On August 19, 2008 CMS finalized additional Stark regulations (“Stark IV”), based on various proposals it first published in the 2008 Medicare Physician Fee Schedule and the 2009 Inpatient Prospective Payment System proposed rules. The Stark IV regulations will become effective on two different dates- some provisions will become effective on October 1, 2008 and others on October 1, 2009. The federal register publication of these new rules can be found at http://edocket.access.gpo.gov/2008/pdf/E8-17914.pdf. A summary of the Stark IV regulations follows:

Limitations on Percentage-Based, Per-Click and Per-Use Arrangements. In the CY 2008 Medicare Proposed Physician Fee Schedule rule, CMS proposed to revise the Stark space and equipment lease exceptions to prohibit per use or per click charges under a lease with a Stark entity as the lessee and the physician as the lessor. CMS also solicited comments on whether the prohibition should extend to circumstances in which the physician is the lessee and the DHS entity is the lessor.

In the Stark IV regulations, the space (§411.357(a)), equipment (§411.357(b)), fair market value (§ 411.357(l)) and indirect compensation exceptions (§411.357(p)) will prohibit rental charges that use a formula based on:

  • a percentage of the revenue attributable to the services performed or generated in the office space or with the equipment; or
  • per-unit of service, to the extent the charges reflect services provided to a patient referred between the parties.

This revision will become effective October 1, 2009

Changes to Definition of Entity/Under Arrangements. In the CY 2008 Medicare Physician Fee Schedule rule, CMS proposed to change the definition of “entity” so that a person or entity would be considered to be furnishing DHS if it “performed” the DHS, or presented or caused a claim to be presented for DHS.

The proposal was significant because of its impact on “under arrangements” ventures, in which an entity such as a physician organization or joint venture, provides services to a hospital “under arrangements,” and the hospital bills for the services as inpatient or outpatient services.

Stark IV finalizes the proposal, and has provided for a delayed implementation date of October 1, 2009, recognizing that many providers have arrangements that may need to be restructured. Significantly, while not creating regulatory text concerning what it means to “perform” DHS, CMS noted in the comments that it did not consider an entity that (i) leases or sells space or equipment used for the performance of the service, or (ii) furnishes supplies that are not separately billable but are used in the performance of the service, or (iii) provides management, billing services or personnel to the entity performing the service to be “performing DHS” for purposes of the regulation.

Revisions to “Stand in the Shoes”

Stark III included a “stand in the shoes” provision under which referring physicians are treated as “standing in the shoes” of their physician organizations for purposes of applying the rules for direct and indirect compensation arrangements. A “physician organization” was defined as a physician (including a PC of which the physician is the owner), a physician practice, or a group practice (as defined under §411.352). In response to concerns from academic medical centers and integrated tax-exempt health systems related to certain support payments, CMS delayed the effective date of the stand in the shoes provisions for arrangements involving AMC faculty practice plans and compensation arrangements between affiliated DHS entities and physicians in integrated 501(c)(3) systems.

In Stark IV, the “stand in the shoes” provisions have been revised to clarify when a physician must and when a physician may, “stand in the shoes” of his or her physician organization. Physicians who have an ownership or investment interest in a physician organization must be treated as standing in the shoes of that physician organization. In contrast, a physician with a titular ownership interest are not required to stand in the shoes or their physician organizations, although they are permitted to do so. CMS has defined a “titular” ownership or investment interest as an interest that does not include the ability or right to receive financial benefits or ownership or investment, including distribution or profits, dividends, proceeds of sale or similar returns on investment.

The “stand in the shoes” requirements will not apply to an arrangement that satisfies the Academic Medical Center (AMC) exception in §411.355(e). Although the stand in the shoes revisions are effective October 1, 2008, CMS has provided that these provisions will not apply to an arrangement which met the indirect compensation exception’s requirements as of September 5, 2007, or which meets an exception in §411.357(other than the indirect compensation exception) as of the date the Stark IV rules are published in the Federal Register, until the expiration of the original term of current renewal term of the arrangement.

Alternate Method for Compliance

In the 2008 Medicare Physician Fee Schedule rule, CMS proposed an alternate method of satisfying requirements for certain exceptions to the Stark regulations, which were intended to assist providers when the failure to meet the requirements were based on a procedural issue, such as a missing signature. In the original proposal, CMS set forth eight criteria that a provider would need to demonstrate in order to avail itself of the protection of the alternate method of compliance, the most significant of which was a requirement that the provider self-disclose the noncompliance to CMS.

In Stark IV, CMS has substantially revised its original proposal, and has proposed that payment may be made if a financial relationship complied with an applicable compensation exception, with the exception of a signature requirement, if (i) the signature is obtained within 90 days if the failure to obtain the signature was inadvertent; (ii) the signature is obtained within 30 days if the failure was not inadvertent. The exception may only be used by the entity only once every 3 years with respect to the same referring physician. This exception will become effective October 1, 2008.

