On July 31, 2008, a display copy of the final rule updating the inpatient hospital payment system (IPPS) for FY 2009 (Final Rule) was posted by the Centers for Medicare and Medicaid Services (CMS) to the agency's website on the Internet. The full text of the Final Rule, which generally applies to discharges beginning October 1, 2008, may be accessed online. Publication of the IPPS Final Rule in the Federal Register is slated for August 18, 2008.

Stark Modifications

Once again, CMS took the opportunity to modify the Stark physician self-referral regulations in the Final Rule as part of an effort to strengthen and refine the application of Stark Law. In particular, CMS made the following changes:

How Long Does a Stark Time Out Last?

Long criticized for not being able to define how long a prohibited financial relationship tainted a physician relationship with a Designated Health Services (DHS) provider, CMS finally adopted an outside period of disallowance. The IPPS Final Rule sets the outside time period during which a prohibited financial relationship is deemed to remain in existence. Under the Final Rule, when a relationship is non-compliant due to compensation issues, all overpayments or underpayments must be corrected before the period of disallowance ends. It is interesting to note that CMS states that the period of disallowance will continue if the excess or insufficient compensation is not repaid or paid, even if the arrangement has been brought into compliance on a prospective basis. Where the noncompliance is unrelated to compensation, the period of disallowance will end on the date that the relationship satisfies all of the requirements of an applicable exception. The agency also clarified that the Final Rule only sets the outside period of disallowance. Parties can argue that the prohibited financial relationship ended on an earlier date. Interestingly, while discouraging the practice, CMS stated that a physician could repay all excess or pay all insufficient compensation by obtaining a loan from the DHS entity, evidenced by a promissory note. Noting that it believed that most loans would be a sham and highly suspect under the anti-kickback statute, CMS stated that the loan must be commercially reasonable and itself meet a Stark exception.

You Have to Own the Shoes to Stand in the Shoes

Under the "stand in the shoes" rules, referring physicians are treated as standing in the shoes of their physician organizations for purposes of applying the direct and indirect compensation arrangement rules. Following significant opposition to the original "stand in the shoes" rule, CMS proposed modifying its position in the IPPS proposed rule.

Under the IPPS Final Rule, CMS will only deem a physician who has an ownership or investment interest in a physician organization to stand in the shoes of the physician organization. However, physicians with only a titular or nominal ownership interest (those who have neither the ability nor the right to receive financial benefits -- such as distribution of profits, dividends, sale proceeds or similar returns on investment) in a physician organization are not "required to" stand in the shoes of their physician organizations. Nominal owners and non-owner physicians can, however, elect to stand in the shoes of their physician organizations to qualify for a Stark exception.

In addition, CMS clarified that the physician "stand in the shoes" compensation arrangement provisions do not apply to arrangements that satisfy the academic medical center exception.

Finally, CMS elected not to finalize its proposed DHS entity stand in the shoes rule. This rule would have required a DHS entity to stand in the shoes of an organization that it owns or controls.

Amendments More Easily Made—Deemed to be "Set in Advance"

In the Final Rule, CMS finally succumbed to reason and will no longer prohibit amendments to lease rental rate changes or personal services compensation arrangements. Previously, CMS argued that a change to compensation violated the "set in advance" requirement of the rental and personal services exceptions because the amended payment could not have been set in advance of the agreement. CMS will now interpret "set in advance" to permit amendments to an agreement if (1) the exception's requirements are satisfied; (2) the amended rental charges or other compensation (or the formula) is determined before the amendment is implemented and the formula is sufficiently detailed so that it can be verified objectively; (3) the formula for amended rental charges does not take into account the volume or value of referrals or other business generated by the referring physician; and (4) the amended rental charges or compensation (or the formula) remains in place for at least one year. This change will significantly ease the burden of modifying contractual terms.

Can I Sign My Agreement Later? Sure!

CMS also finally recognized that contracts cannot always be signed before services are provided. The IPPS Final Rule adds a new exception that allows financial relationships that satisfy all criteria for an exception, other than a signature, to be retroactively corrected. In the case of an inadvertent failure to obtain a necessary signature, the missing signature must be obtained within 90 days of the beginning of the financial relationship. In the case of non-inadvertent failures, the necessary signature must be obtained within 30 days. This new exception, however, can only be used once every three years with respect to an individual physician. The self disclosure and other restrictive requirements for this exception that had been included in the proposed IPPS rule were not included in the Final Rule.

Percentage-Based Leases

The Final Rule prohibits direct and indirect compensation arrangements involving office and equipment lease arrangements where the rental charges were based on a percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated by the use of the office space or equipment. However, this provision has a delayed effective date of October 1, 2009. CMS indicated that percentage-based arrangements are still an area of concern and that they may further restrict percentage arrangements. The agency also clarifies that percentage-based allocations of common area and other building expenses to tenants are not prohibited.

Per-Click Compensation Arrangements

CMS adopted its proposal to prohibit direct and indirect compensation arrangements involving "per-click" payments for the use of equipment or space where a referral relationship exists between the parties. As was the case with percentage-based lease arrangements, this provision also has a delayed effective date of October 1, 2009.

