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Change to Stark In-Office Ancillary Services Exception
The recent health care reform legislation
included one somewhat significant change to the Stark In-Office
Ancillary Services Exception. As you will recall, this exception
permits the referral source physicians who are members of a
physician group practice to refer a patient for imaging services (or
other Designated Health Services - DHS) to be provided within the
group practice without violating Stark. This exception is basically
what permits physician group practices to own and operate and
receive compensation for imaging services and other DHS provided
within their group practice.
Effective immediately upon the legislation
being signed by Obama (March 23, 2010), a physician within a group
practice referring his/her patient for MRI, CT or PET to be provided
within the group practice must provide the patient, at the time of
the referral, written notice that the patient may obtain these
imaging services from a supplier other than the group practice. The
written notice must provide the patient with a list of such
alternative suppliers in the area where the patient resides.
At the present time, this new requirement only
applies to DHS in the form of MRI, CT and PET. And it only applies
to physician group practices composed of physician referral
actually three separate provisions,
governs physician self-referral for
Medicare and Medicaid patients. The law
is named for United States Congressman
Pete Stark, who sponsored the initial
bill. Here is a list of
Guidelines and their ramifications.
physician referrals to facilities in
which there is a financial interest.
self-referral is the practice of a
physician referring a patient to a
medical facility in which he has a
financial interest, be it ownership,
investment, or a structured
compensation arrangement. Critics of the
practice allege an inherent conflict of
interest, given the physician's position
to benefit from the referral. They
suggest that such arrangements may
encourage over-utilization of services,
in turn driving up health care costs. In
addition, they believe that it would
create a captive referral system, which
limits competition by other providers.
Others respond to
these concerns by stating that while
problems exist, they are not widespread.
Further, these observers contend that,
in many cases, physician investors are
responding to a demonstrated need which
would otherwise not be met, particularly
in a medically underserved area.
Congress included a
provision in the Omnibus Budget
Reconciliation Act of 1989 (OBRA 1989)
which barred self-referrals for clinical
laboratory services under the Medicare
program, effective January 1, 1992. This
provision is known as "Stark I". The law
included a series of exceptions to the
ban in order to accommodate legitimate
business arrangements. A number of
observers recommended extending the ban
to other services and programs. The
Omnibus Budget Reconciliation Act of
1993 (OBRA 1993) expanded the
restriction to a range of additional
health services and applied it to both
Medicare and Medicaid; this legislation,
known as "Stark II," also contained
clarifications and modifications to the
exceptions in the original law. Minor
technical corrections to these
provisions were included in the Social
Security Amendments of 1994.
Passage of Stark II
raised a series of concerns on the part
of many provider groups. While Stark I
and II were intended to remove potential
conflicts of interest from physician
decision making, a number of persons
have argued that the legislation,
particularly parts of Stark II,
represents an unwarranted intrusion into
the practice of medicine. They have
stated that the legislation,
particularly the provisions relating to
compensation arrangements, is too
complex and may, in fact, impede
physicians' ability to participate in
managed care networks.
On November 20,
1995, Congress gave final approval to
the conference report on the Balanced
Budget Act (BBA) of 1995. President
Clinton vetoed the measure on December
6, 1995. BBA included several amendments
to the physician self-referral
provisions. The two major changes were
the repeal of the prohibitions based on
compensation arrangements and the
reduction in the list of services
subject to the ban.
Register announced that publication of
Stark III has been extended until March
26, 2008, and Phase II will remain in
effect through that date.
The Phase III final
rule was published on September 5, 2007,
at 72 FR 51012, and became effective
December 4, 2007.
The Stark Law is
related to, but not the same as, the
federal anti-kickback law.
Lawyers and laypersons can find
Stark at [42 U.S.C.S. '1395nn] which is '1877 of the Social Security Act.
Additionally, the regulations are at [42 C.F.R. '411.350 through '411.389].
