4 Critical Concepts From the Latest Stark Act Regulations

The Centers for Medicare and Medicaid Services (CMS) has, over the last several years, grown increasingly concerned with percentage-based lease arrangements, indirect financial relationships, per click payments and “under-arrangements” transactions. It has long indicated that changes to the Federal Ethics in Patient Referral Act (the “Stark Act”) were required in order to address their concerns. The latest Stark Act rules were released on August 19, 2008, in the Federal Register as part of federal regulations covering a variety of subjects relevant to healthcare providers. The changes to the Stark Act regulations address several concepts that will directly affect physicians, hospitals and the entrepreneurial relationships between and of each. This article briefly discusses four of the more important changes.

1. Stand in the shoes. Last year, CMS introduced the “stand in the shoes” concept. Essentially, if a physician owned, or was employed by, an entity (such as a wholly-owned practice or group practice) and that entity had a financial relationship with a provider of designated health services (DHS), the relationship would be viewed, for Stark Act purposes, as though the physician or physicians had a direct financial relationship with the provider of the DHS. Accordingly, the relationships between the physician and the entity and the entity and the DHS provider had to meet a Stark Act exception. For example, if a practice had a lease relationship with a hospital, the physician was deemed to “stand in the shoes” of the practice and therefore the lease had to satisfy the lease exception. The addition of this concept changed the way that indirect financial relationships were viewed.

Previously, under the indirect financial relationships rules, a physician might be employed by an entity that received compensation from a DHS provider, and the compensation from the DHS provider to the entity might not be fair market value, but as long as the physician’s compensation itself met a Stark Act exception and was not related to the volume or value of referrals to the DHS provider, then the compensation would be permissible. The indirect relationship rules allowed relationships that CMS viewed as problematic, such as perclick or percentage-based lease relationships, as the relationships were not deemed to be providing compensation to a physician employee or owner of the entity. The indirect relationship rules also allowed hospitals to provide support payments to affiliated practices as long as the actual payments to the physician employees of the entity were not based on the volume or value of referrals to the hospital or other related provider of DHS. Accordingly, the “stand in the shoes” provisions were intended to tighten up or eliminate these perceived loop holes.

CMS, after reviewing and considering comments on the “stand in the shoes” concept, revised the “stand in the shoes” rule. The “stand in the shoes” rules in the August 19 regulations were significantly less onerous. Specifically, the rules now apply to situations where a physician is an owner of the entity that has a financial relationship with a DHS provider but are not required to be applied to situations where a physician is an employee or a titular owner (i.e., a physician who is not entitled to receive any of the financial benefits of ownership or investment in the entity) of an entity. Accordingly, the “stand in the shoes” concept would apply to a typical group practice relationship between a practice and a hospital but not to a situation where a practice is owned by one person and employs many other physicians. Here, the physician owner would “stand in the shoes” of the practice and the strict “stand in the shoes” rules would apply. The employed physicians would still need to satisfy the rules regarding indirect compensation arrangements but would not have to meet the strict test of the “stand in the shoes” concept.

That stated, CMS has noted:

[W]e are aware of situations where non-owner physician employees and contractors have compensation arrangements that are not based on fair market value and benefit from payments made to their physician organizations from entities to which the physician employees and contractors refer patients for DHS. We remain concerned about such compensation arrangements. (We note that the rules regarding indirect compensation arrangements would apply to these arrangements.) In addition, depending on the circumstances, non-fair market value compensation arrangements potentially implicate the Federal anti-kickback statute (section 1128B(b) of the Act) (the “anti-kickback statute”) and False Claims Act. 73 FR 48694 (Aug. 19, 2008).

Accordingly, although the standards are less stringent for physician employees and titular owners, CMS remains concerned with arrangements involving these parties.

