Proposed Stark Rule Changes May Knock Out Many Ancillary Service Arrangements

August 28, 2007

Bruce A. Johnson

The proposed 2008 Medicare Physician Fee Schedule (PFS), to be published in the Federal Register on July 12, 2007, contains major revisions to the Stark and related Medicare reimbursement rules directed at physician self-referral arrangements. The Centers for Medicare and Medicaid Services (CMS) outlined eleven proposals or initiatives that could provide the necessary 1-2-3 punch to knock out many existing arrangements. One proposal would impose new limits on reimbursement for diagnostic testing services. A second group of proposals—with seemingly minor wording changes to the Stark final rule—would have major practical implications, and a third set would emphasize the enforcement environment.

If the proposals are implemented, many ancillary service arrangements would be weakened and some knocked out entirely. CMS would effectively direct providers to retreat to their respective corners and historical involvement with ancillary services – even though the health care delivery environment continues to change dramatically. This article reviews the proposed changes and provides perspective on their implications for physicians, hospitals and other health care providers.

1. Diagnostic Tests

The first major proposal in the 2008 PFS addresses diagnostic tests and revisits issues first raised in 2007 when CMS proposed to modify the “contractual arrangements” exception to Medicare’s prohibition on reassignment, impose anti-markup prohibitions on “purchased diagnostic tests,” and restrict what constitutes a “centralized building” under the Stark Law. These proposals were directed at perceived abusive arrangements such as “condo” anatomical pathology laboratories which were rejected in OIG Advisory Opinion 04-17, and similar “contractual joint venture” arrangements which were the subject of an April 2003 OIG Special Advisory Bulletin.

CMS didn’t implement its 2007 proposals, but based on the 2008 PFS, the agency continues to have significant concerns regarding “condo” path labs and similar arrangements. In the 2008 proposal, CMS appears to have crafted a simpler, but more expansive solution by proposing an anti-markup provision on both the professional and technical components of diagnostic tests performed by “outside suppliers” who CMS would define as anyone other than a full-time employee of the physician or medical group billing for diagnostic services.

Where the anti-markup provision would apply to the professional component (PC) (e.g., a medical group contracts with a radiologist to provide professional interpretation and the radiologist reassigns the PC fee to the medical group), the billing entity would be prohibited from charging Medicare any more than its actual “net charge” to purchase the PC. CMS would impose additional highly technical rules on the “net charge” calculation to eliminate any potential additional costs that are passed on by the interpreting physician to the medical group, thereby eliminating any ability for the group to mark-up or profit from the PC furnished by an independent contractor service provider.

Similar provisions would apply to the technical component (TC) of diagnostic tests. This means that if the technicians are not full-time employees of the billing physician or medical group, then the billing entity will be limited to billing Medicare its actual cost to acquire the technician’s services. CMS noted that the provisions would apply to TC services performed in centralized buildings–although the proposed rule change would apply whenever the technician personnel are not full-time employees of the physician or medical group billing for the services, regardless of the location of service delivery.

The proposal would still permit medical practices to bill for the TC of MRI or other diagnostic tests performed using a practice’s full-time technician employees. Other arrangements, including using contracted technicians, part-time service and shared facility arrangements, would still be permitted, but the billing entity would not be permitted to make any profit on the TC of the test. Moreover, unless the practice also employs the interpreting physician on a full-time basis, the PC for the interpretation will need to be “split billed” rather than reassigned to the practice for global billing.

CMS also proposed that where an outside supplier (e.g., a non full-time employee) furnishes the service, the billing entity would be required to identify the supplier and indicate its net charge for the service, and payment would be denied if that information were not provided. This provision would help the agency to enforce existing laws, and it could permit CMS to deny payment more frequently.

2. Proposed Substantive Changes to the Stark Law Final Rule

The Stark Law and its implementing regulations have a long, tortured history. First enacted in 1989 (Stark I), and amended effective in 1995 (Stark II), the law has been in force for more than18 years. The rule-making process has lagged with initial, proposed and final rules governing Stark I and II being published in 1995, 1998, 2001 and 2004. The much anticipated “Phase III Final Rule” (which will replace the 2004 Phase II “Interim Final Rule”) is now expected no later than March 2008. This tortured process highlights the challenges CMS faces in implementing a complex law while considering the increasingly divergent interests and demands of different segments of the health care industry. CMS has also learned that rules governing Stark can be efficiently modified through incremental changes that are published in connection with the annual updates to the Medicare physician fee schedule, rather than through a full-blown rule-making process.

