On July 2, 2007, The Centers for Medicare and Medicaid Services (“CMS”) delivered to the Office of the Federal Register its proposed Medicare Physician Fee Schedule payment update for Fiscal Year 2008 (the “Proposed 2008 MPFS Update”). Among the many payment changes, CMS proposed a number of signifi cant amendments to the current Stark law regulations and sought comments on other changes to the Stark law regulations that it is considering but has not yet proposed. These amendments, if adopted in the fi nal physician payment update, which is generally published in the fall, would constitute the most sweeping changes to the Stark law regulations that CMS has made to date outside of the dedicated Stark law rulemaking process.

The breadth of such proposed changes is somewhat surprising given that Phase III of the Stark II regulations is expected to be released before the end of March 2008.

The Proposed 2008 MPFS Update is scheduled to be published in the Federal Register on July 12, 2007. Comments on the Proposed 2008 MPFS Update are due by August 31, 2007. As currently proposed, the Stark law regulation amendments would all go into effect on January 1, 2008.

Expanding the Scope of the Stark Law.

CMS is proposing to expand the defi nition of “entity” for purposes of the Stark law from the current defi nition, which is limited to persons or entities to which CMS makes payments for designated health services (“DHS”), either directly or upon assignment, to include persons or entities that perform DHS.

This proposed change is in response to the perceived proliferation of under arrangement relationships whereby a physician-owned entity provides DHS to a hospital (or other provider) under an arrangement (i.e., the hospital pays the under arrangement provider for performing the DHS and the hospital bills the DHS as a hospital service). CMS is especially concerned that this trend will further increase upon implementation of the revised Ambulatory Surgery Center (“ASC”) payment system, which goes into effect on January 1, 2008, and currently provides that ASCs will be paid 62% of CMS’s payment for the same procedure under the Hospital Outpatient Prospective Payment System (“HOPPS”).

Although we had expected that the defi nition of “entity” would eventually be changed given MedPAC’s 2005 recommendation to Congress that the defi nition be expanded “to include interests in an entity that derives a substantial portion of its revenue from a provider of [DHS],” CMS’s proposal goes well beyond MedPAC’s recommendation.

Further, CMS’s proposal leaves unanswered what activity constitutes the performance of DHS. For instance, although it may be clear that a physician-owned under arrangement provider or staffi ng company performs DHS, does a physician- owned equipment leasing company “perform DHS” if it does not furnish personnel to the hospital? One could reasonably argue that the provision of equipment, in and of itself, does not result in the performance of DHS. Med- PAC specifi cally indicated that one of the potentially abusive practices it was concerned about in recommending the expansion of the defi nition of entity was physicians leasing equipment to persons or entities furnishing DHS. Further, in explaining its proposed change, CMS repeatedly expresses its concern regarding physician ownership of “leasing, staffi ng, and similar entities.” The same uncertainty exists with management contracts regarding what level of services will constitute the performance of DHS.

Prohibiting Certain Per-Click Space and Equipment Leases.

CMS is also proposing restructuring the space and equipment leases to prohibit per-click (and other per-unit-ofservice) lease arrangements to the extent that such charges refl ect services provided to patients referred to the lessee by a physician-lessor. Thus, if adopted in the fi nal regulations, the Stark law would prohibit a physician from renting equipment to a hospital on a per-click basis when the hospital uses such equipment for services rendered to patients referred to the hospital by the physician. CMS is concerned that such arrangements are “inherently susceptible to abuse because the physician lessor has an incentive to profi t from referring a higher volume of patients to the lessee.”

CMS is also soliciting comments on whether a similar prohibition should be enacted with respect to situations where an entity leases equipment or space on a time-based or perunit- of-service basis to a physician-lessee. Despite the commentary to the proposed rule, which distinguishes between physician and non physician lessors, the current text of the proposed amendments to the equipment and space lease exceptions does not appear to make such a distinction. Limiting the Use of Percentage-Based Compensation. Despite the fact that CMS specifi cally backed down from its plan to prohibit percentage-based compensation arrangements in Phase II of the Stark II regulations, CMS is now proposing to restrict the use of percentage-based compensation to only compensating physicians for physician services that they perform. Specifi cally, CMS is concerned that percentage-based compensation arrangements in equipment and offi ce rentals (especially when such percentages are tied to a percentage of revenues raised by the equipment or in the space) are potentially abusive.

