CMS Publishes Stark II, Phase III Final Rule

CMS published in the Federal Register today its Stark II, Phase III final rule.  CMS contends that the final rule, which will take effect in 90 days, generally reduces the regulatory burden on the health care industry.  However, though CMS relaxes the requirements of certain exceptions, some of the rule's key changes will require DHS entities to reevaluate and possible restructure many arrangements with physicians.  Further, while the Phase III final rule does not directly address the changes to the Stark regulations contemplated by CMS in the proposed 2008 physician fee schedule, there are notable intersections between the two rules.

Executive Summary

Here are the most important things you need to know about the Stark II, Phase III final rule:

• The rule creates a new “stand in the shoes” doctrine that will require relationships between providers and physician groups to be analyzed, in some situations, as if the relationships were directly between the provider and the individual physicians.
• The rule changes the requirements for independent contractor physicians providing services on behalf of group practices.
• The rule loosens the physician recruitment exception and specifically allows recruited physicians to be subject to reasonable non-competition covenants by the groups into which they were recruited.
• The rule allows, under certain circumstances, providers that accidentally go over the annual limit on non-monetary compensation (currently $329 per year) to continue to meet the exception if the excess is repaid.  The rule also allows providers to host one medical staff appreciation function without regard to the $329 limits.
• The rule liberalizes the professional courtesy exception for certain providers.
• The rule does away with the so called “safe harbor” used to determine the fair market value of hourly payments for physician services.
• The rule clarifies the definition of “incident to” services and clarifies how physicians may be paid in “group practices”.

The rule clarifies that the fair market value compensation exception is a “two-way street” – this exception protects compensation paid to a physician by a provider and protects compensation paid to a provider by a physician.

There are other, less significant changes not described above included in the Stark II, Phase III final rule.  Some of these other changes, along with a detailed description of the changes listed above, are set out below.

"Stand In The Shoes" Provision Requires Reevaluation Of Direct Arrangements Between DHS Entities And Physician Groups

Under the Stark II, Phase I rule, arrangements between a DHS entity and a physician group (other than a group wholly-owned by a single physician) would have been analyzed as an indirect compensation arrangement between the DHS entity and the physicians in the group (including owners, employees and independent contractors).  In the Phase III rule, CMS revises the definition of a "direct compensation arrangement" to provide that a physician will be deemed to stand in the shoes of his group (i.e., the physician will be deemed to have a direct compensation arrangement with a DHS entity if the only intervening entity between the physician and the DHS entity is the physician's group).  As a result, DHS entities must reevaluate all of their direct compensation arrangements with physician groups not as indirect compensation arrangements but as direct compensation arrangements with the individual physicians in the group.  Note that it is not necessary to reevaluate compensation arrangements with, for example, management or leasing companies owned by physicians.  Such arrangements will continue to be analyzed as indirect compensation arrangements.  If an arrangement between a DHS entity and a group does not fall within a direct compensation arrangement exception (e.g., the personal services exception, the lease exceptions or the fair market value exception) it must be restructured.  Arrangements that were entered into prior to today and that currently satisfy the requirements of the indirect compensation arrangements exception need not be restructured until the end of the original term of the arrangement or the current renewal term.  However, arrangements entered into after today or arrangements that currently do not satisfy the indirect compensation arrangement exception (e.g., because they did not meet the definition of an indirect compensation arrangement and therefore did not need to meet the exception) must be restructured by the effective date, or possibly within 90-days of the effective date if the arrangement qualifies for protection under the exception for temporary non-compliance.

