For many medical groups, revenues from ancillary services make up a substantial portion of the group's profits. Income from clinical lab services, imaging equipment, and similar group ancillary services can sometimes equal or exceed income generated by the physicians' professional services. As a consequence, ancillary profits generally comprise a large portion of the income distributed among group members at the end of the year.
According to HCFA, an appropriate income distribution formula must demonstrate the following features:
PREDETERMINED FORMULA
To qualify for Stark II exceptions applicable to group practices, the medical group must distribute income and overhead according to methods that are "previously determined." According to HCFA, ad hoc distribution methods established at the end of the group's fiscal year are much more likely to reflect the volume or value of the members' referrals, and therefore are not appropriate. This does not mean the group must establish in advance the exact amounts to be awarded to group members. As long as the group has adopted the formula before the time period during which the group's revenues are earned and expenses incurred, the final distribution amounts may be calculated at the end of the year based on the group's actual costs and expenses.
An appropriate formula for sharing the group's overall profits, according to HCFA, might be based on a physician's percentage of investment in the group, the number of hours a physician generally devotes to the group, the difficulty of the physician's work, the physician's professional productivity, or an even division among all physicians.
If the formula is based on historical cost and profit patterns of individual physicians, as is often the case, care must be taken to assure that the distribution does not reflect the current volume or value of ancillary referrals. For example, if Dr. Smith's pre-established distribution is set at 20 percent, based on the fact that Dr. Smith has historically generated 20 percent of the group's costs and revenues, but during the current year Dr. Smith happens to generate 45 percent of the group's ancillary profits, the group cannot adjust Dr. Smith's distribution at the end of the year to reward him or her for the additional ancillary referrals. Furthermore, the formula should not include a retroactive "true up" adjustment the next year to directly reward Dr. Smith or other physicians based on their ancillary referrals.
UNIFIED BUSINESS
In addition, the regulations require the group's overhead expenses and income to be distributed according to methods indicating the practice is a unified business. The regulations state that 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." In recent speeches, however, HCFA representatives have recognized that it may be appropriate to charge higher overhead to those group members who insist on more expensive office space or additional support staff at their separate locations. However, income distribution formulas that treat each group location as an independent cost center could create problems.
HCFA also takes a dim view of establishing separate profit pools for each specialty or subspecialty in a medical group, 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." As an example, the regulations cite specialties consisting of one or two physicians, where pooling would be much more likely to reflect the volume or value of each physician's referrals. For the same reason, problems could arise if separate pools were established for each type of ancillary income, with each pool having a different distribution formula that rewards those group members most likely to make referrals for that type of ancillary service. A preferable method would be to place all of the group's ancillary income into a single pool and to distribute the funds among group members without regard to specialty or type of ancillary income.
VOLUME OR VALUE OF REFERRALS
The regulations specifically prohibit basing the group's income distribution formula on the volume or value of a physician's referrals, either directly or indirectly. According to HCFA, a referral is made whenever a physician requests, orders, certifies, recertifies, requests a consultation, or establishes a plan of care that includes any designated health service for which Medicare or Medicaid payment may be made.
Fortunately, as HCFA's regulatory discussion makes clear, the "volume or value" prohibition applies only to referrals involving designated health services covered by Medicare or Medicaid. The group's income distribution formula may reflect a physician's referrals of patients for services not covered by Medicare or Medicaid, and may also reflect referrals of Medicare and Medicaid patients for services that do not involve designated health services. However, the formula must not be tied to the volume or value of referrals of Medicare or Medicaid patients for designated health services, whether such volume or value is assessed in dollar amounts, in relative value units (RVUs), or any similar measurement.
If the group's income distribution formula carves out Medicare and Medicaid referrals, the group would have to keep a separate accounting of services provided to non-Medicare and Medicaid patients. If it appeared that a physician was receiving an inordinately high distribution in proportion to the actual value of his or her non-Medicare and Medicaid referrals, government auditors would likely conclude that the higher payments were actually a disguised payment for Medicare and Medicaid referrals. Therefore, HCFA states in the regulations, "the most straightforward way for a group to demonstrate that it is meeting the requirements for the exception would be for the group to avoid a link between physician compensation and the volume or value of any referrals, regardless of whether the referrals involve Medicare or Medicaid patients."
