CMS Proposes Significant Changes to Stark Regulations and Anti-Markup and Reassignment Rules



CMS published in the Federal Register today its proposed 2008 physician fee schedule.  In the rule, CMS proposes to reverse its position on key Stark regulatory provisions and proposes significant changes to the anti-markup and reassignment rules.  CMS' changes seem primarily aimed at what it sees as a proliferation of arrangements under which physicians profit from their referrals in ways that may lead to patient and program abuse in the form of overutilization of services and higher costs to the Medicare Program.  However, CMS reversals and changes may pose compliance challenges for health care providers and suppliers who have in good faith structured arrangements with physicians in reliance on the current rules.


Per-Click Arrangements in Leases
For those keeping score, CMS would have prohibited per-click lease arrangements in the Stark II proposed rule, expressly permitted them in the Stark II, Phase I final rule, and now proposes again to prohibit them.  The Stark regulations currently protect lease arrangements with “unit-of-service-based” compensation so long as the per-unit payment is at fair market value and certain other conditions are satisfied.  For example, a referring physician may lease an MRI to a hospital on a per-click basis so long as the per-click payment is consistent with fair market value.  However, in the 3-year period since the publication of the Stark II, Phase II interim final rule (in which CMS again spoke approvingly of per-click lease arrangements), CMS has reconsidered its position.  CMS now believes that such arrangements are inherently susceptible to abuse because the referring physician profits, for example, each time he or she refers a patient to a hospital for an MRI.  Accordingly, CMS would exempt from protection under Stark's lease exceptions arrangements under which the lessee pays the lessor on a per-unit-of-service basis (including per-click arrangements) for designated health services referred by the lessor.  Note that CMS proposes to exempt per-click arrangements from protection only under Stark's lease exceptions.  However, CMS stated in the Stark II, Phase II interim final rule that, in certain situations, equipment leases may also be eligible for protection under Stark's fair market value exception.  The fair market value exception applies to arrangements for the provision of items and services by physicians or groups of physicians.  It remains to be seen, for example, whether a group of physicians may lease an MRI to a hospital on a per-click basis and still qualify for protection under the fair market value exception. The commentary to the final rule, which should be published around November of this year, may clear this issue up and drive a final nail in the coffin of per-click arrangements.

Percentage Compensation Arrangements
Percentage compensation arrangements are those in which compensation is determined based on a percentage of a fluctuating or indeterminate amount, such as revenues, collections or expenses.  Many of Stark's compensation arrangement exceptions include a requirement that compensation be set in advance.  Again for those keeping score, CMS took the position in the Stark II, Phase I final rule that percentage compensation arrangements are not set in advance; in the Stark II, Phase II interim final rule CMS reversed itself by providing that percentage compensation are set in advance if the formula for calculating the compensation is set forth in sufficient detail before items or services are provided; and now CMS proposes to substantially limit percentage compensation arrangements.  CMS proposes to modify the definition of “set in advance” to clarify that percentage compensation arrangements (i) may be used only for paying for personally performed physician services (e.g., percentage compensation arrangements may not be used in equipment or space leases subject to the set in advance requirement) and (ii) must be based on the revenue resulting from the physician services (e.g., the compensation may not be based on a percentage of a hospital department's savings unrelated to the services provided).

Note that CMS' proposed change would affect only arrangements attempting to qualify for protection under a Stark exception that requires compensation to be set in advance (e.g., the lease exceptions, the personal services exception and the fair market value exception).  It would not affect arrangements qualifying for protection under an exception that does not require compensation to be set in advance (e.g., the employment exception, the indirect compensation arrangement exception and the group practice definition).  Note also however that, even if a set in advance requirement is not included in the relevant exception, in order to require an employee to make referrals of designated health services to the employer, the employee's compensation must be set in advance.  For example, under Stark's group practice definition, a group may pay its physicians a share of overall profits from designated health services (including designated health services performed by others) as long as the profits are divided in a way that does not reflect referrals.  If CMS' proposal is finalized, group practices (including group practices owned and operated by hospital affiliates) will no longer be able to both pay their employed physicians a share of overall profits from designated health services AND require the physicians to refer to the group's affiliated hospitals.

