The Proposed Stark II Regulations Key Changes for Physicians and Physician Groups and Issues for Risk Managers to Address

by Susie Kell and Fay A. Rozovsky

On January 9, 1998, HCFA published in the same document both an interim final rule and a proposed rule to address continuing concern about the application of the so-called Stark II amendments to the Social Security Act dealing with physician referral practices. The interim final rule describes the procedures to be followed in seeking an advisory opinion about a physician referral of a Medicare patient under the Stark requirements. It came about as a result of a provision found in the Balanced Budget Act of 1997. A commentary period was included with the interim final rule. In addition, HCFA put forth a proposed rule to address physician referrals of Medicare and Medicaid recipients to healthcare entities with whom the doctors have a financial relationship. It is this latter component that is the focus of this article.

This summary describes key parts of the proposed rule, including important definitions. Although viewed by many as a proposed regulation of interest to CFOs and health lawyers, the content is particularly important to healthcare risk managers whose responsibilities encompass regulatory and transactional risk exposures and corporate compliance.

Two notes of caution are in order. First, this is a proposed rule and does not have the effect of law. As HCFA has extended the commentary period, is quite possible that the torrent of responses will cause a delay in the final rule being published. Moreover, the final rule is apt to contain many changes. Second, this summary is not intended to be a substitute for legal advice or reviewing the entire proposed rule. Working in concert with legal counsel, risk managers can help develop appropriate risk management strategies to deal with the rule when it becomes final. Knowing what is found in the proposed version presents an excellent opportunity to understand how in future HCFA intends to deal with physician referral matters.

Evolution of Stark (Ethics in Patient Referrals Act)

The so-called "Stark Laws" date back a decade when the OIG completed a study that demonstrated that there was a higher degree of clinical laboratory utilization among Medicare patients whose physicians owned or invested in the referral facility than all Medicare patients in the population. The compensation arrangements between these clinical laboratories and referring physicians was also of interest to the OIG. The study reveal that Medicare patients of these physicians utilized 32% more laboratory services than the the general Medicare population. Other studies done by the GAO and scholarly findings in well-known medical publications confirmed the OIG findings.

Representative Pete Stark is credited with introducing legislation to curb such practices. First enacted in 1989, a new section was added to the Social Security Act, Section 1877. The legislation (Stark I) was built on the telling empirical data linking physician financial relationships with higher referral rates for ancillary services. The original enactment was limited to laboratory services. The Omnibus Budget and Reconcilation Act of 1993 (OBRA 1993)created an expanded list of entities to whom referrals were prohibited. The new law is commonly referred as Stark II and it became effective January 1, 1995 . In 1995, HCFA promulgated regulations under Stark I. The January, 1998 proposed regulation implements the Stark II law and at the same time, attempts to clear up ambiguity found in the interpretation of the 1995 Stark I regulation.

Basic Stark Rule:

The basic rule in Stark is quite straightforward:

"if a physician or a member of a physician’s immediate family has a financial relationship with a health care entity, the physician may not make referrals to that entity for the furnishing of designated health services under the Medicare program, unless certain exceptions apply."

Although the basic rule seems simple enough, it is in the application of the proposed regulation, definitions, and exceptions that complexity emerges. Failure to act in accordance with the law can prove quite serious.

Sanctions include denial of payment, requiring refunds of improperly paid claims, and civil monetary penalties of up to $25,000 for each item billed in violation, $100,000 for any scheme to circumvent the regulations and Medicare program exclusion. There is no "intent" requirement to this statute. Given these sweeping sanctions, it is important to move beyond the "basic rule" and to understand the definitions, how these terms will be applied, and the exceptions found in the proposed Stark II rule.

The Exceptions that Prove the Rule

To those who have dealt with Stark II, the exceptions will be familiar. However, three new exceptions have been added that address discounts, de minimis compensation, and fair market value compensation.

Exceptions Listed under Stark II:

Definitions:

Designated Health Services – are defined by the Stark II law as: clinical laboratory services; physical therapy services; occupational therapy services; radiology services including MRI and the professional component of radiology; computerized axial tomography scans, and ultrasound services; radiation therapy services and supplies; durable medical equipment and supplies; prosthetics, orthotonics and prosthetic devices and supplies; home health services; outpatient prescription drugs; inpatient and outpatient hospital services. Importantly, HCFA states that designated health services include services which are components of other services. For example, although skilled nursing services is not listed, because a skilled nursing facility may provide designated health services such as laboratory services, a physician referral to an SNF may constitute a Stark violation.

