Stark Law Changes Proposed in 2009 Medicare Inpatient Payment System Update

Publications

The Centers for Medicare and Medicaid Services ("CMS") has proposed changes to the regulations promulgated under the physician self-referral law (along with its implementing regulations, commonly referred to as "Stark"). The changes are contained in the 1,200-page Inpatient Hospital Prospective Payment System ("IPPS") proposed rule for fiscal year 2009  published yesterday, April 30, 2008, in the Federal Register.

Executive Summary
Here are the most important things you need to know about the proposed Stark-related changes in the IPPS proposed rule:

  • CMS proposes that a physician would not be deemed to "stand in the shoes" of his or her physician organization if (i) the physician does not have an ownership interest in the organization, and (ii) all compensation arrangements between the physician and the organization meet either Stark's employment, personal services or fair market value exceptions.
  • Like the "stand in the shoes" rule for physicians, CMS proposes a "stand in the shoes" rule for providers of Stark designated health services ("DHS").  For example, if a hospital has a subsidiary that employs a physician, the hospital will be deemed to stand in the shoes of the subsidiary, and there will be a direct financial relationship between the hospital and the employed physician.
  • CMS proposes rules for determining the time period for which a physician is prohibited from referring patients for DHS to an entity with which the physician has a non-compliant financial relationship.  
  • CMS solicits comments on the establishment of a Stark exception to protect legitimate gainsharing arrangements.
  • CMS solicits comments on whether physician ownership of implant and other medical device companies present risks that should be addressed by Stark.
  • CMS solicits comments on a proposed form of "Disclosure of Financial Relationships Report" that would be used by CMS to gather information about financial relationships between hospitals and physicians and the frequency of required reporting.

There are other, less significant proposed changes not described above included in the IPPS proposed rule.  Some of these other changes, along with a detailed description of the changes listed above, are set out below.

Physician "Stand in the Shoes" Rule
The physician "stand in the shoes" rule was included in the Stark II, Phase III final rule published in September of 2007. The rule generally provides that a physician will be deemed to "stand in the shoes" of his or her physician organization for purposes of evaluating financial relationships between the physician and entities to which the physician makes referrals for designated health services. Prior to this rule, many arrangements were evaluated as "indirect" financial relationships between the physician and the DHS entity because the arrangement was with the physician's group practice. For example, a contract between a hospital and a cardiology group to read EKGs constituted an "indirect" financial relationship between the hospital and the group's physicians. Under the "stand in the shoes" rule, this arrangement became a "direct" financial relationship between the hospital and the group's physicians. The effect of the "stand in the shoes" rule was that these arrangements would be required to meet one of Stark's "direct" financial relationship exceptions, rather than the "indirect" exception.

In late 2007, CMS delayed the effectiveness of the physician "stand in the shoes" rule with respect to academic medical centers ("AMCs") and nonprofit integrated health systems. The reason for the delay was to allow time to evaluate the effect of the rule on support payments and other financial arrangements between AMCs and integrated health systems and their affiliated physician groups. These payments are very common, and previously had not created significant issues under Stark. Under the physician "stand in the shoes" rule, these arrangements would be required to meet a direct exception.

Interestingly, instead of proposing modifications to the physician "stand in the shoes" rule solely to address the issues with AMCs and nonprofit integrated health systems, CMS has instead proposed modifications to the overall application of the rule. Specifically, CMS has proposed two alternate approaches to modify the rule, as follows:

Proposal One
In the first option being considered by CMS, a physician would not "stand in the shoes" of his or her physician organization if the physician's relationship with the physician organization meets the requirements of one of the following direct exceptions for compensation relationships: employment, personal services, or fair market value. All of these direct exceptions require compensation paid to the physician to be fair market value. Note that these exceptions only protect compensation arrangements, not ownership interests.  Therefore a physician owner of a group practice will not fit within any of these exceptions, and will continue to stand in the shoes of his or her physician organization. CMS requests comments on whether there are situations in which a physician owner of a physician organization should not stand in the shoes of the organization. CMS also indicates it is considering an approach under which non-owner physicians would not "stand in the shoes" of their physician organization even if they do not meet one of the three direct exceptions listed above.

