The federal physician self-referral ban or Stark law has been a part of the legal landscape for almost 25 years. The breadth of the law’s prohibitions, its strict liability formulation and draconian remedies have made it the threshold regulatory issue for most health care transactions involving physicians. From 1992 to 2009 the Centers for Medicare & Medicaid Services (CMS) generated a steady flow of proposed and final regulations interpreting the Stark law. In recent years, the agency’s Stark-related regulatory activity has been less prodigious, predominantly focused on discrete issues such as the whole hospital exception. During the period when Stark rulemaking activity was relatively modest, the courts began issuing opinions interpreting the statute, typically in the context of federal False Claims Act lawsuits. The agency focused on development of the Self-Referral Disclosure Protocol and Stark law waivers in the context of the Medicare Shared Savings Program and other health care reform-based innovation models.

The events of this past month illustrate how the dynamics are changing. On July 15, CMS returned to rulemaking with the issuance of the 2016 Physician Fee Schedule proposed rule, which included significant proposed changes to the Stark law’s scope and application. On July 2, the 4th Circuit released its opinion in U.S. ex rel. Drakeford v. Tuomey Healthcare System, highlighting the differences between Stark regulatory guidance and judicial interpretations of the poorly drafted statute. On July 14, CMS announced the mandatory Comprehensive Care for Joint Replacement (CCJR) bundled payment program, which includes the prospect of additional Stark law waivers. 

The events of July also illustrate the many ways in which Stark compliance is a moving target. Some of the movement will be helpful; while some will frustrate even the most compliance-centered of organizations. Rulemaking, waiver programs and the wild card of judicial interpretations exacerbate the challenges of Stark “target practice” and highlight the fundamental disconnect between the nature of the conduct giving rise to a Stark violation and the draconian consequences of noncompliance. A disturbing—but accurate—observation: With Stark, a miss is as good as a mile. Consequently, while several of July’s Stark law developments signal greater flexibility and a recognition of the need to address the statute’s inconsistency with the goals of health care reform, the Stark law remains a challenging and evolving regulatory obstacle in almost any context.

For better or worse, right now all of the processes that potentially affect the parameters of the Stark law appear to be in motion. 

Proposed Regulations

On July 15, 2015, CMS published in the Federal Register the 2016 Physician Fee Schedule Proposed Rule, which includes several proposed changes to the Stark law. The Proposed Rule signals the agency’s desire to address some of the Stark law’s practical challenges and the tension between the Stark law and the advancements in patient care and payment methodologies attendant to health care reform.

On the practical side, CMS has proposed two new exceptions. The first would permit hospitals, Federally Qualified Health Centers and Rural Health Centers to provide remuneration to a physician or physician group to assist with the recruitment and employment of certain non-physician practitioners (specifically, physician assistants, nurse practitioners, clinical nurse specialists, and certified nurse midwives). The second exception addresses timeshare arrangements with physicians for the use of space and equipment.

The Proposed Rule also proposes more flexible standards for the writing, signature and term requirements for certain compensation exceptions and expands the range of permissible holdover arrangements. These components of the Proposed Rule are a welcome recognition of the industry’s need for a more practical approach to compliance with the procedural aspects of the various Stark exceptions. In this context, Stark target practice should get a little easier.

The Proposed Rule also revisits the whole hospital exception, providing additional guidance for physician-owned hospitals regarding advertising requirements and, notably, expressly rejects the holding of the 3rd Circuit in U.S. ex rel. Kosenske v. Carlisle HMA, Inc., that a hospital-based physician's use of a hospital's resources when treating hospital patients constituted remuneration from the hospital to the physician.

Finally, the Proposed Rule solicits comments on a broad range of topics. Of particular note, the agency seeks input on how to implement a law designed to address abuses peculiar to a predominantly fee-for-service market when both government and commercial payers are transitioning to value-based purchasing. The agency acknowledges the concern that "the [Stark] law prohibits financial relationships necessary to achieve the clinical and financial integration required for successful health care delivery and payment reform." The Proposed Rule solicits comments "regarding perceived barriers to achieving clinical and financial integration posed by the [Stark] law generally and, in particular, the 'volume or value' and 'other business generated' standards set out in [the agency’s] regulations."

Public comments on the Proposed Rule must be submitted by Sept. 8, 2015.
 
Tuomey and Other Case Law Developments

On July 2, 2015, the 4th Circuit issued its opinion affirming the District Court’s judgment in favor of the government in its case against Tuomey Healthcare System, Inc. (Tuomey). The court upheld damages and penalties totaling $237,454,195 for violations of the Stark law resulting in violations of the federal False Claims Act. The case arises out of a series of arrangements between Tuomey and local surgeons under which the physicians were considered “part time employees” during the time they were performing outpatient procedures at the hospital. The physicians were paid a base salary, which fluctuated annually based on the physicians’ net professional collections for outpatient procedures, a productivity bonus, pegged at 80 percent of the amount of their annual professional collections, and an incentive bonus.

A physician who objected to the employment agreement filed suit against Tuomey as a qui tam relator under the federal False Claims Act. The case has a colorful history, featuring no fewer than four separate law firms offering different interpretations of the Stark law’s application to the part-time employment arrangements, tape- recorded board meetings, strong-willed and outspoken hospital leadership and zealous government enforcers.  The Tuomey saga includes two trials, two jury verdicts and two Circuit Court opinions.