2. Per-click relationships. The final Stark Regulations prohibit per-click financial relationships. In essence, per-click relationships for radiation therapy, gamma knives and several other services will no longer be permitted. In a typical per-click relationship, a party would enter into a lease arrangement for a service or piece of equipment. The rental charge would be a set amount paid per service or “click” and there would be no limit on the number of “clicks.” CMS indicated that per-click lease arrangements give them significant concern regarding overutilization:

Even though the amount of payment per service may not vary, the incentive for overutilization remains because the greater number of referrals, the greater amount of revenue realized by the lessor. Whether a physician receives a per-click payment directly or whether the entity in which the referring physician has an ownership or investment interest receives the payment, and revenues, profits and bonuses are then distributed to the various physician owners/investors, it remains true that the lessor has an incentive for overutilization. 73 FR 48718 (Aug. 19, 2008).

Accordingly, CMS has revised the space and lease exceptions to specifically provide that the rental charges cannot be determined using a formula based on “per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties.” 42 C.F.R. §411.357(a)(5)(ii) and (b)(5)(iii). These revisions will become effective October 1, 2009. As a number of industries have been built around per-click relationships and block-lease relationships, these relationships will need to be restructured by no later than October 2009.

In many per-click lease relationships, the leasing arrangements are between a DHS provider and a physician group rather than individual physicians. Therefore, a party could circumvent the per-click prohibition by relying on the fair market value exception or the indirect compensation exception. CMS addressed this issue:

We agree that the prohibition on per-click payments for space or equipment, to the extent that such payments reflect services provided to patients referred by the lessor to the lessee, should apply regardless of whether the physician himself or herself is the lessor or whether the lessor is an entity in which the referring physician has an ownership or investment interest. We agree with the commenter that our concerns with per-click payments for office space or equipment are not fully addressed if parties could structure an equipment or office space lease arrangement as an indirect compensation arrangement that would qualify for the exception in §411.357(p). Likewise, we do not believe that parties should be able to circumvent the prohibition by using the fair market value exception at §411.367(l) (which is applicable to equipment leases). Accordingly, we are making corresponding changes to the exception in §411.357(p) [indirect compensation exception] to prohibit the use of perclick payments in the determination of rental charges for office space and equipment arrangements, and to the exception in §411.357(l) [fair market value exception] to prohibit the use of per-click payments in the determination of rental charges for equipment. 73 FR 48720 (Aug. 19, 2008).

In addition to concerns with per-click arrangements, CMS also voiced concern over time-based rental payments such as block leases. In a typical block-lease relationship, a party would enter into a lease arrangement for a piece of equipment. The rental charge would be a set amount and the party would lease that equipment for a specified period of time, such as, for example, three days a week for three hours. Here, CMS has less concern than it does with per-click arrangements but still advises parties to be cautious when entering into these types of arrangements:

We believe that time-based rental payments, such as block time leases, depending on how they are structured, may meet the requirements of the space and equipment lease exceptions, including the requirements that the agreement be at fair market value and be commercially reasonable, even if no referrals were made between the lessee and the lessor, and that they not take into account the volume or value of any referrals or other business generated between the parties. We believe that the same concerns we identified above with respect to certain per-click lease arrangements can exist with certain time-based leasing arrangements, particularly those in which the lessee is leasing the space or equipment in small blocks of time (for example, once a week for 4 hours), or for a very extended time (which may indicate the lessee is leasing space or equipment that it does not need or cannot use in order to compensate the lessor for referrals). We will continue to study the ramifications of “block time” leasing arrangements and may propose rulemaking in the future. Parties entering into block leases should structure them carefully, taking into account the antikickback statute. 73 FR 48719 (Aug. 19, 2008).

3. Percentage-based leases. In addition to prohibiting per-click leases, CMS will no longer permit percentage- based leases. Specifically, the lease exceptions have been revised to provide that rental charges cannot be determined using a formula based on “a percentage of revenue raised, earned, billed, collected or otherwise attributable to the services performed or business generated” in the office space or through the use of equipment. 42 C.F.R. §411.357(a)(5)(ii) or (b)(5)(ii). Percentagebased compensation for personal services will be permitted.

