Making Sense of the Stark Law. Compliance for the Medical Practice

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1 Making Sense of the Stark Law Compliance for the Medical Practice

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3 Making Sense of the Stark Law Compliance for the Medical Practice The information contained in this manual is intended to serve as a general resource and guide. It is not to be construed as legal advice. Attorneys with knowledge of the Stark Law and other fraud and abuse laws should be consulted regarding the application of these laws to specific situations. This manual was prepared by William M. Mandell, Esq. and Dean P. Nicastro, Esq., of the law firm of Pierce & Mandell, P. C. (Boston, Massachusetts) in conjunction with and under the direction of the Massachusetts Medical Society s Department of Health Policy/Health Systems and the Office of the General Counsel Massachusetts Medical Society. All rights reserved.

4 TABLE OF CONTENTS Introduction.. 1 Statutory and Regulatory History The Stark Prohibition. 3 Defined Terms Example Figures: Financial Arrangements Standards of Proof to Demonstrate a Violation Compliance with the Anti-Kickback Laws Penalties and Sanctions for Violating Stark Reporting Obligations Whistleblowers and the Stark Law Stark Law Advisory Opinions Making Sense of the Exceptions Relevant to Independent Medical Practices Individual Physician Compensation Relationships Compensation to Non-group Practice Physicians Other Medical Practice/Physician Relationships with DHS Entities Other General Exceptions Physician-Hospital Relationships Indirect Compensation Arrangements Managed Care Relationships Purchase and Sale of Medical Practices Final Comments Exhibit A: 2005 DHS CPT/HCPCS Code List Exhibit B: Stark Law MD Compensation Grid

5 INTRODUCTION Physicians are under increasing scrutiny by federal and state enforcement agencies with regard to their financial relationships both within and outside their medical practices. This booklet summarizes the federal statute and regulations that govern the so-called Stark Law 1 that prohibits certain physician self-referrals. (For those who want to read the actual text of the law, the statute appears as Section 1877 of the Social Security Act and is codified at Title 42 of the United States Code Section 1395nn, and the regulations issued by the Centers for Medicare and Medicaid Services (CMS) appear at Title 42 of the Code of Federal Regulations, Sections et seq.) The Stark statute, regulations, advisory rulings, and some agency commentary can be found on the CMS website at www. cms.hhs.gov/medlearn/refphys.asp. This booklet has been specifically written to address Stark from the perspective of the independent medical practice. The Stark Law, however, is quite broad in its scope and does regulate many other providers that have financial relationships with physicians particularly hospitals. The reader should note that this booklet is not meant to be an exhaustive treatment of the Stark Law and the concerns of the medical practice have been emphasized. It is also important to keep in mind that a physician s financial relationships can call into question many other federal and state fraud and abuse laws in addition to the Stark Law. There are several other federal and state health care fraud and abuse laws that may have a bearing on a Massachusetts physician s financial relationships, including the Medicare/Medicaid anti-kickback or illegal remuneration for referral laws, similar Massachusetts state anti-kickback laws covering both government programs and private health insurance, Medicare/Medicaid mandatory and permissive exclusion laws, the Federal False Claims Act, and the Massachusetts False Claims Act. Therefore, the Stark Law must always be considered in tandem with other fraud and abuse compliance issues, especially the federal and Massachusetts anti-kickback laws. 1 In addition to the CMS, many other federal and state agencies have the authority to investigate and refer for prosecution or prosecute cases involving non-compliant physician financial relationships. The offices of the U.S. Attorneys, the U.S. Department of Justice, and the Federal Bureau of Investigation (FBI) have authority to investigate and prosecute alleged violations of federal health care laws. The Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) has as its mission the identification and elimination of fraud, waste, and abuse in HHS programs and the promotion of efficiency and economy in departmental operations. In Massachusetts, the Medicaid Fraud Control Unit of the Massachusetts Attorney General s office is charged with the enforcement of the state s fraud and abuse laws. The Massachusetts Medical Society (MMS) has put together this booklet in an effort to assist physicians and their medical practices with their ongoing Stark compliance efforts. The information contained within these pages is not intended to meet individual practice needs, but rather, to serve as a general reference and educational guide. Physicians and medical practices are encouraged to seek advice from their own counsel to address specific legal issues that arise in their individual practices. 1 The law, including the statute and regulations, has taken on the name of its sponsor, California Congressman Fortney Pete Stark, but it actually is styled as Limitation on Certain Physician Referrals.

6 Massachusetts Medical Society STATUTORY AND REGULATORY HISTORY The first version of the Stark Law (Stark I) was passed by Congress in 1989 and barred physicians from referring patients or specimens to clinical labs, including physician office labs, with which a physician or immediate family members had a financial relationship, and also barred such labs from billing for Medicare-covered tests, unless the relationship came within certain recognized exceptions. Stark I was based on the premise that physicians order both more laboratory tests and more complex tests when they stand to benefit financially. 2 Final agency regulations under Stark I were not issued until six years later, in 1995, covering just the self-referral prohibition for clinical laboratory services (these have now been nullified by the final Stark II regulations). By then, Congress had already expanded the Stark Law in 1993 to apply to nine other general categories of designated health services (Stark II) starting in Proposed Stark II regulations were first issued on January 9, 1998, and set forth a broad agency application of the law. For instance, in the proposed Stark II regulations, a referring physician could not be compensated based on personally performed services. After significant opposition to many aspects of the proposed Stark II regulations were articulated by the health care community through extensive comments, the CMS decided to issue final Stark II regulations in two major initial phases. Final Stark II Phase I regulations were issued in January 2001, and went into effect on January 4, Final Stark II Phase II regulations were issued in March 2004 and went into effect on July 24, With the exception of Medicaid managed care plans, the CMS has not yet addressed the application of the Stark Law to Medicaid and other state health programs in these two phases of the Stark II regulations, and is also considering public comments on Final Stark II Phase II regulations, so a Stark II Phase III set of regulations is expected to be issued some time in the future. A major source of confusion and complexity about the Stark Law is that Congress chose to define prohibited physician financial relationships broadly to include compensation arrangements as well as ownership interests. A critical element of the Stark Law is that Congress delegated to the regulatory agency the authority to expand and create new exceptions to the prohibition. During the process of issuing the Stark regulations over the past decade, the CMS has wrestled with the right balance between certainty, consistent with the legislative drafters intent to provide a bright line approach, and the effort to carve out a variety of exceptions to address concerns raised in the numerous comments from providers and others in the health care community. It is interesting to note that prior to the enactment of the Stark Law, the American Medical Association (AMA) had in effect since 1977 an ethical rule limiting physician ownership in health care facilities to which the physician refers to situations involving community need, and a general ethical standard that wherever a physician may have a conflict of interest, he or she should seek alternative arrangements for the care of his or her patient. 2 In 1992, the MMS endorsed the policy of the AMA Council on Ethical and Judicial Affairs, which was adopted unanimously by the AMA House of Delegates in December 1991 related to physicians ownership of facilities. Thus, the Stark Law legislatively proscribes in an extremely broad fashion what the medical profession had long before considered and crafted as a more balanced approach toward addressing physician conflicts between patient care and financial self-interest. 2 See AMA Policy E-8.032, Conflicts of Interest: Health Ownership by a Physician.

