More Stark Law Changes Finalized in 2009 IPPS Final Rule

CMS has again materially modified the regulations promulgated under the Stark Law.  The changes will be contained in the Inpatient Hospital Prospective Payment System ("IPPS") final rule for fiscal year 2009, which will be published in the Federal Register on August 19, 2008.  Except as set forth below, the changes will be effective October 1, 2008.

Executive Summary
Here is the least you need to know about the Stark regulation changes in the IPPS final rule:

• Non-owner physicians are not required to "stand in the shoes" of their physician organizations.
• "Per-click" rental charges are not permitted in space or equipment leases (such as lithotripter leases) between DHS entities and referring physicians or entities in which referring physicians have an ownership interest (effective October 1, 2009).
• Percentage of revenue rental charges are not permitted in space or equipment leases between DHS entities and referring physicians or entities in which referring physicians have an ownership or investment interest (effective October 1, 2009).
• CMS prohibits many under arrangement agreements between hospitals and referring physicians by changing the definition of DHS "entity" to include both the entity that bills for the DHS and the entity that performs the DHS (effective October 1, 2009).

These changes are discussed more fully below along with other noteworthy changes, such as (i) a change in CMS position on amending agreements, (ii) the expansion of the obstetrical malpractice subsidy exception, (iii) clarification as to the time period Stark's prohibition against referrals applies if an exception is not met, (iv) the addition of alternative methods for complying with the requirement that certain agreements be signed, and (v) clarification and addition of requirements concerning disclosures by hospitals of their financial relationships with physicians.

Stand In The Shoes
Before CMS introduced the "stand in the shoes" concept in 2007, arrangements between DHS entities and physician organizations were evaluated as indirect compensation arrangements between the DHS entity and the physicians in the physician organization.  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 physicians standing in the shoes of the group.  As a result, the arrangement was required to meet one of Stark's direct financial relationship exceptions, rather than the indirect exception.  Previously, physicians who stood in the shoes of their physician organization included owners, employees and independent contractors.

In contrast, the IPPS final rule requires only physicians who have ownership or investment interests in their physician organization to stand in the shoes of their physician organization.  For example, consider a physician organization owned by a hospital affiliate.  The physician organization employs physicians but has no physician owners or investors.  Under the IPPS final rule, none of the non-owner physicians are required to stand in the shoes of the organization, and an arrangement between the organization and a DHS entity could be analyzed as an indirect compensation arrangement between the DHS entity and the physicians. 

Other important things to note about the "stand in the shoes" changes:

• "Titular" owners are not required to stand in the shoes of their physician organizations. Titular owners are owners in title only who do not have the right to receive any of the financial benefits of ownership or investment such as the right to a distribution of profits, dividends, proceeds of sale, or similar return on investment.
• Non-Owners may opt to stand in the shoes of their physician organizations.  While not required to stand in the shoes of their physician organizations, non-owners (and titular owners) are permitted to do so. For example, consider again the contract between a hospital and a cardiology group to read EKGs. The contract must meet (i) a direct compensation arrangement exception (to protect referrals by the group's owners to the hospital), and (ii) if the group's employees do not stand in the shoes of the group, the indirect compensation arrangement exception (to protect referrals by the employees to the hospital). To meet the indirect compensation arrangement exception, compensation from the group to the employees may not vary with or otherwise take into account referrals by the employees to the hospitals. Rather than examining the compensation between the group and its employees, the parties may wish to deem the employees to stand in the shoes of the group and thereby rely on the direct exception to protect the entire arrangement.
• Existing arrangements may not need to be restructured immediately.  CMS acknowledges that many agreements, which would otherwise have qualified for an indirect compensation exception, have been structured to comply with a direct compensation exception in accordance with the 2007 final stand in the shoes rule. Unless the parties opt to have non-owners stand in the shoes as described above, these arrangements must be restructured to fit within the new stand in the shoes framework. However, CMS provides that, if the arrangement qualified for the indirect compensation arrangement exception as of September 5, 2007, it need not be restructured until the end of the original term or current renewal term.
• The stand in the shoes rule does not apply to financial relationships that qualify for Stark's academic medical center exception.
• The proposed DHS entity stand in the shoes rule was not finalized.  CMS previously proposed a stand in the shoes rule that would have applied to DHS entities, such as hospitals, imaging centers, laboratories and other providers of DHS. Under the proposed rule, the DHS entity would have been deemed to stand in the shoes of certain affiliated entities. For example, if an entity that owned a hospital had a subsidiary entity that employed a physician, the hospital would have been deemed to stand in the shoes of the subsidiary entity, and there would have been a direct financial relationship between the hospital and the employed physician. In the IPPS rule, CMS declines to finalize a DHS entity stand in the shoes rule, but warns that attempts to evade restrictions on payments for referrals by using interposed organizations are highly suspect under the fraud and abuse laws and will be subject to close scrutiny.
  