To effectuate such a prohibition, CMS is proposing that percentage compensation arrangements: (i) may be used only for paying for personally performed physician services and (ii) must be based on revenues directly resulting from the physician services rather than based on some other factor such as a percentage of the savings by a hospital department.

Here again, many details about CMS’s proposal remains unclear. For instance, is CMS using the term “physician services” for purposes of the proposed prohibition in the same restrictive manner as the term is used for purposes of the physician services exceptions (i.e., those physician services reimbursable by Medicare)? In such cases, the proposed changes would prohibit percentage-based management agreements. Likewise, it appears that CMS is only allowing percentage-of-revenue compensation arrangements. If so, physicians could not be compensated on the basis of a percentage of collections, a percentage of a fee schedule or other similar methods currently utilized by hospitals and others in the health care industry. Also, such a defi nition would appear to prohibit percentage-based bonuses tied to quality, patient satisfaction, and other seemingly legitimate goals of physician compensation.

Placing the Burden of Proof on the Billing Entity.

CMS is proposing that in any appeal of a denial of payment on the basis that the service was furnished in violation of the Stark law, the burden of proof is on the entity submitting the claim for payment to establish that the service was not furnished pursuant to a prohibited referral; upon denial, the entity will have to establish that it furnished the service in compliance with the Stark law. This is consistent with other claim denials by CMS or its contractors, and should not be interpreted as affecting the burden of proof in penalty and false claims situations.

Incorporating Safeguards into the Obstetrical Malpractice Insurance Subsidy Exception.

In addition to seeking comments on how it might expand the obstetrical malpractice insurance subsidy exception without creating a risk of program or patient abuse, CMS is proposing to specifi cally list the conditions that must be included in such arrangements to safeguard against program or patient abuse. These safeguards would be in lieu of the current requirement that incorporates the conditions in the Anti-Kickback safe harbor (42 C.F.R. § 1001.952(o)).

Limiting the Scope of the Interest in a Retirement Plan Defi nitional Exception.

CMS has proposed redefi ning its defi nitional exception for retirement plans, which currently excepts from the defi nition of ownership or investment interests a physician’s interest in a retirement plan, to clarify that such exception only applies to an interest in an entity that arises from a retirement plan offered by that entity to the physician (or immediate family member) through the physician’s or immediate family member’s employment with that entity.

This clarifi cation is intended to prevent situations where a physician’s retirement plan invests in an entity that furnishes DHS and the physician makes referrals to such entity without the necessity of fi tting into an ownership interest because the ownership interests are the result of contributions to the physician’s retirement plan.

Requiring DHS Entities to “Stand in the Shoes” of Any DHS Entity It Owns or Controls.

Here again, CMS seems to be harkening back to its 1998 proposed Stark II regulations, by proposing that a DHS entity that owns or controls an entity to which a physician refers Medicare patients for DHS, the DHS entity would stand in the shoes of the entity it owns or controls and would be deemed to have the same compensation arrangement with the same parties (on the same terms) as does the entity that it controls. CMS provides the example of a hospital that owns a foundation that contracts with physicians. The hospital would be treated as having a direct compensation relationship with the physicians. Whereas such arrangements would currently be analyzed as creating a direct compensation relationship with the foundation and an indirect compensation relationship with the hospital, the arrangement would now be analyzed as creating a direct compensation relationship, presumably, with both the hospital and the foundation.

The proposal, however, leaves unaddressed the implications of such analysis. For instance, if the foundation is set up to be a “group practice” under the Stark law, would the preferential compensation provisions to group practices be available when analyzing the direct compensation relationship between the hospital and the physician or would such analysis be limited to the more restrictive compensation provisions of the personal services exception?

Still Considering.

CMS is also seeking comments on and still considering a number of additional changes to the Stark law. Most signifi cantly, CMS is considering:

  • adopting an alternative compliance policy for failures to meet the procedural requirements of certain exceptions;
  • amending the in-offi ce ancillary services exception to limit utilization of the exception for certain types of DHS and to limit use of the exception by non specialist physicians for furnishing specialized ancillary services; and,
  • defi ning the period of disallowance for fi nancial relationships that fail to comply with the Stark law.

It is expected that many of these issues will be addressed in the upcoming Phase III of the Stark II regulations.