Mid-Atlantic Health Law TOPICS

The Health Care Financing Administration (HCFA), of the Department of Health and Human Services, has recently published its long-awaited proposed Stark II regulations. Shortly after publication, HCFA announced that, due to the quantity and substance of complaints and comments prompted by the proposed rules, issuance of a final regulation would likely take another three years. Nevertheless, it is instructive to comprehend the current proposal, because (1) HCFA's current thinking is a clue to the final form of the regulations, and (2) the current proposal is a guide to how the statute may be enforced in the interim, pending the adoption of final rules.

A. General Prohibition

Generally, Stark II prohibits physicians from referring Medicare or Medicaid patients, for 11 types of designated health care services, such as physical therapy services and radiology, to health care entities, in or with which the referring physician (or an immediate family member) has an ownership interest or compensation relationship. Such relationships are collectively referred to in the law as "financial relationships."

B. Revised Definitions

Several important terms have been re-defined in the proposed regulations as follows:

1. "Referral" would be defined to include certifying or recertifying the need for a designated health service for which program payment may be made.

2. "Referral" would not include requests by a radiologist for diagnostic radiology services, or requests by a radiation oncologist for radiation therapy services.

3. "Financial relationship" would include indirect ownership, no matter how many levels removed.

4. While loans by a physician to an entity to which a patient is referred have been treated as an "ownership interest," unsecured loans would be excluded from this category.

5. The term "consultations," as revised, would allow referrals to consultants where the consultant in turn refers the patient to a health care entity that the original physician was unable to refer to, but only if the consultant takes over the care of the patient for the condition prompting the initial referral.

C. Designated Services

Only 11 "designated services" fall within the self-referral prohibitions of Stark II. These designations would be altered, as follows:

1. Invasive radiology and screening mammography would not be designated services, but diagnostic mammography would be.

2. Services provided "under arrangements" with a hospital would be designated services, as they would be considered "hospital services." This would apply to outpatient as well as inpatient services. This would be the case even though the service itself, for example, lithotripsy, is not on the designated services list.

3. Services would never lose their designation. For example, physical therapy would remain a designated service even when provided by or through a nursing facility. Accordingly, a physician with an interest in a physical therapy practice could not refer the patient to a nursing facility which then refers the patient to that physician's PT practice.

D. New Compensation Exemptions

Three new exemptions to compensation relationships are proposed in the new regulations.

1. Health care entities would be allowed to give referring physicians discounts based on the volume of referrals, so long as the discount is passed on, in full, to the payor (Medicare, Medicaid, etc.).

2. "De minimis" benefits could be provided to a referrer, if the following criteria were met: (a) the benefits did not exceed $50 per item, or $300 per year; (b) no cash or cash equivalents would be allowed; (c) the benefits could not be based on the volume or value of referrals; (d) the benefits were not part of a formal arrangement; and (e)the benefits were made available to all physicians similarly situated, regardless of whether they refer patients. Clearly, this "de minimis" exemption is narrowly drawn, and would likely be of little help in working with issues such as holiday gifts, ballgame tickets, etc.

3. Remuneration at fair market value for items or services would be exempt. This is a "catch-all" exemption, applicable where no other specific exemption applies. This is a useful tool, and is limited only in that such arrangements must also comply with the federal anti-kickback law.

E. Existing Exemptions

The following changes are proposed to existing exemptions:

1. Physicians supervising in-office ancillary services would be permitted to be absent from the treatment for brief unscheduled periods - but not to treat other patients.

2. Independent contractor agreements would no longer need to be in effect for at least one year to qualify for exemption.

3. The provision of crutches to patients would be allowed under the in-office ancillary exemption, but only if the physician sells the crutches at cost.

4. Several existing exemptions require that remuneration not be dependent upon the volume or value of referrals between the parties. Under the proposal, this requirement would be deemed met where there is a risk-sharing arrangement that puts the referring physician at substantial financial risk.

5. The isolated transactions exemption would be available only where the transaction involves a one-time payment. Long term installment payment arrangements would not qualify.

F. Group Practice Definition

Certain referrals among members of the same "group practice" are permitted under the statute. However, practices seeking to take advantage of these physician services and in-office ancillary exemptions must fall within Stark's definition of a "group practice." The following changes are proposed to that definition:

1. The "group practice" exemption would not be available to a practice owned by one physician, but employing additional physicians. Only owners would be counted in determining whether the practice consists of "two or more" physicians, a prerequisite for being considered a "group practice." It should be noted that other exemptions may still apply to such one-owner practices, for example, the independent contractor exemption.

2. A group practice could include non-physicians as owners, to the extent allowed by state law. This is a positive development, allowing formats such as limited liability companies to be group practices even if they include non-physician owners.

3. For the purpose of determining who is a "member" of a recognized group practice, only owners and employees would be counted - not independent contractors. This would pose limitations on who may supervise ancillary services.

4. The proposed rules indicate that HCFA will unfavorably view compensation methodologies that treat separate offices as if they were distinct enterprises. This could result in some groups losing their "group practice" designations.

G. Conclusion

In sum, the proposed regulations are a mixed bag, with some provisions working to providers' benefit, while others tighten already restrictive rules. HCFA is expected to continue to process comments, while providers must continue to guess which provisions might be applied to a current relationship or transaction, despite the non-final nature of the proposed regulations.