7 Making Sense of the Stark Law: Compliance for the Medical Practice THE STARK PROHIBITION The Stark Law prohibits the making of referrals or the billing for payment for certain designated health services (DHS) covered by Medicare or Medicaid if there is a financial relationship between the referring physician (or immediate family member of the physician) and an entity receiving payment for the DHS, unless the relationship comes within one of many enumerated exceptions to the prohibition. The operative language states that if a physician (or immediate family member) has a financial relationship with a DHS entity, the physician may not make a referral to the entity for the furnishing of any Medicare- or Medicaid-reimbursable DHS, and the entity may not present or cause to be presented a Medicare or Medicaid claim or bill to either program or any individual, third-party payor, or other party for such referred or ordered services. In order to fully understand the scope and breadth of the Stark Law, several terms defined in the statute and regulations must be consulted. These are as follows: Physician Immediate family member Financial relationship Entity Referral 3 Designated health services (DHS) The exceptions DEFINED TERMS The starting point in making sense of the Stark Law is to understand those services and items that it covers. Designated Health Services The Stark Law was enacted to only cover a defined set of services and items believed by Congress to be prone to over-utilization in cases in which the referring physician had a financial relationship with the entity receiving payment for such services and items. Initially, between 1992 and 1994, the Stark Law only applied to clinical laboratory services reimbursable by Medicare. Since 1995, the Stark Law covers the following expanded list of so-called designated health services (DHS) reimbursable under either Medicare or federally funded state health programs: Clinical laboratory services Occupational and physical therapy services (including speech-language pathology services) Radiology services including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services, even if they are cardiac (e.g. echocardiograms), vascular, obstetric, gynecological, or ophthalmic and not generally performed by radiologists (but this

8 Massachusetts Medical Society category specifically excludes nuclear medicine procedures, 3 radiology procedures integral to and performed during a nonradiological medical procedure, certain radiology procedures performed immediately after a nonradiological medical procedure, and x-ray, fluoroscopy, and ultrasound services that require the insertion of a needle, catheter, tube or probe) Radiation therapy services and supplies (not including nuclear medicine procedures) Durable medical equipment and supplies Parenteral and enteral nutrients, equipment, and supplies Prosthetics, orthotics, and prosthetic devices and supplies (not including certain surgically implanted devices at ambulatory surgical centers (ASCs) and eyeglasses and contact lenses prescribed after cataract surgery) Home health services Outpatient prescription drugs Inpatient and outpatient hospital services, including services provided under arrangement 4 As is apparent from this list of DHS, Congress and the CMS included both services and items. Therefore, as used throughout this publication, the reference to DHS includes all of the items and services listed above. To eliminate confusion about which items and services are prohibited for four of the ten designated health services categories (clinical laboratory services, physical and occupational therapy, radiology and certain other imaging services, and radiation therapy services), the CMS has issued a list of CPT/HCPCS codes to specifically identify the services and items within these categories of DHS that are subject to the Stark Law. The list is updated periodically and is available on the CMS website, gov/medlearn/refphys.asp, and in the physician fee schedule rules, published annually in the Federal Register. The 2005 DHS CPT/HCPCS code list is included in the back of this publication as Exhibit A. This list also sets forth exclusions from the Stark Law by code for certain preventive screening exams, immunizations and vaccines, and erythropoietin (EPO) and other dialysis-related drugs. The CMS did not define the remaining DHS by specific CPT or HCPCS codes, believing the regulations define these six other DHS areas sufficiently. There is, however, continuing uncertainty in many of these DHS categories. In particular, the application of Stark to office procedures that may involve administration of prescription medications has been challenging for internal medicine, pulmonology, and oncology practices. In the commentary regarding the Stark II Phase II regulations issued in March 2004, the CMS did acknowledge that the category of outpatient prescription drugs under Stark will include prescription drugs covered by Medicare under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). As the MMA establishes a new Medicare Part D prescription drug benefit effective January 1, 2006, the CMS has announced its intention to further revise the Stark regulations to address the application of Stark to the Part D benefit. Physicians should assume that the Stark rules will be applicable to their (and immediate family members ) financial relationships with any entities that render and bill Part D-covered prescription medications starting in CMS has announced that it plans to expand the definition of radiology and certain other imaging services and radiation therapy services and supplies sometime in 2005 to include diagnostic and therapeutic nuclear medicine services and supplies.

9 Making Sense of the Stark Law: Compliance for the Medical Practice The question of whether some medical services and procedures are DHS and thus covered by Stark has already been the subject of litigation in federal court. In 2002, a federal district court ruled on a lawsuit filed by the American Lithotripsy Society and Urology Society of America that lithotripsy is not a DHS and did not fall under the definition of inpatient or outpatient services under Stark. Subsequently, in the final Stark II regulations, the CMS confirmed that it does not consider lithotripsy an inpatient or outpatient service anymore. The CMS did note, however, that contractual relationships between hospitals and physicians regarding lithotripsy constitute a financial relationship under Stark, and thus must comply with an exception if the physician will refer Medicare patients to the hospital for any other DHS. DHS covered by Stark may include the professional as well as the technical or facility component of the fee, depending on the type of service and how it is paid by Medicare. For instance, radiology and other imaging services are defined by the CMS to include both the professional and technical components of covered tests or procedures. Comparatively, the CMS defines inpatient and outpatient hospital services under Stark to exclude professional services performed by physicians or other professionals if Medicare reimburses the physician s services independently and not as part of the hospital service. Yet physical and occupational therapy, which are paid as a professional fee, are defined as a Stark-covered DHS. And, in many instances, Stark-covered DHS constitutes a physician s professional fee, such as certain outpatient prescription drugs administered in a medical office, or those DHS performed by someone under the supervision of a physician and billed as incident to 4 that physician s services. Also, many common diagnostic procedures, such as pulmonary function tests, EKGs and ECGs, are not DHS subject to Stark when rendered within the medical practice setting, but would be subject to Stark when rendered in the outpatient or inpatient hospital setting as outpatient or inpatient hospital services are included in the definition of Stark DHS. 5 Any DHS paid by Medicare as part of a composite payment under a separate benefit that is not included on the DHS list for example, end-stage renal disease, hospice care, or physical therapy services billed and paid as skilled-nursing facility (SNF) services are not subject to the Stark prohibitions. However, any DHS that is payable itself as a composite rate (e.g., any service provided as a home health service or inpatient and outpatient hospital service) is subject to the Stark Law. Overall, each physician and group practice should undertake a complete review of all services, procedures, and items they order and/or render to determine if Stark applies to them. Such an analysis is very important especially when establishing new relationships with other physicians and parties that may be ordering or rendering Stark-covered services or items. Many of the national specialty societies have been quite helpful in identifying which services and procedures within their specialties may be covered under Stark. Physician Physician means a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry, or a chiropractor. Thus, the Stark Law can apply to services orderedby other licensed practitioners, not just medical doctors. 4 The term incident to is itself a Medicare term of art defined by the Medicare regulations and Medicare manuals. The applicable definition depends on whether the services incident to are hospital outpatient services or services furnished by a physician. For hospital outpatient services, incident to services are those furnished by a hospital (or those under arrangement with a hospital) pursuant to a physician s order and under physician supervision. For physician s services, incident to services are those rendered without charge or included in the physician s bill.