The changes to the Stark Law final rule that are proposed in the 2008 PFS would have a major impact on the activities and arrangements of many health care providers. The PFS proposals may also represent an ominous sign of things to come when Phase III is eventually published later this year or in early 2008. Major changes proposed in the 2008 PFS are outlined below.

Under Arrangements Models. The most significant changes under the PFS proposal would modify the term “entity” under the Stark final rule in order to effectively bar many “under arrangements” transactions in which a physician-owned or joint venture organization owns or leases equipment, space and personnel involved in the performance and delivery of services (e.g., cardiac testing, diagnostic imaging or other services) that are billed as hospital services furnished “under arrangements.” This change would mean the Stark Law’s referral prohibitions would apply both to hospitals that submit claims for designated health services (“DHS”) furnished order arrangements, and to the organization that performs the service itself. In cases where the Stark Law applies to a referral arrangement, an applicable exception must be met or the physician referral will be prohibited and payment denied. If the expanded “entity” definition is finalized, a physician will be making a referral to an entity that will implicate the Stark Law when he/she refers a patient to a hospital or to a separate company which furnishes services to that hospital “under arrangements,” and in most cases no Stark Law exception for such physician ownership relationships will be available to permit the financial and referral relationship.

Historically, certain hospital services were furnished “under arrangements” as a means to access necessary services without having multiple parties acquire and operate the same specialized services and technology. For example, many large multispecialty groups historically have furnished certain services to hospitals “under arrangements.” Since the publication of the Phase II final rule, however, many hospitals and physicians have developed new, more expansive “under arrangements” models that extend well beyond these historical approaches. The business justifications for these new models include promoting greater physician involvement in service delivery efficiency and cost control, focusing on quality, and better aligning incentives related to the operation of critical hospital service lines—to prevent the proliferation of redundant service lines and for other reasons.

The proposed change to the definition of an “entity” under the Stark Law final rule effectively would eliminate many of the newer “under arrangements” models, while also affecting both historical arrangements and those involving services that are presently only able to be reimbursed as hospital services. For example, if the proposed rule change becomes effective, physician ownership of sterotactic radiosurgery (SRS) or gamma knife treatment facilities would be restricted. SRS procedures are commonly furnished in facilities owned by radiation oncologists, neurosurgeons and certain other physician specialties. Medicare only pays for SRS as a hospital service, so SRS procedures are sometimes furnished in physician-owned treatment facilities, but paid for as hospital services furnished “under arrangements.” If the proposed rule changes are implemented, the “under arrangements” model would still be permitted, but SRS facility ownership would be limited to radiation oncologists (by virtue of the Stark Law’s definition of what constitutes a “referral”); neurosurgeons and other referring physicians would be prohibited from making referrals to any SRS facility/service entity in which they hold an ownership interest, unless an exception applies (and the only available exception for such ownership arrangements would be that for investments in “rural providers”).

The proposed rule change also would sweep within its reach those relationships that have been or continue to be established as a means to provide necessary care but without requiring the proliferation of the multiple service providers. In these more traditional “under arrangement” models, the service provider (e.g., a multispecialty group practice) has its own independent patient base and need for the technology and services. The portion of the total services furnished “under arrangements” typically constitutes a fraction of the whole. CMS appears to recognize that some accommodation to these traditional arrangements may be appropriate, as it has indicated that it wishes to consider alternative approaches to the expanded “entity” definition that might only include those organizations in which a “substantial” portion of the revenue from the entity is derived from providing DHS.

Unit-of-Service (Per Click) Payments in Space and Equipment Leases. The Phase II interim final rule’s exceptions for leases of space and equipment permit “per click” lease payments that are consistent with fair market value. The current provisions permit such arrangements even when a physician makes a referral to a DHS entity that leases space or equipment from the physician for use in furnishing the service. For example, the current regulatory framework permits a physician to lease a laser to a hospital for use in performing a procedure on the physician’s patient in connection with an inpatient or outpatient hospital service. Likewise, it permits groups of physicians to lease diagnostic imaging equipment to an independent diagnostic testing facility (IDTF), and it permits the IDTF to pay the equipment leasing company for use of the equipment on a fair market value “per click” basis, including in connection with services furnished to patients of the physician lessors.