In the commentary to the Final Rule, CMS discussed its views regarding fair market value analysis under percentage-based and per-click arrangements. Specifically, the agency indicated that it will not consider an agreement to be at fair market value if a lessee is paying a physician substantially more for equipment and a technologist than it would have to pay a non-physician-owned company for the same or similar equipment and service. More troubling, CMS indicated that it had significant concerns regarding whether an agreement was commercially reasonable if the lessee performed a sufficiently high volume of procedures, such that it would be economically feasible for the DHS entity to purchase the equipment rather than continuing to lease it from a physician that refers patients.

Under Arrangements

The Final Rule expands the definition of "entity" to include not only the party billing for a DHS service, but also the party performing the DHS service. This change will significantly impact many hospital "under arrangement" ventures with physicians, such as cardiac catheterization labs. As a result of the number of ventures potentially impacted, the effective date of this provision was delayed until October 1, 2009. CMS, however, did not extend this look-through approach to cover physician-owned device marketing companies, which are becoming more prevalent purveyors of surgical implant products to hospitals. This is an area that CMS is likely to act on in the future.

Obstetrical Malpractice Insurance Subsidies

CMS revised the exception for obstetrical malpractice insurance subsidies to permit hospitals, federally qualified health centers, and rural health clinics (but not other entities) to provide obstetrical malpractice insurance subsidies under alternative standards, to physicians who regularly engage in an obstetrical practice that is (1) located in a primary care Health Professional Shortage Area, rural area, or area with a demonstrated need for the physician's obstetrical services, as determined in an advisory opinion; or (2) comprised of patients, at least 75 percent of whom reside in a medically underserved area, or are part of a medically underserved population.

Retirement Plans

The Final Rule clarifies that the exclusion of a retirement plan from the definition of an "ownership or investment interest" pertains only to interests in an entity arising from a retirement plan offered by that entity to the physician (or the physician's immediate family member) through the physician's (or immediate family member's) employment with that entity. This clarification was designed to ensure that retirement plans are not used as vehicles to invest in DHS entities.

Burden of Proof

CMS also "clarified" that the burden of proof in Stark DHS claim denials, consistent with CMS's existing procedures with respect to claims denials, would be on the DHS entity submitting the claim for payment. The DHS entity must be able to establish that the service was not furnished pursuant to a prohibited referral.

The Disclosure Report is Coming

CMS confirmed its intent to send the Disclosure of Financial Relationships Report (DFRR) to up to 500 hospitals as a minimum one-time information collection effort regarding physician financial relationships. Although acknowledging an increase in the previous time projected for completion of the DFRR (from 31 to 100 hours), CMS declined to extend the required time for completion, which remains 60 days. Hospitals may, however, request an extension.

Other Key Changes

Other key changes from the Final Rule's 1743 pages include changes to EMTALA and hospital-acquired infections.


CMS finalized only one of the two proposals to clarify EMTALA which appeared in the proposed rule. Due to multiple comments received, the agency refused to finalize a clarification which would have required that hospitals with specialized capabilities accept transfers of inpatients who remained unstable subsequent to admission. Commenters were concerned that the proposed rule would facilitate patient dumping at hospitals with specialized capabilities. The agency also finalized its proposal to allow hospitals to meet their on-call obligations through the use of a community call plan. The community call plans must be formalized among the hospitals and meet certain specified elements outlined in the Final Rule.

Hospital-Acquired Conditions

Out of nine proposed categories of hospital-acquired conditions, CMS finalized only two additional conditions to the previous list of eight for which it will no longer pay a higher weighted diagnosis-related group (DRG). Poor glycemic control was one of the conditions added, as CMS indicated that extreme manifestations of poor glycemic control are reasonably preventable through the application of evidence-based guidelines and sound medical practice while in the hospital setting. The second condition, deep vein thrombosis/pulmonary embolism after certain orthopedic surgical procedures, was selected by CMS following commentary that cited various risk factors that should be considered in weighing the degree of preventability. CMS responded that the adoption of the condition "will have the positive effect of encouraging attention to risk assessment prior to surgery." Additionally, the agency finalized the expansion of the surgical site infection condition to include infections occurring after certain orthopedic surgeries and bariatric surgery.

New NCD Process for 3 Serious Adverse Events

Concurrent with the publication of the IPPS Final Rule, CMS also initiated the national coverage determination process for three serious adverse events: surgery on the wrong patient, wrong surgery on the patient, and surgery on the wrong body part. Comments are due by August 30, 2008.

Additional Highlights

The Final Rule also finalizes a number of provisions that were set out in the proposed rule for which hospitals must be prepared including new quality measure reporting requirements, reporting for low-volume hospitals, the phasing out of the indirect medical education adjustment to capital payments, further refinements to the Medicare-Severity DRG payment system as well as changes to the area wage index [subject to the implementation of the newly-enacted Medicare Improvements for Patients and Providers Act]. For a detailed analysis of these provisions from the proposed rule, please see the April 17, 2008, issue of the Health Law Update.