Stark Rules Change – Again

September 4, 2008

Faegre & Benson

Authors:  Bruce A. Johnson & Thomas S. Schroeder

How could the government possibly make matters worse for hospitals and physicians doing their best to avoid Stark violations in their everyday business transactions? Simple: just take one of the most complicated sets of regulations ever imposed and change it up three times in the course of a year!

Hospital administrators’ and physicians’ heads are surely spinning, and their lawyers are struggling mightily to come to grips with the nearly 2,000 pages of regulatory text containing additional Stark rule changes in the 2009 Inpatient Prospective Payment System final rule (hereafter referred to as the “2009 IPPS final rule”), issued by the Centers for Medicare and Medicaid Services (CMS) on July 31, 2008. However, come to grips with it they must, because the final rule contains many important changes to the so-called Stark II, Phase III final rules issued in September 2007 (the “Phase III final rule”), and finalizes several of the more controversial aspects of the 2008 Physician Fee Schedule proposed rule (the “2008 PFS proposed rule”) issued in July 2007.

Deals will be killed; contracts will need to be re-written. More fundamentally, avenues will be narrowed for hospital-physician collaboration in the provision of ancillary and other services. Except as noted below, these rules take effect October 1, 2008. So as painful as it may be given the frequency and complexity of the changes to the Stark rules, providers should read on.

Six Feet “Under Arrangements”

A year after expressing serious reservations with “under arrangements” contracts, CMS adopted changes to clarify the definition of “entity” in a manner that will prevent many “under arrangements” models involving physician-owned entities in most settings.

“Under arrangements” models involve one entity furnishing services to hospital patients, coupled with the hospital’s billing and reimbursement for those services under the hospital outpatient fee schedule. Historically, these arrangements have involved hospitals, large physician groups or other non-physician entities. More recently, however, physician-owned joint venture entities, including those in the specialties of cardiology, radiology and urology, began to use “under arrangements” models, thereby triggering concerns that the arrangements created the potential for overutilization of services through a loophole permitting self-referrals that would otherwise be prohibited by the Stark law.

Making good on its warnings in the 2008 PFS proposed rule, CMS redefined “entity” in the 2009 IPPS final rule in such a way as to encompass most physician-owned joint ventures providing services “under arrangements” with a hospital. Until the new rule, “entity” for purposes of the Stark law includes the person or entity that bills and is paid for designated health services (DHS), as well as the person or entity that actually performs the service. Under the revised definition, an entity performing services “under arrangements” will qualify as a DHS entity. And where a physician has an ownership interest in the under arrangements entity, the physician may not make referrals to that entity absent compliance with one of the ownership exceptions to the Stark law—the exception for rural providers being the only viable exception available.

CMS’ decision to expand the definition of “entity” will significantly curtail “under arrangements” joint ventures between hospitals and physician-owned organization groups. Given its breadth and recognizing that the new definition will require many hospitals and physicians to significantly restructure existing “under arrangements” contracts, CMS delayed implementation of this change until October 1, 2009.

Some Percentage Pay, Per-Clicks Go Clunk

In various exceptions—including those governing rental of office space, equipment, fair market value and indirect compensation arrangements—the Stark rules mandate that the manner of payment not take into account the volume or value of any referrals or other business generated between the parties. In all but the latter of those exceptions, the payment must also be set in advance.

Nevertheless, citing congressional intent to permit certain per-use or per-unit of service leases (referred to as “per-click” arrangements), CMS had previously allowed for per-click payments in prior phases of the rules—even for services provided to patients referred by a physician lessor. CMS had also allowed percentage-based payments, provided that the percentage-based formula was fixed (“set in advance”) for the term of the agreement.

Now CMS has changed its mind on both scores, at least in part. With respect to per-click arrangements, the 2009 IPPS final rule changes the space, equipment, fair market value, and indirect compensation exceptions to prohibit rental of space or equipment using a formula based on per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties. Similarly, the same exceptions now prohibit percentage-based pay in space or equipment rentals, whether the percentage is based on revenues, billings, collections, or is otherwise attributable to the services performed or business generated using the space or equipment.