10 Massachusetts Medical Society Immediate Family Member Immediate family member or member of a physician s immediate family means husband or wife; birth or adoptive parent, child, or sibling; stepparent, stepchild, stepbrother, or stepsister; father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent or grandchild; or spouse of a grandparent or grandchild. The inclusion of immediate family member under the Stark Law was intended to close any loopholes through which a DHS entity could have a prohibited financial relationship with a referring physician s family member. A major practical problem, however, is created for those physicians who have other physicians in the family practicing in the same community, or for those physicians who have family members who own or work for DHS entities, including group practices. Needless to say, such multi-physician family and family office staff situations must be carefully reviewed to avoid any Stark problems. Financial Relationships 6 Any financial relationship between a referring physician and a DHS entity implicates the Stark Law, even if the relationship is wholly unrelated to the DHS payable by Medicare or Medicaid. For instance, if a primary care physician is paid by a group practice to be the medical director of a skilled nursing facility, but also orders tests from the group in-office clinical lab for his or her patients, the medical director relationship, as well as the physician s other ownership interests and compensation arrangements would be subject to Stark. A financial relationship is defined as a direct or indirect ownership or investment interest in an entity through equity, debt, or other means, or a direct or indirect compensation arrangement involving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, between a physician (or immediate family member) and an entity. Any financial relationship between the referring physician and the DHS entity is covered by Stark, even if it is wholly unrelated to a Medicare/Medicaid DHS, if the referring physician will make referrals of Medicare/Medicaid DHS to the DHS entity. A financial relationship may be direct or indirect. A direct financial relationship exists if remuneration passes between the referring physician (or immediate family member) and the DHS entity without any intervening persons or entities. An indirect financial relationship exists if one or more persons or entities are interposed between the referring physician and the DHS entity. The Stark regulations set out the following tests, including a knowledge element, to determine if an indirect relationship is subject to Stark. An indirect ownership/investment interest exists if both of the following are true: There is an unbroken chain of one or more parties having ownership/investment interests between the referring physician (or an immediate family member) and a DHS entity. The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician (or an immediate family member) has some ownership/ investment interest through the intermediaries in the DHS entity (even if it is not the specific terms or composition of the relationships).

11 Making Sense of the Stark Law: Compliance for the Medical Practice An indirect compensation arrangement exists if all of the following are true: There is an unbroken chain of one or more parties having financial relationships between the referring physician (or an immediate family member) and a DHS entity. The referring physician (or immediate family member) receives aggregate compensation from the party in the chain with which the physician (or immediate family member) has a direct financial relationship that varies with or reflects the volume/value of referrals or other business generated for the DHS entity (including any time- or unit-based compensation that may be otherwise allowed under other Stark exceptions). The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician s (or immediate family member s) compensation so varies or reflects the volume or value of the physician s DHS referrals or other business generated. As the original language in the Stark statute enacted by Congress encompassed both direct and indirect relationships, the CMS has attempted to devise definitions that strike a balance between a clear bright line rule and one that is flexible and excuses certain unknown violations. This complicated approach taken by CMS with regard to indirect financial relationships reflects this tension. Indirect compensation arrangements are defined broadly to include arrangements that are otherwise permissible, but exclude those for which the DHS entity did not have sufficient knowledge of the referring physician s indirect ownership or compensation arrangements with the DHS entity (see the section entitled Standards of Proof to Demonstrate a Violation ). A relationship that comes within the indirect compensation arrangement definition may still be permissible if it meets the indirect compensation arrangement exception (see the section entitled Indirect Compensation Arrangements ). Indirect ownership or investment interests would have to come within one of the general or ownership/investment interest exceptions in order for the referring physician to refer DHS to the indirectly owned DHS entity. 7 For the purposes of determining if there is an indirect financial relationship subject to Stark, a wholly owned professional corporation (PC) and its sole physician owner are considered the same party in the chain. Thus, the relationship of a DHS entity with a PC does not create an indirect relationship with the PC s sole physician owner. But group practices and their physician owners are not considered to be the same party in a chain of financial relationships, and thus can be subject to potential indirect relationships. Therefore, a professional corporation that contracts with a hospital to provide echocardiogram interpretations would not constitute an indirect compensation relationship with a single shareholder physician who refers DHS to the hospital, but would potentially create indirect compensation relationships with the PC s referring physicians if the PC was a group practice, depending on whether the group practice s referring physicians received aggregate compensation that varies (or otherwise takes into account) the volume or value of DHS referrals or other business generated for the hospital. Common ownership by a referring physician and a DHS entity of another party [e.g., physician and hospital co-ownership of a physician-hospital organization (PHO)] by itself, however, does not establish an indirect ownership relationship (but it could create an indirect compensation arrangement). The CMS has also clarified that stock options or convertible securities that originally are received or purchased for money or in return for a capital contribution will be considered ownership or investment interests. Comparatively, if they are received as compensation for services, they will be considered compensation until the time they are exercised, at which time they become an ownership or investment interest.

12 Massachusetts Medical Society Examples of direct and indirect ownership/investment interests and direct and indirect compensation arrangements are illustrated in Figures 1 through 6 on this and the following pages. Figure 1: Example of Direct Ownership or Investment Interest A Referring Physician Referrals Equity Ownership B Physical Therapy Business (DHS Entity) 8 FINANCIAL ARRANGEMENT A has an equity interest in B through direct ownership or shares of stock (if stock, B s stock is not publicly traded). A refers to B.

13 Making Sense of the Stark Law: Compliance for the Medical Practice Figure 2: Example of Indirect Ownership or Investment Interest A Referring Physician Referrals Co-owner B Imaging Equipment Leasing Company 9 FINANCIAL ARRANGEMENT A is a direct co-owner of B. B has extended a capital loan to C. A refers to C. Capital Loan C Ambulatory Service Center (DHS Entity)

14 Massachusetts Medical Society Figure 3: Example of Indirect Ownership or Investment Interest A B Referring Physician Employment Relationship Group Practice 10 Referrals C Investment FINANCIAL ARRANGEMENT A is employed by B. B owns non-publicly traded shares of stock in C. A refers to C. MRI Center (DHS Entity)

15 Making Sense of the Stark Law: Compliance for the Medical Practice Figure 4: Example of Direct Compensation Agreement A Referrals B Referring Physician Independent Contractor Relationship Clinical Lab (DHS Entity) 11 FINANCIAL ARRANGEMENT A serves as part-time director of B under an independent contractor relationship. A refers to B.

16 Massachusetts Medical Society Figure 5: Example of Indirect Compensation Arrangement A Referring Physician Net Revenues Referrals 12 B Group Practice FINANCIAL ARRANGEMENT A, as a co-owner of B, receives a share of B s net revenues. B leases office space to C for a rental amount based on the volume of business generated by B for C. A refers to C. C has knowledge of A s sharing in B s net revenues. Office Lease C Hospital (DHS Entity)

17 Making Sense of the Stark Law: Compliance for the Medical Practice Figure 6: Example of Indirect Compensation Arrangement A Referrals C Referring Physician Hospital (DHS Entity) Co-owner B Imaging Equipment Leasing Company Capital Loan 13 FINANCIAL ARRANGEMENT A is a co-owner of B. C contracts with B to lease imaging equipment to C. C has made a capital loan to B. A shares in B s net revenues in an amount that varies with the volume of imaging business generated by A for C. A refers to C. C has knowledge of A s sharing in B s net revenues.

