Significant Changes to Stark II Exceptions Go Into Effect October 1, 2009

Healthcare reform has never been so much in the forefront of the public’s mind. However, with all of the discussion focused on broad overarching policy goals, it is easy to forget that the Centers for Medicare and Medicaid Services (CMS) has passed significant changes to the physician self-referral statute, 42 U.S.C. §1395nn (Stark II), that go into effect on October 1, 2009. Generally, Stark II prohibits physicians from referring Medicare patients for certain designated health services (DHS) to an entity with which the physician or a member of the physician’s immediate family has a financial relationship, unless an exception applies.

In September 2007, CMS issued what was supposed to be the final phase, Phase III, of the Stark II regulations. However, CMS made additional changes to the Stark II regulations in the August 2008 Final Rule for Hospital Inpatient Prospective Payment Systems (2009 IPPS Final Rule). While some of the changes went into effect on October 1, 2008, the effective date for some of the other changes was delayed until October 1, 2009.

The new rules implemented several changes to the scope of permitted arrangements that may require hospitals to change or restructure their physician contracting and payment policies. These changes could cause a hospital’s current contracts to fall out of a Stark II exception. If the financial relationship with a physician or immediate family member is not in an exception, suddenly every claim submitted by a hospital pursuant to the newly prohibited relationship would be a Stark II violation incurring severe fines of $15,000 per claim and possible exclusion from the Medicare and Medicaid programs.
Specifically, CMS made changes to: 1) the “stand in the shoes” rule; 2) definition of “entity”; 3) signature requirements; and 4) per click and percentage based compensation.

“Stand in the Shoes” Provisions – Effective October 1, 2009

Stark II, Phase III issued a new rule in which members of a physician organization are deemed to “stand in the shoes” of the physician organization. This rule was designed to require hospitals and physicians to comply with the more stringent exceptions for direct compensation relationships instead of “indirect” compensation relationships. In other words, prior to the rule, the hospital’s financial relationship with the physician organization (i.e. group practice) was considered direct but the financial relationship with the physicians was considered indirect. Under the stand in the shoes rule, the physicians are deemed to have a direct financial relationship with the hospital which requires the parties to fit the relationship in more specific exceptions.

The 2009 IPPS Final Rule modified the “stand in the shoes” rule to limit its applicability to only those physicians who have an ownership or investment interest in a physician organization. Non-owner or titular owner physicians in a physician organization are not deemed to stand in the shoes, but may elect to do so if they choose.

Change in the definition of “Entity” for Services Provided “Under Arrangements”- Effective October 1, 2009

Effective October 1, 2009, CMS shall expand the Stark definition of “entity” to apply to both the hospital that bills for services provided “under arrangements” and the entity that performs the services for the hospital. CMS considers a DHS to be “performed” by a physician-owned entity if the entity does the medical work and could bill for the DHS. In the preamble language, CMS explained that an entity will not be deemed to have performed the DHS if: 1) the entity only leases or sells the space or the equipment used for the furnishing of the DHS; 2) the entity only furnishes supplies that are not separately billed but used in the performance of the DHS; 3) the entity only provides billing services; or 4) the entity only provides the personnel to the entity providing the DHS.

This change significantly limits hospital-physician joint venture arrangements where the physician has an ownership interest in an entity providing services “under arrangement” to the hospital or DHS entity. Any such ventures that currently exist need to be reviewed and possibly restructured prior to October 1, 2009.

Alternative Method for Compliance with Signature Requirements

If an agreement met an applicable Stark exception except for the signature requirement, the financial arrangement is not immediately void. Instead, the agreement is still valid so long as the parties meet the signature requirement within 90 days after the beginning of the relationship. However, if the parties had knowledge of the failure, the signatures must be obtained within 30 days.

Per-Click and Percentage-Based Compensation – Effective October 1, 2009

Despite CMS’ long standing concerns, it had permitted parties to enter space and equipment lease arrangements with per-click (per use) or percentage based payments so long as the per-click or percentage-based payments were consistent with fair market value, commercially reasonable, and did not take into account the volume or value of referrals or other business generated between the parties. Effective October 1, 2009, these arrangements will be prohibited. The indirect and fair market value exceptions were likewise modified with corresponding changes.

This change is significant since numerous hospital-physician joint ventures involve leases with per-click or percentage based arrangements. A common arrangement involves a hospital-physician joint venture purchasing equipment and then entering into equipment leases with various healthcare providers. Any such arrangements with per-click or percentage-based arrangements will need to be restructured to flat fee arrangements for blocks of time or dissolved before October 1, 2009. Please note, the per-click and percentage-based payment arrangements are still allowed for personal service arrangements under certain conditions.

With the October 1, 2009 deadline fast approaching, hospitals and other DHS entities need to review their financial arrangements with physicians and physician organizations to make sure these arrangements comply with the current Stark II exception requirements and the exception requirements that go into effect on October 1, 2009.

“Significant Changes to Stark II Exceptions Go Into Effect October 1, 2009.”

Louisiana Hospital Association Impact Law brief, Vol. 24, (No.8). Aug.26, 2009

Michael R. Schulze