CMS made these changes because of heightened concerns that certain per-click and percentage-based compensation arrangements provide an incentive for increasing DHS referrals in order to increase the rental payment under the lease. CMS is also concerned that fluctuating rental payments using these methodologies may not result in fair market value payments, and that physician lessors may refer patients to the lessee of his/her equipment rather than to entities that may employ a different and/or more appropriate treatment modality. The changes are effective October 1, 2009. Existing arrangements will not be grandfathered.

Note that the new per-click limitation does not prohibit physicians from accepting per-click payment from entities for services rendered to patients that were referred by others. Thus, a physician could lease equipment or space to an entity and refer patients for DHS to that entity, and structure the arrangement so that the physician would receive per-use fees for services rendered to patients referred by others, but receive compensation calculated on another basis for services rendered to patients referred by the lessor physician.

Note also that CMS did not ban percentage-based payment formulae in non-rental arrangements. Indeed, it expressly approved percentage-based pay for personally performed physician services. However, CMS warned that it will continue to monitor arrangements for non-professional services (e.g., management or billing services) that are based on a percentage of revenue raised, earned, billed, collected, or otherwise attributable to a physician’s or physician organization’s professional services. Further restrictions on percentage-based formulae may appear in future rulemaking.

Finally, CMS states that block-time leases, if properly structured, may meet the requirements for space and lease rental. However, it notes that it will continue to monitor such arrangements and may propose rulemaking in the future. CMS specifically notes that parties entering into such arrangements should structure them carefully, particularly taking the anti-kickback statute into consideration.

Tough Shoes to Fill

Recall that the Stark law and regulations prohibit a physician from referring a Medicare, Medicaid or other government beneficiary to an entity for any of eleven DHS if the physician has a financial relationship with the entity—unless one of numerous exceptions applies. Stark also prohibits the entity (which will typically be a hospital or physician practice) from submitting a claim to Medicare/Medicaid. The eleven DHS include clinical laboratory, physical/occupational therapy, radiology, durable medical equipment, and inpatient and outpatient hospital services, to name a few. Violations of Stark can lead to recoupment of payments, civil money penalties, False Claims Act liability (including whistleblower claims, treble damages, $11,000 per-claim fines and attorneys fees), and possible exclusion from participation in governmental programs.

Under the Phase III final rule, referring physicians were considered to “stand in the shoes” of their physician organizations—meaning that the referring physician was treated as having the same compensation arrangements with the entity billing or performing the DHS as did his or her physician organization.

The Phase III stand in the shoes rule had a dramatic impact by requiring many previously compliant indirect compensation arrangements to fit within one of the exceptions available for direct compensation arrangements. It also called into question the permissibility of certain mission support payments among components of hospitals, integrated delivery systems, and academic medical centers (AMCs). The widespread outcry over this change prompted CMS to delay the application of the stand in the shoes rule as it applied to AMCs and nonprofit integrated health systems until December 4, 2008.

Under the 2009 IPPS final rule, with one exception, a physician who has an ownership or investment interest in a physician organization is deemed to stand in the shoes of that physician organization. The exception is in the case of physicians with only “titular” ownership interests in the physician organization (i.e., the physician does not receive any of the financial benefits of ownership through the distribution of profits, dividends, proceeds of sale, or similar returns). Such titular physician owners and non-owner physicians are not required to stand in the shoes of their physician organizations—although they may choose to treat themselves, if they desire, as standing in the shoes of their physician organizations. This option is designed, in part, to ease compliance for those providers who already modified compensation arrangements to comply with Phase III, but the option will continue to be available in the future. Under the 2009 IPPS final rule, the stand in the shoes analysis also does not apply to arrangements that meet the Stark law’s exception for AMCs.

The IPPS final rule provides the flexibility to continue using the indirect compensation exception for non-owner physician employees (including titular owners) of physician organizations. And by excepting titular owners from the stand in the shoes analysis, CMS accommodates the “friendly PC” structure used in states where physician groups may not be employed by hospitals or other than physician-owned entities due to so-called corporate practice doctrines.