18 Massachusetts Medical Society Entity An entity (i.e., the party that is billing Medicare or Medicaid for the DHS) can be either a person or organization and is defined by the Stark Law to include any of the following entities to which payment is made directly or upon assignment on the patient s behalf; or to which the right to payment has been reassigned as permitted under Medicare Program rules: A physician s solo practice A practice of multiple physicians Any other person, sole proprietorship, public or private agency or trust, corporation, partnership, limited liability company, foundation, nonprofit corporation, or unincorporated association that furnishes one or more services categorically included under the scope of the Stark Law An entity, however, does not include the referring physician himself or herself, but does include his or her medical practice. This means that a physician in solo practice, whether practicing as a sole proprietor or through a professional corporation or professional limited liability company, could be subject to the Stark Law to the extent the physician refers DHS to his or her own practice and does not personally perform or render the DHS. 14 The fact that a physician in solo practice could be subject to the Stark Law is perhaps one of the most misunderstood aspects of the law. Many physicians over the years have been led to believe that the Stark self-referral prohibition only applies to physicians relationships to group practices or hospitals and other providers. This is not accurate. Qualifying as a group practice under Stark allows physicians practicing together and providing DHS the most leeway in how they can compensate themselves. But the scope of the law s prohibition does reach the solo practitioner, whether incorporated or not, who orders and bills for any service or item defined as a Stark DHS that he or she does not personally perform. If the solo physician personally performs the Stark-covered item or service, he or she may bill Medicare or a state health program without violating the Stark Law. If the solo physician has such ordered item or service performed by a member of his or her staff under supervision, the Stark Law could be violated unless an exception applies. Another important exclusion under Stark is that the self-referral prohibition does not apply to a physician s practice when purchased diagnostic tests are billed to Medicare in accordance with Medicare Program rules. Referral The Stark Law permits physicians from referring patients to themselves. A referral to one s self is not a referral if the referring physician personally performs the service. A referral to one s own medical practice, however, is a referral. Referral is defined very broadly to include services performed by the referring physician s employees, coworkers, or independent contractors. All such requests to others for items or services are prohibited referrals unless they are excluded by definition or fall under an exception. A referral includes any of the following: A request, order, or certification of medical necessity by a physician for an item or service that is reimbursable under Medicare or a state health program

19 Making Sense of the Stark Law: Compliance for the Medical Practice A request by a physician for a consultation with another physician, including tests or procedures ordered by or to be performed by (or under the supervision of ) the consultant physician A request for or establishment of a plan of care by a physician A referral to a physician s wholly owned professional corporation is not a referral if the referring physician personally performs the service. A referral by a physician to his or her own medical practice, regardless of its type of organization, however, is a referral that could violate Stark if some other physician or individual personally performs the referred service. Referral is also defined to include services performed or items rendered by the referring physician s employees, independent contractors, or fellow group practice physicians and other professionals. Thus, the Stark Law applies to the ordering of covered services or items to be performed or rendered by the referring physician s employees (including incident to services billed as part of the physician s fee), independent contractors, or group practice members. If a physician personally performs the services, there is no referral, regardless of whether the physician bills the programs directly or another entity bills pursuant to an assignment. Thus, there is no potential Stark violation and no need to try to come within one of the Stark exceptions where there is only a DHS that has been personally performed by the referring physician. However, technical components associated with a physician s personally performed services are referrals to which the Stark Law applies. Thus, if a physician referred and then performed the professional component of an inpatient hospital service payable by Medicare, the physician would still have made a referral to the hospital since it would be separately billing Medicare for the Part A or facility or technical component. 15 A physician s prohibited financial relationship with an outside DHS entity (e.g., a home health agency) is not imputed to the physician s entire group practice. The Stark Law, however, applies to situations in which another person or entity who is controlled or whose referrals are directed by a physician, such as a nurse practitioner, makes the referral. That physician would be viewed as the referring physician. A referral made by someone else in a physician s group, including a non-physician, may be imputed to that physician if he or she directs the referral or otherwise controls the person making the referral. Consultation is defined to mean a professional service furnished to a patient in which the physician s opinion or advice regarding evaluation and/or management of a specific medical problem is requested by another physician; the request and need for consultation are documented in the patient s medical record; and the consulting physician prepares a written report of his or her findings, which is provided to the requesting physician. Accounting for the unique aspects of ordering tests in pathology, radiology, and radiation oncology, the Stark Law does not prohibit requests by (i) a pathologist for clinical diagnostic laboratory tests and pathological examination, (ii) a radiologist for diagnostic radiology services, or (iii) a radiation oncologist for radiation therapy (including necessary and integral ancillary services requested, and appropriately supervised, such as CT, MRI, and ultrasound), provided that the request results from a consultation initiated by another physician and the tests or services are furnished by (or under the supervision of ) the requesting specialist or another pathologist, radiologist, or radiation oncologist in the same group practice. The CMS declined to extend this protection to cardiologists who request and interpret echocardiograms, seeing cardiologists as distinct from these other specialists, and classifying echocardiograms no differently than any other DHS test.

20 Massachusetts Medical Society The Exceptions In the event there is a financial relationship between an entity that bills for DHS and a physician who makes referrals (or any immediate family member of such physician), the Stark Law prohibits referrals from the physician to the entity, and prohibits the entity from billing Medicare or Medicaid for those referred services, unless the financial relationship falls squarely within one of the so-called Stark Law exceptions. The exceptions determine the permissibility of health care financial relationships under Stark. The exceptions are divided into three categories: 1. General exceptions that apply to both ownership/investment interests and compensation arrangements 2. Exceptions that apply only to ownership/investment interests 3. Exceptions that apply only to compensation arrangements 16 Within these categories there are exceptions that originally were crafted by Congress and appeared in the Stark statute, with others added by the CMS in the Stark regulations under its statutory authority to add additional exceptions as it deems advisable. The additional regulatory exceptions all require adherence to the federal anti-kickback law as a condition for satisfying the Stark exception. The exceptions are listed on page 17 by category (those with an asterisk were added by the CMS and require anti-kickback compliance as a condition). Any ownership or investment interest of a physician including the ownership in a solo or group practice that provides DHS that meets a general exception (e.g., in-office ancillary services) or an ownership exception (e.g., a rural clinical lab) also does not have to meet any of the compensation exceptions with respect to profit distributions, dividends, or interest payments on secured obligations.