Under Arrangements Agreements and Other Similar Arrangements
Stark prohibits physicians from making referrals to entities for the furnishing of designated health services if the physicians have an un-excepted financial relationship with the entity.  CMS currently interprets the entity furnishing designated health services to mean the entity that bills for the services.  For example, consider a joint venture between hospitals and physicians to provide imaging services to the hospital on an under arrangements basis.  Though the joint venture provides the imaging services, because it does not bill for them, the physicians' ownership interest in the joint venture need not qualify for protection under a Stark exception.  CMS proposes to revise the Stark regulations to provide that the entity furnishing designated health services is the entity that bills for OR performs the service.  If so, for example, physician investors in the above example could only refer to the hospital imaging services to be performed by the joint venture if the physicians' ownership interest in the joint venture qualified for a Stark exception.  It remains to be seen what constitutes "performing" services outside of the typical under arrangements model.  For example, it is not clear at what point an entity providing some combination of equipment and personnel to an IDTF is deemed to be performing the IDTF's services.

Other Changes to Stark
CMS proposes changes or solicits comments with respect to several other provisions of the Stark regulations.  For example:

  • In-Office Ancillary Services Exception. CMS solicits comments on, (i) whether certain services should not qualify for the exception (for example, any therapy services that are not provided on an incident to basis, and services that are not needed at the time of the office visit in order to assist the physician in his or her diagnosis or plan of treatment, or complex laboratory services); (ii) whether and, if so, how CMS should make changes to the definitions of same building and centralized building; (iii) whether nonspecialist physicians should be able to use the exception to refer patients for specialized services involving the use of equipment owned by the nonspecialists; and (iv) any other restrictions on the ownership or investment in services that would curtail program or patient abuse. One has to wonder whether CMS is going to mount an assault on the use of expensive ancillaries, like MRI and CT, by medical groups that do not use the ancillary service at the time the patient is seen for an office visit.
  • OB Malpractice Insurance Subsidy Exception.  Stark's OB malpractice insurance subsidy exception currently only cross-references to the anti-kickback safe harbor.  CMS seeks comments on revising the exception to improve access to OB care while at the same time appropriately guarding against program or patient abuse.


Under an existing rule known as the “purchased diagnostic test rule” (PDT rule), a physician purchasing a test from another physician or supplier may not “mark up” the test when submitting the bill to Medicare.  Under the current rule, the anti-markup component of the PDT rule does not apply to the professional component.  However, the current proposal would extend the anti-markup provisions of the PDT rule to the professional component of diagnostic tests, thus prohibiting one physician from profiting off the professional work of another physician.  Note that the proposal would extend the anti-markup rule only to the professional component of a diagnostic test, not to professional services generally.

The amount the purchasing group may charge Medicare is limited to the lesser of, (i) the net charge to the group imposed by the outside professional, (ii) the group’s actual charge, or (iii) the fee schedule amount that would be allowed if the group billed directly.

The proposed anti-markup rule applies to the technical and professional components without regard to whether or not the purchasing group “purchased” the test or obtained the right to bill for the test under the reassignment rules.

There is a special definition of “net charge” to prevent gaming.  If the physician who actually performs an interpretation must pay to the buying group some sort of fee for access to the buying group’s reading equipment in order to perform the interpretation, the charge for use of the reading equipment must be taken into account.  For example, consider the case of a neurosurgery practice with its own MRI that seeks to purchase interpretations from an independent contractor radiologist.  The neurosurgery group charges the radiologist $25 for the right to come on-site and use its reading equipment.  The radiologist charges $100 for his interpretation.  For purposes of the professional anti-markup rule, the radiologist’s charge to the neurosurgery group is $75.

Perhaps most controversially, the only services that are not subject to the anti-markup rule are services performed by “full-time employees.”  This proposal is certainly expected to receive a considerable amount of criticism.  If the provision is allowed to stand as drafted, how would a medical group handle professional services rendered by part-time employees?  Assuming the part-time employee receives some sort of salary, how could one ever figure out what that professional employee’s “charge” was for any particular professional services?  Since reading radiologists for groups or imaging centers are typically not employees at all, how does the purchaser take into account its billing cost and collection risks?  Expect the industry to comment heavily on this portion of the proposal.

Through an incredibly complex series of changes, CMS (perhaps unintentionally, perhaps intentionally) is proposing to reverse its current position on the ability of off-site independent contractor physicians to render services that can be billed through the “in-office ancillary services exception.”  The series of changes that would be required to effectuate this change would make even the most diehard Medicare regulatory expert’s head spin.

Comments on most sections of the proposed physician fee schedule rule must be received by CMS on or before August 31, 2007.  For more information on the proposed rule and its affect on Stark and the anti-markup and reassignment rules, please feel free to contact Jay Hardcastle at 615-252-2386 or Mark Lewis at 615-252-2347, or another member of the Health Care Team.