New Stark Rules

td>				equipment leasing arrangements. CMS makes clear
On August 19, 2008, the Centers for Medicare				that the prohibition on per-click payments
and Medicaid Services (CMS) published final				applies regardless of whether the physician is
Stark rules in its 2009 Final Hospital Inpatient				personally the lessor or whether the lessor is an
Prospective Payment Systems rule (Final				entity in which the referring physician has an
Rule). The Final Rule contains several important				ownership or investment interest. This limitation
revisions to the Stark regulations, some of which				applies where the lessor is a DHS entity that
will require physicians, hospitals, or other				refers patients to a physician or physician
healthcare providers, to unwind or restructure				organization lessee.
their arrangements. Some of the new Stark rules				Realistically, this new per-click prohibition,
are not effective until October 1, 2009, to give				combined with the prohibition on percentage-based
parties with arrangements that are impacted by				compensation formulae, will have a significant
the new rules time to unwind or restructure, but				impact on current leasing joint venture
other provisions are effective October 1, 2008. In				arrangements whereby referring physicians and
addition to these new Stark changes, healthcare				hospitals or others have formed a joint venture
providers must stay tuned for additional significant				entity for the purpose of leasing space or
Stark and Medicare payment regulatory changes,				equipment to a hospital or other DHS entity on a
which are expected to be published in November				variable fee basis. The Final Rule now requires that
2008 as part of the 2009 Medicare Final Physician				to the extent there are any physician investors in
Fee Schedule, and in future regulations. With all of				the joint venture leasing entity that refer to the
the recent regulatory changes, healthcare				lessee entity, the lease payments between the
providers should have their arrangements				lessee and the joint venture may not be based
reviewed to ensure that they continue to be in				on either (i) a percentage of revenue raised,
compliance with the Stark law.				earned, billed, collected or otherwise attributable to
A synopsis of the Final Rule Stark changes is as				the services performed or business generated in
follows:				the space or through use of the equipment, or (ii)
Stand in the Shoes Provisions: Effective				per-unit rental charges, to the extent that such
October 1, 2008, only physicians who have an				charges reflect services provided to patients
ownership or investment interest in their physician				referred between the parties.
organizations (e.g., group practice) will be required				Percentage-Based Leasing Arrangements
to stand in the shoes (SITS) of those				—
organizations. The SITS doctrine no longer applies				The Demise of Percentage-Based Compensation
to non-owner physicians. CMS also carves out an				for Space and Equipment Leases
exception for physicians participating in financial				In an earlier proposal, CMS planned on eliminating
arrangements that satisfy the Stark exception				percentage-based compensation arrangements
for academic medical centers. The SITS concept				except in the context of personally performed
is used for purposes of determining whether a				service agreements. CMS now modifies its earlier
physician has a direct or indirect financial				position, and finalizes a rule that eliminates all
relationship with a DHS entity.				percentage-based compensation only in the
Set in Advance and Amendments to				context of space and equipment leases.
Agreements: CMS now states that it is reversing				Specifically, the Final Rule amends the current
its prior position and permitting multi-year				Stark exceptions for the rental of office space,
agreements to be amended after the first year				the rental of equipment, fair market value
without violating Stark’s set in				compensation arrangements, and indirect
advance requirement.				compensation arrangements to prohibit the use of
Period of Disallowance: Effective October 1, 2008,				compensation formulae for space or equipment
CMS establishes a rule that sets the outer limit of				leases based on a percentage of the revenue
the time period during which referrals are				raised, earned, billed, collected or otherwise
prohibited as a result of a financial relationship that				attributable to the services performed or business
fails to satisfy a Stark exception. Disallowance				generated in the leased office space or to the
begins when the relationship fails to satisfy an				services performed on or business generated by
exception and ends no later than the date that it				the use of leased equipment. In implementing this
satisfies an exception and the parties have				rule, CMS effectively ends all percentage-based
returned any overpayments or paid any				arrangements for the lease of space or
underpayments.				equipment, whether structured as direct or
Alternative Method for Compliance: Effective				indirect financial arrangements. Current percentage
October 1, 2008, if a financial relationship complied				lease arrangements that run afoul of this new
with an applicable Stark exception, except for				prohibition will need to be restructured prior to
meeting the signature requirement, Medicare				October 1, 2009.
payments to the entity will be permitted if the				Under Arrangements Under Attack
signature requirement is complied with within thirty				Under current Stark law, only entities that bill
(30) days (for knowing failures) or ninety (90)				Medicare for DHS are considered DHS entities.