Per Click Rental Charges
After creating a stir in the Medicare 2008 Physician Fee Schedule proposed rule, in the IPPS final rule, CMS made good on its proposal to prohibit per-click space and equipment lease payments.  In doing so, CMS closed a considerable loophole in the Stark regulations.

The IPPS final rule provides that, effective October 1, 2009, space and equipment leases that include per-unit-of-service (i.e., per-click) rental charges are not permitted “to the extent that such charges reflect services provided to patients referred by the lessor to the lessee.”  For example, under the final rule, a lithotripsy company owned, directly or indirectly, by referring physicians may not lease a lithotripter to a hospital on a per-click basis.

Other important things to note about per-click rentals:

• The prohibition applies regardless of whether the space or equipment leased is used in providing DHS.  For example, CMS acknowledges that it presently does not consider lithotripsy to be a DHS. Nevertheless, CMS' position is that an arrangement under which a physician-owned company leases a lithotripter to a hospital on a per-click basis constitutes an un-excepted compensation arrangement between the physician and the hospital. Therefore, any referrals of DHS by the physician to the hospital will be prohibited if such a lease were in place.
• The prohibition may apply regardless of whether the DHS entity is the lessor or the lessee. CMS indicates that the prohibition is not limited to circumstances in which the lessor is a physician or physician organization – it also will apply to any lease in which a lessor DHS entity is in a position to refer patients to a lessee physician or physician organization.
• An "on demand" lease is tantamount to a per-click lease.  CMS refuses (for now) to extend the per-click prohibition to time-based leases generally, but concludes that “on demand” leases (i.e., those in which the schedule of usage is not set in advance) are tantamount to a per-click lease and, therefore, are covered by the per-click prohibition.
• Block leases are OK, for now.  CMS notes that part-time block leasing is permissible for now, but suggests that it may revisit such arrangements in the future. Further, CMS warns that all leases must be commercially reasonable. For example, CMS questions whether an equipment lease is commercially reasonable if the lessee is performing a sufficiently high volume of procedures such that it would be economically feasible to purchase the equipment rather than continuing to lease it from a referring physician.

Percentage of Revenue Rental Charges
Effective October 1, 2009, rental charges under office leases and equipment leases between a DHS entity and a referring physician may not be based on a percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the office space or using the equipment, as applicable.

Other important things to note about percentage of revenue rentals:

• Like the per-click rental prohibition, the percentage of revenue rental prohibition applies regardless of whether the arrangement with the referring physicians is direct or indirect and regardless of whether the DHS entity is the lessor or the lessee.  For example, physicians often lease equipment to hospitals or other DHS entities through a separate company owned by the physicians that is specifically created for the purpose of owning and leasing the equipment. This arrangement creates an indirect compensation arrangement under Stark, and is therefore not subject to the requirements of the direct exception for equipment leases. To address this, CMS also amends the indirect compensation arrangement exception to make it clear that these sorts of indirect leases with referring physicians also are prohibited from having rental charges that are percentage-based.
• The prohibition does not apply to arrangements only for services.  CMS originally proposed in the 2008 Medicare Physician Fee Schedule to allow percentage-based compensation only for personally performed physician services. However, CMS received numerous comments objecting to this proposal on the basis that it would prohibit percentage-based compensation arrangements commonly used in the industry, such as management agreements and billing agreements. In response, CMS adopts a more narrow approach to prohibiting percentage-based compensation arrangements by focusing on office and equipment leases, which it states were its primary concern. CMS seems to be specifically concerned about percentage-based equipment leases in which the lease payment is based on a percentage of the technical revenue collected for use of the equipment. Although percentage-based compensation may continue to be used for arrangements other than office and equipment leases, and specifically may continue to be used for management and billing arrangements (unless the management services include providing space and/or equipment), CMS states that it will continue to monitor the use of percentage of revenue-based compensation and may adopt additional limitations in the future if it determines these arrangements are abusive.
  

