STARK LAW - Information
on physician investment
PHYSICIAN INVESTMENT AND PHYSICIAN OWNED
regulatory changes made by the Centers for Medicare and Medicaid Services
have modified physician investment guidelines in the Phase III final
regulations of the
(“Stark III”) and in
the 2008 Medicare Physician Fee Schedule proposed and final rules (the “2008
Fee Schedule”). The 2008 Fee Schedule’s limitations on reimbursement for
diagnostic tests and its prohibitions on an independent diagnostic testing
facility sharing its facility with another Medicare provider or supplier
have made investment in certain health care ancillaries, such as imaging
equipment and anatomic pathology labs, less attractive to physicians.
Investment opportunities continue to exist but awareness of the impact of
these legal and regulatory procedures is strongly advised before any
financial consideration is given.
Ambulatory Surgical Centers
Neither Stark III nor the 2008 Fee Schedule has imposed restrictions upon a
physician’s ability to invest in ambulatory surgical centers. ASC services
are not designated health services covered by the Stark law. The Stark law,
in the absence of an applicable exception, prohibits a physician from
referring a Medicare or Medicaid patient to an entity in which he, or an
immediate family member, has a financial interest for the provision of any
of 11 designated health services.
Investment in an ASC, however, must comply with the federal Anti-Kickback
statute’s safe harbor provisions. The Anti-Kickback statute (the
“Anti-Kickback Statute”) prohibits anyone from offering, paying, soliciting
or receiving any remuneration in exchange for the referral of Medicare or
Medicaid business. The Anti-Kickback Statute contains certain exceptions,
known as safe harbors, which allow conduct that would otherwise violate the
statute (collectively “Safe Harbors”, individually “Safe Harbor”). The Safe
Harbor for investments in ASCs has four categories: surgeon owned ASCs;
single specialty ASCs; multi-specialty ASCs; and hospital/physician ASCs.
Safe Harbor protection requires full compliance with all of the standards of
any one category. The standards require, in part, that each physician
investor (1) be in a position to refer patients directly to the ASC and
perform surgery on such referred patients; (2) derive at least one-third of
his medical practice income from procedures he performs at the ASC and (3)
perform at least one-third of the procedures that may be performed in an ASC
setting at the investment entity ASC if the investment is in a
multi-specialty ASC (the “ASC Safe Harbor”).
Medical Space/Medical Equipment Leasing Companies; Management
Medical space/medical equipment leasing companies and medical management
companies continue to present investment opportunities for physicians.
Typically, a leasing company will either own or lease space and/or equipment
and will lease, or sublease, the space and/or equipment to a health care
facility. In return for the lease or sublease of the space and/or the
equipment, the health care facility will pay the leasing company a rental
fee. A management company will manage a health care facility by performing
tasks such as billing, collecting, accounting, hiring and firing of
personnel on behalf of the health care facility. In exchange for its
performance of management functions, the health care facility will pay the
management company a management fee.
There are no restrictions on the physician specialty that can invest in a
medical space/medical equipment leasing company or in a medical management
company. As noted earlier, under the ASC Safe Harbor, physicians who want to
invest in an ASC must be in a position to refer patients directly to the ASC
and perform surgery on such referred patients. It follows that primary care
physicians are not permitted to invest in ASCs. However, even though a
primary care physician cannot invest in an ASC, he can invest in (1) a
medical space leasing company that owns or leases the building in which the
ASC is located and that leases or subleases the space to the ASC; (2) a
medical equipment leasing company that owns or leases equipment, such as
MRIs and CTs, to the ASC and (3) a medical management company that manages
Investments in medical space/medical equipment leasing companies and medical
management companies should be structured to fall within the Small
Investment Safe Harbor. The Small Investment Safe Harbor requires, in part,
that no more than 40 percent of the investment interests be held by
investors who are in a position to make a referral for the entity and no
more than 40 percent of the entity’s gross revenue may come from referrals
or business otherwise generated from investors.
Furthermore, lease agreements between the leasing companies and the health
care facilities and the management agreements between the management
companies and the health care facilities must be structured to fall within
other applicable Safe Harbors and the exceptions to the Stark Law. The
applicable Safe Harbors for leases and management agreements and the
applicable Stark Law exception for leases require, in part, that the rent
under the leases and the management fee under the management agreement be at
the fair market value and not be determined in any manner that takes into
account the volume of patients referred to a health care facility by a
physician owner of the leasing company or the management company.
Hospitals may present viable investment opportunities for physicians;
however, investments in hospitals should be structured to fall within
applicable Safe Harbors, such as the Small Investment Safe Harbor and Stark
Law exceptions. The Stark Law has an exception, known as the “whole hospital
exception,” that permits a physician to refer his Medicare or Medicaid
patient for the provision of any of 11 designated health services to a
hospital in which he has an ownership interest if the referring physician is
authorized to perform services at the hospital and the physician’s ownership
is in the entire hospital and not merely a distinct part of department of
It is worth noting that Congress continues to focus on physician-owned
hospitals. Members of the Senate have stated that they expect to introduce
legislation that would eliminate the whole hospital exception entirely, thus
preventing physicians from referring their Medicare/Medicaid patients to
hospitals in which they have ownership interests. Members of the House of
Representatives have passed legislation that greatly restricts a physician’s
ability to invest in a hospital to which he refers Medicare or Medicaid
patients. The House legislation, known as the Paul Wellstone Mental Health
and Addiction Equity Act (the “Wellstone Act”) was passed on March 3, 2008.
The Wellstone Act eliminates the whole hospital exception for
hospitals that do not have physician ownership and Medicare provider
agreements as of the date of its enactment and limits physician ownership in
existing hospitals to no more than 2 percent, individually and 40 percent in
the aggregate. However, to date, no changes have been made to the whole
hospital exception and it continues to allow physician investment in
In addition to ASCs, medical space/medical equipment leasing companies and
medical management companies and hospitals, hospices, physical therapy
clinics and home health agencies continue to present investment
opportunities for physicians. Investment in any of these entities, though
not restricted by the 2008 Fee Schedule or Stark III, should be structured
to fall within applicable Safe Harbors and exceptions to the Stark Law.
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