days (for inadvertent failures) after the				The Final Rule significantly expands the definition
commencement of the relationship.				of entity to include entities that perform
Per-Click Leasing Arrangements: Effective				services that are in turn billed as DHS by another
October 1, 2009, CMS eliminates the use of				entity. As a practical matter, this change means
per-click fee payments in space and/or				that referring physicians likely will not be able to
equipment leases when the payments reflect				have an ownership or investment interest in
services provided to patients referred between				under arrangements service providers.
the parties. This per-click fee prohibition				Because this change will require the unwinding or
applies to both direct leasing arrangements and				restructuring of many under arrangements
indirect leasing arrangements (e.g., leases between				transactions (e.g., physician-owned entities that
physician-owned leasing companies and hospitals).				provide services to hospitals under
Percentage-Based Leasing Arrangements:				arrangements), CMS delayed the effective
Effective October 1, 2009, CMS eliminates				date until October 1, 2009.
percentage-based compensation in space and				Under the current Stark regulations, because the
equipment leases, paralleling its treatment of				under arrangements service provider is not
per-click payments in space and equipment				considered a DHS entity, the Stark analysis
leases. Under the Final Rule, compensation for the				focuses on the relationship between the hospital
rental of office space or equipment that is				and the referring physicians associated with the
determined using a formula based on a				service provider. These arrangements are
percentage of the revenue raised, earned, billed,				analyzed as either direct financial arrangements (if
collected, or otherwise attributable to the services				a referring physician stands in the shoes of the
performed, or business generated in the office				service provider) or indirect financial arrangements
space, or the services performed or business				(if stand in the shoes does not apply) and
generated through the use of equipment is				generally can be structured to fit within a direct or
prohibited.				indirect compensation exception.
Services Provided Under Arrangements:				Under the Final Rule, any financial relationship
Effective October 1, 2009, both the hospital that				between the service provider and the physicians
bills for services provided under				who refer patients to it for services that the
arrangements and the entity that provides the				hospital bills under arrangements will need
services to the hospital will be considered to be				to comply with a Stark exception. Direct
furnishing designated health services				compensation exceptions should be available to
(DHS) under Stark. This change will				protect referrals from the service
effectively eliminate a referring physician’s				provider’s non-owner physicians, but very
ability to own interests in such service providers.				few exceptions are available for referring
Exception for Obstetrical Malpractice Insurance				physicians who own an interest in the service
Subsidies: Effective October 1, 2008, CMS adds an				provider. In most cases, the only exception that
alternative exception for subsidies of malpractice				could apply is the exception for rural providers.
insurance premiums provided by hospitals,				CMS makes clear that even if a service provider,
federally qualified health centers, and rural health				such as a cardiac-catheterization lab, performs
clinics.				services that would not otherwise be DHS if the
Ownership or Investment Interest in Retirement				services were provided and billed by the service
Plans: October 1, 2008, CMS narrows the so-called				provider in a freestanding setting, the services
retirement plan exception to ensure that				become DHS and the service provider becomes a
referring physicians cannot use it to evade				DHS entity when a hospital bills for those services
Stark’s self-referral prohibition by investing				pursuant to an under arrangements
in a DHS entity via their employer’s				contract as the services are considered inpatient
retirement plan. Under the Final Rule, only a				or outpatient hospital services.
physician’s ownership or investment				CMS did not define when an entity is considered
interest in their employer-sponsored retirement				to be performing DHS. CMS states that
plan is protected.				the common meaning of the term should apply.
Burden of Proof: Under the Final Rule, CMS				CMS states in preamble commentary that it
revises the regulations to place the burden of				considers a physician or physician organization to
proof in appeals of Stark-based payment denials				have performed DHS if the physician or
on the entity appealing the denial. This burden is				physician organization does the medical work for
consistent with the burden of proof on Medicare				the service and could bill for the service, but the
providers and suppliers appealing payment denials				physician or physician organization has contracted
based upon other reasons, such as a failure to				with a hospital and the hospital bills for the service
meet a condition of coverage.				instead. However, CMS states that it would
Disclosure of Financial Relationships Report				not consider a lessor of equipment or space, a
(DFRR): The Final Rule announces that CMS				provider of management, billing services, or
is proceeding with its proposal to send the DFRR				personnel, or an entity that furnishes supplies that
to 500 hospitals. The DFRR is designed to collect				are not separately billable but are used in the
information regarding the ownership and				performance of medical services to be
investment interests and compensation				performing DHS. Left unclear is whether an entity
arrangements between hospitals and physicians.				that does some, but not substantially all, of the
Medicare Stark Payment Denial Code: Although				medical work for the service (such as a
not part of the Final Rule, it is significant for				turnkey management service provider) will be
healthcare providers to note that Medicare				considered to be performing DHS. Additionally,
Carriers and Intermediaries have now been given				because of the new per-click and
a specific code to deny payment to providers due				percentage-based compensation prohibitions
to violations of Stark.				discussed above, even if not deemed to be a
Stand in the Shoes (SITS)				DHS entity, many of these arrangements will no
Under the Final Rule, a physician who has an				longer meet a Stark exception.