Revised Definition Of DHS "Entity" Prohibits Many Under Arrangement Agreements With Referring Physicians
Previously, financial relationships between entities that performed, but did not bill, for DHS did not implicate Stark.  Effective October 1, 2009, CMS revises the definition of DHS "entity" to include not only those billing for DHS, but also those performing  DHS.  Where one entity performs DHS that is billed by another entity, both entities are DHS entities with respect to the service.  Therefore, any financial relationship between a referring physician and the performing entity must meet a Stark exception.

Other important things to note about the change to the definition of DHS "entity":

• The revised definition will prohibit many under arrangements agreements with referring physicians.  For example, hospitals often joint venture with physicians to provide surgical, imaging or cardiac services to the hospitals under an arrangement pursuant to which the joint venture entity provides the services, the hospital pays the joint venture entity, and the hospital bills and collects for the service. Previously, the physicians' ownership interest in the joint venture entity did not need to meet a Stark exception because the hospital, and not the joint venture entity, was considered the DHS entity. Under the IPPS final rule, both the hospital and the DHS entity are DHS entities with respect to the services provided under arrangements. Accordingly, the physician investors in the joint venture entity would need to meet an applicable ownership exception. Typically, the only ownership interest exception available is the rural provider exception. Accordingly, under arrangement agreements with referring physicians that do not draw substantially all of their patients from rural areas will be prohibited.
• CMS gives no guidance on when an entity "performs" DHS.  Commenters questioned whether management companies, lessors and vendors "perform" DHS and requested additional guidance on the circumstances under which an entity will be deemed to perform DHS. In response, CMS clarifies that an entity that (i) leases or sells space or equipment; (ii) furnishes supplies that are not separately billed; or (iii) provides management services, billing services, or personnel does not perform DHS. However, CMS declines to define "perform," stating instead that it should have its common meaning. Accordingly, it is unclear whether an entity that provides all or some combination of the services described above performs DHS.
  

Other Noteworthy Changes
Other noteworthy Stark-related changes in the IPPS final rule include the following:

• CMS alters its position on amending agreements subject to the set in advance requirement (effective October 1, 2008).  Many Stark compensation arrangement exceptions require that compensation be set in advance. CMS previously took the position that amending the financial terms of an arrangement during its term would violate the set in advance requirement. CMS now believes that amendments during the term are acceptable, provided that: (i) all of the requirements of the applicable exception are satisfied; (ii) the amended rental charges or other compensation (or the formula used) is determined before the amendment is implemented, and the formula is sufficiently detailed so that it cane be verified objectively; (iii) the formula for the amended rental charges does not take into account the volume or value of referrals or to other business generated by the referring physician; and (iv) the amended rental charges or compensation (or the formula used) remain in place for at least one year from the date of the amendment.
• CMS expands obstetrical malpractice subsidy exception (effective October 1, 2008).  The current obstetrical malpractice insurance subsidy exception requires compliance with the anti-kickback safe harbor. In response to comments that the anti-kickback safe harbor is too restrictive, CMS revises the exception to create an additional set of requirements under which hospitals, federally qualified health centers, and rural health clinics may provide obstetrical malpractice insurance subsidies as an alternative to complying with the anti-kickback safe harbor. The exception now allows the entities mentioned above to pay for some or all of the costs of the malpractice insurance premiums for a physician who engages in obstetrical practice as a routine part of his or her medical practice as long as certain conditions are met, including the requirement that the physician's medical practice is located in a rural area, a primary care HPSA, or an area with demonstrated need for the physician's obstetrical services OR at least 75% of the physician's obstetrical patients reside in a MUA or are members of a medically underserved population.
• CMS clarifies period of disallowance (effective October 1, 2008).  For some time, there have been questions about the time period for which a physician would be prohibited from referring patients for DHS or during which an entity would be prohibited from submitting claims for such referrals where a Stark exception is not satisfied. Effective October 1, 2008, CMS places an outside limit on the so-called “period of disallowance” in circumstances in which the noncompliance is unrelated to compensation, or in circumstances in which the noncompliance is due to the payment of excess or insufficient compensation to satisfy the particular Stark exception. In particular, the amended section provides as follows:

