This article appeared in the October 2009 issue of G-2 Compliance Report.

Effective October 1, 2009, the Centers for Medicare and Medicaid Services ("CMS") revised the Federal physician self-referral law (commonly known as the "Stark Law") in a manner that will render most "under arrangements" relationships between hospitals and physician-owned, third-party service providers out of compliance with the Stark Law.[1] Such "under arrangements" relationships include, for example, certain sleep center arrangements, cath lab arrangements, radiology service arrangements and clinical laboratory arrangements. Also effective October 1, 2009, CMS revised the Stark Law such that most arrangements involving percentage-based or per-unit of service (also known as "per click") rental payments for office space leases and equipment leases between physicians or physician groups and clinical laboratories, hospitals or other entities that furnish designated health services are out of compliance with the Stark Law. Although there is room for certain per-click lease arrangements, described below, most percentage-based or per click leases must be revised into flat fee or block time arrangements.

Stark Law Basics

In brief, the Stark Law (1) prohibits a physician from making referrals for certain designated health services ("DHS") payable by Medicare to an entity with which the physician (or an immediate family member) has a direct or indirect financial relationship (ownership or compensation), unless an exception applies; and (2) prohibits the entity from filing claims with Medicare (or billing another individual, entity or other third-party payor) for those DHS rendered as a result of a prohibited referral.[2] DHS includes inpatient and outpatient hospital services; clinical laboratory services; physical therapy, occupational therapy and speech-language pathology services; radiology and certain other imaging services; radiation therapy services and supplies; durable medical equipment and supplies; parental and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; and outpatient prescription drugs.[3]

The Stark Law is a strict liability statute. Therefore, a financial relationship that does not meet a relevant exception is noncompliant, regardless of whether one or both of the parties to the arrangement were unaware of, or did not intend, the defect. The Stark Law establishes specific exceptions and grants the Secretary of the U.S. Department of Health and Human Services the authority to create regulatory exceptions for financial relationships that pose no risk of program or patient abuse.[4] Violations of the Stark Law are subject to various penalties including civil money penalties of up to $15,000 for each service plus two times the reimbursement claimed; exclusion from the Federal health care programs (including Medicare and Medicaid); and possible "boot strapped" civil penalties under the False Claims Act.[5]

In sum, if your financial relationship falls under the Stark Law, you need to meet a Stark Law exception, or you will be subject to the penalties described above.

"Entity" and "Under Arrangements"

Under the Medicare payment rules, certain providers, including acute care hospitals, can provide services to their patients directly or "under arrangements" with a third party and bill Medicare for those services.[6] As of October 1, 2009, the Stark Law regulations change "under arrangements" relationships from arrangements that must solely meet a Stark Law compensation exception [7] to arrangements that must meet a Stark Law compensation and ownership exception because of the change in the definition of "entity."

Effective October 1, 2009, the definition of "entity" will be expanded as follows:

Entity means…[a] physician's sole practice or a practice of multiple physicians or any other person, sole proprietorship, public or private agency or trust, corporation, partnership, limited liability company, foundation, nonprofit corporation, or unincorporated association that furnishes DHS. …A person or entity is considered to be furnishing DHS if it –

(i) Is the person or entity that has performed services that are billed as DHS; or

(ii) Is the person or entity that has presented a claim to Medicare for the DHS, including the person or entity to which the right to payment for the DHS has been reassigned….[8]

What is the impact of the change in the definition of "entity"?

This amendment to the definition of "entity" means that the Stark Law will apply not only to entities that submit claims to Medicare and receive payment for DHS, but also will apply to entities that "perform" DHS, even if they do not submit claims for DHS. Whether the physician-owned service provider/hospital relationship has an issue under the revised definition of "entity" depends on whether the physician-owned service provider is "performing" the DHS. Although CMS did not provide a specific definition of "perform" in the regulatory revisions, CMS did state: "We do not consider an entity that leases or sells space or equipment used for the performance of the service, or furnishes supplies that are not separately billable but used in the performance of the medical service, or that provides management, billing services, or personnel to the entity performing the service, to perform DHS."[9] There is still an area of some uncertainty in determining whether a service provider is "performing" the DHS that are "billed as DHS."[10]

