WWW.KENNEDYCOVINGTON.COM H E A LT H L A W NEWS Proposed Revisions to Stark II Regulations On July 2, the Centers for Medicare and Medicaid Services ("CMS") issued a Medicare Physician Fee Schedule proposed rule for 2008 (the "Proposed Rule"). Included within the Proposed Rule are recommended changes to regulations promulgated pursuant to 42 U.S.C. § 1395nn1 ("Stark II") as well as some suggested related changes to the purchased diagnostics rule, 42 U.S.C. § 1395u(n)(1), all of which, if adopted, would: · Prohibit unit of service ("per click") payments in space and equipment rentals · Change the definition of "set in advance" to eliminate all percentage based payments except those tied to personally performed physician services · Clarify that an ownership/investment interest includes an interest in a DHS entity that results from a physician's (or family member's) participation in a retirement plan that purchases an interest in that DHS entity · Impose the burden of proof of Stark II compliance on the entity that submits the claim for payment · Expand the scope of the purchased diagnostics rule so that its anti-mark up provision covers both the professional and technical components of diagnostic tests billed by a physician or group but performed by someone other than a fulltime employee (and certain other changes to limit "gaming" of the rule) · Change the definition of DHS "entity" to include any entity that "performs the DHS," as well as entities that submit the claim for reimbursement 1Stark II prohibits a physician from "referring" Medicare patients for certain designated health services ("DHS") when those services are furnished by an entity with which the physician has a financial relationship. A "financial relationship" encompasses both ownership and compensation arrangements. The nature of the Stark II regulatory scheme is to prohibit all referrals, as defined by Stark II, from physicians to entities providing DHS unless specifically excepted. July 2007 Founded in 1957, Kennedy Covington is one of the largest law firms in the Carolinas with offices in Charlotte, Raleigh, Research Triangle Park, Columbia and Rock Hill. Our more than 200 attorneys use their diverse experience and knowledge to counsel clients in varied industries such as banking and finance, real estate, technology and manufacturing. At Kennedy Covington, we give more than a legal opinion; we provide a business perspective. This newsletter is published as a service to clients and others interested in health law issues. The information provided herein is general in nature and should not be relied upon as legal advice as to specific factual situations. Our health law practice group welcomes your comments or inquiries about this newsletter or about any specific matters you may wish to discuss with us. Health Law Practice Group Gina L. Bertolini Tate M. Bombard Richard P. Church Colleen M. Crowley 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) 919.466.1195 919.466.1125 919.466.1187 919.466.1189 919.466.1275 919.466.1181 919.466.1180 919.466.1246 919.466.1126 919.466.1182 919.466.1249 919.466.1185 919.466.1250 In the Proposed Rule, CMS also seeks comments relating to a number of other specific proposals for future changes to Stark II, including: · Possible limits on the use of the in office ancillary services exception that would affect certain "pod labs" and other shared ancillaries · Restructuring certain indirect relationships that CMS believes are created to avoid noncompliant direct relationships (the "stand in the shoes" provision) · Adoption of an "alternative method for compliance" for "innocent and trivial" Stark II violations · Clarification of the time frame that referrals should be "tainted" by noncompliant Stark II relationships ("period of disallowance") · Expansion of obstetrical malpractice subsidy protection Also of note in the July 2 publication is CMS commentary suggesting that there are additional Stark II rule changes in close to final form that will be published prior to the finalization of the provisions discussed in the Proposed Rule. CMS has signaled that one likely change will be to treat individual physicians as "standing in the shoes" of their group practices for purposes of analyzing Stark II financial relationships. This advisory focuses on six aspects of the Proposed Rule, which if adopted as proposed/discussed by CMS, are most likely to directly affect a large number of providers. Unit-of-service (Per-Click) Payments in Space and Equipment Leases In Phase I of the 2001 final rule, CMS made it clear that the "volume or value standard" would permit timebased and unit-of-service based payments even when the physician receiving the per unit payment was the referral source, provided the unit payment represented fair market value at inception and did not subsequently change during the term in a manner that took into account DHS referrals. In the Proposed Rule, CMS seeks to revise the space and equipment rental exceptions by adding language that would prohibit unitof-service payments when the payments reflect services provided to patients referred by the lessor to the lessee. This proposal marks a return to CMS's earlier position on per click leasing arrangements that was discussed (but never adopted) in the 1998 proposed Stark II rule. In addition to proposing this limitation on per-click equipment and space leases, CMS is soliciting comments on whether it should prohibit timebased or unit-of-service-based payments when the lessor is the DHS entity and the lessee is the physician(s). CMS is concerned about increasing reports of physicians leasing space in hospitals to perform technical services under arrangement on a per procedure basis. "Set in Advance" and Percentage-based Compensation Arrangements Several of the compensation exceptions in Stark II require the compensation be "set in advance." In Phase II of the final Stark II rule, CMS clarified that a percentage compensation arrangement could satisfy the "set in advance" requirement provided that the specific formula was set forth in sufficient detail before the furnishing of the items or services and the formula was not modified within the time period in any manner that took into account the volume or value of referrals. In the Proposed Rule, CMS wants to clarify that it only expects the percentage compensation arrangements to protect personally performed physician services. CMS is concerned that percentage compensation arrangements are being used for other, potentially abusive, situations such as payments for equipment or office space on the basis of a percentage of the revenues raised by the equipment or in the medical office space. What is not clear in the Proposed Rule is whether arrangements