Groups May Need To Restructure Indirect Arrangements With Independent Contractor Physicians

To fit services performed or supervised by an independent contractor physician (other than a locum tenens physician or an on-call physician providing services on-call) into either the physician services exception or the in-office ancillary services exception, the contractor must meet the definition of a "physician in the group practice".  In the Phase III rule, CMS changes the definition of "physician in the group practice," to require a direct contractual arrangement between the group and the contractor.  As expressed in the Phase III preamble and in the proposed 2008 physician fee schedule rule, CMS believes that there must be a "strong and meaningful" nexus between the contractor and the "physicians in the group practice" and that, for example, the nexus between a group and a leased employee is insufficient.  Accordingly, groups may need to change indirect arrangements with independent contractor physicians (e.g., an orthopedic group leases a radiologist from a radiology group) into direct arrangements (e.g., the orthopedic group contracts directly with the radiologist). 

Hospitals, FQHCs And Rural Health Clinics May Wish To Review Their Physician Recruitment/Retention Policies In Light Of The Relaxation Of The Elements Of The Recruitment And Retention Exceptions

Recruitment Exception.

In the Phase III rule, CMS relaxes the requirements of the physician recruitment exception in several ways.  For recruits joining an existing group, the group may now impose reasonable practice restrictions (including noncompetes) on the recruit.   It appears that CMS will view a noncompete as reasonable if it complies with state law. In addition, CMS clarifies that it does not view any of the following as imposing unreasonable practice restrictions: (i) restrictions on moonlighting; (ii) prohibitions on soliciting patients and/or employees of the group; (iii) requiring that the recruit treat Medicaid and indigent patients; (iv) requiring that a recruit not use confidential or proprietary information of the group; (v) requiring the recruit to repay losses of his or her practice that are absorbed by the group in excess of any recruitment payments; and (vi) requiring the recruit to pay a predetermined amount of reasonable damages (that is, liquidated damages) if the physician leaves the group and remains in the community.

Other key changes to the recruitment exception include the following:

• CMS excepts from the prohibition against recruiting physicians already in the DHS entity's service area   physicians employed on a full-time basis for the previous two years in a prison facility, Department of Defense or Department of Veterans Affairs facility or Indian Health Services facility, provided the physicians did not maintain separate private practices in addition to such full-time employment.
• CMS revises the definition of the DHS entity's service area in a manner that will give some DHS entities more flexibility in determining the locations to which they may recruit physicians.
• Under the Stark II, Phase II rule, only the "incremental" expenses of the group may be allocated to a physician recruited to the group.   Under the Phase III rule, if a physician is recruited to a group in a rural area or HPSA to replace a physician who within the last 12 months has retired, died, or relocated outside of the DHS entity's service area, the group may, instead of allocating only incremental expenses, allocate to the recruit the lesser of a per capita allocation of group expenses or 20% of group expenses.
• Rural health clinics are now permitted to use the recruitment exception in addition to hospitals and federally qualified health centers.

Retention Exception

CMS expands in the Phase III rule the arrangements which might be protected by the retention payments exception.  First, the rule allows rural health clinics, as well as hospitals and FQHCs, to qualify for the exception.  Second, the rule no longer requires that the DHS entity be located in a health professional shortage area ("HPSA").  Instead, retention payments that otherwise meet the requirements of the exception are permissible as long as (i) the physician’s current medical practice is located in a rural area, a HPSA, or an area of demonstrated need as determined by an advisory opinion; or (ii) at least 75% of the physician’s patients either reside in a medically underserved area or are members of a medically underserved population.  Third, CMS expands the exception to permit, under certain circumstances, retention payments even in the absence of a bona fide written offer, where the physician provides a written certification satisfying certain criteria and the DHS entity takes reasonable steps to verify the information set forth in the written certification (note that the limitations imposed on retention payments are different depending on whether the payment is based on a bona fide written offer of employment or recruitment or a physician’s written certification). 

Hospitals And Others May Wish To Review Their Medical Staff Compensation Policies
In Light Of The Relaxation Of The Non-Monetary Compensation, Compliance Training And Professional Courtesy Exceptions

Non-Monetary Compensation Exception.