Period of Disallowance

CMS had previously proposed a regulation concerning the period of time for which a physician could not refer DHS to an entity, and for which the entity could not bill Medicare because a financial relationship between the referring physician and the entity failed to meet a Stark exception.

In Stark IV, CMS has provided that the period of disallowance begins at the time the financial relationship fails to meet the requirements of an exception and ends not later than:

  • if the noncompliance is not related to compensation, the date the relationship satisfies all requirements of an applicable exception;
  • if the noncompliance relates to the payment of excess compensation, the date the excess compensation is repaid in full and the financial relationship satisfies all of the requirements of an applicable exception;
  • if the noncompliance relates to the payment of less than sufficient compensation, the date the additional compensation is paid and the financial relationship satisfies all of the requirements of an applicable exception.

The regulation does not require the entity to self-report in order to use the disallowance period regulation. These regulations are effective October 1, 2008.

Obstetrical Malpractice Insurance Subsidies

In the 2008 Medicare Physician Fee Schedule rule, CMS proposed revising the exception for obstetrical malpractice insurance subsidies to list conditions that CMS believed would make the exception more useful, and yet still guard against program abuse.

In Stark IV, CMS has revised the exception by adding an alternative set of requirements that hospitals, federally qualified health centers and rural health clinics may meet to provide obstetrical malpractice insurance subsidies. The new criteria permits a hospital federally qualified health center or rural health clinic to provide such a subsidy to a physician who regularly engages in obstetrical practice as a routine part of a medical practice that is:

  • located in a primary care HPSA, rural area, or area with a demonstrated need, as determined by the Secretary of the Department of Health and Human Services in an advisory opinion; or
  • is comprised of patients at least 75% of whom reside in a medically underserved area (MUA) or are part of a medically underserved population (MUP) if:(1) the payments are made to the person or organization providing the malpractice insurance; (2) the arrangement is in writing, is signed by the entity and the physician and sets forth the terms of payment; (3) the arrangement is not conditioned upon the physician’s referral of patients to the entity providing the payment; (4) the payment is not based directly or indirectly on the volume or value of actual or anticipated referrals from the physician or any other business generated between the parties; (5) the physician is allowed to establish staff privileges at any hospital, federally qualified health center or rural health clinic and to refer business to any other entities (except as may be permitted in employment and certain service contracts); (6) the physician treats federal health care program beneficiaries in a nondiscriminatory manner; (7) the insurance is a bona fide policy or program, and the premium, if any, is calculated based on a bona fide assessment of the liability risk covered under the insurance; (8) for each coverage period (not more than one year), at least 75% of the physician’s obstetrical patients treated under the policy during the prior period resided in a rural area, HPSA, medically underserved area or area with a demonstrated need for the physician’s service as determined by the Secretary in an advisory opinion; or were part of a medically underserved population; and (9) the arrangement does not violate the anti-kickback statute or any other Federal or State law or regulation governing billing or claims submission.

This new exception is effective October 1, 2008.

Exception for Ownership/Investment Interests in a Retirement Plan

In the 2008 Medicare Physician Fee Schedule rule, CMS proposed to create an exception for a physician or immediate family member’s ownership interest in a retirement plan offered by an entity as a result of the physician or immediate family member’s employment with that entity.

CMS finalized this proposal in 411.354(b)(3)(i). This provision is effective October 1, 2008.

Burden of Proof

CMS clarified that in any appeal of a denial of payment for DHS that was made on the basis of a prohibited referral, the burden of proof is on the entity submitting the claim to establish it was not furnished pursuant to a prohibited referral. 

Clarification Concerning Phase III Amendment vs. Termination Rules

CMS previously took the position that the “set in advance” requirements of the office space, equipment lease, and personal services exceptions would not permit amendment of the compensation terms, including the methodology for determining compensation, during the term of an agreement. CMS instead advised that parties must terminate the agreement and enter into a new agreement. However, the new agreement could not be entered into during the first year of the original agreement.

In Stark IV, CMS has revised its position, and now states that changes to rent or compensation provisions may be made if (1) all of the requirements of an applicable exception are satisfied; (2) the amended rental charges or other compensation (or the formula for the amended charges or compensation) is determined before the amendment is implemented and the formula is detailed enough to permit objective verification; (3) the charges or formula for the charges or compensation does not take into account the volume or value of referrals or other business generated ; and (4) the amended rental charges or compensation (or formula) must remain in place for at least a year from the date of the amendment. CMS also made clear that this interpretation applies to all exceptions to compensation arrangements that include a 1-year term requirement.


Certainly the most broadly helpful changes in the newest Stark regulations are to the “stand in the shoes” provisions because the rule changes permit continued use of the indirect compensation terms of the Stark regulations whenever a financial relationship is with employed physicians who are not shareholders or owners of a physician group. Generally, however, the prohibition of certain “per click” arrangements, the period of disallowance rules, and the new “under arrangements” rules are further evidence that CMS is determined to continue tightening the rules surrounding physician relationships with hospitals and other entities that receive patient referrals from physicians.