In addition, under the first option proposed by CMS, a physician would not "stand in the shoes" of his or her physician organization if the physician's referrals for DHS are protected under the AMC exception. If the requirements of the AMC exception are not met, the physician could still avoid being deemed to "stand in the shoes" for his or her physician organization by meeting the employment, personal services or fair market value exceptions as noted above. Also related to AMCs, CMS includes in its first proposal that the "stand in the shoes" rule would not apply when compensation is provided by a component of an AMC to a physician organization affiliated with that AMC through a written contract to provide services required to satisfy the AMC's obligations under Medicare graduate medical education rules. For example, if an AMC enters into a contract with a community physician group to serve as a teaching site for residents of the AMC. In this situation, the physicians in the community physician group would not "stand in the shoes" of their group, and the arrangement would be analyzed using the indirect exception.

Proposal Two
CMS proposes a second approach to modifying the physician "stand in the shoes" rule under which CMS would leave the rule in affect without modification, but would create a separate exception to protect arrangements that do not pose a risk of abuse. CMS requests comments on appropriate exceptions that could be created. CMS specifically mentions the possibility of an exception for "mission support" payments made by AMCs or integrated health systems to affiliated physician organizations.

Compliance with Indirect Exception
If a physician does not "stand in the shoes" of his or her physician organization, consideration must be given to compliance with the "indirect" exception. CMS expresses concern that the "indirect" exception is being construed too narrowly. Specifically, CMS emphasizes the requirement of the indirect exception that the aggregate compensation not vary with or take into account the volume or value of referrals or other business generated. CMS points out that compensation can take into account referrals or other business generated not only through variable, per click or percentage-based compensation, but also potentially through exclusive contracts, inflated fixed payments or tying of compensation to referrals.  Specifically, CMS is concerned that where a physician-employee's compensation arrangement with his or her group practice exceeds fair market value but is nevertheless protected by the in-office ancillary services exception, compensation may reflect the volume or value of referrals to a DHS entity, for example as the result of a support or other payment between the DHS entity and the group practice that is designed to channel compensation to the physician-employee for referrals to the DHS entity.  CMS requests comments on ways to ensure that the indirect exception properly addresses abusive arrangements.

DHS Entity "Stand in the Shoes" Rule
In addition to the physician "stand in the shoes" rule established in the Stark II, Phase III final rule, CMS also has proposed a "stand in the shoes" rule that would apply to DHS entities, such as hospitals, imaging centers, laboratories and other providers of DHS. Under the proposed "stand in the shoes" rule for DHS entities, the DHS entity would be deemed to "stand in the shoes" of certain affiliated entities. For example, if an entity that owns a hospital has a subsidiary entity that employs a physician, the hospital will be deemed to stand in the shoes of the subsidiary entity, and there will be a direct financial relationship between the hospital and the employed physician.

In the 2009 IPPS proposed rule, CMS proposes that, for purpose of applying the DHS entity "stand in the shoes" rule, a DHS entity will be deemed to "stand in the shoes" only of another organization in which it has a 100% ownership interest. Note that the DHS entity will stand in the shoes of any wholly-owned subsidiary regardless of whether the subsidiary itself is a DHS entity.  Notably excluded from this rule are joint venture entities in which the DHS entity owns less than 100% but might still own a controlling interest, and, perhaps more significantly, so called "sister entities", which are entities that have a common parent organization with the DHS entity. For reasons unrelated to Stark compliance, hospitals typically form physician organizations as "sister entities" to the entity that owns the hospital rather than subsidiaries. If implemented as proposed, these entities would not be covered by the rule. CMS seeks comment on whether the "stand in the shoes" rule for DHS entities should encompass other entities that are effectively controlled by the DHS entity even though not 100% owned. CMS mentions in particular a DHS entity that is the sole member of a nonprofit entity. 