STARK II PHASE III FINAL RULE
On September 5, 2007, the Center for
Medicare and Medicaid Services ("CMS")
completed the long-awaited third and
final installment in its rulemaking
process under the federal physician
self-referral prohibition commonly known
as the "Stark law." The new final rule,
referred to as "Phase III," responds to
public comments regarding the Phase II
interim final rule with comment period
published on March 26, 2004, and
addresses the entire Stark law
regulatory scheme. As in Phases I and
II, CMS has continued its efforts in
Phase III to reduce the regulatory
burden on the healthcare industry
through its interpretation and
modification of previously promulgated
exceptions to the Stark law's general
prohibition on referrals. The new
regulations will be effective December
42 U.S.C. 1395nn.
The October 1st Stark Law Changes:
Implications for Diagnostic Imaging Arrangements
By: Adrienne Dresevic, Esq. and Carey F. Kalmowitz, Esq.
The Health Law Partners, PC
Last year, on August 19,
2008, the Centers for Medicare and Medicaid Services ('CMS')
published final Stark rules in its 2009 Final Hospital Inpatient
Prospective Payment Systems Rule (the 'Final Rule').
The Final Rule contains three (3) significant
modifications to the Stark regulations which become effective
this year on October 1, 2009.
This article addresses these modifications and their
implications for common diagnostic imaging arrangements.
and Equipment Leasing Arrangements Generally Prohibited
Effective October 1, 2009, CMS prohibits the use of
unit-of-service ('per-click') fee payments in space and/or
equipment leases when the payments reflect services provided to
patients referred between the parties.
Under the Final Rule, for example, a diagnostic equipment
leasing company owned (directly or indirectly) by referring
physicians may not lease equipment to a hospital on a per-click
basis if the physician owners will be referring to the hospital.
Although in the past, per-click payments were generally
permitted under the Stark law, reflecting concerns that this
type of compensation methodology was inherently susceptible to
abuse, the Final Rule prohibits the use of per-click payment
methodologies for leasing arrangements under the space and
equipment lease exceptions, fair market value exception, and the
exception for indirect compensation arrangements to the extent
that these charges reflect services provided to patients
referred between the parties.
It is noteworthy that, although properly structured
per-click space and equipment leases were permissible under
Stark, even when the lessor was generating the 'clicks' through
his or her referrals, there always was a measure of uncertainty
as to the level of risk these arrangements engendered under the
Federal Medicare and Medicaid Anti-kickback Statute (the 'AKS').
The Final Rule does not, however, prohibit per-click
compensation arrangements involving non-physician-owned lessors
to the extent that such lessors are not referring patients for
designated health services ('DHS'), nor does it prohibit
per-click payments to physician lessors for services rendered to
patients who were not referred to the lessee by the physician
In addition to the per-click payment restrictions,
'on-demand' rental agreements will be considered per-click or
per-use arrangements, and are also prohibited under the Final
Rule. Thus, time-based leasing arrangements whose minimum
requirements are so limited and/or flexible (i.e., as to the
usage level and/or schedule of use) will, in effect, convert the
arrangement into a prohibited per-click rental. CMS views such
arrangements as 'on-demand' leases.
The Final Rule, however, will not prohibit all time-based
leasing arrangements (e.g., block time leases), as CMS believes
that they may meet the requirements of the space and equipment
lease exceptions. However, CMS specifically cautions that
certain time-based leasing, such as leasing space or equipment
in small blocks of time (e.g., once a week for 4 hours), raise
significant concern and parties entering into block leases
should carefully structure such arrangements taking into account
Diagnostic imaging providers should consider the
following when applying the new per-click leasing prohibition:
Arrangements involving entities owned
solely by radiologists who are able to qualify for
'radiologist consultation exception' generally will not be
restricted by the per-click leasing prohibition, as they are not
considered referring physicians under Stark.
The 'per-click' leasing prohibition
applies regardless of whether the DHS entity (e.g., hospital, IDTF, physician practice) is the lessor or lessee.
On-demand equipment and/or space leases
(e.g., leases in which usage is not set in advance) are covered
by the prohibition.
Block schedule leases for equipment and/or
space are still permissible so long as the blocks of time are
not set with such minimal requirements that they cause the lease
to be re-characterized as a prohibited 'on-demand' per-click
The per-click prohibition only applies to
space and equipment leasing arrangements and does
not apply to personal service or other employment arrangements.
Percentage-Based Compensation Space and Equipment Leasing
Arrangements Generally Prohibited
Effective October 1, 2009, CMS prohibits percentage-based
compensation in space and equipment leases, paralleling its new
treatment of per-click payments in space and equipment leases.