Therefore, as a result of the change in the definition of "entity," in addition to the agreement between the hospital and the physician-owned third party that provides the "under arrangements" services to the hospital needing to meet a Stark Law compensation exception in order for the physician owner to refer DHS to the hospital, effective October 1, 2009, the physician's ownership in the third-party service provider must meet a Stark Law ownership exception in order for the physician to refer patients for inpatient or outpatient services/DHS performed by the third-party service provider "under arrangements" to the hospital for which the hospital bills.[11] Unfortunately, there are very limited exceptions for referrals from the physician owner.[12]

This change in the definition of "entity" is significant because many physician-owned entities provide services to hospitals. If an arrangement falls under this change, it must be examined and typically must be restructured or terminated because of the strict liability penalties of the Stark Law. Restructuring could take different forms – a buy-out of physician ownership in the third-party service provider; the hospital purchasing the third-party service provider; or the hospital providing the service through its own employees and leasing the equipment.

Change in Allowed Lease Arrangements

Effective October 1, 2009, most percentage-based and per-click leases will not meet an exception under the Stark Law. Specifically, the Stark Law exceptions for the rental of office space, the rental of equipment, fair market value compensation and indirect compensation arrangements have been revised to provide that charges or compensation may not be determined using a formula based on –

(A) A percentage of the revenue raised, earned, billed collected, or otherwise attributable to the services performed on or business generated through the use of the equipment; or

(B) Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred by the lessor to the lessee.[13]

In the 2009 IPPS Final Rule, CMS explained that it was prohibiting percentage-based and per-click leases because it had not intended that percentage-based compensation formulae be used for anything other than compensating physician for the physician services that they personally perform.[14] For example, CMS saw an issue with percentage-based leases because lease payments based on a percentage of revenues earned by the lessee provide an incentive for the lessor to increase DHS referrals to the lessee so as to increase the rental payment under the lease. CMS also questioned whether percentage-based lease payments, which fluctuate, could be fair market value, which would increase the risk of program or patient abuse. CMS stated its intention to continue to monitor compensation formulae between DHS entities and referring physician including arrangements for non-professional services (e.g., management and billing services) and, if appropriate, further restrict percentage-based formulae in a future rulemaking.[15]

With regard to per-click leases, the prohibition on per-click payments for space or equipment used in the treatment of a patient referred to the lessee by a physician applies regardless of whether the physician himself or herself is the lessor or whether the lessor is an entity in which the referring physician has an ownership or investment interest. The prohibition also applies where the lessor is a DHS entity that refers patients to a physician lessee or a physician organization lessee. The exception to the per-click prohibition would be if the services are rendered to patients that were referred by others. Thus, if a physician wants to lease equipment or space to an entity and refer patients for DHS to that entity, it would be possible for the parties to structure the arrangement so the physician would receive per-click fees for services rendered to patients referred by others, but would receive compensation calculated on some other basis for services that were rendered to patients who were referred by the physician.[16]

Under the Stark Law exceptions, leases may continue to have flat fee payments or block time arrangements. Those arrangements should fit under an exception, but CMS has specifically stated that it has concerns regarding lease arrangements involving small blocks of time (e.g., once a week for four hours), or for a very extended time, which could indicate that the lessee is leasing space that it does not need or cannot use in order to compensate the lessor for referrals).[17] Again, CMS stated that it would continue to study the ramifications of block leases and may propose additional rulemaking in the future.

As with all physician arrangements, and as CMS reminds us, the parties to these arrangements must also take into consideration the Federal anti-kickback statute when structuring their arrangements. To the extent possible, arrangements should meet a Federal anti-kickback statute safe harbor.

Next steps

Some entities have delayed their analysis of their arrangements under the Stark Law revisions with hopes that CMS would delay the effective date. However, based on our discussions with CMS regulators, the revised rules will become effective October 1, 2009. As such, we recommend that entities with such arrangements review the arrangements to ensure compliance with the Stark Law and, if necessary, discuss restructuring options with counsel who is familiar with the Stark Law and Federal anti-kickback statute.