(For)Got Signature?

In the 2008 PFS proposed rule, CMS proposed to give providers some leeway when they inadvertently fail to comply with the procedural requirements of a Stark exception. The 2009 IPPS final rule creates a new section § 411.353(g) which allows, under certain circumstances, an entity to bill for DHS when the financial relationship between the entity and the referring physician fully complies with a Stark exception but for the signature requirement. Where signatures are missing inadvertently, providers may avoid Stark law penalties if they obtain the missing signature within 90 days after the start of the financial relationship. Where missing signatures are not inadvertent, providers have a 30-day grace period within which to obtain the needed signatures.

In order to take advantage of these grace periods, the financial relationship must, from the beginning, meet all the requirements of the applicable exception except for the signature requirement, and entities may only use the grace periods once every three years with respect to the same physician.

CMS promulgated this final rule in order to relieve providers from severe punishment for technical violations of the Stark law. In order to encourage providers to utilize this new rule, CMS chose not to mandate self-reporting as a prerequisite to the alternative method of compliance. The alternative method of compliance does not forgo the need for signatures, as the period of disallowance will be triggered if the necessary signatures are not obtained within the specified timeframes.

Is it Fixed Yet?

Under the Stark rules, the “period of disallowance” refers to the period of time for which a physician cannot refer DHS to an entity, and the entity cannot bill Medicare, because a financial relationship between the referring physician and the entity failed to satisfy all of the requirements of an exception to the Stark self-referral prohibition. There has long been confusion over when the period of disallowance ends—if ever—if parties discover a noncompliant relationship.

In the 2009 IPPS final rule, CMS creates an outside limit on the period of disallowance. The final rule provides that where the non-compliance is not related to the payment of compensation, the period of disallowance will end no later than the date that the financial relationship satisfies all of the requirements of an applicable exception. Where the noncompliance is related to the payment of compensation, then the period of non-compliance will end no later than the date on which all excess compensation is returned to the party that paid it (or to which it is owed) and the financial relationship satisfies all of the requirements of an applicable exception.

CMS is attempting to create a bright line rule so that providers can be assured that referrals made after a certain date will not run afoul of the statute. CMS also emphasizes that the final rule does not preclude providers from arguing that the period of disallowance may be in fact shorter than the outer limit set in the rule.

OB Insurance Subsidies

In the 2009 IPPS final rule, CMS retains the current exception allowing obstetrical malpractice insurance subsidies but broadens the exception’s potential application. The prior exception only allowed a “hospital or other entity” to provide obstetrics malpractice subsidies to physicians practicing in a primary care Health Care Professional Shortage Area (HPSA). The expanded exception now allows hospitals, federally qualified health centers, and rural health clinics to provide obstetrics malpractice insurance subsidies when a physician’s practice is: (1) located in a primary care HPSA, rural area, or an area with a demonstrated need, as determined by the Secretary of Health and Human Services in an advisory opinion; or (2) comprised of patients at least 75 percent of whom reside in a medically underserved area or are part of a medically underserved population.

CMS declined requests to expand the exception to physicians practicing other medical specialties, although it kept the door open to considering data indicating that, without an expansion of the exception, beneficiary access to other (or all) medical specialties is hindered.

Closing the Retirement Investment Loophole

The current Stark rules exempt any interest in a retirement plan from the definition of “ownership and investment interests.” In prior proposed rulemaking, CMS expressed a concern that some physicians may be using retirement plans to purchase or invest in other entities to which they refer patients as an end-run around the Stark rules.

In the 2009 IPPS final rule, CMS modifies the retirement plan exemption to specify that the only interest in a retirement plan that is exempted from the definition of “ownership and investment interests” is an “interest in an entity that arises from a retirement plan offered by that entity to the physician (or a member of his or her immediate family) through the physician’s (or immediate family member’s) employment with that entity.” CMS indicates that this is not a change, but rather a clarification better reflecting its original intent.

Disclosure of Financial Relationships

The Stark regulations have contained reporting requirements since their initial adoption in 1991, but to-date CMS has not implemented this aspect of the regulations, nor has it engaged in any comprehensive reporting initiative to examine financial relationships between hospitals and physicians.