Specifically, the Final Rule amends the current Stark
exceptions for the rental of office space, the rental of
equipment, fair market value compensation arrangements, and
indirect compensation arrangements to prohibit the use of
compensation formulae for space and equipment leases based upon
a percentage of the revenue raised, earned, billed, collected,
or otherwise attributable to the services performed or business
generated in the office space lease or to the services performed
on or business generated by the use of leased equipment.
Effectively, by implementing these changes, CMS precludes
the use of most percentage-based arrangements for the lease of
space or equipment (direct or indirect) between DHS entities
(e.g., hospitals, IDTFs, physician practices) and referring
Diagnostic imaging providers should consider the following
when applying the new percentage-based compensation space and
equipment leasing prohibition:
As with the per-click prohibition,
radiologists (and radiologist-owned entities) who are able to
qualify for the so-called 'radiologist consultation exception'
generally will not be restricted by the percentage-based
compensation prohibition, as they are not considered referring
physicians under Stark.
As with the per-click prohibition, the
percentage-based compensation prohibition also applies whether
or not the DHS entity (e.g., hospital, IDTF, physician practice)
is the lessor or lessee.
The prohibition applies whether or not the
leasing arrangement with the referring physician(s) is direct or
indirect. Thus, referring physicians that own a diagnostic
imaging leasing company that, in turn, leases diagnostic imaging
equipment to a hospital are prohibited from charging the
hospital percentage-based compensation under the lease.
The prohibition does not extend outside of
the space and equipment lease context (e.g., management
services), but CMS cautioned that it intends to continue to
monitor compensation formulae in arrangements between DHS
entities and referring physicians and, if appropriate, may
further restrict percentage-based formulae in a future
'Under-Arrangements' Transactions with Referring Physicians Are
Effective October 1, 2009, both the hospital that bills for
services provided 'under arrangements' and the entity that
performs the services to the hospital will be considered to be
furnishing DHS under Stark.
This change effectively eliminates a referring physician's ability to maintain an ownership interest in such
'under arrangements' service providers.
Specifically, under the Final Rule, an entity for purposes
of Stark will include the person or organization that: (1) bills
for the DHS; or (2) performs the DHS.
Under these new rules, where one entity performs a
service that is billed by another entity, both entities are
considered DHS entities with respect to that service.
Under the Final Rule, for example, referring physicians
of a physician-hospital joint venture entity that furnish CT
angiography to a hospital pursuant to an under arrangements
contract are prohibited from referring patients to the hospital
for such CT angiography services unless the arrangement
satisfies the rural provider exception. Pursuant to the Final
Rule, any financial relationship between the service provider
and the physicians who refer to it for services that the
hospital bills under arrangements will need to comply with a
Stark exception. In
practice, there are limited, if any, exceptions available to
protect referrals for the service provider's physicians.
CMS does not define what it means to perform a service, but
does indicate that an organization is not performing DHS if it
merely leases or sells space or equipment, furnishes supplies
that are not separately billable, or provides management,
billing services or personnel to the entity performing the
service. One issue
for which it remains uncertain is whether an entity that
performs some, but not substantially all, of the clinical aspect
for the service (e.g., turnkey management service provider) will
be considered to be performing DHS.
Diagnostic imaging providers should consider the following
when applying the new definition of DHS entity:
Unlike referring physicians (e.g.,
cardiologists), radiologists will generally be permitted to have
an ownership in such under arrangements joint ventures because
they typically are not considered referring physicians under
Stark. Thus, under the above CT under arrangements' example, if
the CT service provider is owned by non-radiologists, then the
arrangement will not be viable under the Final Rule if the
physician owners refer to the hospital for CT services.
By contrast, however, if the entity were owned by
radiologists, this arrangement could remain in effect in
compliance with Stark.
In practice, the only available ownership
exception (for referring physicians) that will protect an 'under
arrangements service provider is the rural provider exception.
Therefore, unless substantially all of the patients reside in a
rural area, under arrangements service agreements with
referring physicians will be prohibited.
Although an arrangement limited solely to
discrete components of the service (e.g., equipment, supplies,
non-physician personnel), by itself, will not rise to the level
of performing the service, it is not clear, whether an entity
that performs some, but not substantially all, of the clinical
aspects of the service (e.g., turnkey management service
provider) will be considered to be performing DHS.
Before the October 1, 2009 effective date,
diagnostic imaging providers should review their current leasing
and or service arrangements to ensure compliance with the new
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