another exception. Hospitals, pharmaceutical companies, and other healthcare providers should review their policies regarding gifts and benefits provided to physicians, including expensive dinners, retreats, or seminars. Even an incidental benefit such as free parking is mentioned as a potentially suspect benefit, unless directly related to patient treatment at the hospital.
Personal Services Agreement Exception
This exception has been modified in several ways. First, the agreement must either cover all services to be performed by the physician on behalf of the hospital, or the agreement must incorporate by reference all other service agreements between the parties. This will mean that every time the parties terminate an agreement or enter into a new agreement, every related contract must be amended.
Second, although the term of the agreement still must be for one year, accompanying HCFA comments indicate that the agreement may include termination provisions allowing earlier termination for good cause, as long as the parties do not, within the one-year period, enter into a new arrangement. Renewals must also be for at least a one-year term.
Employment Exception-Productivity Bonus
An important change has been proposed regarding productivity bonuses, and it may necessitate changes to existing employment agreements between hospitals and physicians. Under the proposed revision, a physician's productivity bonus can no longer take into account any designated health services provided to patients referred by the physician himself, even if the physician personally performs those services.
In other words, if a hospital-employed physician refers a patient for hospital inpatient or outpatient services, or for any of the hospital's other designated health services, the physician cannot receive bonus credit for those services even if he performs the services himself. HCFA argues that the physician would have an incentive to overutilize if his bonus is based, even in part, on his own referrals for designated health services. However, it is acceptable for the productivity bonus to include non-designated health services provided by the physician based on his own referrals, as well as designated health services provided by the physician upon referral by someone else.
Lease Exceptions
The exceptions for leases of space or equipment remain basically unchanged. However, the accompanying comments indicate that "per click" lease arrangements may be acceptable as long as the lease payments do not reflect services for patients referred by the lessor physician. (Otherwise, according to HCFA, the lessor physician might overutilize in order to increase the rental payment.)
Leases, like personal services agreements, can now be terminated earlier than their one-year term, as long as the parties do not enter into a new arrangement within the one-year period. Renewals must be for at least a one-year term, rather than on a month-to-month basis.
Group Practice Arrangements
Physician group practices often rely on the "in-office ancillary services. exception in order to make referrals for designated health services provided within the group. Without this exception, members of a physician group could not treat their Medicare or Medicaid patients using the group's own clinical lab, X-ray equipment, or similar designated health services.
The proposed regulations, if adopted, will have a significant impact on the way group practices must do business in order to qualify for the in-office ancillary services exception. Among the changes proposed by HCFA are the following:
Definition of Group Member: The term "member" would include only physician owners and employees (full-time and part-time). Independent contractors can no longer be considered members of a group practice, nor can their referrals qualify under the in-office ancillary services exception.
This means that all of the group's ancillary services must be performed or directly supervised by group owners or employees, rather than by independent contractors. It also means that independent contractors may not be able to share in the group's overall profits or receive productivity bonuses. Referrals by independent contractors will have to qualify under another exception such as the personal services exception or the new exception for compensation arrangements, under which the reimbursement amount must be set in advance and meet fair market value standards.
Inclusion of Individual PCs: A group practice must be organized as a legal entity consisting of two or more physicians. Previously, this legal entity could not be comprised of any other legal entities. The proposed regulations now allow the member physicians to have their own individual professional corporations, but still do not allow the inclusion of any additional legal entities consisting of more than one physician. (For example, the group practice can be organized as a legal entity consisting of several physicians who each have their own individual professional corporations, but the group practice cannot be organized as a legal entity that consists of other partnerships or non-individual corporations.)
Income Distribution Plans: The group's method for allocating overhead costs and revenues must be established prior to the time during which the costs are incurred or the revenues are generated. However, there is no prohibition against an allocation method based on costs and revenues for the preceding year, as long as this method is adopted prior to the upcoming year.
Pooling of Costs and Revenues: The allocation method must indicate that the group is a unified business. According to HCFA, the method should demonstrate "centralized decision making, a pooling of expenses and revenues, and a distribution system that is not based on each satellite office operating as if it were a separate enterprise."
Overall Profits: Distribution of overall profits should reflect pooling of revenues and profits from all of the group's locations, including locations in different states. HCFA takes a dim view of treating separately those profits that belong only to a particular specialty or subspecialty, stating, "We believe that the narrower the pooling, the more likely it will be that a physician will receive compensation for his or her own referrals (for example, a subspecialty group or location could contain only one or two physicians.)"
Productivity Bonus: The physician's productivity bonus can no longer take into account any designated health services provided to patients referred by the physician himself, even if the physician personally performs or directly supervises those services.
In other words, if the physician refers a patient for the group's designated health services and then either performs or supervises the services himself, the physician cannot receive bonus credit for those services. HCFA argues that the physician would have an incentive to overutilize if his bonus is based, even in part, on his own referrals for designated health services. However, it is acceptable for the productivity bonus to include non-designated health services provided or supervised by the physician based on his own referrals, as well as designated health services provided or supervised by the physician upon referral by someone else.
