Stark II, Phase III: Recent Changes to the Stark Referral Prohibitions

Monday, December 3, 2007
Contributed by: Patrick S. Weir

The original Stark self-referral prohibition was enacted in 1989. There have been numerous revisions leading up to the most recent Phase III, which takes effect December 4, 2007. The Centers for Medicare and Medicaid Services (CMS) released Phase III addressing the entire Stark regulatory scheme. Phase III is intended to expound on previous discussions, not to change the scope or meaning. The final product is regulations that are stunning in their complexity.

Physician Recruitment

The most drastic changes to the Stark regulations contained in Phase III are changes to the physician recruitment exception. This physician recruitment exception is designed to protect certain remuneration that is provided by a hospital to a physician as an inducement for the physician to relocate his or her medical practice into the "geographic area served by the hospital."

One of the changes made to the exception was to allow group practices to impose practice restrictions upon recruited physicians, provided the restrictions do not "unreasonably restrict" the recruited physician’s ability to practice in the "geographic area served by the hospital." Another change was to add a provision that allows 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.

Certain physicians can now be exempt from the Stark relocation requirements. They will be exempt if they were employed full time by a federal or state bureau of prisons, the Department of Defense of Veterans Affairs, or facilities of the Indian Health Service. This exemption applies only if the physician did not maintain his/her own separate private practice in addition to the full-time employment. The exemption can also be allowed if CMS issues an advisory opinion that the physician has not established a medical practice.

Phase III revises the exception that a physician recruit who is subject to the practice relocation requirement must move his/her practice from outside the hospital’s geographic area into such an area and either move at least 25 miles or derive at least 75% of revenues from services to new patients. Further, groups in rural areas or a health professional shortage area (HPSA) that recruit a physician to replace a retired, deceased, or relocated physician may either allocate any costs attributed by the recruited physician based upon either the actual additional costs or the lower of a per capita allocation or 20% of the aggregate costs of the practice.

Physician in the Group Practice

Phase III has modified the definition of "physician in the group practice." CMS makes it clear that an independent contractor physician must furnish patient care services for the group practice under a direct contractual arrangement with the group. An independent contractor physician is only considered a "physician in the group practice" when he or she is performing services on the group’s premises. This requirement will likely further restrict the ability of groups to use independent contractor physicians and to bill for those services.

Phase III clarifies that productivity bonuses may be directly related to volume or value of designated health services (DHS) personally performed by the physician or to referrals by the physician for DHS services and supplies "incident to" the physician’s personally performed services. CMS states that services that have their own benefit category cannot be billed as incident to services. CMS also clarifies that "incident to" services include both services and supplies. Accordingly, under Phase III, profits must be allocated in a manner that does not directly relate to DHS referrals, including any DHS billed as an "incident to" service.

Definition of Referral

Phase III also clarified the definition of what a "referral" actually is. In response to several commenters who requested clarification on whether certain types of services can be personally performed by the referring physician, eliminating the need to meet a Stark exception, CMS noted that there are few, if any, situations in which a referring physician could personally furnish durable medical equipment (DME). Doing so would require the referring physician to be enrolled in Medicare as a DME supplier and personally perform all the duties of a supplier.

Security Interest in Hospital Equipment

Physicians can now have a security interest in equipment that was sold to a hospital. Before Phase III, this relationship was considered a prohibited financial relationship. A security interest held by a physician in equipment sold by the physician to a hospital and financed through a loan from the physician to the hospital does not create an "ownership interest." However, this security interest will be considered a compensation arrangement between the physician and the hospital requiring that all the arrangements meet a Stark exception.

Indirect Compensation

CMS revised the definition of "indirect compensation arrangements" so that a physician is now deemed to "stand in the shoes" of his/her physician organization. In other words, a hospital that contracts with a large medical group will now be viewed as having a direct compensation arrangement with all the physicians in the group. This revision will require hospitals to review agreements with group practices that were structured to comply with the previous indirect compensation exception.

Future Changes

If the previous phases are any indication, new amendments are certain to come. The new regulations published in Phase III provide greater flexibility to physicians and providers. Phase III is a good reminder of the complex challenges of continued compliance with the evolving parameters of the Stark referral prohibitions. Physicians and providers should become familiar with the new rules and regulations to be certain that any financial relationships comply with the regulations, and consult with qualified counsel prior to entering into any such relationship in the future.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.