Apart from the staggering size of the verdict, Tuomey is noteworthy in that the opinions of the 4th Circuit add to the growing confusion over how the Stark law should be applied to common physician compensation arrangements. For example, the 4th Circuit’s most recent opinion upheld the jury’s determination that the physicians’ compensation varied with the volume or value of referrals pointing to the annual adjustment of the physicians’ salary based on collections from the prior year, the bonus structure and  the fact that the more procedures the physicians performed, the more Tuomey billed and collected facility fees. This finding is directly at odds with both the first 4th Circuit opinion in Tuomey and agency guidance. CMS has clearly stated that the fact that there might be a relationship between a physician’s personal productivity and the volume of procedures billed by a hospital did not mean that the physician’s compensation is based on the volume or value of referrals. The majority opinion in Tuomey rejects the agency’s guidance, creating a new level of uncertainty surrounding productivity-based compensation and supporting the concurring opinion’s reference to Stark as “a moving target.” While the issues are sorted by the courts and the agency, it appears that work RVUs rather than procedures may be a more conservative choice for as compensation productivity metric.

In other Stark-based False Claims Act cases, the arguments of the enforcement agencies and recent court rulings have created additional ambiguity as to the parameters of the Stark law’s fair market value and commercial reasonableness requirements. Hospital subsidies of physician practices, compensation rates in excess of the 75th percentile of market surveys and comparisons between a physician’s compensation before and after employment by a hospital have all been the used as the basis for arguments that a physician compensation arrangement violated Stark. As these issues evolve in the courts, hospitals should consider whether they have adequately documented how the support of their employed physicians or their other physician compensation arrangements further the hospital’s mission, enhance its clinical integration efforts and/or enable it to provide essential services to the community.

Mandatory CCJR Program and Stark Waivers 

On July 14, 2015, CMS published its proposed rulemaking on Comprehensive Care for Joint Replacement (CCJR) model. The CCJR model is a new bundled payment arrangement under which acute care hospitals in 75 geographic areas will be subject to retrospective bundled payments for episodes of care for lower extremity joint replacement (LEJR). Unlike the voluntary Bundled Payment Care Improvement (BPCI) initiative, the proposed CCJR model requires hospitals located in 75 specified geographic areas to participate in this bundled payment model.

Like Model 2 of the BPCI initiative, CCJR is a "retrospective bundled payment model" that promotes accountability for the cost of patient care by reconciling the actual amount expended for an episode of care ("Episode of Care") against a predetermined target price. For CCJR, an Episode of Care is initiated by an eligible Medicare fee-for-service beneficiary inpatient admission to the hospital for services billed under MS DRG 469 or 470 and continues for 90 days following discharge. The Episode of Care includes all related items and services paid under Medicare Part A and Part B, including physicians’ services, inpatient hospital service, readmissions (subject to limited exceptions), skilled nursing facility services, durable medical equipment, and Part B drugs.

Prior to the start of each performance year, CMS will set a target price for each hospital for each of the two Episodes of Care. The target price generally will include a two percent discount over projected spending, and is based on a blend of hospital-specific and regional spending for knee and joint replacements. Over time, regional Medicare costs will weigh more heavily in the agency’s determination of the target price.

During an Episode of Care, all providers will continue to be paid under the current Medicare fee-for-service payment system. At the end of a CCJR performance year, if the actual spend for a hospital patient is below the target price per Episode of Care and certain quality performance standards are met, the hospital will receive a reconciliation payment from CMS for the difference between the target price and actual episode spending, subject to a cap.

Although hospitals are not required to do so, CMS anticipates that many hospitals may want to enter into certain financial arrangements with “Collaborators”— meaning other providers and suppliers who are engaged in care redesign and provide services included in the bundled payment calculations. The CCJR Proposed Rule suggests that hospitals and Collaborators will be allowed to enter into sharing arrangements based on a hospital’s internal cost savings, net reconciliation payment amounts from CMS, and/or a hospital’s responsibility to repay CMS. As described, these sharing arrangements would permit "gainsharing" or "alignment" payments to Collaborators provided certain requirements are met.

The CCJR Rule outlines a number of other requirements governing the calculation and distribution of any gainsharing or alignment payments, suggesting that waivers of the fraud and abuse law (including the Stark law) similar to those used in BCPI Model 2 might be available. Unfortunately, the Rule avoids any commitment stating only that the Secretary will "consider whether waivers of certain fraud and abuse laws are necessary to test the CCJR model as the model develops.” The hospitals forced to participate in the CCJR Program can either wait for further guidance or accept some level of risk if they wish to initiate negotiations with potential Collaborators to develop agreements that provide for gainsharing or alignment payments. To reduce their exposure, hospitals should include in any such agreements appropriate caveats or modification provisions to permit the terms to be changed should further guidance be forthcoming.

An explicit CCJR Stark law waiver would be a welcome development, facilitating the industry’s ability to adapt to a value-based purchasing model. The challenge will be the need to ensure that the specific terms of the CCJR Stark law waiver are met. This process is complicated by the differences among the Stark law waivers that have been adopted for other programs. The MSSP waivers, while exceedingly broad, have their own set of requirements and limitations. The BCPI waivers are different for each of the four models and a provider must satisfy the specific requirements of the waiver applicable to the model in which it is participating. A health system or provider network participating in more than one of the programs must ensure that its financial arrangements are either Stark compliant or that they satisfy the specific requirements of the waiver that applies given the context of the financial arrangement. Financial arrangements covering patients who are covered by multiple programs may require consideration of multiple waivers.