Direct Supervision: A group member who provides direct supervision of ancillary services must be in the same "office suite" and "immediately available" to provide assistance and direction. The proposed regulations clarify that the "office suite" requirement can generally be satisfied by a group of contiguous rooms, but might also include rooms on adjoining floors, as in a townhouse office, as long as the physician is close at hand.
The regulations also allow the supervising physician to be occasionally absent for brief, unexpected absences (as when called for an emergency consultation) or during routine absences of short duration (such as a lunch break). However, the physician cannot be absent to make hospital rounds or to carry out other scheduled duties when he or she is supposed to be providing direct supervision.
As currently proposed, the regulations offer new protection for arrangements that HCFA feels do not create a risk of improper self-referrals. On the other hand, the accompanying comments make it clear that some arrangements previously thought to be acceptable will now have to be revised. The following is an overview of significant issues covered by the proposed regulations.
Arrangements Between Hospitals and Physicians
Because hospital inpatient and outpatient services are among the designated health services covered by the Stark Law, any financial relationship between a hospital and physician must meet special requirements before the physician can refer Medicare or Medicaid patients to the hospital for treatment. The proposed Stark II regulations and accompanying regulatory comments specifically address a number of common financial relationships between physicians and hospitals.
Physician Ownership in a Chain of Hospitals: According to the regulatory comments, ownership in a chain of hospitals can qualify under an exception that allows physicians to have ownership in a "whole hospital." As long as the physician's interest is not limited to a specific division or type of service provided by the hospital or hospital system, the physician may refer patients for hospital inpatient and outpatient services. The physician must be authorized to perform services at the hospital to which he or she is referring the patient.
Home Health Services: Additional limitations have been placed on the ability of a physician to refer patients to a home health agency with which the physician has a financial relationship. The comments specifically state that hospital-based home health services do not qualify for protection under the "whole hospital" exception. Moreover, home health services cannot qualify for the "in-office ancillary services exception" because the services are furnished in the patient's home rather than in the physician's office.
Lithotripsy Services: Although lithotripsy services, by themselves, are not designated health services, when provided by a hospital they are considered hospital services and thereby become designated health services. HCFA declined to create special protection for such services, stating, "[W]e have learned of situations in which urologists...invest in lithotriptors, then require that hospital outpatient departments use the physicians' equipment if they want to receive any urology referrals."
Loans: Loans from a hospital to a physician are generally considered compensation, and the loan and each repayment by the physician must meet a compensation exception (such as the new exception for fair market value compensation, discussed below).
If the physician lends money to the hospital, on the other hand, for example by accepting a secured promissory note for purchase of his practice, the physician may be deemed to still have an ownership interest in the practice. Thus, if the practice is being operated as a hospital outpatient clinic, or if the practice includes radiology equipment or other designated health services, the physician would not be able to make referrals to the practice unless one of the ownership exceptions is met.
New Exception for Fair Market Value Compensation: The proposed regulations establish an important new exception for certain compensation arrangements that are for fair market value and that comply with the anti-fraud and abuse laws. To qualify under the new exception, the compensation arrangement must:
- Be in writing;
- Cover all services provided by the physician to the hospital, or make reference to all other contracts between the parties;
- Specify the time frame, which can be less than one year with periodic renewals as long as the terms and conditions do not change during the course of a year;
- Set the compensation or compensation method in advance, which must be fair market value and not related to the volume or value of referrals (whether or not covered by Medicare or Medicaid) or other business between the parties;
- Be commercially reasonable and in furtherance of the legitimate business interests of the parties; and
- Meet a fraud and abuse safe harbor or otherwise be in compliance with the fraud and abuse provisions.
New 'De Minimis' Exception
Under this new exception, non-cash gifts and incidental benefits are allowed as long as they do not exceed a value of $50 per gift and $300 in the aggregate (presumably per physician) per year, and as long as similar gifts or benefits are given to similarly situated physicians without regard to referrals. Examples include free samples, coffee mugs, training, and similar items or services.
Now that specific "de minimis" limits have been established, any gifts or benefits that exceed these values may deemed to be in violation of the Stark law unless they meet another exception. Hospitals, pharmaceutical companies, and other healthcare providers should review their policies regarding gifts and benefits provided to physicians, including expensive dinners, retreats, or seminars. Even an incidental benefit such as free parking is mentioned as a potentially suspect benefit, unless directly related to patient treatment at the hospital.
Personal Services Agreement Exception
This exception has been modified in several ways. First, the agreement must either cover all services to be performed by the physician on behalf of the hospital, or the agreement must incorporate by reference all other service agreements between the parties. This will mean that every time the parties terminate an agreement or enter into a new agreement, every related contract must be amended.
Second, although the term of the agreement still must be for one year, accompanying HCFA comments indicate that the agreement may include termination provisions allowing earlier termination for good cause, as long as the parties do not, within the one-year period, enter into a new arrangement. Renewals must also be for at least a one-year term.