PRODUCTIVITY BONUSES
Medical groups may award productivity bonuses to physician members based on services personally performed by the physician or incident to such services, as long as the bonus is not determined in any manner that is directly related to the volume or value of referrals by the physician.
In a major change from the earlier Stark I regulations, the proposed regulations state that a group member's productivity bonus cannot take into account any designated health services provided to Medicare or Medicaid patients referred by the physician himself, even if the physician personally performs or directly supervises those services. In other words, if a physician member refers a Medicare or Medicaid patient for any of the group's designated health services, the physician cannot receive bonus credit for those services even if he performs or supervises 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, a productivity bonus may include designated health services provided or supervised by the physician upon referral by another physician member of the group. Thus, if Dr. Smith refers a Medicare patient for tests at the group's imaging center and then personally performs or supervises the tests, Dr. Smith cannot receive productivity bonus credit for those services. However, if another group member refers the Medicare patient for imaging tests and Dr. Smith either performs or supervises the tests, Dr. Smith's productivity bonus may include credit for the services. There is some concern that this restriction may lead to informal patterns among group members to see each other's patients, which in turn could put patients at risk due to the break in continuity of care.
CONCLUSION
The recently proposed Stark II regulations are likely to have a significant impact on how medical groups do business. Although not yet adopted in final form, the regulations provide insight into how the government interprets the self-referral prohibitions, and compliance with the new regulations should provide significant protection. Physicians should, therefore, review their current income distribution plans and consult with their legal counsel to determine whether changes are appropriate.
The federal law commonly referred to as Stark II imposes stringent limits on the ability of physicians to make self-referrals for designated health services. As described in the February 1998 issue of the Group Practice Journal, the Health Care Financing Administration (HCFA) recently proposed new regulations governing Stark II. Although the regulations have not yet been adopted in final form, HCFA officials have stated that in their view, actions taken in reliance on the proposed regulations will be deemed to comply with the Stark law.
The Stark II regulations include a detailed discussion of group income distribution plans. The discussion sets out several examples of income distribution structures that could cause a medical group to lose its eligibility for special statutory exceptions designed to protect medical group referrals. Based on this discussion, medical groups should reevaluate their current income distribution formulas and consult with legal counsel to determine whether changes are appropriate.According to HCFA, an appropriate income distribution formula must demonstrate the following features:
- Income and expenses are allocated according to methods determined before the income is earned or expenses incurred;
- The formula indicates the practice is a unified business, with centralized decision making and pooling of expenses;
- Distribution of profits is not related to the volume or value of referrals; and
- Productivity bonuses do not take into account the physicians' own referrals of Medicare or Medicaid patients for designated health services.
PREDETERMINED FORMULA
To qualify for Stark II exceptions applicable to group practices, the medical group must distribute income and overhead according to methods that are "previously determined." According to HCFA, ad hoc distribution methods established at the end of the group's fiscal year are much more likely to reflect the volume or value of the members' referrals, and therefore are not appropriate. This does not mean the group must establish in advance the exact amounts to be awarded to group members. As long as the group has adopted the formula before the time period during which the group's revenues are earned and expenses incurred, the final distribution amounts may be calculated at the end of the year based on the group's actual costs and expenses.
An appropriate formula for sharing the group's overall profits, according to HCFA, might be based on a physician's percentage of investment in the group, the number of hours a physician generally devotes to the group, the difficulty of the physician's work, the physician's professional productivity, or an even division among all physicians.
If the formula is based on historical cost and profit patterns of individual physicians, as is often the case, care must be taken to assure that the distribution does not reflect the current volume or value of ancillary referrals. For example, if Dr. Smith's pre-established distribution is set at 20 percent, based on the fact that Dr. Smith has historically generated 20 percent of the group's costs and revenues, but during the current year Dr. Smith happens to generate 45 percent of the group's ancillary profits, the group cannot adjust Dr. Smith's distribution at the end of the year to reward him or her for the additional ancillary referrals. Furthermore, the formula should not include a retroactive "true up" adjustment the next year to directly reward Dr. Smith or other physicians based on their ancillary referrals.