Excluded from the definition are those services that are "incidental or secondary to another procedure that the physician has ordered" such as invasive or interventional radiology in which imaging is necessary to guide a needle or catheter. Screening mammography is no longer a designated health service based on the theory that Medicare only pays for the exam at stated intervals and therefore, there cannot be over utilization. Additional services that excluded are referrals for designated health services in: 1.) an ambulatory surgery center; 2.) ESRD facility; or 3.) hospice.

Direct Supervision- In order to qualify for the in-office ancillary services exception, services must be furnished personally by a referring physician or another physician in the same group practice, or be furnished by individuals who are directly supervised by one of these physicians. Stark II has defined direct supervision as: supervision by a physician present in the office suite in which the services are being furnished, at the time they are being furnished and immediately available to provide assistance and direction throughout the time the services are being provided. This definition will not be satisfied by a physician being an office suite across the hall, however, HCFA does indicate that the physician will considered present during short unexpected absences or during routine absences of short duration (i.e. lunch breaks).

Financial Relationship- Stark II defines a financial relationship as ownership or an investment interest in an entity no matter how many levels removed from a direct interest. Thus, if a physician has ownership in an entity that has an interest in an entity that that provides designated health services, a financial relationship does exist. This will require physicians to have more extensive knowledge of the companies owned by the companies in which they invest.

Consultation- HCFA clarifies that a consultation occurs whenever a physician requests that a patient see another physician, such as a particular specialist, but the original physician retains control over the care of the patient, including any care related to the condition that prompted the consultation. The consulting physician may order and perform tests for the patient and must provide the original physician with a report.

This is a consultation as long as the original physician is the physician who gathers information from the consultant physician and makes the decision about how to proceed with the patient’s care.

Group Practice- A group practice is a group of two or more physicians legally organized as a partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan, or similar association, that meets the criteria below:

Referral- A referral under Stark occurs when a physician requests (1) designated health services for which payment may be made under Medicare Part B, regardless of whether payment was made or not; (2) a consultation with another physician. HCFA also discussed the distinction between a "consultation" and a "referral" which reinforces the idea that a "referral" rather than a "consultation" has occurred when the physician retains control over the patient’s care. Importantly, if the first physician retains control over the patient’s care any designated health services ordered by the consulting physician are counted as referrals made by the first physician. This may be rather exhausting for the first physician to keep track of. The good news however, is that HCFA now states that referrals by one group practice member will not be considered a referral by all members of that group practice. Thus, a financial relationship by one physician in a group practice will not prohibit referrals from to an entity from all of the physicians in that group practice.

Group Practice Issues

Ownership Issues

Physician- Vendor Relationships- Supply arrangements between physicians and vendors where the physician can direct the selection of goods may be considered a violation of the Stark law. Specifically, a physician purchasing a supply at a discount and marking the supply up to eliminate the discount when billing Medicare would not meet the discount exception. HCFA was also concerned that physicians might have an ownership interest in a supplier or manufacturer, thus realizing a profit every time the product is utilized. In these cases the physician would be prohibited from billing anyone for the designated health supply or service.

Physician-Hospital Ownership- Where a physician has an ownership or investment interest, not simply a compensation arrangement, in a hospital as a whole, not merely a subdivision of the hospital, referrals by that physician to that hospital for designated health services fall within an exception to the Stark II referral prohibition. This does not include hospital-based home health agencies as HCFA defines these agencies as separate entities requiring their own certification. However, if an employment arrangement or other compensation arrangement which meets an express exception exists, the physician would not be prohibited from making a referral to the HHA.

Rural Providers Furnishing Designated Health Services- The exception of rural providers is broadened to an entity that furnishes not less than 75% of the designated health services that it provides to the residents of a rural area.

Compensation Issues

Volume or value of referrals- Payment cannot reflect the volume or value of referrals or other business generated between two parties. This standard is triggered by sable compensation payments also if those payments are based on making a referral to a particular provider. For example, a hospital might include as a condition of employment the requirement that the physician refer only within the hospital’s own network of providers.

