On July 31, 2008, CMS issued a pre-publication version of the commentary to the 2009 Medicare Inpatient Prospective Payment System final rule (which will be published officially in the Federal Register on August 19, 2008). Within this lengthy payment rule are significant changes to the Stark law. This Client Bulletin describes these critically important Stark law changes.

“Under Arrangements”

Stark now applies to arrangements where services are billed by hospitals but actually provided by a physician-owned entity under contract with the hospital. CMS resumed its pursuit of restrictive regulation of the concept of “under arrangements,” a practice that has been increasingly used to obtain hospital reimbursement rates for services that are actually provided by an entity that is owned by referring physicians. CMS accomplished this by changing the definition of the term “entity” to include the person or entity that actually performs the Stark-regulated designated health service (“DHS”), even if another person or entity bills for such service. Thus, Stark applies to an entity providing a service “under arrangements” to a hospital, even if the entity does not submit a bill to Medicare. This means that physicians with ownership or compensation arrangements with an entity providing a service “under arrangement” to a hospital may not refer to that entity unless a Stark exception applies. Effectively, this will restrict the vast majority of “under arrangement” relationships between hospitals and physicians. Of note, CMS delayed the effective date of this part of the rule until October 1, 2009 in order to give parties ample time to restructure existing arrangements that would no longer satisfy Stark as a result of this change.

CMS initially proposed this definitional change in July 2007 as a part of the proposed calendar year 2008 physician fee schedule rule. Tremendous reaction from the industry caused CMS to refrain from implementing it as a final rule effective January 1, 2008. In the new regulations, CMS made slight modifications from its July 2007 proposal, but essentially adopted it as proposed, albeit with the delayed effective date.

The preamble to the new regulations summarized comments received in favor of and against the proposal. The overarching theme was CMS’s concern that a physician’s ownership or investment interest influenced the decision to order or refer to a certain service. CMS noted that hospitals were largely supportive and that very few hospitals and no hospital associations submitted comments in opposition to the proposal to restrict “under arrangements” transactions between physician-owned entities and hospitals. Physician groups, and particularly groups and associations related to urologists, submitted comments in opposition to the proposed rule. However, CMS also cited comments from urologists that supported CMS’s concern with over-utilization where a treating physician had an ownership interest in a certain type of service. CMS clearly indicated a belief that “under arrangements” relationships were being improperly used to transfer, in effect, beneficial ownership of hospital departments to physicians.

CMS stated: “If a physician may not purchase an interest in the radiology department of a hospital, refer patients to the hospital for radiology procedures, and claim the benefit of the [Stark] hospital exception … he or she should not be allowed to enter into a joint venture with the hospital through which the hospital effectively moves its radiology department (or part of its radiology department) outside of the hospital and into a facility in which the physician has an ownership interest and to which the physician refers patients for DHS that are billed ‘under arrangements.’ ”

Hospitals should evaluate all of their contractual arrangements with physician-owned service providers for potential amendment prior to October 1, 2009.

The “Stand in the Shoes” Rule

Only physician owners/investors must “stand in the shoes” of their physician organizations; non-owner/investor physicians may “stand in the shoes.” In the new Stark regulations, CMS narrowed the prior “stand in the shoes” rule to apply only to those physicians who are owners or investors in their physician organizations effective October 1, 2008. Under the prior “stand in the shoes” rule, all physicians were deemed to “stand in the shoes” of their physician organizations. This meant that any arrangement between a DHS entity and a physician involved in a physician organization had to comply with one of Stark’s direct compensation arrangement exceptions and the indirect compensation analysis was not available. This was problematic because the direct compensation exception requirements are generally more stringent than the indirect compensation requirements. This also presented a challenge for arrangements with physician organizations that had previously relied on the indirect compensation analysis and could not comply with any direct compensation exception.

Under the new Stark regulations, DHS entity arrangements with physicians who are not owners/investors (e.g., employees and independent contractors), or physicians whose ownership/investment interest is titular only1, such as hospital-controlled friendly professional corporations, can use the indirect compensation arrangement analysis. Many of these arrangements may fall outside of Stark’s definition of indirect compensation arrangement and, as a result, will not need to comply with any Stark exception. CMS nevertheless recognized that in some circumstances non-owner/investor physicians may desire to “stand in the shoes” of their physician organizations so that the parties can rely on the protection of a Stark direct compensation exception. The new regulations permit that as an option.

Previously grandfathered indirect arrangements remain grandfathered until their renewal. The prior rule’s grandfathering exception allowed arrangements that complied with the indirect compensation exception as of September 5, 2007 to remain in place through the expiration of the initial term, or any current renewal term, without complying with “stand in the shoes”. That will remain the case under the new regulations. However, if a grandfathered arrangement is due for renewal before October 1, 2008, it will now need to comply with the new regulation’s “stand in the shoes” requirements.