Employment Exception-Productivity Bonus
An important change has been proposed regarding productivity bonuses, and it may necessitate changes to existing employment agreements between hospitals and physicians. Under the proposed revision, a physician's productivity bonus can no longer take into account any designated health services provided to patients referred by the physician himself, even if the physician personally performs those services.
In other words, if a hospital-employed physician refers a patient for hospital inpatient or outpatient services, or for any of the hospital's other designated health services, the physician cannot receive bonus credit for those services even if he performs the services himself. HCFA argues that the physician would have an incentive to overutilize if his bonus is based, even in part, on his own referrals for designated health services. However, it is acceptable for the productivity bonus to include non-designated health services provided by the physician based on his own referrals, as well as designated health services provided by the physician upon referral by someone else.
Lease Exceptions
The exceptions for leases of space or equipment remain basically unchanged. However, the accompanying comments indicate that "per click" lease arrangements may be acceptable as long as the lease payments do not reflect services for patients referred by the lessor physician. (Otherwise, according to HCFA, the lessor physician might overutilize in order to increase the rental payment.)
Leases, like personal services agreements, can now be terminated earlier than their one-year term, as long as the parties do not enter into a new arrangement within the one-year period. Renewals must be for at least a one-year term, rather than on a month-to-month basis.
Group Practice Arrangements
Physician group practices often rely on the "in-office ancillary services. exception in order to make referrals for designated health services provided within the group. Without this exception, members of a physician group could not treat their Medicare or Medicaid patients using the group's own clinical lab, X-ray equipment, or similar designated health services.
The proposed regulations, if adopted, will have a significant impact on the way group practices must do business in order to qualify for the in-office ancillary services exception. Among the changes proposed by HCFA are the following:
Definition of Group Member: The term "member" would include only physician owners and employees (full-time and part-time). Independent contractors can no longer be considered members of a group practice, nor can their referrals qualify under the in-office ancillary services exception.
This means that all of the group's ancillary services must be performed or directly supervised by group owners or employees, rather than by independent contractors. It also means that independent contractors may not be able to share in the group's overall profits or receive productivity bonuses. Referrals by independent contractors will have to qualify under another exception such as the personal services exception or the new exception for compensation arrangements, under which the reimbursement amount must be set in advance and meet fair market value standards.
Inclusion of Individual PCs: A group practice must be organized as a legal entity consisting of two or more physicians. Previously, this legal entity could not be comprised of any other legal entities. The proposed regulations now allow the member physicians to have their own individual professional corporations, but still do not allow the inclusion of any additional legal entities consisting of more than one physician. (For example, the group practice can be organized as a legal entity consisting of several physicians who each have their own individual professional corporations, but the group practice cannot be organized as a legal entity that consists of other partnerships or non-individual corporations.)
Income Distribution Plans: The group's method for allocating overhead costs and revenues must be established prior to the time during which the costs are incurred or the revenues are generated. However, there is no prohibition against an allocation method based on costs and revenues for the preceding year, as long as this method is adopted prior to the upcoming year.
Pooling of Costs and Revenues: The allocation method must indicate that the group is a unified business. According to HCFA, the method should demonstrate "centralized decision making, a pooling of expenses and revenues, and a distribution system that is not based on each satellite office operating as if it were a separate enterprise."
Overall Profits: Distribution of overall profits should reflect pooling of revenues and profits from all of the group's locations, including locations in different states. HCFA takes a dim view of treating separately those profits that belong only to a particular specialty or subspecialty, stating, "We believe that the narrower the pooling, the more likely it will be that a physician will receive compensation for his or her own referrals (for example, a subspecialty group or location could contain only one or two physicians.)"
Productivity Bonus: The physician's productivity bonus can no longer take into account any designated health services provided to patients referred by the physician himself, even if the physician personally performs or directly supervises those services.
In other words, if the physician refers a patient for the group's designated health services and then either performs or supervises the services himself, the physician cannot receive bonus credit for those services. HCFA argues that the physician would have an incentive to overutilize if his bonus is based, even in part, on his own referrals for designated health services. However, it is acceptable for the productivity bonus to include non-designated health services provided or supervised by the physician based on his own referrals, as well as designated health services provided or supervised by the physician upon referral by someone else.
Direct Supervision: A group member who provides direct supervision of ancillary services must be in the same "office suite" and "immediately available" to provide assistance and direction. The proposed regulations clarify that the "office suite" requirement can generally be satisfied by a group of contiguous rooms, but might also include rooms on adjoining floors, as in a townhouse office, as long as the physician is close at hand.
The regulations also allow the supervising physician to be occasionally absent for brief, unexpected absences (as when called for an emergency consultation) or during routine absences of short duration (such as a lunch break). However, the physician cannot be absent to make hospital rounds or to carry out other scheduled duties when he or she is supposed to be providing direct supervision.