21 Making Sense of the Stark Law: Compliance for the Medical Practice Table 1: Permissible Health Care Financial Relationships under Stark General Ownership Compensation Physician Services Publicly Traded Securities Office Space Rental In-Office Ancillary Services Mutual Funds Equipment Rental Services Furnished Prepaid Plan Enrollees Rural Providers Bona Fide Employment Academic Medical Centers* Entire (Non-specialty) Hospital Personal Services Arrangement (Including Managed Care Incentive Plans) Implants Furnished by an ASC* EPO and Other Dialysis-Related Drugs* Preventive Screening Tests, Immunizations, and Vaccines* Eyeglasses and Contact Lenses Following Cataract Surgery* Intra-family Rural Referrals* Temporary Noncompliance* MD Recruitment MD Recruitment Through Practice* Isolated Transactions Non-DHS Hospital Remuneration Pre-1990 Group-Hospital Arrangements Payments by an MD MD Charitable Donations* Non-monetary Compensation* Fair Market Value Compensation* Medical Staff Incidental Benefits* Risk Sharing Arrangements* Compliance Training Indirect Compensation Arrangements* Referral Services (Anti-kickback Safe Harbor) OB MedMal Insurance (Anti-kickback Safe Harbor) Professional Courtesy* Retention Payments in Underserved Areas* Community-Wide Information Systems* 17 * Added by the CMS and require anti-kickback compliance as a condition.

22 Massachusetts Medical Society STANDARDS OF PROOF TO DEMONSTRATE A VIOLATION Originally, the Stark Law was intended to establish a bright line test for compliance; the very existence of a prohibited financial relationship, even if indirect, violated the law unless the relationship met all of the requirements under an applicable exception, or the financially interested physician did not make any Medicare or Medicaid referrals. The exceptions were originally intended by the drafters of the Stark Law to be clear and discernable, as to be unlike the health care community s difficult experience with the anti-kickback laws (see the section entitled Compliance With the Antikickback Laws ). The bright line originally intended by Congress, however, has become somewhat fuzzy as a result of many features in the final Stark regulations added by the CMS. The CMS added a knowledge element in order to prove that a physician s indirect financial relationship with a DHS entity has violated Stark. A DHS entity that has an indirect financial relationship with a referring physician that does not come within a Stark exception would not be prohibited from being paid for DHS if it did not have actual knowledge of, and did not act in reckless disregard or deliberate ignorance of, either the ownership/investment interest through the intermediaries in the DHS entity or the existence of any aggregate compensation to the referring physician that varies with the level of DHS referrals made to the DHS entity. 18 If any direct physician financial relationship does not fully comply with all of the requirements of at least one Stark exception, the law is violated regardless of the knowledge or intent of the DHS entity unless the DHS entity could show that it did not have actual knowledge of, and did not act in reckless disregard or deliberate ignorance of, the identity of the referring physician, and the claim otherwise complies with all applicable federal and state laws, rules, and regulations. This knowledge standard was intended to protect DHS entities against arbitrary payment denials for minor financial relationships with referring physicians who are not known to the DHS entity. Under this knowledge (actual knowledge or reckless disregard or deliberate ignorance) standard, the CMS has explained that the DHS entity does not have a duty to inquire about relationships with referring physicians unless facts and circumstances exist such that a failure to follow up with an inquiry would constitute deliberate ignorance or reckless disregard. In other words, did the DHS entity have some reason to suspect the existence of a prohibited arrangement, and should it have taken reasonable steps to find out? The level of inquiry according to the government and the applicable cases interpreting this language, of course, depends on the circumstances. At the very least it can be said that if medical practices and other DHS entities are deficient about keeping or deliberately fail to keep track of their physician financial relationships, they will be deemed to have sufficient knowledge to have violated the Stark Law. Medical practices generally have direct financial relationships with their physicians and know the identity of all referring physicians. Thus, in most cases, it would be difficult for smaller medical practices to avoid Stark liability under this knowledge standard that goes beyond just actual knowledge and requires some level of inquiry about any longer-term financial relationship with a physician who may be in a position to refer to a practice. The knowledge standard required to assess civil money penalties against referring physicians and DHS entities is comparable to the knowledge found in the federal False Claims Act (i.e., did the accused actually know or act with reckless disregard or deliberate ignorance about the prohibited relationship?). In no event, however, does ignorance of the law itself provide a defense against an alleged violation.

23 Making Sense of the Stark Law: Compliance for the Medical Practice There is now also a grace period of up to 90 days that can be used once every three years for certain temporary lapses in compliance due to reasons beyond the control of the DHS entity if the parties were in compliance with an exception for at least 180 consecutive days prior to the lapse and they expeditiously take steps to rectify the noncompliance. COMPLIANCE WITH THE ANTI-KICKBACK LAWS While a comprehensive treatment of the anti-kickback laws is beyond the scope of this publication, it is essential for all physicians and their staffs to fully understand the regulatory interplay and differences between the Stark and anti-kickback laws. The CMS and state-level anti-kickback authorities including the Massachusetts Attorney General s Office have made it clear that satisfaction of the Stark Law does not automatically result in immunity under other fraud and abuse laws, including the federal and state anti-kickback statutes. These statutes prohibit any individual or entity from knowingly and willfully soliciting, receiving, offering, or paying any form of remuneration ( in cash or in kind ) in order to induce the referral of an individual for the furnishing, or arranging for the furnishing of, any item or service payable under the Medicare or Medicaid programs, or, as is the case in Massachusetts, under any private health plan or insurer. Any party accused of violating the anti-kickback laws can be subject to civil money penalties, criminal prosecution, and/or exclusion from the Medicare and Medicaid programs. Thus the anti-kickback laws are broader in scope than the Stark physician self-referral prohibition. 19 The federal anti-kickback statute does set forth numerous safe harbors (including those for employment, independent contractors, and group practices) that are similar but not identical to their counterpart Stark exceptions. For example, the anti-kickback safe harbor for independent contractor physicians would only protect contracted services for which the aggregate annual remuneration is set in advance (e.g., $5,000 per month), while the Stark exception counterpart (the personal services arrangement exception) comparatively requires that there be an objectively verifiable compensation formula set in advance, but not the aggregate compensation (e.g., 45% of collections from the physician s personally performed services). The CMS, however, in two instances did add anti-kickback safe harbors as Stark exceptions (referral services and obstetrical medical malpractice insurance). Any physician financial relationship that is subject to the Stark Law will also be subject to the anti-kickback laws, thus the effort to confirm the regulatory compliance of a physician s financial relationship should not end with Stark. The relationship must also be considered under the anti-kickback laws. Unlike the Stark Law, which in most situations requires strict adherence to an exception to avoid the prohibition and possible sanctions, the failure to come within an anti-kickback safe harbor does not render a physician s financial relationship per se illegal. At the same time, the federal anti-kickback statute has been interpreted by the federal courts in an extremely broad fashion, so that the government need only prove that a single, and not just the primary, purpose of the remuneration to a physician, even if only offered or solicited but never tendered, is to induce referrals. Also, the anti-kickback laws require the government to prove that an accused party intended to violate the law. Thus, there is a greater amount of grey area under the anti-kickback laws with regard to compliance. Because of this uncertainty, Congress has required the OIG to issue anti-kickback advisory rulings in response to requests from private parties.