The PFS proposal would make changes that were previously proposed but not adopted in 1998; namely, to provide that per-unit-of-service or “per click” arrangements would be allowed only to the extent that the payments not include payments for services furnished to patients referred by the lessor to the lessee. If implemented, the proposed rule changes would mean, for example, that a physician can lease a laser to a hospital or a group of physicians could lease an MRI to an IDTF, but the lease payments would need to exclude “per click” amounts associated with the use of the equipment on the lessor physicians’ referred patients. Moreover, because the Stark Law final rule defines a “referral” expansively to include both direct DHS referrals, but also more “indirect” referrals that originate from a physician’s request for a consultation (e.g., primary care physician requests orthopedic consult, orthopedic surgeon orders MRI from IDTF which leases equipment from primary care physician’s equipment company), the proposed change likely will change the financial returns of many equipment leasing deals. The proposed rule change would still permit more traditional full-time (e.g., full one-year term) “block of time” lease arrangements in which there is no per-click payment.

CMS also is requesting comments on other arrangements in which physician lessees pay a lessor of space and/or equipment on a per-unit-of-time or per-unit-of-service basis, and where the units themselves reflect referrals from the lessor to the lessee. This would include, for example, where a specialist physician leases space, equipment and personnel in a medical practice or other health care facility and pays a pre-defined amount for use of the resources for each service the specialist furnishes in the facility (e.g., $100 rent per service such that the specialist pays $600 when he performs six services, $1,000 when he performs 10, etc.).

In-Office Ancillary Services Exception. In the PFS, CMS engaged in a fair amount of discussion and saber-rattling directed at a perceived misuse of the law’s in-office ancillary services exception. In the PFS, CMS notes that the in-office exception to the Stark Law constitutes one of the law’s most important exceptions. It highlights that the exception contains many provisions and opportunities that are not available with other exceptions, including the ability for physicians in medical group practices to furnish ancillary services, such as routine urinalysis or blood tests, which are related to the medical conditions that brought the patient to the physician’s office.

In its comments, however, CMS expresses concerns about potential abuse of the in-office ancillary services exception. It focuses on the perceived abuses presented by condo path labs and similar arrangements described in OIG Advisory Opinion 04-17, and in other “turn key” arrangements in which third parties other than the physician practice are responsible for much (if not all) of the patient care. CMS also observes that the services provided in reliance on the exception have expanded well beyond those that are related to the medical condition that brought the patient to the physician’s office in the first instance, and it expresses concern that ancillary service arrangements are marketed to physicians over the Internet!

Tellingly, CMS declined to propose any specific changes to the in-office ancillary services exception in the PFS, but it clearly has its eye on the exception, and changes may be in the works. In the PFS, CMS solicited comments on whether certain services should be permitted under the exception (including, for example, physical therapy services that are not furnished incident to a physician’s services, ancillary services that are not required to assist in patient diagnosis or developing a plan of treatment, and certain complex laboratory services). It also requested comments regarding potential changes to the exception’s “building” requirements, and others that would help curtail program or patient abuse.

Modifications to Other Definitions and Exceptions. The PFS also outlines a number of additional proposed changes to specific definitions or exceptions under the Stark Law final rule, including:

  • Amending language to clarify that percentage based compensation arrangements may only apply to charges, revenues or receipts derived from a physician’s personally performed services, and to confirm that physicians may not also receive a portion of the TC receipts that result from the physician’s diagnostic testing referrals;
  • Modifying the requirements of the existing exception for obstetrical malpractice insurance subsidies;
  • Clarifying that ownership interests which are subject to the Stark Law include interests in an entity via a retirement plan that is offered to a physician or immediate family member by a DHS entity; and
  • Making changes to clarify that where a DHS entity (e.g., a hospital) owns or controls an entity to which a physician refers Medicare patients for DHS, the DHS entity would “stand in the shoes” of the DHS entity that it owns or controls, and it would be deemed to have the same financial relationships with any referring physician as the entity it owns or controls as a means to eliminate any ability to avoid the application of the Stark Law by interposing one or more legal entities between the physician and another DHS entity. CMS noted that, on the physician side of the equation, it may be addressing in the upcoming Phase III final rule whether physicians should be considered as standing in the shoes of their group practices, thereby collapsing what is currently an indirect compensation analysis into a direct compensation analysis.