ownership or investment interest in a physician				Alternative Exception for Obstetrical Malpractice
organization (e.g., group practice) is deemed to				Insurance Subsidies
stand in the shoes of his or her physician				The Stark regulations currently include an
organization, but a physician who has only a				exception for obstetrical malpractice insurance
compensation arrangement (or one with only				premium subsidies that meet the federal
titular ownership interest) need not be				anti-kickback safe harbor. The Final Rule includes a
treated as standing in the shoes of such				new alternative exception that protects subsidies
organization. A titular ownership interest is an				paid by a hospital, federally qualified health care
ownership interest where the physician is not able				center or rural health clinic if 10 specific
or entitled to receive any of the financial benefits				requirements are met. Under the new alternative,
of ownership or investment, including, but not				among others, the physician’s practice
limited to, the distribution of profits, dividends,				must be located in a primary care Health
proceeds of sale or similar return on investment				Professional Shortage Area, rural area, or area
(e.g., captive PC). For physicians who are not				with a demonstrated need for obstetrical
required to be treated as standing in the				services; or at least 75% of the
shoes, an entity may elect to apply stand				physician’s obstetrical patients must live in
in the shoes on a case-by-case basis.				a medically underserved area or are part of a
The new SITS rule does not apply to				medically underserved population.
arrangements that satisfy the requirements of				Ownership or Investment Interests in Retirement
the academic medical center (AMC)				Plans
exception, but CMS declined to finalize a separate				Under current Stark regulations, ownership and
exception for compensation arrangements				investment interests do not include an interest in
involving mission support payments or similar				a retirement plan. The Final Rule modifies this
payments in the context of AMCs or integrated				exception to address concerns regarding potential
delivery systems. CMS also declined to extend the				circumvention of the self-referral prohibition by
current SITS moratorium applicable to AMCs and				referring physicians investing through retirement
integrated health care delivery systems beyond				plans in a DHS entity that he or she would be
its December 4, 2008, deadline. However, the				prohibited from investing in directly. CMS revises
new revisions to the SITS rule should allow an				the retirement plan exception to except only
indirect compensation analysis of many				ownership or investment interests in an entity
arrangements to be preserved.				that [arise] from a retirement plan offered by
Last, CMS did not finalize its earlier proposal to				that entity to physician (or a member of his or
apply SITS to owners of DHS entities beyond				her immediate family) through the
physician organizations.				physician’s (or immediate family
Set in Advance and Amendments to				member’s) employment with that
Agreements — CMS Changes its Position				entity.
In response to a comment in the preamble				Accordingly, under the Final Rule, a referring
discussion of the Final Rule, CMS indicates that it				physician, for example, that is employed by a
has reconsidered and changed its earlier Stark II				practice that furnishes in-office ancillary services,
Phase III Final Rule position, that a multi-year				(Practice) and, through his employment
agreement for rental of office space or a				with Practice, has an interest in the
personal service arrangement may not be				Practice’s retirement plan, and the
amended during its term without violating the				Practice’s retirement plan then invests in a
Stark exceptions’ requirement that the				home health agency (HHA), will need to
compensation under the arrangement be set				rely upon an ownership exception for his
in advance for the term of the agreement.				investment in the HHA, just as if he or she
This position was widely criticized as imposing				invested in the HHA directly. As a practical
additional transaction costs on the parties to these				matter, unless the rural provider exception applies,
agreements by requiring them to terminate an				there likely is no applicable ownership exception.