The non-monetary compensation exception allows DHS entities to provide physicians with items or services the aggregate value of which is less than, currently, $329 per year.  Under the Phase III rule, in the event a DHS entity inadvertently provides items or services in excess of the cap, the physician may repay the excess to preserve compliance with the exception if (i) the excess is no more than 50% of the cap and (ii) the excess is returned within 180 calendar days or the end of the calendar year, whichever is earlier.  DHS entities may use this provision only once every three years with respect to a particular physician.  Under the Phase III rule, CMS will also allow DHS entities to provide one medical staff appreciation function per year for the entire staff without regard to the non-monetary compensation cap; provided that any gifts or gratuities provided at the function are subject to the cap.  Finally, CMS clarifies that the cap is to be calculated on a calendar year basis and that the fair market value of any items and services provided under the exception, and not their costs, should be applied towards the cap.

Compliance Training Exception.

In the Stark II, Phase II rule, CMS stated that it did not consider CME to be compliance training for purposes of the compliance training exception.  Instead, CMS suggested that DHS entities attempt to protect CME provided to physicians under the non-monetary compensation exception.  In the Phase III rule, CMS softens its position.  CMS revises the compliance training exception to permit compliance training programs that involve CME credit provided that compliance training is the primary purpose of the program.

Professional Courtesy Exception.

CMS deletes the requirement that insurers be notified of whole or partial reductions in coinsurance obligations on the grounds that it is not necessary to prevent program or patient abuse.  Nevertheless, CMS believes doing so would be prudent and notes that insurers may require such notification.  Further, failure to notify insurers of the waiver of co-insurance obligations may be problematic under other federal law.  CMS also clarified that the exception applies only to DHS entities with formal medical staffs (since these are the types of entities that have traditionally provided professional courtesy).  Finally, note that, notwithstanding CMS' changes to the professional courtesy exception, professional courtesy continues to raise issues under the anti-kickback statute and that a professional courtesy arrangement that violates the anti-kickback statute will be deemed to violate Stark.

Other Significant Changes

• Fair Market Value Hourly Compensation.  In the Stark II, Phase II rule, CMS included in the definition of fair market value a safe harbor for hourly rates determined by reference to either (i) the average hourly rate for emergency room services in the relevant market or (ii) at least four of six identified national surveys.  Because it may be infeasible to obtain information regarding hourly rates for emergency room physicians in competing hospitals and because several of the identified surveys are no longer available (or may not be readily available) CMS deletes the safe harbor in the Phase III rule.  Though CMS continues to believe that reference to multiple, objective, independently published salary surveys remains a prudent practice for establishing fair market value, DHS entities can no longer be assured that hourly rates so established will be deemed consistent with fair market value.
• Group Practices and Incident To Services.  Under the Stark law, a group practice may pay its physicians a share of overall DHS profits, or a productivity bonus based on DHS they personally performed or DHS incident to their personally performed services as long as the share or bonus is not determined in a manner that relates directly to referrals of DHS.  Under Phase III, a physician's share of overall DHS profits may not be directly based on DHS performed "incident to" his personally performed services.  For example, a physician's share of overall DHS profits may be based on the ratio of the collections from his personally performed services to the ratio of the collections from all the group's physicians personally performed services.  But the share could not be based on the collections from the physician's personally performed services and services "incident to" those personally performed services.  Further, for purposes of determining the services on which a productivity bonus may be based, CMS clarified that while "incident to" services can include applicable services and supplies (e.g., drugs), "incident to" services do not, unless otherwise permitted to be billed as "incident to", include services that have their own separate and independently listed benefit category.  For example, diagnostic x-ray tests, diagnostic laboratory tests and other diagnostic tests cannot be "incident to" services because they have their own, separate benefit category. 
• Ancillary Services Exception.  To qualify for the in-office ancillary services exception, the ancillary services must be provided in a centralized building or the same building where at least some physician services unrelated to the performance of DHS are provided.  CMS cautions against creating a satellite office that appears to satisfy the “same building” requirements, but in fact is merely a sham arrangement.  For example, renting office space part-time in a freestanding imaging facility purportedly to provide physician services unrelated to DHS at the facility location would be considered a sham if few or no such services were actually contemplated or provided.  CMS further notes that physician services provided in the satellite office via telemedicine do not count toward the "some physician services" requirement.