24 Massachusetts Medical Society Also, all of the Stark exceptions that have an asterisk (see the Exception List, page 17) that do not appear in the original Stark statute require that the financial relationship not violate the federal antikickback laws in order to meet the applicable Stark exception. For example, one of the conditions to meet the Stark fair market value compensation exception, which can protect physician compensation arrangements that do not come within any of the other Stark exceptions, is that the compensation arrangement not violate the federal anti-kickback laws. In the Stark II regulations, the CMS explained that to fulfill this condition, the parties would have to show that the particular arrangement meets one of the following criteria: Qualifies as an anti-kickback safe harbor Has been specifically approved by the OIG in a favorable anti-kickback advisory opinion Does not violate the federal anti-kickback law This leaves huge uncertainty in terms of Stark compliance for any such physician financial relationship that does not meet an anti-kickback safe harbor, unless the parties go to the time and expense of seeking an OIG anti-kickback advisory ruling. It is hard to describe these CMS-added Stark exceptions as providing a bright line test for physicians and related entities. 20 While compliance with Stark does not automatically cause a physician s relationship to be compliant with the anti-kickback laws, it is likely to bring the relationship closer to being within a safer zone under the anti-kickback statute if it does not fall within any of the anti-kickback safe harbors. PENALTIES AND SANCTIONS FOR VIOLATING STARK The Stark Law is violated when a referring physician who has a prohibited direct or indirect financial relationship with a DHS entity refers a Medicare- or Medicaid-covered DHS to the DHS entity or when the DHS entity submits claims for payment for such a DHS. Stark provides for two basic types of sanctions: nonpayment/refund of claims imposed on the DHS entity, and civil money penalties for knowing violations imposed on both the DHS entity and referring physician. Specifically, a violation of the Stark Law can result in the following: Denial of Medicare or Medicaid payment to the DHS entity for the referred DHS services or items Required refund from the DHS entity within 60 days of any amounts billed and collected for the referred DHS services or items Imposition of a civil money penalty (CMP) on any referring physician or DHS entity for each bill or claim that the physician or DHS entity knows or should know is for referred services for which payment may not be made (The OIG may impose up to $15,000 in CMPs per wrongful claim and per missed refund, or an assessment of up to triple the amount claimed for each service that was the basis for the CMP.) Imposition of a CMP of up to $100,000 on any referring physician or DHS entity for each arrangement or scheme the physician/entity knows or should know has a principal purpose of assuring referrals that, if directly made, would violate the Stark Law prohibitions

25 Making Sense of the Stark Law: Compliance for the Medical Practice A five-year exclusion from the Medicare and Medicaid programs for any provider that submits a claim or bill that the provider knows or should know is improper The main sanctions of the Stark Law, denial of payment and required refund, can only be imposed upon the DHS entity and not the referring physician. Although only DHS entities are liable for this most immediate and easily implemented Stark sanction in the form of payment denials and refunds by the Medicare and Medicaid programs, physicians as owners of medical practices are at great risk under Stark. A Stark violation arises from the failure of a financial relationship between a DHS entity and a referring physician to come within a Stark exception. Many medical practices are DHS entities and the required refund of any DHS payments made to a medical practice could easily add up to a substantial amount if the Stark violation existed over the course of multiple months or years. For example, a group practice that fails to compensate its physicians consistently with the Stark requirements for group practices and provides in-office radiology services could be required to refund all Medicare and Medicaid payments for the radiology services, and the group practice itself, as well as each referring physician, could be subject to CMPs of up to $15,000 per refunded claim. Referring physicians as well as DHS entities can be assessed a CMP of up to $15,000 per violation (i.e., a separate CMP per prohibited DHS referral, per prohibited claim for DHS payment, and per missed required refund). Both the referring physician and DHS entity can also be assessed a CMP of up to $100,000 per arrangement that is intended to circumvent the Stark prohibition. In order to assess CMPs, the government would have to prove that the referring physician or DHS entity had knowledge or should have knowledge of the Stark violation. 21 REPORTING OBLIGATIONS U nder the final Stark II regulations, there are no affirmative periodic reporting obligations concerning an entity s ownership and compensation arrangements. Instead, DHS entities must submit certain required information only if they are requested to do so by either the CMS or the OIG. The information that can be required to be disclosed includes: the names and unique physician identification numbers of all physicians who (or whose immediate family members) have an ownership or investment interest in or compensation arrangement with the entity, and with respect to each such physician, the nature of the financial relationship, as evidenced by documentation, routinely maintained by the entity in the course of its business. DHS entities can also be required to produce documentation supporting compliance with certain Stark exceptions, including group practice eligibility and temporary compliance lapses. If a request for documents is made, the DHS entity must respond within the time period specified in the request, which will be at least 30 days. Failure to meet Stark Law reporting obligations subjects a provider to a civil money penalty of up to $10,000 for each day of noncompliance, and possible Medicare Program exclusion.

26 Massachusetts Medical Society WHISTLEBLOWERS AND THE STARK LAW Both federal and Massachusetts False Claims Acts prohibit the submission of false claims for thirdparty payment, and provide for the recovery of multiple damages plus significant civil penalties per false claim. Under these laws, there are whistleblower or so-called qui tam provisions that enable private parties to initiate a legal action against the alleged wrongdoer and recover a sizable percentage of any settlement or judgments in the case. The anti-kickback and Stark Laws are increasingly being used as underlying allegations in federal False Claims Act cases. For example, a $6.5 million penalty was paid in a Stark-related qui tam federal False Claims Act case settled in 2003 against a group of Rapid City, South Dakota oncologists and a local hospital that arose from allegations of a below-fair-market-value office rental arrangement. Also, a Boston multi-specialty group recently settled a federal False Claims Act qui tam lawsuit by paying $230,000, including approximately $41,400 to one of its former physician partners who was the whistleblower, based on alleged Stark Law violations arising from the group s compensation system. The group had paid physician members a percentage of the income derived from lab tests that the member physicians ordered from the group s lab. According to CMS, violations of the Stark Law may be pursued under the federal False Claims Act. The OIG and United States Department of Justice also share this view. 22 The theory underlining the use of an anti-kickback or Stark violation as a precursor to a federal False Claims Act (FCA) action accepted by many federal courts is one of implied or express false certification (i.e., regulatory compliance is a condition of payment and the filing of a claim for payment by a party allegedly in violation of either the anti-kickback or Stark laws constitutes a false implied or explicit certification of such compliance). Some qui tam/fca court decisions have even held that actions under the federal FCA do not require that the government suffer actual damages in order to state a claim and impose civil penalties. Thus, Stark compliance is essential not only to protect against the risk of government program action to enforce Stark that could result in payment denial and recoupment, civil penalties, and program exclusion, but also to protect against the possibility of an aggrieved former employee, physician coowner, or other party with inside knowledge, filing a whistleblower action for alleged violations of the Stark Law. STARK LAW ADVISORY OPINIONS The CMS is required to issue advisory opinions interpreting the Stark Law upon request. In particular, the CMS is required to issue written advisory opinions discussing whether a physician s referrals relating to certain DHS (other than clinical laboratory services) are prohibited under the Stark Law. The purpose of the advisory opinion process is to provide meaningful advice on how the Stark Law applies to specific factual situations. A CMS Stark advisory opinion is binding only on the individuals or entities that request it and no third party is bound by, nor may it legally rely on, an issued advisory opinion. These advisory opinions, however, are publicly released on the CMS website and are instructive on how the agency is interpreting and enforcing the Stark Law. To date, the CMS has only issued a handful of such advisory opinions and most address the issue of ownership in specialty hospitals. These can be found at