Process for Applying "Stand in the Shoes" Rules
CMS recognizes that implementation of the physician and DHS "stand in the shoes" rules has the potential to create enormous confusion as parties attempt to apply both rules simultaneously to the same arrangement. Therefore, CMS has proposed a set of guidelines for the order in which the "stand in the shoes" rules would be applied. 

Period of Disallowance under Stark
Since the Stark II, Phase II interim final rule was released, there have been a number of questions about the time period for which a physician is prohibited from referring patients for DHS to an entity with which the physician has a non-compliant financial relationship.  In the Phase III final rule, CMS stated that the statute provides no explicit limitation on the billing and claims submission prohibition. In the 2008 Physician Fee Schedule proposed rule, CMS clarified that the statute contemplates that the period of disallowance begins with the date that a financial relationship failed to comply with the statute and the regulations and ends with the date that the arrangement came into compliance or ended.  CMS went on to solicit comments on issues related to periods of disallowance.  

CMS is now proposing an outside limit on the period of disallowance in certain circumstances.  The proposed amendments would implement the following changes.  First, where the reason a financial relationship does not meet an exception is not related to compensation (basically any technical reason, such as a missing signature on a written agreement), the period of disallowance would begin on the date the arrangement was first out of compliance and would end no later than the date the arrangement was brought into compliance (for example, by having the agreement signed). Second, where the reason a financial relationship does not meet an exception is related to the payment or receipt of excess compensation (for example, payment of compensation to a physician that exceeds fair market value), the period of disallowance would begin on the date the arrangement was first out of compliance and end no later than the date the excess compensation (including interest, if appropriate) was returned by the party receiving it to the party that provided it, and all other requirements of the applicable exception are met.  Third, where the reason a financial relationship does meet an exception is related to the payment or receipt of insufficient compensation (for example, a physician pays a hospital office rent that is below market), the period of disallowance would begin on the date the arrangement was first out of compliance and end no later than the date the shortfall (i.e., the amount, with interest as appropriate, required to bring the arrangement into compliance from the date of its inception) was paid to the party to which it was owed and all other requirements of the exception were met.

In certain circumstances, CMS indicates that the period of disallowance would need to be determined on a case-by-case basis.  These circumstances include: (a) situations in which an arrangement ends prior to the excess compensation being returned or shortfall being paid; (b) situations in which an arrangement may be noncompliant for reasons related to compensation that do not involve payment or receipt of excess compensation or a shortfall in compensation paid or received; and (c) situations in which parties to a financial relationship never bring a noncompliant relationship into compliance with an exception or in which the arrangement ends earlier or later than the expiration date provided in the underlying agreement. 

CMS provides a few illustrations of how it would determine the period of disallowance for certain types of non-compliant relationships which are sure to cause anxiety among health care providers and their counsel.  As an example, CMS describes a situation in which a hospital inadvertently fails to increase a physician's office rent under a lease in accordance with an automatic inflation adjustment contained in the lease. Even if the back rent is paid promptly following discovery of the oversight six months later, CMS views the period of disallowance to be the period from when the rent increase should have occurred until the time the back rent is paid. Technically this means that any referrals from the physician to the hospital during this time violated Stark.

Gainsharing
"Gainsharing" typically refers to an arrangement under which a hospital shares with physicians a percentage of a reduction in the hospital's costs to compensate the physicians for their assistance in achieving the cost reductions. In the 2008 Physician Fee Schedule proposed rule, CMS proposed that percentage-based compensation may only be used to pay physicians for services that they personally perform and that such arrangements must be based on the revenues directly resulting from the physician services rather than based on some other factor such as a percentage of the savings by the hospital department.  If implemented, the limits on percentage-based compensation would pose a significant obstacle to the establishment of meaningful gainsharing arrangements. 

