Hospital, Doctor Deals Up for Review

September 4, 2008

Sheri Qualters

The National Law Journal

Lawyers say a sweeping overhaul of government rules regulating financial arrangements between doctors and hospitals will likely force many of them to undo or restructure joint ventures, leasing deals and other contracts for medical services.

The changes will bring doctors, doctor-owned entities and hospitals that use such services back to the negotiating table with their lawyers, said Bill Maruca, a Pittsburgh corporate and health law partner at Philadelphia’s Fox Rothschild. The changes also raise barriers for doctors who want to invest in ancillary lines of business involving medical services such as testing, Maruca said.

“We’re going to have go back and evaluate deals we thought were squeaky clean,” said Maruca.

The U.S. Department of Health and Human Services’ Centers for Medicare & Medicaid Services (CMS) issued the changes affecting doctors and hospitals last month in a massive 651-page rules package, Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal 2009 Rates, that also included several other categories of regulations.


The physician self-referral rule changes restrict exceptions to a physician self-referral law, the so-called Stark Law. That law, which is part of the Social Security Act, generally bars doctors from making referrals for certain designated Medicare-payable health services to entities with which the doctor, or an immediate family member, has a financial relationship.

Some of the changes kick in on Oct. 1, including the so-called “stand in the shoes” provision for doctors with an ownership interest in their doctor group. The provision holds them to the same compensation arrangement tests as their doctor group when they refer Medicare patients for certain designated health services to facilities in which they have a financial interest. The rule means that more financial arrangements fall under the scope of the physician self-referral law.

Three of the most significant changes take effect in October 2009.

One major change limits so-called “under arrangements,” which allow doctor-owned entities to provide services to hospitals and the hospital to bill Medicare for such services.

Another change bars physicians who lease equipment or space for medical services from billing for each unit of service on a so-called “per click” basis if doctors refer Medicare patients for the services. The rules have also narrowed the use of compensation to a physician-owned entity providing medical services to Medicare patients based on a percentage of revenue or billing.

Although the Stark Law was meant to curtail such relationships, exceptions have mushroomed in CMS rule making over the years, lawyers say.

The new rules are a rollback of many exceptions, said Heather Zimmerman, a Reed Smith partner in Falls Church, Va., and a member of the firm’s life sciences health industry group.

“These changes are really starting to narrow the Stark exceptions,” Zimmerman said. “CMS is realizing that some of the exceptions developed early on might have been broader than they thought.”


Reed Smith’s clients on both the doctor and hospital side of deals now have a little more than a year to renegotiate or dissolve complex financial relationships, Zimmerman said. “We are fielding calls from clients to discuss the options, which could include restructuring,” she said. “Some clients are considering unwinding arrangements. Those are both options being explored.”

The previously allowed under arrangements deals, for example, were often used by physician-owned entities as a way to pay for an investment in expensive equipment, said Linda Baumann, a health care partner at Washington-based Arent Fox.

“This is kind of a big deal,” Baumann said. “There are a lot of arrangements the government knows have to be unwound.”

The changes were foreshadowed in the surprise inclusion of similar proposed rules embedded in CMS’ July 2007 announcement of proposed 2008 doctor reimbursement rates for Medicare Services. Lawyers rushed to help their clients make comments at the time. The changes ultimately weren’t included in the final rule on 2008 doctor reimbursement rates.

The changes surfaced again when the current rules were proposed in April and finalized in the current rules.

CMS did not make officials available, but the final rules published in the Federal Register discussed some of the “hundreds” of comments it received about the July 2007 proposals. The agency’s explanation of the changes also spells out its intent to address overuse of medical services and billing to Medicare by curbing some financial arrangements.

In its statements about “per click” compensation arrangements, for example, CMS stated that it wanted “to address a burgeoning risk of abuse and increased costs to the Medicare program.”

Similarly, CMS noted its continuing concern about the “risk of over utilization” for medical services provided by other entities “under arrangements” to hospitals, a risk it first identified in a 1998 proposed rule.

CMS also said it was restricting the use of compensation based on a percentage of revenue or billing to doctors who lease office space or equipment for medical services because it “poses a heightened risk of program and patient abuse” because it increases the incentive for leasing doctors to make more referrals for medical services.

Even before the July 2007 proposal, “there’s always been an understanding that CMS or the office of the inspector general in the U.S. Department of Health and Human Services could take a position to squash these types of arrangements,” or they could be deemed violations of federal anti-kickback statutes, Zimmerman said.

But joint ventures or contracts based on the now-prohibited terms are common because they were often solid business moves for both parties: “At the end of the day, it’s about risk tolerance and improving a business,” Zimmerman said. “People went forward anyway, as part of a business decision with the thought that when and if it should be restructured, it can be.”

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