27 Making Sense of the Stark Law: Compliance for the Medical Practice MAKING SENSE OF THE EXCEPTIONS RELEVANT TO INDEPENDENT MEDICAL PRACTICES Notwithstanding the popular misconception, referrals made within a medical practice are potentially subject to both the Stark and anti-kickback laws. For the physician in solo or group practice, the threshold consideration under Stark is to first determine whether the practice is rendering and billing for any DHS that is not personally performed by the referring physician. If the solo or group medical practice is doing so, then it is a DHS entity prohibited from billing Medicare and Medicaid for any DHS referred by any physicians with a financial relationship (i.e., all physicians who own the practice and/or receive any form of compensation from the practice), unless those physicians relationships come within one of the Stark exceptions. Any DHS personally performed or provided by the referring physician is not defined as a referral under the Stark Law. However, any DHS performed or provided by any person other than the referring physician, including, but not limited to, the referring physician s employees, independent contractors, or other physicians in the same medical practice, are subject to the Stark prohibitions. In addition, the financial relationship between the referring physician and the practice billing Medicare and Medicaid must fall within one of the enumerated Stark exceptions in order to avoid a Stark violation. This is true even in the case where Medicare permits the services rendered by the other person to be billed under the physician s billing number as incident to the referring physician s services. As discussed above, unlike the anti-kickback statute safe harbors, failure to strictly comply with all the requirements of a Stark exception leaves the parties in violation of the law. 23 For any medical practices subject to Stark, the Physician Services and In-office Ancillary Services exceptions are the most preferable. If all the requirements are met, they cover all of the physicians within a group practice and permit more flexibility in how the practice can permissibly compensate its physicians. These exceptions work differently for solo and group practices. Alternatively, a medical practice with two or more physicians that does provide and bill for Medicare or Medicaid DHS but does not qualify as a group practice under Stark can have distinct compensation arrangements (but not ownership relationships) with individual physicians under the bona fide employment, personal services arrangement, fair-market-value, or academic medical center exceptions. These are the same exceptions that apply to compensation arrangements with hospitals and other DHS entities. Rendering DHS Within a Solo Practice Because of the emphasis the Stark Law puts on group practices, a further popular misconception exists that the Stark prohibitions have no potential application to physicians in solo practice. In fact, Stark does apply to a physician in solo practice if he or she provides and bills for Medicare or Medicaid DHS items or services that are furnished in any manner by other individuals within the practice. For instance, a solo practice physician that employs a technician to render X-rays to Medicare and Medicaid patients is subject to the Stark Law. Most solo practices with a single office location can easily satisfy the in-office ancillary services exception if the physician supervises his staff in conformance with applicable Medicare Part B rules on supervision (see the section entitled In-Office Ancillary Services Exception ).

28 Massachusetts Medical Society Shared Office Arrangements Under the in-office ancillary exception, separate physician practices in the same building may share and bill separately for ancillary services if each of the individual physician practices involved separately meets the supervision, location, and billing requirements of this exception. Therefore, independent physician practices may share clinical laboratory or other DHS resources, including personnel, without violating Stark as long as they meet all of the following criteria: Each physician practice independently meets the supervision requirements for the particular ancillary services when they are performing the services. The ancillary service and the physicians offices are located in the same building, and each rendering practice can independently meet the other elements of the location test of the in-office ancillary services exception. Each physician practice independently bills for the ancillary services furnished to its own patients as allowed under the Stark in-office ancillary service exception. All other applicable Stark exceptions are met (e.g., equipment and space leases), all applicable Medicare billing rules are satisfied, and the arrangement does not violate the anti-kickback statute. 24 Rendering DHS Within a Group Practice The in-office ancillary services exception is the most valuable for medical practices, but it is only available to either solo practices or practices with multiple physicians that satisfy all of the requirements under the Stark definition of a group practice. Definition of Group Practice Notwithstanding the more liberal provisions on incentive compensation for employed and contracted physicians issued by the CMS in the final Stark II Phase II regulations, the Stark exceptions available through group practices continue to permit more leeway in the distribution of revenue to all physicians within the group practice. Meeting the definition of a group practice under Stark is not only preferable under the Stark Law, but will also serve to help protect a medical practice under the anti-kickback statute as the group practice safe harbor under this law requires that a practice meet the Stark group practice definition. In order for a medical group to qualify as a group practice under Stark, the practice must meet all of the requirements described below. Single Legal Entity The group must be organized as a single legal entity of any kind, authorized under state law and operated primarily for the purposes of being a physician group practice. The entity may be organized by physicians, individual physician professional corporations, health care facilities, or other persons or entities. The single legal entity may be organized or owned (in whole or in part) by another entity that was a medical practice, provided that such a parent organization is not an operating physician practice.

29 Making Sense of the Stark Law: Compliance for the Medical Practice The Stark regulations prohibit affiliations of physicians formed substantially to share profits from referrals, or separate group practices under common ownership or control through a physician practice management company, hospital, health system, or other entity or organization. However, a group practice that is otherwise a single legal entity may itself own subsidiary entities. A group practice operating in more than one state will be considered to be a single legal entity notwithstanding that it is composed of multiple legal entities, provided that the states are contiguous, the ownership is identical, and the multiple organizational structures are legally necessary. Two or More Physician Members The group must have at least two or more physician members meaning physicians who are owners, employees, or locum tenens/on-call physicians. Independent contractor physicians are not defined as members of a group practice, and thus do not count in considering whether there are two or more physician members of the group (independent contractor physicians, however, are allowed to serve as the supervising physician for purposes of meeting the in-office ancillary services exception). Thus, a professional corporation that has one shareholder physician who contracts with multiple physicians as independent contractors would not qualify as a group practice under Stark Range of Care Each physician member must provide substantially the full range of his or her routinely provided services through the joint use of shared office space, facilities, equipment, and personnel. 25 Services Furnished by Group Practice Members Substantially all of the patient care services of the physicians who are members of the group (i.e., owners, employees, or locum tenens/on-call physicians, but not independent contractors) must be provided through the group and must be billed under a billing number assigned to the group, and amounts so received must be treated as receipts of the group. The CMS has deemed substantially all to mean at least 75 percent of the total patient care services of the group practice members. Satisfaction of this requirement will be determined by the total patient care time group member physicians spend rendering patient care services, measured by any reasonable means (e.g., time cards). Temporary grace periods for satisfaction of this condition are available for new practices, relocating physicians, and those in health professional shortage areas. Thus, significant outside activities by a practice s physician owners and employees could result in a disqualification as a group practice under Stark. Distribution of Expenses and Income Overhead expenses and income must be distributed in accordance with methods that are determined before the receipt of payment for the services giving rise to the overhead expense or producing the income. A group practice, however, is not precluded from adjusting its compensation methodology prospectively, subject to restrictions on the distribution of revenue from Medicare and Medicaid DHS under the special rules for profit shares and productivity bonuses (see the section entitled Group Practice Compensation ). Unified Business/Decision-Making The group practice must be a unified business with at least centralized decision-making by a body representative of the group practice that maintains effective control over the group s assets and liabilities,