In prior proposed rulemaking, CMS created a collection instrument called the Disclosure of Financial Relationships Report (DFRR) to collect information concerning the ownership and investment interests and compensation arrangements between hospitals and physicians. In the 2009 IPPS final rule, CMS announces that the DFRR will be sent to 500 hospitals, both general acute care hospitals and specialty hospitals. CMS’ goal is to identify arrangements that potentially may not be in compliance with Stark, as well as practices that may assist CMS in any future rulemaking. CMS may decide to decrease, but not increase, the number of hospitals receiving the DFRR based on further review and comments its receives. CMS indicates the DFRR will be used as a one-time collection effort. However, it may propose future rulemaking to use the DFRR or some other instrument as a periodic or regular collection instrument.

CMS cautions that to the extent it does not find a Stark violation in a hospital’s DFRR, the hospital should not interpret that finding as an affirmative statement that its financial relationships are in compliance. The government might still determine that a violation exists based on further review of information collected as part of the DFRR or from other sources.

MS estimates that it will take each hospital approximately 100 hours to complete the DFRR at a cost of $4,080 per hospital. While this estimate is up from 31 hours and $1,550 per hospital in the IPPS proposed rule, many hospitals will still find that CMS revised estimates still substantially understate hospitals’ actual experience.

Hospitals will have a 60-day limit during which to complete and return the DFRR. Failure to timely submit the requested information may result in civil monetary penalties of up to $10,000 for each day beyond the deadline; however, CMS stated it will work with entities to comply with the reporting requirements before seeking to invoke its authority to impose civil monetary penalties.

Who Says You Didn’t?

CMS has long contended that the burden of proof was on the provider when Medicare denies payment on a claim due to a Stark violation, but to-date the regulations have not expressly addressed the burden. CMS fills that gap in the 2009 IPPS final rule.

Under the new rules, when payment for DHS is denied on the basis of a purported Stark violation, and the denial is appealed, the ultimate burden of proof at each level of administrative appeal will be on the entity submitting the claim to establish that the service was not furnished pursuant to a prohibited referral (and not on CMS or its contractors to establish that the service was furnished pursuant to a prohibited referral). The rules do allow for the burden of production to shift to the government “depending on the evidence presented by the claimant,” but the threshold showing necessary for this burden-shifting to take place is nowhere explained.

Note that this new provision does not impact the evidentiary rules in False Claims Act cases or in other types of court cases, as CMS readily acknowledges. Federal court rules and jury instructions in civil cases clearly place the burden on the government and plaintiff whistleblowers in all court proceedings.

CMS believes that, in most instances, the question of whether a provider or supplier meets a Stark exception will be a factual one, and that the provider or supplier, and not CMS or its contractors, will possess documentation containing the particulars of the financial relationship at issue. However, because many of the exceptions to the physician self-referral prohibition require compliance with the anti-kickback statute, providers may have a difficult time “proving a negative” under an intent-based criminal statute. In a court proceeding, the government has the burden to prove intent under the anti-kickback statute.

CMS to Contractors: Just Say “213”

Anyone who reached the bottom of this article will be acutely aware of just how complicated the Stark rules can be. Nevertheless, as if to prove the point that a label is easier to grasp than a concept, on August 15, 2008, CMS announced the implementation of a new “Claims Adjustment Reason Code”—No. 213—which it wants its fiscal intermediaries and carriers to use when they get a claim from a DHS entity that should be denied because of “Stark.”

CMS’ Transmittal and accompanying MedLearn piece instructs contractors:

Please note that the statute enumerates various exceptions, including exceptions for physician ownership or investment interest in hospitals and rural providers. You can read these exceptions in Section 1877 of the Social Security Act Sec. 1877 which you can find [on CMS’ website] and in 42 C.F.R. Part 411, Subpart J.

The confidence CMS demonstrates in its contractors’ ability to understand and correctly implement Stark’s regulatory morass is nothing short of breathtaking.

But then again, even if they get it wrong, the burden of proof will be on providers.

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