Indirect compensation analysis now available for some AMCs and IHSs making “mission support” payments. In the new regulations, CMS explicitly stated that Academic Medical Center (“AMC”) arrangements that meet the AMC exception, 42 CFR 411.355(e), need not comply with the new “stand in the shoes” rule. For example, faculty practice plan physicians are not required to “stand in the shoes” of their faculty practice plans if the AMC satisfies the AMC exception. This exemption may be of limited value, however, because many AMCs are unable to satisfy the AMC exception due to its restrictions on payments to physicians. Before “stand in the shoes,” most AMCs in this predicament, as well as other tax exempt integrated health systems (“IHS”) making mission support payments, complied with Stark by applying the indirect compensation analysis, under which support payments typically fell outside of the definition of indirect compensation arrangement and did not need to meet a Stark exception. But after the prior “stand in the shoes” rule, these AMCs and IHSs would have been required to comply with a direct Stark exception, which would have been difficult or impossible for many AMCs and IHSs.

In response to these concerns, many industry stake-holders had hoped that CMS would either revise the AMC exception or create a new exception protecting “mission support” payments. CMS declined to do so in the new regulations, however. CMS’s current view is that where the AMC exception cannot be met, faculty practice plans and other physician organizations receiving mission support payments should be analyzed like any other physician group practice. Nevertheless, the new regulations do offer relief for those AMCs or IHSs making payments to physician organizations that do not have physician owners/ investors, or with only “titular” physician owners/investors. As noted above, hospital-controlled professional corporations will likely only result in “titular” ownership by physicians and would, therefore, not be subject to the “stand in the shoes” rule. Accordingly, these AMCs and IHSs may once again apply the indirect compensation analysis. Yet, Stark compliance will remain problematic for any AMC or IHS making support payments to a physician organization that has physician owners/investors who are not mere “titular” owners/investors, because those physician owners/ investors must “stand in the shoes” of the physician organization. In that case, compliance with a direct compensation exception may be difficult because support payments are not typically tied to specific items or services, as is required by the Stark direct compensation exceptions.

Hospitals should review any “mission support” payments made to physician organizations, such as professional corporations, to determine if the “stand in the shoes” rule applies and ensure that the payments qualify for a Stark exception under the new regulations.

CMS reversed recent position on amending agreements under exceptions with “set in advance” requirement. CMS has reconsidered its recent interpretation of the Stark “set in advance” rule as it applies to amendments of rental charges in space and equipment leases and compensation in personal services agreements. Apparently, CMS was sympathetic to industry concerns that its prior position would have prevented amendments to these arrangements during the term. As a result, under the new regulations, the “set in advance” requirement of these exceptions will be met if (1) all requirements of the exception are met; (2) amended rental charges or compensation is determined before the amendment is implemented and the formula is sufficiently detailed so that it can be objectively verified; (3) the formula does not take into account the volume or value of referrals or other business generated; and (4) the amended rental charges or compensation remain in place for at least one year from the date of amendment. CMS also clarified that this rule regarding amendments applies to all Stark compensation exceptions that include a one-year term requirement. These include the space and equipment rental exceptions, and personal services arrangements exceptions.

CMS declined to finalize its proposed entity “stand in the shoes” rule. Due to overwhelming industry comments in opposition, CMS did not finalize the previously proposed entity “stand in the shoes” rule. CMS indicated that the final physician “stand in the shoes” rule appropriately addressed its goal to simplify the Stark analysis of financial relationships between DHS entities and referring physicians and as a result, the entity “stand in the shoes” rule was unnecessary at this time.

Space/Equipment Leases

Per-click rental charges in space/equipment leases are prohibited. The new regulations prohibit per-click (i.e., per-use or per unit-of-service) rental charges for space or equipment in leases between DHS entities and physicians to the extent such charges reflect services referred between the parties. This means that the prohibition applies when the physician is the lessor or when the physician is the lessee of space or equipment. CMS stated it had concerns that per-click lease arrangements: (1) result in overutilization of services; (2) create incentives for a lessee to refer patients to the leased space or equipment rather than to another provider that may provide a more efficient or appropriate treatment modality; and (3) may encourage anti-competitive behavior, as some entities may enter into these arrangements out of fear of losing referrals. CMS noted that because physicians themselves may submit claims for DHS, these concerns apply both to arrangements where a DHS entity leases to a physician and to arrangements where a physician leases to a DHS entity. The regulations also make corresponding changes to the indirect compensation arrangement and fair market value exceptions to prevent use of those exceptions to protect per-click lease arrangements. The prohibition on per-click rental charges for office space and equipment is effective October 1, 2009. There is no grandfathering of existing leases – all leases between DHS entities and physicians must comply with this rule as of October 1, 2009. Hospitals should (1) ensure that any new leases entered into with physicians do not have per-click rental charges and (2) review all current leases that will continue past October 1, 2009, and restructure any that contain per-clerk rental charges by October 1, 2009.

Percentage compensation to set rental changes in space/equipment leases is prohibited. Also prohibited by the new Stark regulations is the use of percentage-based compensation formulae in determining rental charges for the lease of office space and equipment, such as rental changes based on a percentage of the revenue generated by the lessee physician. CMS expressed a belief that such rental charge calculations impermissibly create an incentive for the lessor to increase referrals to the lessee. CMS was also concerned that fluctuating rental payments under a percentage-based formula may not represent fair market value, depending on the final amount of collections actually received. Percentagebased compensation formulae are still permitted in arrangements for a physician’s personally performed services and for non-professional services (such as agreements for management or billing services). The new regulations only address percentage-based compensation formulae for rental charges in leases. CMS stated that it will continue to monitor other types of arrangements and that it might further restrict percentage-based formulae in a subsequent rule. This prohibition is effective October 1, 2009. There is no grandfathering of previous leases – all leases between DHS entities and physicians must comply with this rule as of October 1, 2009. Hospitals should (1) ensure that any new leases entered into with physicians do not utilize percentage-based compensation formulae to determine rental charges and (2) review all current leases that will continue past October 1, 2009, and restructure any that have such formulae by October 1, 2009.

Block time leases generally remain permissible but some may be affected. The new regulations did not make any changes to “block time” leases and such arrangements generally remain permissible. However, CMS clarified that it views “on demand” block-time leases to be identical to per-click leases. An “on demand” block-time lease is one without a prearranged schedule that would allow a lessee to “lease” space or equipment for a certain time period (e.g., one hour) whenever desired or as need demands. CMS also expressed concerns with blocktime leases for very small blocks of time or for very extended periods of time and recommended that such leases be entered into with caution. Finally, CMS stated that it will continue to monitor blocktime leases in general and may propose rules in the future to address such arrangements. As with perclick leases, hospitals should (1) ensure that any new leases entered into with physicians are not structured as “on demand” block-time and (2) review all current leases that will continue past October 1, 2009, and restructure any that use “on demand” block-time schedules by October 1, 2009.

Compliance Issues

New rules clarify and emphasize period of disallowance. When a financial relationship between a DHS entity and a physician does not comply with Stark, the result is that any referrals from the physician to the DHS entity are subject to disallowance by Medicare. The new regulations clarify that the “period of disallowance” begins when the noncompliant financial relationship begins and ends no later than: (1) the date of compliance if the noncompliance is not related to compensation (e.g., the agreement is not in writing); or (2) the date when all excess compensation is repaid and there is compliance if the noncompliance is related to compensation (e.g., the physician is paid an amount exceeding fair market value). These provisions are not intended to prevent the parties from arguing that the period of disallowance ended earlier than the prescribed outside period of disallowance because the financial relationship ended at an earlier time. Importantly, the rules clarify that while curing noncompliance can end the period of disallowance, it can never eliminate the period of disallowance. The new regulations state: “...the fact that a new agreement is entered into (or an existing agreement is modified) at some point does not, by itself, remove the tainted effects of the nonconforming compensation.” The previously created exception for temporary noncompliance (42 CFR 411.353(f)) remains unchanged and may be available in limited circumstances.

New missing signature exception created. The new regulations create one exception to the strict period of disallowance rules for when noncompliance is due solely to a missing signature on an agreement. In that case: (1) if the missing signature(s) is inadvertent, the agreement will be considered Stark-compliant so long as the signature(s) is obtained within 90 days from commencement of agreement; or (2) if missing signatures is not inadvertent (e.g., is known by the parties), the agreement will be considered Stark-compliant so long as the signature(s) is obtained within 30 days from commencement of agreement. Referrals made during the time when the agreement was without signature(s) will not be subject to disallowance. Please note that this exception only applies when all other aspects of compliance are satisfied from the outset of the agreement. For example, the exception would not apply if a personal services agreement was not set forth in writing at the commencement of the agreement but was then later finalized in writing – referrals during that period without a written agreement would likely be subject to disallowance since the noncompliance was not just missing signatures. This exception (which will be new section 42 CFR 411.353(g)) may only be used one time every three years with respect to the same physician.

Obstetrical Malpractice Insurance Subsidies

OB malpractice insurance subsidy exception expanded. The exception for obstetrical malpractice insurance subsidies (42 CFR 411.357(r)) has been expanded. Previously, the exception applied only to arrangements that strictly complied with the corresponding Anti-Kickback Statute safe harbor on obstetrical malpractice insurance subsidies (42 CFR 1001.952(o)). This was considered too narrow given that arrangements not fitting within an Anti-Kickback Statute safe harbor do not necessarily violate the Anti-Kickback Statute. The previous exception has been retained. In addition, CMS has created a new exception (42 CFR 411.357(r)(2)) that allows hospitals, federally qualified health centers, and rural health clinics to provide an obstetrical malpractice insurance subsidy to a physician who regularly engages in obstetrical practice as a routine part of a medical practice that is: (1) located in a primary care HPSA, rural area, or area with a demonstrated need, as determined by HHS in an advisory opinion; or (2) is comprised of patients at least 75 percent of whom reside in a medically underserved area (“MUA”) or are part of a medically underserved population (“MUP”).