UNIFIED BUSINESS
In addition, the regulations require the group's overhead expenses and income to be distributed according to methods indicating the practice is a unified business. The regulations state that 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." In recent speeches, however, HCFA representatives have recognized that it may be appropriate to charge higher overhead to those group members who insist on more expensive office space or additional support staff at their separate locations. However, income distribution formulas that treat each group location as an independent cost center could create problems.
HCFA also takes a dim view of establishing separate profit pools for each specialty or subspecialty in a medical group, 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." As an example, the regulations cite specialties consisting of one or two physicians, where pooling would be much more likely to reflect the volume or value of each physician's referrals. For the same reason, problems could arise if separate pools were established for each type of ancillary income, with each pool having a different distribution formula that rewards those group members most likely to make referrals for that type of ancillary service. A preferable method would be to place all of the group's ancillary income into a single pool and to distribute the funds among group members without regard to specialty or type of ancillary income.
VOLUME OR VALUE OF REFERRALS
The regulations specifically prohibit basing the group's income distribution formula on the volume or value of a physician's referrals, either directly or indirectly. According to HCFA, a referral is made whenever a physician requests, orders, certifies, recertifies, requests a consultation, or establishes a plan of care that includes any designated health service for which Medicare or Medicaid payment may be made.
Fortunately, as HCFA's regulatory discussion makes clear, the "volume or value" prohibition applies only to referrals involving designated health services covered by Medicare or Medicaid. The group's income distribution formula may reflect a physician's referrals of patients for services not covered by Medicare or Medicaid, and may also reflect referrals of Medicare and Medicaid patients for services that do not involve designated health services. However, the formula must not be tied to the volume or value of referrals of Medicare or Medicaid patients for designated health services, whether such volume or value is assessed in dollar amounts, in relative value units (RVUs), or any similar measurement.
If the group's income distribution formula carves out Medicare and Medicaid referrals, the group would have to keep a separate accounting of services provided to non-Medicare and Medicaid patients. If it appeared that a physician was receiving an inordinately high distribution in proportion to the actual value of his or her non-Medicare and Medicaid referrals, government auditors would likely conclude that the higher payments were actually a disguised payment for Medicare and Medicaid referrals. Therefore, HCFA states in the regulations, "the most straightforward way for a group to demonstrate that it is meeting the requirements for the exception would be for the group to avoid a link between physician compensation and the volume or value of any referrals, regardless of whether the referrals involve Medicare or Medicaid patients."
PRODUCTIVITY BONUSES
Medical groups may award productivity bonuses to physician members based on services personally performed by the physician or incident to such services, as long as the bonus is not determined in any manner that is directly related to the volume or value of referrals by the physician.
In a major change from the earlier Stark I regulations, the proposed regulations state that a group member's productivity bonus cannot take into account any designated health services provided to Medicare or Medicaid patients referred by the physician himself, even if the physician personally performs or directly supervises those services. In other words, if a physician member refers a Medicare or Medicaid patient for any of the group's designated health services, the physician cannot receive bonus credit for those services even if he performs or supervises 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, a productivity bonus may include designated health services provided or supervised by the physician upon referral by another physician member of the group. Thus, if Dr. Smith refers a Medicare patient for tests at the group's imaging center and then personally performs or supervises the tests, Dr. Smith cannot receive productivity bonus credit for those services. However, if another group member refers the Medicare patient for imaging tests and Dr. Smith either performs or supervises the tests, Dr. Smith's productivity bonus may include credit for the services. There is some concern that this restriction may lead to informal patterns among group members to see each other's patients, which in turn could put patients at risk due to the break in continuity of care.
CONCLUSION
The recently proposed Stark II regulations are likely to have a significant impact on how medical groups do business. Although not yet adopted in final form, the regulations provide insight into how the government interprets the self-referral prohibitions, and compliance with the new regulations should provide significant protection. Physicians should, therefore, review their current income distribution plans and consult with their legal counsel to determine whether changes are appropriate.