existing agreement and enter into a new				Burden of Proof
agreement on modified terms rather than simply				In the Final Rule, CMS clarifies that when a DHS
amending the agreement.				entity appeals a claim for payment that was
CMS now states that in light of the new final				denied on the basis that it was furnished pursuant
revisions with respect to percentage-based and				to a prohibited referral, the DHS entity has the
per-click compensation formulae, an				burden of proof at each level of the appeals
agreement is permitted to be amended as long as				process to establish that the service was not
the following criteria are met: (1) All of the				furnished pursuant to a prohibited referral. The
requirements of an applicable exception are				burden of production on each issue at each level
satisfied; (2) The amended rental charges or				of appeal is initially on the DHS entity, but may
compensation (or the compensation formula) is				shift to CMS or its contractors depending on the
determined before the amendment is				evidence the DHS entity presents. CMS notes
implemented, and the formula is sufficiently				that this approach is consistent with the current
detailed that it can be verified objectively; (3) The				Medicare claims appeals process.
formula for amended rental charges does not				Given the far reach of Medicare’s
take into account the volume or value of referrals				Recovery Audit Contractors (RACs) and
or other business generated by the referring				CMS’ new Stark payment denial code, in
physician; and (4) The amended rental charges or				the near future, providers may be faced with
compensation (or the compensation formula)				RAC auditors (who are paid on a contingency
remain in place for at least one year from the				basis) denying services based on Stark violations.
date of the amendment.				Although this raises several issues not addressed
Period of Disallowance for Non-Compliant				in this article, it certainly should change
Relationships				one’s perspective on the fairness of
In the Final Rule, CMS finalizes its earlier proposal				requiring the claimant to establish the burden of
to provide that from the time that a financial				proof at each level of the appeals process.
relationship fails to satisfy a Stark exception to a				The Disclosure of Financial Relationships Report
period no later than the date that the financial				(DFRR)
relationship satisfies all of the requirements of a				The Final Rule announces that CMS is proceeding
Stark exception (including returning any				with its proposal to send the Disclosure of
overpayments or paying any underpayments), a				Financial Relationships Report (DFRR) to
physician may not refer DHS to the entity and				500 hospitals (general acute care and specialty).
the entity may not bill Medicare. These new rules				The DFRR is designed to collect information
create an outside limit for the period of				concerning the ownership/investment interests
disallowance and are not intended to prevent				and compensation arrangements between
parties from arguing that the period of				hospitals and physicians. Hospitals that receive the
disallowance ended sooner on the theory that the				DFRR will have 60 days to respond. CMS may
financial relationship ended earlier. CMS cautions,				decide to decrease (but not increase) the number
however, that the beginning and end dates of a				of hospitals that will receive the DFRR. CMS notes
financial relationship for purposes of the				that although it has authority to impose civil
disallowance period do not necessarily correspond				monetary penalties of up to $10,000 per day for
with the term of the parties’ written				late submissions, it is using the Final Rule to inform
agreement.				the public that it will issue a letter to any hospital
Alternative Method for Compliance —				that does not return a completed DFRR, inquiring
CMS Provides Flexibility for Technical Defects Due				as to why the hospital failed to do so, before
to Missing Signatures				imposing such penalties. Also, CMS reiterated that
A host of Stark compensation exceptions include				it will give hospitals extensions of time to
a signature requirement. The Final Rule adopts a				complete the DFRR submission upon a
provision which permits payments to an entity				demonstration of good cause.
that fully complied with an applicable Stark				What’s Next?
exception, except with respect to a signature				Clearly, many of the Stark changes in the Final
requirement, if (i) the failure to comply with the				Rule will require modification, restructuring, or
signature requirement was inadvertent and the				unwinding of existing arrangements. CMS has
entity rectifies the failure to comply within 90				given providers a year to comply with many of
days after the commencement of the financial				the significant changes. However, CMS is not done
relationship (without regard to whether referrals				yet, as many additional Stark and Medicare
have occurred or compensation paid), or (ii) the				payment rules are expected to be published this
failure to comply with the signature requirement				year as part of the 2009 Medicare Final Physician
was not inadvertent (knowing) and the entity				Fee Schedule. These expected changes relate to
rectifies the failure within 30 days after the				Medicare’s anti-markup prohibition, new
commencement of the financial relationship. This				IDTF requirements for physician’s
new exception may only be used once every				furnishing imaging services in the office, and a
three years with respect to the same referring				new Stark gainsharing exception. Further, CMS
physician.				has also promised future proposals which may
Prohibition on Per-Click Space and				narrow the in-office ancillary services exception,
Equipment Lease Arrangements				an exception that is crucial to many group
Under the Final Rule, CMS prohibits the use of				practices providing ancillary services (e.g., imaging,
per-click payments for space and				lab, PT) through their offices.

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New Stark Rules