On April 14, 2008, CMS issued the proposed FY 2009 Hospital Inpatient Prospective Payment System rule (the “Proposed Rule”). In the Proposed Rule, CMS is soliciting industry comments through June 13th on several significant proposed changes to the current Stark II Phase III regulations, including changes to the “stand in the shoes” rule, as well as comments on the Disclosure of Financial Relationships Report (“DFRR”) information collection instrument.

I. Physician “Stand In The Shoes” Provisions

The Industry Concern. Under the current Stark II Phase III physician “stand in the shoes” rule, which became effective December 4, 2007 (the “Current Rule”), referring physicians “stand in the shoes” of their physician organizations (“PO”) for purposes of applying the Stark rules outlining direct and indirect compensation arrangements. After CMS released the Current Rule, industry stakeholders raised concerns about its effect on academic medical centers (“AMCs”) and integrated tax-exempt health systems (“IHSs”). In particular, these stakeholders were concerned that payments between related entities comprising AMCs and IHSs for mission support and similar purposes would be required to satisfy a Stark direct compensation exception.

This created a significant problem because, in many instances, no direct compensation exception is available to protect the payment arrangements, which are often not tied to any specific items or services. As a result, to comply with Stark, these payment arrangements would have to cease. Industry stakeholders voiced significant objections to disrupting these payment arrangements, many of which they view as necessary and nonabusive. In response, in November, 2007, CMS delayed the application of the physician “stand in the shoes” rule to certain arrangements involving AMCs and IHSs for one year to allow CMS time to consider less objectionable alternatives. In the Proposed Rule, CMS is now proposing two alternative solutions and seeking industry comments. CMS is also seeking industry comments proposing other potential solutions.

The First Proposed Solution. Under the first proposed solution, a physician would not “stand in the shoes” of his or her PO if the compensation arrangement between the PO and the physician satisfied the requirements of either: i) any one of the compensation exceptions for bona fide employment relationships, personal services arrangements, or fair market value compensation, or ii) the AMC exception or certain written agreements required for AMCs to meet Medicare Graduate Medical Education requirements.

This first proposed solution would require analysis of the type of compensation a referring physician receives from the PO. While appealing at first blush, this first proposal creates new difficulties. First, it is not broad enough to resolve all of the concerns raised by the AMC and IHS stakeholders. For example, some payment arrangements may not satisfy any of these compensation exceptions, but may nonetheless be nonabusive. Second, it would require entities receiving referrals from physicians for Stark designated health services (“DHS entities”), such as hospitals, to consider the internal compensation arrangements between physicians and their POs. This is problematic because DHS entities generally do not have access to this information.

In yet another twist on the first proposed solution, CMS is also seeking comments on whether it should limit application of the physician “stand in the shoes” rule only to physicians who hold an equity interest in their POs.

The Second Proposed Solution. Under the second proposed solution, CMS would not change the Current Rule at all, but would create a new exception for certain arrangements not covered by existing exceptions that do not pose a risk of program or patient abuse. Rather than offering a specific proposed exception, CMS is soliciting comments on an exception to cover mission support payments or other similar payments between DHS entities, POs, and physicians. Through these comments, CMS is seeking industry input on how best to define key terms affecting the scope of a new exception, such as “mission support” and “IHS”, as well as what types of payment arrangements should be protected by a new exception.

II. DHS Entity “Stand In Shoes”

In addition to addressing when physicians should “stand in the shoes” of their POs, the Proposed Rule, CMS is seeking comments on when a DHS entity should “stand in the shoes” of an organization it owns. CMS is proposing that a DHS entity would “stand in the shoes” of any entity that it wholly owns (not just a wholly owned DHS entity). In particular, CMS is interested in comments on whether the “stand in the shoes” rule should apply if the DHS entity owns less than 100 percent of another entity. Under CMS’ proposal, the owner-DHS entity would be deemed to have the same compensation arrangements with the same parties and on the same terms as does the organization it owns. Moreover, a DHS entity would “stand in the shoes” of any wholly owned organization, but not an entity that it controls but does not own, such as an affiliate company where the DHS entity is the sole member. Jointly owned entities would not be affected.

