On July 2, 2007, the Centers for Medicare and Medicaid Services (“CMS”) released the annual proposed regulations establishing the 2008 Medicare physician fee schedule (the “Rules”). The Rules, which are slated for publication in the Federal Register on July 12, 2007, contain many proposed changes to the Stark regulations, which if adopted, would impact many proposed and current arrangements. The following constitutes a brief overview of certain of the proposed changes:

1. Elimination of unit-of-service (per click) rental payments. The Stark Law exceptions currently permit per click rental payments in space and equipment leases as long as the per click payment is established at a fair market value rate that does not change during the lease term based upon the volume or value of referrals between the parties. In a turnabout, the Rules propose eliminating the per click payment option in space and equipment leases in situations where a physician is the lessor and is in a position to make referrals to the lessee. CMS has not decided whether to impose a similar restriction in situations where the physician is the lessee and has solicited comments on the advisability of doing so.

2. Under arrangements transactions. The Rules express several concerns with services provided “under arrangements” to hospitals and other providers, including the risk of overutilization and increased costs to the Medicare program. To address the concern, CMS is proposing to revise the definition of “entity” in the Stark regulations to include not only the person or entity that submits claims to Medicare for designated health services (the current definition) but also the person or entity that performs the designated health services. Currently, physicians with an investment interest in an entity that provides services to hospitals under arrangements are deemed to have only a compensation arrangement with the hospital, for which exceptions are potentially available. The proposed change would also establish an ownership interest on behalf of the physician in an entity furnishing designated health services, for which a Stark Law exception likely would not be available. In addition to proposing the new definition of entity, CMS is soliciting comments on whether to implement an alternative approach to address the under arrangements situation; specifically, whether to adopt the MedPAC proposal, which would revise the definition of physician ownership to include an interest in an entity that derives a substantial portion of its revenue from a provider of designated health services.

3. Percentage-based compensation. Current Stark Law exceptions permit percentage-based compensation, as long as the specific formula is set in sufficient detail before the furnishing of the items or services and is not modified during the term of the agreement in any manner that reflects the volume or value of referrals. Noting that percentage-based compensation arrangements are being used for the provision of items and services other than compensating physicians for services they perform, including equipment or office space arrangements, the Rules propose to limit percentage-based compensation to payment for personally-performed physician services. The Rules also propose to require that the payment be based on revenues directly resulting from the physician’s services, rather than on some other factor such as a percentage of cost savings in a hospital department.

4. Anti-markup provision. Current Medicare rules prohibit the markup of the technical services of certain diagnostic tests performed by outside suppliers when billed by physicians. Concerned that the Medicare program reassignment rules and certain Stark Law provisions have led to confusion regarding the application of the anti-markup rules, CMS is proposing to prohibit physicians from marking up the technical component and the professional interpretation of diagnostic tests that are purchased or billed under reassignment. CMS also proposes to apply the anti-markup provision to the technical component of diagnostic tests performed in a centralized building by a group practice.

5. In-office ancillary services. Expressing a belief that Congress included the exception for in-office ancillary services to allow physicians to provide certain services necessary for the diagnosis or treatment of the medical condition that brought the patient to the physician’s office, CMS is concerned that services furnished today under the in-office ancillary services exception often are not closely connected to the physician’s practice, either by location or interaction between the physicians who treat the patients, and the staff that provides the ancillary services. CMS is also concerned about the migration of sophisticated and expensive imaging or other equipment to physician’s offices, as well as turnkey operations for in-office laboratories and other ventures marketed to physicians over the Internet. Declining to include a specific proposal for amending the in-office ancillary services exception, CMS nonetheless is soliciting comments on changes that should be made. Specifically, the agency has expressed an interest in receiving comments on whether certain services should not qualify for the exception, whether certain physicians should be able to use the exception to refer patients for specialized services involving use of equipment owned by the physicians, and whether changes should be made to the definitions of “same building” and “centralized building” in the exception.

6. Alternative criteria for satisfying certain exceptions. In a positive move, CMS is proposing to develop alternative criteria that would enable financial arrangements that fail to qualify for an exception based on a trivial violation, such as the absence of a signature, to escape sanctions under Stark Law. The Rules would grant CMS the non-appealable right to determine whether the alternate method applies and specifies several requirements, including self-disclosure of the situation to CMS; determination that the arrangement satisfied all but the prescribed procedural or form requirement; and demonstration that the failure to meet the prescribed criteria was inadvertent and that referrals were made without knowledge that the prescribed criteria were not met.

It should be noted that the Rules are currently in proposed form, and as a result, could undergo substantial changes prior to publication in final form. Moreover, CMS is expected to publish the long-awaited Phase III of the Stark regulations in final form shortly, and this could also affect any changes proposed in the Rules. Nevertheless, healthcare entities and physicians involved in financial transactions should consider several courses of action. First, consideration should be given to submitting a formal letter to CMS commenting on the proposed changes. The Rules establish August 31, 2007 as the deadline for submission of comments. Moreover, consideration should be given to examining arrangements, particularly those in the planning stage, to provide for alternative compensation methods or termination in the event the proposed changes in the Rules are adopted.