4. Under-arrangement transactions. CMS has long indicated its concern with the increasing use of “under-arrangements” transactions between physician entities and hospitals. In an “under-arrangements” transaction, a physician entity performs services and sells those services to a hospital pursuant to a contract, i.e. provides the services “under arrangements.” The hospital then bills for those services, which then makes those services DHS as hospital services.

The “under-arrangement” concept was used originally by hospitals (often in rural areas) to provide certain services (such as certain types of imaging or cardiac catheterization) to their patients that were not available at the hospital because the services were needed infrequently. However, in the last several years, the use of “under arrangements” has proliferated.

CMS published comments to the recent Stark Act revisions highlighting why these arrangements have become popular:

[T]he commenter stated that the increasing frequency of “under-arrangements” contracts, coupled with greater Medicare payment for hospital services (as opposed to payment for the same service under the Medicare physician fee schedule), provides what may be an irresistible financial incentive for physicians to refer patients to the entity contracted to provide the services “under arrangements” to the hospital or other provider. The commenter, a large health benefits company, also stated that, because hospitals use the same billing system for both Medicare and private commercial payers, hospitals are frequently reimbursed where services were performed by entities under contract with the hospital to provide services, such as ASCs. Because the commenter’s contractual reimbursement rate is higher for hospitals than for ASCs, in an “under-arrangements” situation, the commenter sometimes inadvertently provides excessive reimbursement for the actual cost of care rendered, thereby inflating the cost of medical care.

A commenter asserted that the number of physician-owned entities providing services “under arrangements,” including cardiac catheterization laboratories, have proliferated in recent years, presumably because of the physician self-referral rules. 73 FR 48723 (Aug. 19, 2008)

Accordingly, CMS has revised the definition of “entity” such that the furnishing DHS encompasses not only the entity that bills for DHS but also performs the DHS, if it is not the same entity. In other words, an entity will be considered to be providing DHS if it performs DHS and sells the services to a party who bills Medicare and Medicaid even if it does not itself bill Medicare.

CMS provided support for its revised definition of “entity”:

Our conclusion that the Congress intended an entity that performs services that are billed as DHS to be a DHS entity, notwithstanding that the entity contracts with another to bill Medicare, is supported by both the language of the physician self-referral statute and its underlying purpose. Section 1877(a) of the Act contains two basic prohibitions with respect to physician self-referral. First, under section 1877(a)(1)(A) of the Act, if a physician (or an immediate family member) has a financial relationship with an “entity,” it may not make a referral to the entity for the “furnishing” of DHS, unless the financial relationship meets an exception. Second, under section 1877(a)(1)(B) of the Act, an entity that receives a prohibited referral may not present or cause to be presented a claim to Medicare, and also may not bill any individual, third party payor, or other entity.

Section 1877(a)(1)(A) of the Act does not define “entity” as any particular type of organization but rather defines it in a functional sense, that is, an organization that furnishes DHS. Our current definition of “entity” at §411.351 similarly provides that an “entity” is any type of organization, regardless of form of ownership (for example, partnership, LLC or corporation) that “furnishes” DHS. We believe that furnishing DHS includes performing services that are billed as DHS to the Medicare program, irrespective of whether the entity performing the services submits the claim or whether some other entity (such as a hospital providing the services “under arrangements”) submits the claim. In this regard, we note that section 1877(a)(1)(B) of the Act provides that an entity that furnishes DHS may not present, or cause to be presented, a Medicare claim. This language demonstrates that the Congress intended that furnishing DHS encompasses not only the entity that bills for the DHS, but also the entity that performs it, if those are not the same entities; otherwise there would be no need to include the language “cause to be presented.” 73 FR 48723 (Aug. 19, 2008)

The revised definition of “entity” will become effective October 1, 2009. Therefore, parties to “under-arrangements” contracts will have to unwind or cease such arrangements by October 2009.

Mr. Becker sbecker@mcguirewoods.com and Ms. Moore emoore@mcguirewoods.com are attorneys for McGuireWoods.

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