On January 22, 2009, the Centers for Medicare and Medicaid Services (“CMS”) issued Stark law Frequently Asked Question (“FAQ”) 9556 at http://tiny.cc/ZJKzK, addressing Stark and lithotripsy services. In the FAQ, CMS clarified that, under certain circumstances, a hospital may use a per-use or percentage-based formula to compensate a physician-owned lithotripsy partnership providing lithotripsy services to a hospital “under arrangements”.  

In a typical “under arrangements” contract, a physician-owned lithotripsy company provides both the equipment and technical personnel and performs the lithotripsy service for the hospital charging on a per-service basis. In turn, the hospital treats the contract as an “under arrangements” service allowing the hospital to bill for the lithotripsy services. However, recent Stark law changes affecting both “under arrangements” contracts and equipment leasing have called into question the continued permissibility of these commonplace lithotripsy contracts.  

In particular, on August 19, 2008, CMS expanded the definition of “entity” in the Stark regulations to include entities that “perform” the designated health services, which would include entities providing the entire package of services to a hospital “under arrangements”, as well as the entity billing Medicare for the designated health services. This change means that as of October 1, 2009 physician-owned entities providing services to hospitals “under arrangements” (other than for lithotripsy as explained below) will have to be restructured if the physician-owners refer to the hospital for designated health services, which include all inpatient and outpatient hospital services.  

As explained in the FAQ, however, lithotripsy is a unique service under Stark because, due to a prior court case, CMS does not consider lithotripsy to be a “designated health service”. Therefore, “if the physician-owners of the lithotripsy partnership make referrals to the hospital for lithotripsy services ONLY”, the Stark law would not even be implicated and the arrangement need not comply with a Stark law exception. In that case, a per-service or percentage-based compensation formula would be permitted, even if the lithotripsy arrangement includes equipment.  

In many instances, however, the physicianowners of a lithotripsy company will refer to the hospital for services in addition to the lithotripsy services. In that case, the compensation arrangement between the lithotripsy partnership and the hospital must comply with an applicable Stark law exception because all hospital services are designated health services. For example, the arrangement could satisfy the Stark law personal services exception, as discussed further below. In other words, physician-owned lithotripsy partnerships can avoid complying with a Stark exception altogether ONLY if the physicianowners do not refer to the hospital for anything but lithotripsy services. Of concern then is what Stark law exceptions are available to protect the typical lithotripsy “under arrangements” contract where the physicians refer to the hospital for other services.  

One option to consider is the equipment lease exception. A problem may be, however, that on August 19, 2008, CMS also prohibited the use of per-service and percentage-based compensation for equipment leases where the lessor refers for the services involved. For example, a physician-owned equipment company leasing equipment to a hospital where the physicianowners refer to the hospital for the service involving the equipment cannot use a percentage-based or perclick compensation arrangement beginning October 1, 2009. Therefore, if an arrangement must comply with the Stark equipment lease exception, beginning on October 1, 2009 it cannot use per-service or percentage-based compensation. After this August, 2008 change, many industry observers assumed that lithotripsy “under arrangements” contracts, which by nature involve providing equipment used by hospitals, would have to comply with the Stark lease exception, and as a result, would be unable to use per-service or percentage-based compensation terms starting in October. But, in the FAQ, CMS explains that, at least for physician-owned lithotripsy companies, another avenue remains possible -- the personal services exception, which will continue to allow use of percentage-based and per-service compensation.  

Regarding this other avenue, CMS reiterated its prior position first articulated in Phase II that CMS will not require use of the lease exception whenever equipment is provided as part of an overall service contract. CMS explained that where contractors provide “the tools of their trade” in connection with service contracts, which can include equipment, the lease exception need not be satisfied. Applying that rationale to lithotripsy “under arrangements” contracts, CMS stated:  

“provided that a lithotripsy partnership is actually furnishing a service (or a package of services) to the hospital, and not merely leasing equipment over which the hospital would have dominion and control, the hospital may compensate the lithotripsy partnership using a per-unit or percentage-based compensation formula, as long as the requirements of a relevant exception are satisfied.”  

Thus, CMS has made clear that a physician-owned lithotripsy partnership can rely on the personal services exception, which does not prohibit the use of per-service or percentage-based compensation.

Caution should be taken in extending this “tools of the trade” rationale to arrangements involving services other than lithotripsy, however, because the FAQ applies only to the question presented involving physician-owned lithotripsy partnerships. CMS gives no clear indication in the FAQ, regarding the circumstances in which it may be willing to extend this rationale to other service arrangements that include equipment. Thus, it remains uncertain when CMS will view inclusion of equipment in a broader service arrangement as merely bringing a “tool of the trade”, thereby eliminating the need to comply with the Stark equipment lease exception.  

Moreover, bear in mind that for any “under arrangements” services contract except lithotripsy, as discussed above, beginning on October 1, 2009 a physician-owned entity providing the package of services “under arrangements” will be a Stark designated health services “entity” requiring an ownership exception to allow its physician-owners to refer to the hospital. Yet, the only Stark ownership exceptions are for rural areas and publicly traded companies, which will not be available to protect the vast majority of “under arrangements” contracts. As a result, it will not be possible for physician-owned entity “under arrangements” contracts with hospitals to comply with Stark as of October 1, 2009 due to the lack of an ownership exception, unless they are restructured such that they are no longer for “under arrangements” services. Companies providing lithotripsy services “under arrangements” will escape this obstacle only due to CMS’ special treatment of lithotripsy as a non-designated health service.  

For non-lithotripsy “under arrangements” companies, restructuring options may include buying out physician-owners, hospital acquisition of the “under arrangements” company, and reducing the package of services provided by the “under arrangements” company to something less than the entire package of services. Any restructuring option should be considered carefully in light of the recent Stark changes to the lease exception and CMS’ increasing concerns about abusive leasing arrangements, as well as compliance with the federal anti-kickback law.