PHYSICIAN SELF REFERRAL REGULATIONS

PHYSICIAN SELF REFERRAL REGULATIONS: STARK II, PHASE II
IS THAT ALL THERE IS?


Shellie Karno,
Law Firm of Lowis & Gellen

SUMMARY

On July 26, 2004, Phase II of the interim final regulations of Stark II became effective.1 The regulations are the second of two phases of the final Stark regulations.2 The Center for Medicare and Medicaid Services (“CMS”) has clarified that the original regulations issued in 1995 are now superceded by these interim final rules.3 The Phase II regulations continue the trend of liberalizing interpretations and adding exceptions. This article provides a short overview of the federal physician self-referral statute and explores the recent significant changes.

CONCLUSION

The intent of the Phase II regulations is “to reduce the burden and prescriptive nature of the Stark law”. However, the physician self-referral regulations have been 15 years in the making and embody hundreds of pages of statute. Don’t try to sort this out yourself at home. The sanctions associated with a violation can be devastating to a provider. The public and private enforcement initiatives will continue their upward spiral. For questions about the Stark II Phase II regulations, or about self-referral issues in general, please contact Shellie Karno or Jerry Clousson at the law offices of Lowis & Gellen.

BACKGROUND

The physician self-referral rules prohibit a physician from referring patients to an entity for the furnishing of designated health services covered by Medicare, when the physician, or an immediate family member, has a financial relationship with the entity. 4 The regulations defined “designated health services” to include:

• Clinical laboratory services
  
  
• Physical therapy services
  
  
• Occupational therapy services
  
  
• Radiology services
  
  
• Durable medical equipment
  
  
• Prosthetics
  
  
• Outpatient prescription medication
  
  
• Home health services
  
  
• Outpatient hospital services.
  

This means that a physician cannot refer a patient covered by Medicare for any of the above services to an entity wherein the physician has a financial interest. The law has carved out many exceptions to the self-referral prohibition. However, even when the transaction does fall within an exception, it is imperative that the amount of payment reflects fair market value and is not based on the volume or value of the referrals.

EXCEPTIONS TO THE SELF-REFERRAL PROHIBITION

While the statute sets out a general prohibition against self-referral, the heart of the statute is the list of arrangements and relationships where the prohibition does not apply. Exceptions are generally categorized into three types: the ownership interest exception, the compensation arrangement exception, and the all purpose exception.

The ownership interest exception allows for physician ownership of investment securities that can be purchased on terms generally available to the public.6 For example, a physician does not violate the self-referral prohibition by ordering medications manufactured by a publicly owned pharmaceutical company that he or she owns stock in. The ownership interest exception also applies to providers in rural areas, and to hospitals located in Puerto Rico.7 The ownership interest exception extends to ownership interests in hospitals when the physician is on staff at the hospital and is authorized to perform services.8

Compensation arrangement exceptions include the rental of office space and equipment, provided that the physician does not share the space or equipment with the landlord.9 Bona fide employment agreements are excepted,10 as are personal services arrangements such as a medical director.11 Physician incentive and physician recruitment plans that meet certain criteria are excepted from the self–referral prohibition.12 The exception that allowed for a one time or isolated transaction has been expanded under the new regulations to permit multiple payments that are integrally related.13 Payments made by a physician to a laboratory for the provision of clinical lab services, or to an entity for other items or services, are allowed provided the items and services are furnished at fair market value. 14

The regulations carve out an exception for certain group practice arrangements between a hospital and a group practice if the arrangement is commercially reasonable, and otherwise qualifies for the exception.15 The group practice exception allows for referrals to physician services provided by another physician in the same group practice. In-office ancillary services, excluding durable medical equipment, that are furnished by the referring physician, or by a member of the group, or by individuals who are supervised by the referring physician or group member, fall within the in-office ancillary services exception. 16 Designated health services may be furnished in one of two places - a centralized building used by the group practice to provide designated health services, or in the same building that the referring physician or the group practice provided services unrelated to designated health services.

PHASE II EXCEPTIONS

The regulations create several new exceptions covering charitable donations by physicians,17 hospital referral services,18 obstetric malpractice insurance,19 professional courtesy discounts,20 payments made to retain physicians in underserved areas,21 and intra-family referrals in rural areas.22 The new regulations also provide a 90 day grace period for arrangements that have fallen out of compliance with an exception.23 The physician recruitment exception now allows for remuneration from a hospital in return for relocating to the geographic area served by a federally qualified health center.24 The employment relationship exception now permits the physician to be paid a productivity bonus based on personally furnished designated health services.25 Compensation arrangements based upon a percentage of the professional services provided can qualify for an exception, as long as the percentage itself is set in advance. The office and equipment exception has been liberalized to apply to any lease arrangement, including capital leases.26 This exception also allows for many sublease arrangements, provided that the tenant does not share the space or equipment with the lessor.

The earlier academic medical center exception was fraught with various conditions for the medical center and the physician. In Phase II, the CMS accommodated the many requests for a relaxation of several key definitions including expansion of the definition of a qualifying academic medical center.27

REPORTING AND SANCTIONS

The regulations require that each entity furnishing Medicare covered items or services provide the Department of Health and Human Services (“HHS”) with information regarding the entity’s ownership, investment and compensation arrangements.28 However, CMS is still developing a procedure for implementing the reporting requirements and does not currently require any reporting until such procedures are put in place.29 In the reporting requirements described in the Phase II regulations, an entity “may be required” to submit information upon request of the HHS or CMS. 30 Entities are given 30 days from the date of the request to provide the information.

Stark provides for two types of sanctions: 1) non-payment of improper claims for designated health services and recoupment of amounts already paid, and 2) civil monetary penalties of $15,000 for knowing violations. 31 In addition, violations of the self-referral prohibition may also be prosecuted by the Department of Justice under the False Claims Act.32 Violations under the False Claims Act can be pursued by whistleblower actions, and the monetary incentives of such lawsuits may obviate the need for government enforcement.

1. 69 Fed. Reg. 16053
2. 42 U.S.C. 1395 nn
3. www.cms.hhs.gov/media/press/release.asp. Accessed 3/29/04
4. Id at (a) (1)
5. Id at (a) (6) (A-K)
6. Id at (6) (1) (a) and (b)
7. Id at (d) (1) and (2)
8. Id at (d) (3)
9. Id at (e) (1) (A) and (B)
10. Id at (e) (2)
11. Id at (e) (3) (A)
12. Id at (e) (3) (B)
13. 69 Fed. Reg. 16098
14. 42 U.S.C. 1395 nn (e) (8)
15. Id at (e) (7)
16. Id at (b) (2)
17. 42 C.F.R. 411.357 (j)
18. Id at 411.357 (q)
19. Id at 411.357 (r)
20. Id at 411.357 (s)
21. Id at 411.357 (t)
22. Id at 411.355 (j)
23. 69 Fed. Reg. 16057
24. Id at 16139
25. Id at 16138
26. Id at 16086
27. Id at 16137
28. 42 U.S.C. 1395 nn (f)
29. 63 Fed. Reg. at 1703
30. 69 Fed. Reg. at 16142
31. Id at 16056
32. Id at 16126