Recent Health Law Developments
| Client Update
September 2007
Health Law Practice Group
CMS Issues Final Stark II Phase III Regulations
On September 5, 2007, the Centers for Medicare and Medicaid Services (“CMS”) published Phase III of
regulations promulgated pursuant to 42 U.S.C. § 1395nn (“Stark II”) in the Federal Register (“Phase
III”). Phase III is a final rule that will be effective December 4, 2007. Phase III finalizes and responds to
public comments regarding the Stark II Phase II Interim Final Rule with comment period published on
March 24, 2004. Phase III is separate from the recommended changes to Stark II proposed by CMS on
July 2, 2007, contained within the Medicare Physician Fee Schedule proposed rule for 2008 (“the
Proposed Rule”).1
Phase III makes several important changes to Stark II. Significant changes to existing regulatory
exceptions are found in the physician recruitment exception and the exception for retention payments in
underserved areas. Phase III also creates a new “stand in the shoes” provision under which a physician
is deemed to “stand in the shoes” of his or her physician organization. In addition to these changes, CMS
has made various other revisions, modifications and clarifications, many of which are discussed below.
Physician Recruitment Exception
Phase III includes a number of amendments to the physician recruitment exception, the majority of
which apply only to rural areas (those areas outside a Metropolitan Statistical Area or certain defined
New England counties). For example, CMS is amending the physician recruitment exception to permit a
potentially more generous income guarantee (allowing the physician practice to allocate costs to a
recruited physician in an amount not to exceed either the actual incremental costs attributable to the
recruited physician or the lower of a per capita allocation or 20% of the practice’s aggregate costs)
under certain circumstances in the case of a physician who is recruited to join a physician practice in a
rural area or Health Professional Shortage Area (“HPSA”) to replace a deceased, retiring or relocating
physician. Additionally, CMS is allowing a hospital in a rural area to determine the “geographic area
served by the hospital” using an alternative test that encompasses the lowest number of contiguous (or
in some cases, noncontiguous) zip codes from which the hospital draws at least 90% of its inpatients.
CMS also is revising the definition of “geographic area served by the hospital” to restrict a hospital that
draws fewer than 75% of its inpatients from all of the contiguous zip codes from which it draws
inpatients to recruit a physician into the geographic area composed of only the contiguous zip codes
from which it draws inpatients.
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The Proposed Rule is likely to be finalized later this fall. While Phase III does not finalize any changes covered
under the Proposed Rule, it makes several references to issues covered under the Proposed Rule that will likely be
addressed in future rulemaking (for example, the time frame that referrals and claims should be disallowed by
noncompliant relationships, the best way to curb the proliferation of certain “under arrangement” ventures with
referring physician ownership and possible changes to the in-office ancillary services exception, such as whether
certain types of arrangements (e.g., in-office pathology labs and sophisticated imaging equipment) should be
eligible for protection under the in-office ancillary services exception).
Phase III contains changes that now permit physician practices to impose certain practice restrictions on
a recruited physician as long as such restriction does not unreasonably restrict the recruited physician’s
ability to practice medicine in the geographic area served by the hospital (non-competition provisions
are no longer categorically prohibited). CMS also is revising the recruitment exception to permit rural
hospitals to recruit physicians into an area outside of the hospital’s geographic service area if it is
determined through a CMS advisory opinion that the area has a demonstrated need for the recruited
physician. Additionally, CMS is permitting rural clinics to utilize the exception and is clarifying that a
physician must relocate his or her practice from outside the geographic area served by the hospital into
the geographic area served by the hospital. Finally, CMS is exempting from the relocation requirement
(a) those physicians who for a period of two years have been full-time employees of a federal or state
bureau of prisons, the Department of Defense, Veterans Affairs or Indian Health Service, provided the
physician had no private practice of medicine; and (b) those physicians who have been deemed in an
advisory opinion not to have an established medical practice comprised of a significant number of
patients who are or could become patients of the recruiting hospital.
Retention Payments in Underserved Areas Exception
In Phase III, CMS expands the exception for retention payments to include rural areas and also to
permit a hospital to make a retention payment even if the physician does not have a firm, written
recruitment or employment offer, provided the physician certifies in writing that, among other things, he
or she has a bona fide opportunity for future employment by a hospital, academic medical center or
physician organization that requires relocation of his or her medical practice at least 25 miles (and
outside the geographic area served by the hospital) and certain other conditions are satisfied. Under the
new “bona fide opportunity” provision, the retention payment cannot exceed the lower of 25% of the
physician’s current income (measured over no more than a 24 month period) or the reasonable cost of
recruiting a new physician to the geographic area to replace the retained physician.
New “Stand in the Shoes” Provision
Phase III modifications to Stark will mean that in certain instances a physician will now be deemed to
“stand in the shoes” of his or her physician organization (newly defined as a physician, including a
professional corporation of which the physician is the sole owner, a physician practice (not defined), or a
Stark II group practice). A physician “stands in the shoes” when the sole intervening entity between the
physician and the entity furnishing DHS is his or her physician organization. In such situations, the
physician will be treated as having the same compensation arrangement with the designated health
service (“DHS”) entity that the intervening physician organization has with the DHS entity. As a result,
many compensation arrangements that previously were analyzed as indirect compensation
arrangements now will be analyzed as direct compensation arrangements that must comply with an
applicable direct compensation exception.
Due to a mini grandfathering provision in Phase III that relates only to the “stand in the shoes”
provision, compensation arrangements that were entered into prior to September 5, 2007 and that
satisfied the requirements of the indirect compensation arrangement exception on that date do not need
to be amended during the original term or the current renewal term to comply with the requirements of
a direct exception.
