On September 5, 2007, the Centers for Medicare and Medicaid Services (“CMS”) issued Stark II Phase III final regulations, which became effective December 4, 2007. Because these regulations provide detailed guidance and changes regarding the federal prohibition against physician self-referral, commonly referred to as the “Stark Law,” these regulations will have an important impact on physicians’ business arrangements. The most significant provisions in the regulations include the following:

“Stand in the shoes” provision

A physician in a group practice is deemed to “stand in the shoes” of his or her organization for purposes of the Stark Law and its exceptions. As a result, physician group practice entities generally do not shield physicians from having a direct financial relationship with designated health service entities. The regulations do, however, create a “grandfather” provision that permits existing indirect financial relationships formed before September 5, 2007 to remain intact until the existing contracts terminate. Additionally, CMS has issued a final rule delaying the effective date of the “stand in the shoes” provisions of Phase III for certain limited arrangements involving academic medical centers (“AMC”) and integrated section 501(c)(3) health care systems until December 4, 2008. However, there are a number of situations the delay does not cover.

Physician recruitment exception

CMS adjusted several rules related to the physician recruitment exception to the Stark Law. In particular, the new regulations change the definition of the geographic area served by a hospital for recruitment purposes; permit a more generous income guarantee when a physician is recruited to replace a deceased, retiring, or relocating physician; and exempt from the relocation requirement a physician who has been employed for two years prior by a federal or state department of corrections, the Department of Defense, the Veteran’s Administration, or the Indian Health Service, provided the physician did not have a separate private practice. Additionally, the new regulations specifically permit various “limitations on practice,” including non-solicitation and some restrictive covenant agreements and liquidated damages, with some caveats.

In recognition of the unique physician recruitment issues faced by rural areas, CMS also instituted a number of changes to benefit rural providers, including permitting rural health clinics to use the physician recruitment exception, and permitting a rural hospital to use an alternate test to determine its geographic area for recruitment purposes.

“Physician in a group practice” definition

CMS revised this provision to require independent contractor physicians to have direct contractual relationships with practice groups to be considered a “physician in a group practice for purposes of the physicians services and in office ancillary services exceptions. Additionally, independent contractor physicians must perform billable services in a group’s practice facilities to qualify as a supervising “physician in a group practice.”

Holdover provision for personal services exception

CMS created a six-month holdover provision for this exception, duplicating the provision that exists for the rental of office space exception “Incident to” definition CMS revised this definition to clarify that the term includes both incident to services and supplies. A physician in the group practice may be paid a productivity bonus based upon services he or she has personally performed, or services “incident to” such personally performed services, or both.

Non-monetary compensation

CMS made two changes to this rule. First, physicians may repay, within the calendar year, the amount of any non-monetary compensation that is above the federal limits for non-monetary compensation to avoid violations of the Stark Law. Second, entities may host one annual function, such as a holiday party, in addition to the non-monetary compensation limit if the event is for the entity’s entire medical staff.

Compliance training

The final regulations permit continuing medical education (“CME”) events to fall within the Stark Law’s training exception but only if compliance is the primary purpose of the events.

Professional courtesy

CMS deleted the requirement that entities notify insurers when professional courtesy involves the whole or partial reduction of any coinsurance obligation. CMS modified this exception, however, to make clear that it applies only to hospitals and other providers with formal medical staffs, rather than entities without formal medical staffs, such as durable medical equipment (“DME”) providers.

In-office ancillary services exception

Although it has not yet acted, CMS is considering whether certain types of arrangements, such as those involving in-office pathology labs and sophisticated imaging equipment, should continue to be eligible for protection under the in-office ancillary services exception. We anticipate this will be an area for a future rulemaking.

To access the new regulations, visit http://a257.g.akamaitech.net/7/257/2422/01jan20071800edocket.access.gpo.gov/2007/pdf/07-4252.pdf. Because the Stark Law is intensely fact specific, legal counsel is recommended to ensure compliance.