CMS also reiterated that contractor physicians must provide or supervise, as applicable, services in the group's facilities to qualify for the physician services or in-office ancillary services exception.  Note that through an incredibly complex series of changes, CMS (perhaps unintentionally, perhaps intentionally) proposed in the proposed 2008 physician fee schedule rule to reverse its position on the ability of off-site independent contractor physicians to render services that can be billed through the “in-office ancillary services exception.”  Given CMS' position in the Phase III rule, it remains unclear whether that change was intentional.

• Ownership Interests.  In the Phase III rule, CMS revises the definition of ownership interest to exclude a security interest taken by a physician in equipment sold to a hospital and financed by a loan from the physician to the hospital.  Such arrangements should instead be analyzed as compensation arrangements which may, for example, qualify for protection under the isolated transactions exception.  However, CMS also reiterated its position that a security interest taken in the revenue of a hospital department or other discrete hospital operations would constitute an ownership interest and would not be protected under the whole hospital exception.
• Intra-Family Referrals.  In the Stark II, Phase II rule, CMS added an exception for referrals by a physician to an immediate family member.  The exception required that no other person be available to provide the services within 25 miles of the patient's residence.  In the Phase III rule, CMS adds an alternative distance test.  The exception may be met if there is no other provider (i) within 25 miles of the patient's residence or (ii) within 45 minutes transportation time from the patient's residence.
• "Holdover" Personal Services Arrangements.  As currently exists for leases, the Phase III rule makes provision for "hold over" personal services arrangements.  An arrangement of at least 1 year otherwise compliant with the personal services exception will continue to be protected for six months following its expiration provided that the terms and conditions do not change.
• Fair Market Value Exception.  CMS revises the fair market value exception to protect arrangements involving the provision of items or services by a DHS entity to a physician as well as arrangements involving the provision of items or services by a physician to a DHS entity.  CMS also clarifies that the fair market value exception cannot protect leases of office space and that an arrangement potentially protected by the fair market value exception cannot be protected by the payments by a physician exception.
• Reporting Requirements.  CMS adds to the information that an entity must maintain, and disclose to CMS or the OIG upon request, the NPI number of any physician that has a reportable relationship with the entity.  This is in addition to the UPIN number of such physicians.

Proposed Changes Included In The Proposed 2008 Physician Fee Schedule

The Phase III rule did not directly address the changes CMS proposed to the Stark regulations in the proposed 2008 physician fee schedule rule (the "Proposed Rule").  However, two notable intersections between the proposed changes and the Phase III final rule are as follows:

• Per Click Arrangements.  Under the Proposed Rule, per-click arrangements would not qualify for protection under the space or equipment lease exceptions.  Since under the Phase III rule, arrangements between a DHS entity and a group must qualify for protection under a direct compensation exception, the proposed rule might have driven a final nail in the coffin of per-click arrangements.  However, the Phase III rule also revises the fair market value exception to provide that it does not protect space leases.  By omission, the fair market value exception therefore ought to protect equipment leases.  If so, unless CMS carves equipment leases out of the fair market value exception when it finalizes the Proposed Rule, it should be possible to structure per-click equipment leases that must be analyzed as direct compensation arrangements to fit within the fair market value exception.
• In-Office Ancillary Services and Physician Services Exceptions.  In the Proposed Rule, 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.  CMS' solicitation of comments on these subjects together with the Phase III rule changes to the definition of "physician in the group" and CMS' clarification with respect to the same building element of the in-office ancillary services exception seem part of a concerted effort by CMS to make it more difficult for groups to use the in-office ancillary services exception or the physician services exception to refer patients to themselves for specialized services (e.g., radiology) outside of their core practices.

For more information on the Stark II, Phase III final rule, please feel free to contact any member of the Boult Cummings Health Care Team.