3. Proposals Directed at Enforcement

In addition to the technical substantive changes and saber-rattling, CMS also proposed additional changes related to Stark Law enforcement and its exceptions. Most notably, the agency proposed modifications to “clarify” that, consistent with CMS’s policy with respect to claims denials, in any appeal of payment for a DHS that is denied because the service was furnished as a result of a prohibited referral (that is, under an arrangement that does not meet an applicable exception to the Stark Law), the burden will be on the entity submitting the claim to prove that the DHS was not furnished pursuant to a prohibited referral. In making this change, CMS appears to be borrowing from strategies used by commercial payers by permitting the agency to take the position that if there is any basis for questioning a claim, the agency should deny it and force the provider to demonstrate that the specific requirements of a Stark exception have been met.

CMS also made two other enforcement-related proposals. In the first, it requested comments regarding the period of time in which claims should be disallowed due to failure to meet the requirements of an applicable exception under the Stark Law. CMS noted that in general, it believes that the disallowance of payment should begin with the date upon which the financial relationship failed to meet an applicable exception and end when the relationship is compliant. In some instances these specific dates may not be clear, so CMS solicited comments regarding whether a case-by-case approach or a more rigid, formulaic approach for a prescribed period is warranted in those instances.

In the second proposal, the agency requested comments on whether it should define “alternative criteria” for meeting certain exceptions to the Stark Law and if so, what conditions should be imposed related to the use of such alternative criteria. CMS noted that such alternative criteria might be necessary due to the possibility of “inadvertent violations” such as when a written agreement is missing a signature or when another innocent and unintentional mistake occurs. CMS was careful to note that any alternative criteria would not modify existing provisions of the rule related to temporary non-compliance, nor would any such changes result in a waiver of a violation of the Stark Law or regulations.

In its discussion, CMS proposed three enforcement-related proposals. However, in the process, it also highlighted and reemphasized many of the enforcement related resources that already exist, i.e., denial of payment, encouraging self-policing and compliance programs, self-disclosure and others. Given that Stark is a “strict liability” law–meaning that intent to comply does not matter–the agency clearly believes that demanding a conservative, by-the-book approach will achieve compliance and reduce the proliferation of ancillary services which the Stark Law was designed to address.


The proposed changes to Medicare rules governing the Stark Law and reimbursement provisions are just those: proposals. Comments on the proposals may be provided until August 31, 2007 (except that comments relating to alternative criteria for satisfying certain of exceptions must be received by September 12, 2007).

The proposals clearly convey the agency’s concerns with the variety of ancillary service and related ventures that have been developed–despite the presence of the Stark Law. Even if enacted in their present form, the proposed rule changes are unlikely magically to stop the creation or operation of ancillary service ventures as physicians, hospitals, the private sector and the market are far too creative to prevent future innovation. Yet if the proposals are implemented, the size and shape of providers who remain active in the provision of ancillary health care services is likely to change. Providers that are likely to be able to continue to furnish such services include hospitals, large multispecialty physician groups, large single specialty “network” practices focusing on defined disease states (e.g., cancer care, cardiovascular care, neuro/musculoskeletal care), integrated delivery systems and niche service providers.

Unfortunately, there are now, and always will be, circumstances in which greed trumps the needs of patient care. There are certainly positive benefits associated with at least some of the service arrangements that appear to be targeted by CMS. Hospitals, physician groups and other providers engaged in legitimate diagnostic testing and other service arrangements should consider commenting on the proposed rules to provide a discussion of the value of such arrangements under the current regulatory scheme. Absent persuasive comments, the projected massive cuts in reimbursement under the 2008 PFS combined with the significant changes suggested in the proposed rules could very well constitute the knock-out punch for many providers and existing service arrangements.

Previous post:

Next post: