Providers should consider providing comments to CMS on these proposals and start thinking ahead regarding the impact of the proposed changes on current and contemplated arrangements with referring physicians.

The most far reaching change in the Stark Law Phase III rule was indisputably the so-called “stand in the shoes” (SITS) provision. For more information, see McDermott White Paper “CMS Publishes Phase III Stark Law Rule,” and McDermott On the Subject “CMS Delays Stark Law ‘Stand in the Shoes’ Rule for AMCs.” In the Inpatient Prospective Payment System Proposed Rule (IPPS Proposed Rule), released April 14, 2008, the Centers for Medicare and Medicaid Services (CMS) proposes certain significant changes and expansion of the SITS concept, and requests comments on other important aspects of these provisions. This On the Subject summarizes the SITS proposals to encourage comments on these issues and enable providers to start thinking ahead regarding the impact of the proposed changes on current and contemplated arrangements with referring physicians.

Physician SITS Provisions

Under the Phase III rule, a physician “stands in the shoes” of his or her “physician organization” for purposes of analyzing financial relationships. A physician who “stands in the shoes” of his or her physician organization is deemed to have the same compensation arrangement (with the same parties and on the same terms) as the physician organization itself. This has the effect of converting some previously indirect compensation arrangements to direct ones that require a direct exception. It also has the effect of changing the “link” to be analyzed in certain indirect compensation chains that remain indirect even after the application of the SITS rule.

Subsequent to the publication of the Phase III rule, CMS delayed the effective date of this provision for certain academic medical center (AMC) relationships and integrated section 501(c)(3) health care systems. This delay is effective until December 4, 2008. See “CMS Delays Stark Law ‘Stand in the Shoes’ Rule for AMCs.”

In the IPPS Proposed Rule, CMS offers two alternative proposals to further refine the physician SITS rule.

Under the first proposal, the physician would not stand in the shoes of his or her physician organization by virtue of a compensation arrangement, if that compensation arrangement satisfied the employment, personal services or fair market value exception. However, even if the physician does not “stand in the shoes,” the physician could still have an indirect compensation arrangement with a downstream provider of designated health services (DHS entity). Additionally, if the physician were also an owner of the physician organization, SITS would still apply. CMS solicits comment on whether certain owners who hold only a nominal interest (e.g., the shareholder of a “friendly” professional corporation) should not stand in the shoes of the physician organization. CMS also solicits comment on whether only owners should stand in the shoes of the physician organization.

CMS specifically references AMCs in the discussion, and it appears that the changes proposed are intended to replace, and not supplement, the special treatment afforded AMCs in the one-year delay. It should be noted that this first proposal would have the effect of prohibiting faculty practice plans that receive support payments from a teaching hospital from distributing practice plan DHS profits to their faculty, even if the plan qualifies as a “group practice” and the referrals to the group all satisfy the in-office ancillary services exception. CMS notes that it is concerned that the compensation to the physician under the in-office ancillary services exception need not be consistent with fair market value. However, it would appear that this concern could be addressed without precluding faculty practice plans from using the in-office ancillary services exception.

The second approach proposed by CMS would retain the Phase III physician SITS provisions as is, but create additional regulatory exceptions for arrangements not otherwise deemed abusive, including perhaps AMC mission support payments and payments between components of “well-defined” integrated delivery systems. CMS solicits suggestions as to how to define such arrangements and what safeguards would need to be included to protect against the risk of abuse.

Providers should consider providing comments to CMS on these proposals, which are clearly still in the formative stage. Providers also may wish to review their current arrangements in the context of the proposed changes to the physician SITS rule coupled with the proposed DHS entity SITS provisions discussed immediately below.

DHS Entity SITS Provisions

The proposed DHS entity SITS rule would be a corollary to the physician SITS rule adopted in the Phase III regulations and discussed above. The entity SITS has been proposed out of concern that parties could avoid application of the Stark Law by inserting an entity in the chain of financial relationships linking a physician and a DHS entity. A version of the rule was included in the 2008 Medicare Physician Fee Schedule proposed rule but not adopted in the final rule. CMS is now re-proposing a DHS entity SITS rule, in order to establish a comprehensive approach to SITS, “bringing more financial relationships within the ambit of the physician-self-referral law.”

The proposed amendment is simple: a DHS entity stands in the shoes of an organization in which it has a 100 percent ownership interest, and is deemed to have the same compensation arrangements as the organization that it owns. The rule applies to any type of entity (LLC, partnership or corporation). Although CMS states that the rule applies to corporations “regardless of status as non-profit or exempt from taxation,” CMS later clarifies that it is not deeming membership interests to be ownership. Rather, CMS states that it is soliciting comments on whether SITS should apply to entities controlled (rather than owned) by a DHS entity, such as a nonprofit organization of which the DHS entity is the sole member. CMS is soliciting comments on the level of control that would be necessary to trigger SITS, and is also soliciting comments on whether an entity should stand in the shoes of an entity in which it owns less than a 100 percent interest, and if so, what the trigger ownership level should be.

CMS recognizes that the analysis of a chain of financial relationships could vary depending on the order in which the DHS entity and referring physician SITS rules are applied. Therefore, CMS proposes the following conventions:

  • First, apply the physician “stand in the shoes” provisions to the physician and his or her physician organization.
  • However, if the physician “stand in the shoes” results in only one financial relationship remaining between the DHS entity and the collapsed physician/physician organization and that relationship is an ownership interest, the physician “stand in the shoes” would not be applied, and the entity “stand in the shoes” instead would be applied first.
  • If more than two organizations remain after first applying the physician “stand in the shoes,” then apply the entity “stand in the shoes” provisions.

CMS provides examples purporting to illustrate how the SITS provisions collapse and simplify chains of financial relationships. However, CMS creates more questions than it resolves for hospital-owned group practices. First, CMS notes that, if the physician “stand in the shoes” is applied first, there is only one remaining financial link, which is an ownership interest. Therefore, under the conventions noted above, the entity “stand in the shoes” is applied first, so the hospital stands in the shoes of the wholly owned group practice. As a consequence, the compensation received by each physician in the group practice is deemed to be received from the hospital. CMS states that if the physician’s compensation from the group practice does not meet the employment exception, then no direct exception would apply to the compensation arrangement, i.e., the physicians could not refer to the hospital for DHS. CMS ’s analysis does not appear to distinguish hospital DHS from group DHS, and therefore raises significant ambiguity with respect to hospital-owned group practices that have their own (i.e., non-hospital) DHS and meet the Stark Law definition of a group practice. Currently, such group practices may use the in-office ancillary services exception with respect to DHS referrals within the group, and may compensate group physicians in a manner that is indirectly related to DHS referrals to the group (i.e., the group may distribute its DHS revenues among group members). When the hospital stands in the shoes of the group practice, however, the group practice terms are no longer available, since the hospital cannot qualify as a group practice. Therefore, according to CMS , the employment exception is the only available compensation exception. This raises the following questions:

  • Is the employment exception the only available exception with respect to DHS referrals to the hospital? If so, then compensation must be consistent with fair market value and cannot take into account referrals to the hospital, but could still indirectly reflect DHS referrals to the group.
  • Is the employment exception the only available exception for DHS referrals to the group practice as well as the hospital? If so, then the rule effectively eliminates the ability of a hospital-owned group practice to take advantage of the rules applicable to group practices that furnish DHS. Depriving hospital-owned group practices of the possibility of distributing the group’s DHS by qualifying as a group practice and using the in-office ancillary services exception (rather than the employment exception) for intra-group referrals of DHS would be a significant change. While CMS may be seeking to address the risk of abuse where a hospital-owned group practice compensates its physicians in excess of fair market value, the Federal Anti-kickback Law would appear to be an adequate safeguard against such abuse where the compensation could be viewed as coming indirectly from the hospital and therefore not be protected by the employment safe harbor.

Of course, in many cases, a hospital and physician group have a “sister corporation” relationship in a health system corporate structure rather than having a parent-subsidiary relationship. In such cases, the hospital does not stand in the shoes of the physician group, so the traditional indirect compensation analysis is preserved.

Finally, CMS states that the conventions regarding application of the SITS rules are intended to “ensure that at least one compensation arrangement remains between the DHS entity and the referring physician for purposes of analyzing the chain of relationships.” However, the rule does not actually accomplish this objective. For example, if a physician is an employee (not an owner) of a physician organization that in turn owns less than 100 percent of the DHS entity, the physician will stand in the shoes of the physician organization, but the physician organization will not stand in the shoes of the DHS entity. As a result, the remaining relationship is only an ownership relationship. The analytic framework for that relationship remains unclear.

Although CMS appears intent upon expanding the scope of the SITS provisions, the proposed provisions are clearly still in the formative stage, and CMS has asked for comments and suggestions on the concepts and specific application of SITS in particular situations. Providers should take this opportunity to identify issues and problems so that they can be considered and addressed in the final rule. Providers should also consider reviewing their current arrangements in the context of the proposed changes to the physician SITS and the proposed DHS entity SITS, and should take these proposals into account in planning and implementing new arrangements with physicians.