Acknowledging that a number of arrangements will be non-compliant for reasons that are not contemplated in the new regulatory language, CMS has adopted its previous recommendation that a case-by case analysis would be required (for example, situations in which an arrangement ends prior to the return of excess compensation or payment of the shortfall).  CMS also has clarified its position on the effect of the period of disallowance, explaining in part that it believes “the most natural reading of the statute is that all of the requirements of the exception must be met at the time the referral is made (emphasis added), [and] that the statute does not contemplate that parties have the right to back-date arrangements, return compensation, or otherwise attempt to turn back the clock so as to bring arrangements into compliance.”

• CMS adds alternative method of compliance with signature requirements in certain exceptions (effective October 1, 2008).  Although CMS has been clear that it does not have the discretion to waive violations of the physicians self-referral statute, it has been considering whether it should provide an alternative method for satisfying certain requirements of the exceptions where the violations fail to satisfy a procedural or “form” requirement. The most obvious example is an instance of noncompliance arising from a failure to obtain a signature where the applicable exception requires a written agreement. Effective October 1, 2008, the Stark regulations will require that payment be made to an entity that submits a claim or bill for DHS if the financial relationship between the entity and the referring physician fully complies with an applicable Stark exception except with respect to a signature requirement. The new subsection will apply only if one of the following conditions is met:

In order to take advantage of the new alternative method of compliance, at the commencement of the relationship, it must otherwise comply with all requirements of an exception.  Further, the new subsection only may be used by an entity once every three years with respect to the same referring physician. 

• CMS tightens disclosures required of certain hospitals and critical access hospitals (CAHs) regarding physician ownership (effective October 1, 2008).  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 physician owners at the time of a patient’s request. For purposes of this disclosure requirement, the prior rule’s definition of “physician-owned hospital” only included hospitals with physicians as owners, which was inconsistent with Stark. In the final rule, CMS adopted a new definition to include any hospital in which a physician or an immediate family member of a physician has an ownership or investment interest. The new rule also provides an exception to the disclosure requirements for physician-owned hospitals that do not have any physician owners who refer patients to the hospital (e.g. retired) and that have no referring physicians who have an immediate family member with an ownership or investment interest; hospitals satisfying these conditions are not required to disclose ownership to patients. Furthermore, physician-owned hospitals must require medical staff members to disclose their ownership interest in writing to all patients whom they refer at the time of referral. To enforce these provisions, CMS can terminate the Medicare provider agreement of a hospital if it fails to comply with these disclosure requirements.
• CMS finalizes proposal concerning Disclosure of Financial Relationships Report ("DFRR") (effective October 1, 2008).  The DFRR is designed to collect information concerning the ownership and investment interests and compensation arrangements between hospitals and physicians. CMS estimates the cost to complete the DFRR for each hospital will be approximately $4,080 and will involve about 100 hours of the hospital staff's time including accounting staff and attorneys. CMS plans on sending the DFRR to a sample group of 500 hospitals (both general acute care hospitals and specialty hospitals). CMS requires that the DFRR be completed within 60 days. Failure to timely submit the requested information could result in civil monetary penalties of up to $10,000 for each day beyond the deadline established for disclosure. However, CMS indicates that it is not seeking to invoke civil monetary penalties and prior to imposing any penalty, it will inquire as to why a particular hospital did not timely return a completed DFRR. In addition, a hospital may, upon a demonstration of good cause, receive an extension of time to submit the requested information.

Boult Cummings' Commentary
Given the delayed implementation date, and the possible impact on several practice areas, including lithotripsy and other urology services, there may be administrative and, possibly, court action in the coming months by numerous professional associations and physician groups with respect to the rental charges and under arrangements changes.  Additionally, in its comments to the final rule, CMS indicated that it may be open to creating exceptions for certain ownership interests if it can be shown that there would be no risk of program or patient abuse, inviting comments and stating that CMS may issue a proposed rulemaking for such an exception in the future.  Note that the latter, due to the de facto freeze on proposed rulemaking until after the change in administrations, would not be expected until at least early 2009.  Stay tuned.

For more information on the IPPS final rule and its affect on Stark, please feel free to contact any member of the Boult Cummings Health Care Team.