Elimination of the Safe Harbor within the Definition of Fair Market Value
In Phase III, CMS has eliminated the safe harbor provision from the definition of fair market value for
hourly payments to physicians for their personal services. The safe harbor provided two methodologies
for calculating physician hourly rates that would be deemed fair market value for the purposes of Stark
II (one methodology related to the average hourly rate of emergency room physicians, the other related
to averaging the 50th percentile national compensation for physicians in the same specialty in at least
four of six referenced surveys). In deciding to remove the safe harbor, CMS cited several industry
comments regarding, among other things, the lack of availability of several of the surveys identified in
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the safe harbor and the infeasibility of obtaining information regarding hourly rates for emergency room
physicians at competitor hospitals. However, CMS emphasized that fair market value remains an
essential element of many exceptions and noted that reference to multiple, objective, independently
published salary surveys remains a prudent practice for establishing or measuring fair market value.
Fair Market Value Exception
Phase III revised the fair market value exception to clarify that it applies between a physician and entity
regardless of whether payments are to or from the physician and that the fair market value exception
cannot be used for space leases. In related commentary, CMS states these changes eliminate the use of
the “payments by a physician” exception for a number of arrangements that now should be analyzed
under either the fair market value or space lease exception.
Other Important Changes, Clarifications and Comments in Phase III
•
Modifications to the definition of “physician in the group practice” to clarify that an independent
contractor physician must furnish patient care services for the group practice under a contractual
arrangement directly with the group practice, and CMS commentary stating that independent
contractor physicians are “physicians in the group practice” only when performing services on the
group practice’s premises;
•
Revisions clarifying that group practice productivity bonuses can be based directly on services
performed “incident to” the physician’s personally performed services, even if these “incident to”
services are otherwise DHS referrals (for example, physical therapy or outpatient prescription
drugs). CMS also clarified that overall profit shares cannot relate directly to “incident to” services;
•
A new provision that specifies a security interest held by physicians in equipment sold by the
physician to a hospital and financed through a loan from the physician to the hospital is
considered a compensation arrangement (not an ownership interest);
•
Prior to Phase III hospitals were permitted under certain circumstances to provide nonmonetary
compensation to referring physicians up to $300.00 per year (as adjusted annually by the
Consumer Price Index). In Phase III, CMS has modified this exception to provide that if an entity
inadvertently gives nonmonetary compensation in excess of the applicable dollar limit to a
physician within a year, such excess compensation will be deemed to be within the applicable
dollar limit, provided the excess compensation is no more than 50% of the nonmonetary
compensation limit currently in effect and the physician returns the excess compensation (or an
amount equal to the value of the compensation) by the end of the calendar year in which it was
received or within 180 consecutive calendar days following the date such compensation was
received, whichever is earlier;
•
Modifications to the academic medical centers exception to clarify that the total compensation
from each academic medical center component to a faculty physician must be set in advance, fair
market value, and may not be determined in a manner that takes into account the volume or
value of referrals or other business generated by the physician within the academic medical
center. CMS also clarifies that for the purpose of determining whether a majority of physicians on
the medical staff consist of faculty members, the affiliated hospital must include or exclude all
individual physicians with the same class of privileges at the affiliated hospital;
•
Modifications to the personal service arrangements exception allowing a six-month “holdover”
personal service arrangement, provided the “holdover” is on the same terms and conditions as
the immediately preceding agreement;
•
Revisions to the intra-family rural referrals exception to include an alternative distance test based
on transportation time from the beneficiary’s residence (45 minutes transportation time);
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•
Clarification under the exception for charitable donations by a physician that a donation may
neither be solicited nor offered in any manner that takes into account the volume or value of
referrals or other business generated between the parties;
•
Modifications to the professional courtesy exception eliminating the requirement that an entity
offering professional courtesy inform the insurer in writing of the reduction of any coinsurance
obligation on the part of the recipient of the professional courtesy, and clarifying that the
exception is applicable only to entities that have formal medical staffs;
•
Permitting the provision of training programs for which continuing medical education is available
under the compliance training exception provided the primary purpose of the program is
compliance training;
•
CMS takes the position with respect to leasing arrangements that parties wishing to change the
rental charges after the first twelve months of an agreement may not do so by amendment, but
must terminate that agreement and enter into a new one.
•
Commentary regarding permissible amendments to contracts within the first 12 month term
which suggests that, for example, parties may amend an agreement during the first year of its
term, provided that the amendment does not affect the ability to satisfy the other required
elements of the exception (e.g., amending a space lease in a manner that doesn’t affect the rent
calculation, which must be “set in advance”);
•
Commentary clarifying that common areas under space rental agreements means foyers, central
waiting rooms, break rooms, vending areas, etc. to the extent the areas are used by the lessee,
and that common areas do not include exam rooms. Common areas that contain certain limited
equipment (e.g., weight scales) may be shared provided the equipment is limited to the type not
usually separately leased;
•
Commentary clarifying that lessors can charge a holdover rental premium, provided the amount
of the premium is set in advance in the lease agreement at the time of its execution and the
rental rate (including the premium) is consistent with fair market value; and
•
Commentary clarifying that cost of living annual salary adjustments are permissible, provided the
resulting compensation is fair market value and otherwise complies with an exception.
If you have any questions regarding the matters discussed in this advisory, please contact either: Mary
Beth Johnston or Patricia Meador.
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information provided herein is general in nature and should not be relied upon as legal advice as to
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Health Law Practice Group
Gina L. Bertolini
Tate M. Bombard
Richard P. Church
Colleen M. Crowley
Kelly Dixson Furr
Amy O. Garrigues
Mary Beth Johnston
Patricia T. Meador
Carolyn F. Merritt
Mayelin Prieto-Gonzalez
Gary S. Qualls
Patrick J. Togni
Kathy G. Barger (Consultant)
Carol E. Jones (Consultant)
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