As part of its Proposed Physician Fee Schedule (PFS) Rule for CY 2008 (Proposed Rule), 1 the Centers for Medicare and Medicaid Services (CMS) proposed a number of changes and requested comments on the Federal Physician Self-Referral (Stark) Rules. In general, CMS seems to be revisiting the Stark regulations in ways that would make it more difficult to qualify for an exception, thereby strengthening the prohibition on physician self-referral. This Update discusses the proposed changes and request for comments on the Self- Referral Rule made by CMS in the Proposed Fee Schedule Rule. With one exception, noted below, comments are due by close of business on August 31, 2007.

Changes to Reassignment and Physician Self-Referral Rules Relating to Diagnostic Tests Medicare rules currently (a) prohibit the markup of the technical component (TC) of certain diagnostic tests that are performed by outside suppliers and (b) restrict who may bill for the professional component (PC) of diagnostic tests. 2 These issues were discussed in the 2007 PFS proposed rule. CMS is now proposing to impose an “anti-markup” provision on both the technical component and professional component of diagnostic tests, “irrespective of whether the billing physician or medical group outright purchases the PC or the TC, or whether the physician or other supplier performing the TC or PC reassigns the right to bill to the billing physician or medical group.” 3 Notably, an outside supplier is defined in the Proposed Rule as someone other than a fulltime employee of the billing physician or medical group. 4 Because CMS believes that PCs ordered by independent labs do not pose a significant risk of program abuse (because the independent lab is not ordering a TC), CMS would exempt independent labs from the anti-markup provision. 5

Burden of Proof

CMS proposes to clarify that, “consistent with our policy with respect to claim denials, in any appeal of a denial of payment for a [designated health service (DHS)] that was made on the basis that the service was furnished pursuant to a prohibited referral, the burden is on the entity submitting the claim for payment to establish that the service was not furnished pursuant to a prohibited referral.” 6

In-Office Ancillary Services Exception

CMS expresses concern that “services furnished today purportedly under the in-office ancillary services exception are often not as closely connected to the physician practice” as were those services at the time of enactment of the Stark law and some of these types of arrangements “appear to be nothing more than enterprises established for the self-referral of DHS.” 7 In addition, CMS observes that, in response to the Phase II physician self-referral rules, 8 “we received hundreds of letters from physical therapists and occupational therapists stating that the in-office ancillary services exception encourages physicians to create physician and occupational therapy practices.” 9 However, CMS is declining to issue a specific proposal for amending the in-office ancillary services exception but instead is soliciting comments as to what changes should be made, including (1) whether to exclude certain services from qualifying for the exception, (2) whether the definition of “centralized building” should be changed, (3) whether nonspecialist physicians should be able to use the exception to refer patients for specialized services involving the use of equipment owned by the nonspecialist, and (4) whether any other restrictions on ownership or investment interests are warranted in order to curtail program abuse. 10

Obstetrical Malpractice Insurance Subsidies

Out of a concern that the exception is too restrictive, CMS is seeking comments and recommendations for modifications to the exception for OB malpractice insurance subsidies. 11 Unit-of-Service (Per-Click) Payments in Space and Equipment Leases CMS has (again) reconsidered the issue of per-click payments and, in what would be a significant change, is now proposing that space and equipment leases may not include unit-of-service based payments to a physician lessor for services rendered by an entity lessee to patients who are referred by the physician to the entity. 12

Period of Disallowance for Noncompliant Financial Relationships

CMS is seeking comments regarding how it would go about setting forth the criteria for determining the period of disallowance for arrangements that implicate, but failed to satisfy the requirements of, one or more exceptions. 13 In other words, the agency seeks comments on how to determine when a prohibited financial arrangement has “ended” for purposes of the Stark law. 14 CMS also seeks comments on whether (a) a period of disallowance could terminate where the parties have returned, or paid back the value of, the consideration (this would not be available if the parties know or reasonably should have known that the arrangement didn’t satisfy the requirements of an exception) and (b) a period of disqualification from relying on an exception should be imposed where an arrangement has failed to satisfy the requirements of the exception. 15

Ownership or Investment Interests in Retirement Plans

CMS states that it understands that some physicians are using retirement plans (which are excluded from the definition of ownership and investment interests) to purchase DHS entities to which they refer patients for DHS. The agency proposes to clarify the definition to prohibit this type of conduct. 16

“Set in Advance” and Percentage-Based Compensation Arrangements

CMS states that its intent was that percentage compensation arrangements could be used only for compensating physicians for the physician services they perform. 17 CMS is proposing to clarify that percentage-based compensation arrangements (1) may be used only for paying personally furnished physician services and (2) must be based on the revenues directly resulting from physician services rather than based on some other factor such as the savings of a hospital department (“which is not directly or indirectly related to the physician services provided”). 18 Among other things, this will address situations where percentage compensation arrangements are being used for the provision of other services and items, such as equipment and office space that is leased on the basis of a percentage of the revenues raised by the equipment or in the medical office space. 19

Stand in the Shoes

CMS proposes to amend the regulations regarding indirect compensation arrangements to provide that, when a DHS entity owns or controls an entity to which a physician refers Medicare patients for DHS, the DHS entity would “stand in the shoes” of the entity that it owns or controls and would be deemed to have the same compensation arrangements with the same parties and on the same terms as does the entity that it owns or controls. 20 CMS proposes to collapse this type of relationship to “safeguard against program abuse by parties who endeavor to avoid the application of the physician self-referral requirements by simply inserting an entity or contract into a chain of financial relationships linking a DHS entity and a referring physician.” 21 (CMS may address in future rulemaking whether physicians would be permitted to stand in the shoes of their group practices, thereby requiring analysis of certain indirect compensation arrangements as direct compensation arrangements.) 22

Alternative Criteria for Satisfying Certain Exceptions

CMS is considering whether to amend certain of the exceptions to provide an alternate method for satisfying the exception in the instance of inadvertent violations in which an agreement fails to satisfy the procedural “form” requirements of an exception of the statute or regulations, such as a missing signature on a lease. 23 CMS indicates that it would require, among other things, that (1) the facts and circumstances of the arrangement be self-disclosed, (2) the failure to meet all requirements was inadvertent, and (3) the referral and claim for DHS were not made with knowledge (as defined by under the False Claims Act) that the exception was not met. 24 CMS states its belief that, if its proposal were to be adopted and a DHS entity were to submit a claim with the knowledge that its financial relationship did not meet the prescribed criteria of any exception, and did so in advance of any determination from CMS that the arrangement met the alternative method of compliance, the DHS entity could be found liability under the False Claims Act. 25 Comments on this topic will be considered by CMS if they are received by close of business on September 7, 2007. 26

Services Furnished “Under Arrangements”

CMS proposes to revise the Stark regulation’s definition of “entity” so that the DHS entity includes both the person or entity that performs the DHS as well as the person or entity who submits claims or causes claims to be submitted to Medicare for the DHS. 27 CMS notes that it has received anecdotal reports of hospital and physician joint-ventures that provide hospital imaging services under arrangements that formerly were provided by the hospital directly and “there appears to be no legitimate reason for these arranged for services other than to allow referring physicians an opportunity to make money on referrals for separately payable services.” 28