Acknowledging that gainsharing arrangements may implicate Stark, the Anti-kickback statute and the Civil Monetary Penalties statute, CMS nonetheless recognizes in the IPPS proposed rule that the Medicare program and its beneficiaries may derive value from gainsharing arrangements that improve quality of care. Accordingly, CMS is soliciting comments on the possible establishment of a Stark exception to protect legitimate gainsharing arrangements, and is specifically interested in comments on the types of requirements and safeguards that should be included in any exception for gainsharing arrangements and whether certain services, clinical protocols or other arrangements should not qualify for the exception.

Physician-Owned Implant and Other Medical Device Companies
In the IPPS proposed rule, CMS acknowledges that while physician involvement often adds value to device manufacturing and many physicians may have legitimate investment interests in these companies, when physicians profit through their ownership in a device company by referring business to hospitals, concerns about program and patient abuse necessarily arise.  Based on its understanding that many physician-owned device companies are "middle men" rather than manufacturers, CMS expresses concern that some physician-owned device companies serve "little purpose other than providing the physicians the opportunity to earn economic benefits in exchange for nothing more than ordering medical devices or other products that the physician-investors use on their own patients."  CMS has declined for the moment to issue a specific proposal regarding physician-owned device companies, but has solicited comments on whether Stark should address physician-owned device companies and similar companies, and specifically whether these companies present risks of over-utilization, substandard care and increased costs to the Medicare and its beneficiaries.

Definition of Physician-Owned Hospital
Existing regulations require a physician-owned hospital to furnish written notice to all patients that the hospital is physician-owned, and make available to the patients a list of the hospital's physician owners upon request. For purposes of this disclosure requirement, the current definition of "physician-owned hospital" only includes hospitals with physicians as owners. This is inconsistent with Stark, which generally applies to relationships with physicians or their immediate family members. To address this inconsistency, CMS is proposing that the definition of "physician-owned hospital" be modified to include any hospital in which a physician, or an immediate family member of a physician, has an ownership or investment interest.

Required Disclosure of Hospital-Physician Relationships
In addition to the other changes discussed above, one of the more significant portions of the IPPS proposed rule addresses a hospital's obligation to disclose its financial relationships with physicians.  The Social Security Act provides that entities that provide DHS that may be reimbursed by Medicare must provide the Secretary of Health & Human Services with information on their financial relationships with physicians.  The content, timing and manner of reporting is left to the Secretary's discretion. CMS is currently revisiting each of these issues.  The IPPS proposed rule provides a form "Disclosure of Financial Relationships Report" ("DFRR") that CMS proposes to use to gather information about these relationships and solicits comments on the frequency of reporting; whether the DFRR is sensible in the amount of information requested (either too much or too little), the estimated amount of time required to complete the report (initial requests from hospitals indicated that an average of 31 hours was expected) and the associated cost; the amount of time hospitals should have to complete the report; whether the DFRR should be directed to all hospitals and if so, if the collection should be staggered so that all hospitals are not reporting in the same year; and whether hospitals should have to update information on an annual basis and if so, whether they should only have to send in changes to the information already submitted.  CMS proposes to send the DFFR form to a sample group of 500 hospitals in order to gather information to help CMS assess the form and assist CMS in future rule making.

Although CMS emphasizes that failure to report within the timeframes required by the Secretary may result in Civil Monetary Penalties, it also indicates that it is not seeking to invoke its CMP authority and that prior to imposing penalties, it would issue a letter to hospitals that have not timely returned the DFRR asking for an explanation for the delay.  CMS further indicates that a hospital may receive an extension on the time permitted to submit the information if it can demonstrate good cause. 

Conclusion
CMS will accept comments on the proposed rule until June 13, 2008. The final rule is expected to be published by August 1, 2008. If you have any questions about the possible application of the proposed rule to your business, or wish to discuss submitting comments on the proposed rule, please feel free to contact a member of our Health Care Team.