HCFA also states that if a physician receives a payments from a hospital that appear "inordinately high" for unrelated services and the physician also refers to the hospital for designated health services, HCFA, will presume that these payments reflect the volume or value of referrals.

Physician Recruitment- HCFA narrows this exception to payments made by a hospital to a physician to relocate "when a physician resides outside the geographic area and must actually relocate to join the hospital’s staff."

Pre-Paid Plans- Currently, this exception protects intra-plan referrals of plan enrollees. Under Stark II, HCFA will broaden this exception to when a plan physician, provider or supplier refers to a contractor or subcontractor who is not otherwise a part of the plan.

Isolated Transactions- Isolated transactions such as the sale of property or a practice is not considered to be a compensation arrangement by Stark II as long as the following conditions are met:

1) the amount is consistent with fair market value and does not take into account the volume or value of referrals by the physician; 2) the agreement would be commercially reasonable if no referrals were made to the entity; 3) the arrangement meets any other requirements needed to protect against Medicare Program or patient abuse.

Payments by a physician- Payments made by a physician to a laboratory in exchange for the provision of laboratory services or other entity for items or services that are provided at a fair market value, do not constitute a compensation arrangement.

Discounts- HCFA is proposing adding a new exception for discounts however, the physician must pass 100% to the insurer (including Medicare)

De Minimis Compensation- This new exception items or services which do not exceed $50 per gift and an aggregate of $300/year. This excludes cash and cash equivalents.

Fair Market Value Compensation- To recognize the increase in integrated delivery systems and their special needs HCFA has agreed that compensation arrangements that are based on fair value and meet the following criteria should be excepted. The arrangement must:

1. Be in writing, be signed by the parties, and cover only identifiable items or services, all of which are specified in the agreement.
2. Cover all of the items and services to be provided by the physician or immediate family member to cross reference to any other agreements.
3. Specify the timeframe for the arrangement and the parties van enter into only one arrangement for the same items during a single year. Arrangements may be less than a year and can be renewed any number of times if the terms and the compensation do not change within that year.
4. Specify the compensation arrangement and this must be set in advance, be consistent with fair market value, and cannot take into account the volume or value of referrals to the entity (this includes non-Medicare and Medicaid services).
5. The arrangement must involve a transaction that is commercially reasonable and furthers the legitimate business purposes of the parties.
6. Meets the anti-kickback provisions.

Personal service arrangements- The following conditions must be met for an arrangement to be an exception:

1. The arrangement is set out in writing, is signed by the parties and specifies the services covered by the arrangement.
2. The arrangement covers all of the services to be furnished by the physician or an immediate family member to the entity. This may be multiple agreements that are cross referenced. These serves may also be performed by employees of the physician or an immediate family member. Equipment may not be a part of this arrangement and must be considered separately.
3. The total services cannot exceed what is reasonable and necessary for legitimate business purposes, the term of the arrangement must be for one year at a minimum.
4. The compensation is set in advance and does not exceed fair market value and is not determined by the volume or value of referrals or other business generated between the parties.
5. The services to be performed do not involve any activity the violates State or Federal Law.

In the case of a physician incentive plan between a physician and an entity the compensation may take into account the value or volume of referrals if the following criteria are met:

1. No specific payment is made as an inducement to reduce or limit medically necessary services.
2. The physician or physician group is placed at substantial financial risk by the incentive plan.

Brief Summary of how to file for an advisory opinion

Advisory opinions are available under the Stark Law for existing or planned transactions on questions of whether a financial relationship is present or whether it qualifies for an exception. The cost for filing an advisory opinion is a $250 minimum filing fee plus agreeing to pay all of HCFA’s costs in processing the ruling request, this may include consultant’s fees and legal fees. Requestors may set a cap on costs at which point HCFA would stop processing the request until notified in writing that the requestor would like them to continue. HCFA must render the advisory opinion within 90 days after formally accepting the request for processing. HCFA may extend this time period for requests that involve complex legal issues.