III. Definition Clarifications for “Physician” and “Physician Organization”

CMS is proposing to change the definitions of “physician” and “physician organization” to clarify that a physician should be collapsed into the physician’s solely-owned professional corporation for purposes of analyzing Stark direct and indirect compensation relationships. After first taking that step in the analysis, the collapsed professional corporation would “stand in the shoes” of the physician’s PO.

IV. The Period of Disallowance

Since Stark’s inception, industry participants have been uncertain about the period of time that a noncompliant financial relationship continues to prevent the physician from making referrals to the DHS entity (the “period of disallowance”). In the Proposed Rule, CMS addresses the length of the period of disallowance for the first time. Specifically, CMS proposes that, where the reason a financial relationship fails to meet any applicable Stark exception is not related to compensation, (for example, an agreement is not in writing or is missing a signature), the period of disallowance would begin on the date the arrangement was first out of compliance and end on the date the arrangement is brought into compliance. By contrast, where the reason a financial relationship fails to meet a Stark exception is related to the payment or receipt of excess compensation, the period of disallowance would begin on the date the arrangement was first out of compliance and end no later than the date the excess compensation, plus interest, is returned by the recipient to the overpaying party and all other requirements of the applicable Stark exception are met. Of significance is that the repayment necessary to end the period of disallowance must go to the overpaying party, and not the Medicare program, which is inconsistent with the Stark statute and its regulations. This inconsistency is likely to spark industry objections to this proposed repayment obligation.

V. Gainsharing Exception

The Proposed Rule solicits comments on whether a Stark exception for gainsharing is appropriate in light of the clear benefits to the Medicare program where physician and hospital incentives are aligned to lower costs. Gainsharing refers to arrangements where a hospital gives physicians a share of a hospital’s cost savings attributable in part to the physicians’ efforts. In particular, CMS is requesting comments on the types of requirements and safeguards that should be included in a gainsharing exception and whether certain services, clinical protocols, or other arrangements should be excluded from a gainsharing exception.

VI. Physician-Owned Implant and Other Medical Devise Companies (“PODCs”)

As part of the Proposed Rule, CMS is requesting comments on whether the Stark law should address physician investments in PODCs, or whether concerns about abuse arising from PODCs are better addressed by other laws, such as the False Claims Act, the Antikickback Statute, or others.

VII. DFRR

As part of the Proposed Rule, CMS is also reviving the recently withdrawn DFRR information collection instrument. CMS initially proposed the DFRR in May, 2007 as a means to collect information from hospitals across the country about financial relationships with physicians. This information would assist CMS in Stark rulemaking and enforcement. CMS was nearly ready to send the DFRR to a first group of 500, and planned to eventually send the DFRR to all hospitals. However, on April 10, 2008, CMS withdrew the DFRR from its required clearance review by the Office of Management and Budget (“OMB”). CMS is now seeking comments on the DFRR process regarding:

  • Whether the data collection effort should be recurring, and, if so, whether it should be implemented on an annual or some other periodic basis;
  • Whether under the current draft DFRR CMS requests too much or not enough information, or the correct or incorrect type of information;
  • The amount of time it will take hospitals to complete the DFRR and the associated costs, and the period of time CMS should give hospitals to complete and return their responses;
  • Whether CMS should direct the collection instrument to all hospitals, and, if so, whether CMS should stagger the collection so that only a certain number of hospitals receive the DFRR in any given year; and
  • Whether CMS should require hospitals that have completed the DFRR to send CMS annual updates

After CMS considers comments on these aspects of the DFRR, it plans to submit a revised version of the DFRR to OMB for clearance.

CMS is accepting comments on the Proposed Rule through June 13, 2008. A final rule is anticipated by this August.