such as incentive compensation tied solely to physician services but triggered by the behavior of groups of physicians can be set on a percentage formula or whether office leases that are based on fixed percentages of expenses would still be compliant. Period of Disallowance for Noncompliant Financial Relationships (comments sought; no specific text change proposed) When a financial arrangement with a DHS entity fails to meet a Stark II exception, the referring physician cannot refer Medicare patients and the entity cannot bill Medicare for any improper DHS referrals ("Disallowance Period"). Although CMS takes the general position that a Disallowance Period begins when the financial relationship became non-complaint and ends when compliance with an exception is achieved, in commentary to the Proposed Rule CMS recognizes that it is not always clear when a financial arrangement ends. For example, if a lease rate is below market, CMS is concerned that the Disallowance Period not end simply because the lease is terminated, given the possibility that the low historical payments were for future referrals. Similar questions arise with isolated transaction noncompliance. While CMS does not go so far as to propose specific text changes to the existing rule, it does seek comment on this subject by posting the following questions: · Should the Disallowance Period be a prescribed period for each type of infraction, or should it be determined on a case by case basis? · Could the parties be allowed to shorten a prescribed Disallowance Period by unwinding the relationship and returning the prohibited compensation? · When parties fail to comply with a specific Stark II exception should CMS impose a period of disqualification that removes their ability to use that particular exception for other lawful purposes? Stand in the Shoes (comments sought; no specific text change proposed) CMS has long been criticized for treating indirect compensation relationships in an overly (and unnecessarily) complicated manner. In the Proposed Rule, CMS acknowledges concern that there may be instances when an indirect relationship on the DHS entity side should be collapsed and viewed as a direct link, characterizing this as allowing a DHS entity to "stand in the shoes" of any entity which it owns or controls. For example, if a hospital owned a medical foundation, which contracts with a physician to provide services at a clinic owned by the foundation, then the hospital would have a direct compensation relationship with that physician because the hospital would be deemed to "stand in the shoes" of the medical foundation. CMS will likely be critiqued that the addition of a new "standing in the shoes" concept, without significant reform or retraction of other parts of the rule, does little to simplify the confusion around indirect financial relationships and may in fact make the analysis even more complicated. While no specific rule changes are proposed by CMS here, it does warn that an upcoming final rule may soon take the first step and treat physicians as "standing in the shoes" of their group practices. Alternative Criteria for Satisfying Certain Exceptions (comments sought; no specific text change proposed) CMS is considering whether to amend certain exceptions under Stark II to provide an alternate method for satisfying the exception. The alternate method, however, is intended to address only inadvertent violations in which an agreement fails to satisfy procedural or "form" requirements of an exception (i.e., a missing signature) and not substantive violations, such as violations of the requirement that compensation be fair market value or set in advance. The alternative method for compliance would provide that, if an arrangement does not meet all of the existing criteria of an exception, it would nevertheless meet the exception if: · the facts and circumstances of the arrangement are self-disclosed by the parties; · the arrangement satisfies all but prescribed procedural ("form") requirements and the failure to meet these criteria was inadvertent; · claims and referrals were not made with knowledge that all of the criteria were not met; · the arrangement poses no risk of program or patient abuse; no more than a set amount of time has passed since the time of original non-compliance; and the arrangement is not the subject of an ongoing investigation or proceeding. CMS believes that any determination that an arrangement meets the terms of an alternative method for compliance would be at its sole discretion and not subject to further administrative or judicial review. Services Furnished "Under Arrangements" The current Stark II definition of "entity" captures only the person or entity that bills Medicare for DHS. Returning to a much earlier position, first noted in the 1998 proposed Stark II rules, CMS is proposing to revise the definition of "entity" to include not only the entity billing for the DHS, but also any entity that "performs the DHS." Not defined in the Proposed Rule is what it means to "perform the DHS," but the commentary clearly shows CMS is focused on restricting the proliferation of "under arrangement" ventures with referring physician ownership. Expressing concern that: a) referring physicians own leasing, staffing, and similar entities that furnish items and services to entities furnishing DHS but do not submit claims, and b) that referrals by such physician-owners to a contracting DHS entity can significantly increase the physicianowned entity's profits and returns, thereby creating incentives for overutilization, CMS says in no uncertain terms that it can find no valid purpose for many of these arrangements. CMS is also soliciting comments on whether, either in lieu of or in combination with the above, it should expand the definition of physician ownership under Stark II to include interests in an entity that derives a substantial portion of its revenues from a provider of DHS, a recommendation made by the Medicare Payment Advisory Committee in a March 2005 report to Congress. Kennedy Covington will continue to closely monitor the Proposed Rule. Comments on the proposed Rule must be submitted by August 31, 2007. If you have any questions regarding the matters discussed in this advisory, please contact either: Mary Beth Johnston 919.466.1181 mjohnston@kennedyconvington.com Patricia Meador 919.466.1180 pmeador@kennedycovington.com Kennedy Covington Hearst Tower, 47th Floor 214 North Tryon Street Charlotte, NC 28202 www.kennedycovington.com Notice: This communication (including any attachment) is being sent on behalf of Kennedy Covington and may be considered a "commercial mail message" for purposes of the CAN-SPAM Act. © Copyright 2007 Kennedy Covington