Stark and the Risk Manager

The Stark II proposed regulations reflect a strong emphasis on regulatory and transactional requirements. Although this is often view as the domain of lawyers, there is much that can and should be done by healthcare risk managers in terms of minimizing the risk of non-compliance with Stark II requirements. Indeed, as the proposed rules have yet to take effect, there is time for risk managers to take several steps to put in place practical, operation systems for this purpose. These steps include the following:

1. Healthcare System Stark II Evaluation – Determine if the healthcare meets both the current legislation and the anticipated requirements in the proposed regulations. This process is in the nature of a "gap" analysis. Areas identified needing enhancement or refinement can be pinpointed and addressed. Such a process would be a team effort, involving those responsible for physician recruiting, managed care contracting, accounting, etc. Such a team effort could set priorities and work effectively to re-engineer those processes, procedures, and methods that are inconsistent with the Stark II expectations.
2. Contract review- Risk assessments of existing contracts should be conducted with a view to identifying practices incongruent with the Stark II legislation and the proposed rules. Items identified that are inconsistent with these requirements merit the focused attention of legal counsel. Working with legal counsel, risk management can facilitate the process of finding such contracts and where possible rectifying known problem areas. Through contract review, however, contracts may be identified that present complex challenges to resolving such matters. Risk managers should be prepared for this eventuality, particularly if there is potential for litigation based on breach of contract. Not only is it important to work with legal counsel on such matters, but where applicable insurance carriers may need to be put on notice of potential litigation.
3. Lease review – Risk evaluations of leases should be completed for equipment, physician office space, and other items that may run contrary to Stark II legislation and the proposed rules. Identified areas of improvement should be acted on appropriately taking into consideration the terms of such leases and the advice of legal counsel.
4. Physician Recruitment Programs – Careful evaluation is in order of model letters, recruitment contracts, telephone scripts, brochures, and materials used on behalf of the healthcare system by outside recruiters to induce physicians to establish practice in the area. Such an evaluation should be based on the Stark II legislation and proposed regulations. Inconsistent materials should be modified to eliminate any risk potential for noncompliance.
5. Contract Templates – Design model contracts or templates to use in future negotiations. Working with legal counsel, specific language, clauses, definitions, and terms can be developed for inclusion in contracts such that it eliminates or reduces the risk of Stark II legislative or regulatory non-compliance.
6. Contract Review Templates – Develop a contract review grid that helps identify potential Stark II legislative or proposed rule violations. Such an approach would look for certain types of transactions, terms, conditions, or clauses that merit closer review by legal counsel. In essence, the contract review template serves as a contractual "risk indicator" tool.
7. Education – Design Stark II education programs for the board, senior management, contracting officers, accounting services, and other units whose responsibilities are impacted by the legislation and proposed rule. Consider development of a series of topic-specific sessions that include ample time for interactive discussion and case studies. Taking such an approach will make participants more comfortable with the subject matter. Moreover, it will provide an opportunity to evaluate their understanding of the Stark II requirements.
8. Policy and Procedure Enhancements – Assist in the development of model language and terms for upgrading existing policy and procedures to make the content Stark II compliant. Legal counsel should be involved to be certain that the model language and terms fit the overall approach of the healthcare organization in its treatment of Stark II requirements. When changes are completed, work with department heads to facilitate education on the revisions.
9. Take a Broad Approach – Be certain that the education, contract, and other initiatives are not restricted to the acute care campus. It is better to be inclusive, taking into account group practices, office practices, ambulatory centers, home health agencies, and contractors. In doing so, gaps are not created that could create a Stark II risk exposure.
10. Advisory Opinion Policy and Procedure – Work with legal counsel to develop a policy and procedure for those situations in which it may be useful to seek an advisory opinion regarding a proposed transaction under Stark II. Consider developing criteria for initiating an advisory opinion that includes costs, time frame, etc. Legal counsel might also be asked to ascertain if similar advisory opinions have been obtained that may be dispositive of the issue.

Many other risk management factors can be added that are customized to a specific healthcare organization. For example, those with a rural focus have specific needs that relate to exceptions under Stark II. Others, with a strong concern about physician group practice would emphasize elements of the law and proposed rule that are relevant to their needs. The key is to start now to address these regulatory and transactional risk management concerns in a positive, effective style geared to achieving success in Stark II matters.

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