30 Massachusetts Medical Society including, but not limited to, budgets, compensation, and salaries; consolidated billing; accounting; and financial reporting. Compensation Compensation to group practice physicians cannot be based on the volume or value of Medicare or Medicaid DHS referrals, but such DHS revenues can be included in overall profit-share payments or productivity bonuses based on services personally performed, including incident to services. The regulations provide for certain means to distribute overall profit shares and pay productivity bonuses among group practice physicians that are deemed not to relate directly to the volume or value of DHS referrals (see the section entitled Group Practice Compensation ). Physician-Patient Encounters Physician members of the group practice (i.e., owners, employees, or locum tenens/on-call physicians, but not independent contractors) must personally conduct at least 75 percent of the physician-patient encounters of the group. Any medical practice that comes within the Stark group practice definition and meets one of the exceptions applicable to group practices will satisfy several of the conditions for an anti-kickback safe harbor for a physician s investment interests in a group practice. 26 Physician Services Exception Referrals of physician services are an exception when they are furnished personally or supervised by another physician in the same group practice as the referring physician. Physician services are defined under this Stark exception to include incident to services, but only those that are considered physician services under Medicare Part B. All other types of incident to services (e.g., diagnostic tests or physical therapy) are outside the scope of the physician services Stark exception, and would have to qualify under the in-office ancillary services or another exception. This exception is of limited application as it only affords protection within a group practice for referrals of the narrow class of physician services that are included in the definitions of DHS. The main type of DHS that can be protected under this exception is in the area of radiology. For instance, this exception would protect the billing to Medicare of a radiologist s fee for reading a CT scan referred by a primary care physician in the same group practice, provided that the radiologist personally performed or properly supervised the test. In-Office Ancillary Services Exception This exception is perhaps the most important and useful exception for solo and group medical practices. It applies to almost all DHS rendered by a solo or group practice. It does not, however, with the exception of infusion pumps, apply to durable medical equipment (DME), or parenteral and enteral nutrition (PEN) equipment and supplies. Thus, referring physicians, including those who treat patients in their private homes, as well as those physicians medical practices, cannot provide most DME and PEN items to Medicare and Medicaid patients under the in-office ancillary service exception. Referrals of in-office ancillary services to a medical practice are an exception of the Stark prohibitions when each of the following three tests are met by the solo practice or by a multiple physician practice that meets all of the conditions of a group practice under Stark:

31 Making Sense of the Stark Law: Compliance for the Medical Practice 1. Who rendered the service? The service was furnished personally by one of the following: The referring physician A physician who is a member of the same group practice as the referring physician Individuals supervised by a physician (including independently contracted physicians) in the same group practice under the level of supervision required under theapplicable Medicare payment or coverage rules (The interplay of the Medicare coverage andpayment rules with Stark, in the area of supervision, can present a measure of uncertainty, so it is advisable that supervision arrangements be carefully reviewed for legal compliance when contemplating reliance on the in-office ancillary services exception.) 2. Where was the service rendered? The service was furnished under one of the following circumstances: In the same building in which the group practice has an office open to patients for medical services at least 35 hours per week, and the referring physician or one or more group member physicians practices regularly and provides physician services at least 30 hours per week, including some physician services unrelated to the furnishing of DHS (interpretations and reads of tests do not count as non-dhs physician services) In the same building in which the patient receiving the test usually receives physician services from the referring physician or another group member physician and that is owned or rented by their group as an office normally open to the group s patients for medical services at least eight hours per week, and in which the referring physician regularly practices medicine and furnishes physician services to patients at least six hours per week, including some physician services that are unrelated to reimbursable DHS 27 In the same building in which the referring physician is present (not necessarily in the same space or part of the building) and orders the tests during a patient visit or the referring physician or other group member physician is present while the test is furnished during occupancy of the premises that the referring physician or his or her group practice owns or rents as an office that is normally open to the physician s or group s patients for medical services at least eight hours per week, and in which the referring physician or one or more group member physicians regularly practices medicine and furnish physician services at least six hours per week, including some physician services that are unrelated to reimbursable DHS In a centralized building used on a full-time basis by the group practice for the provision of some or all of the group s clinical laboratory services, or for the provision of some or all of the group s other categories of DHS (other than clinical lab services; that is, a centralized facility cannot combine a clinical laboratory and any other category of DHS) Under this exception, solo and group medical practices can refer patients to their practices for the provision of clinical laboratory services, imaging or physical therapy, among other DHS, provided that the non-physicians furnishing the services or items are supervised under applicable Medicare rules, and the services are rendered either in the same building in which the referring physician or group has a

32 Massachusetts Medical Society defined presence and routinely treats patients and practices medicine, or in a centralized location for the DHS. There are also special rules that permit the application of this exception to services rendered to patients in their homes. 3. How was the service billed? The service was billed by one of the following: The physician performing or supervising the services The group practice of which the performing/supervising physician is a member (or for which the supervising physician is an independent contractor while furnishing patient care services for the group practice) under a billing number assigned to the group practice An entity that is wholly owned by the performing/supervising physician or such physician s group practice, under the entity s own billing number or under a billing number assigned to the physician or group practice 28 An independent third-party billing company acting as an agent of the physician, group practice, or entity under a billing number assigned to the physician, group practice, or entity, under a Medicare-compliant billing arrangement The Stark Law does not prohibit medical practices from accepting outside referrals for any DHS from non-practice physicians who do not have a financial relationship with the group practice. The practice accepting such outside referrals, however, may not bill Medicare or Medicaid for such services as in-office ancillary services under the group s billing number, and it would be subject to applicable federal and state reimbursement, licensure, certification, and other requirements as an independent provider of DHS. Group Practice Compensation The Stark Law strictly regulates internal group practice compensation if a practice qualifies as a group practice under Stark and it provides and receives payment for any Medicare or Medicaid DHS. The Stark Law permits group practices to divide revenues among their physicians in ways that are very different and more advantageous than are permitted for other DHS entities with their employed and contracted referring physicians. The policy underlying this disparate treatment between group practices and hospital/other DHS entity compensation arrangements with physicians under Stark is that physicians dividing up revenue from their own joint practice are not receiving the level of substantial income that is generated by DHS referrals to hospital or other DHS entities. Group practices receive favored treatment with respect to physician compensation under Stark in the following ways: They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) directly (e.g., with a percentage of collections) based on Medicare and Medicaid DHS personally performed by the referring physician. They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) with a productivity bonus based on Medicare and Medicaid

33 Making Sense of the Stark Law: Compliance for the Medical Practice DHS performed by others incident to the referring physician s personally performed services, provided that the share of the bonus is not determined in a manner that is directly related to the volume or value of Medicare or Medicaid DHS referrals by the physician. They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) with a share of overall profits of the group, provided that the share of profit is not determined in a manner that is directly related to the volume or value of Medicare or Medicaid DHS referrals by the physician. They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) directly based on any non-dhs referrals by the referring physicians (although such compensation directly based on the volume or value of any private pay referrals or non-dhs Medicare or Medicaid referrals could implicate various federal or state fraud and abuse statutes, including the anti-kickback statutes). Group practice physician compensation also is advantageous because it is neither subject to the fairmarket-value limits under the other Stark physician compensation exceptions, nor subject to the set in advance requirement applicable to all other Stark physician compensation exceptions, except for bona fide employment relationships. This is to permit group practices from engaging in profit sharing and productivity bonuses. The Stark II regulations set out special group practice compensation rules permitting Medicare and Medicaid DHS revenues to be paid indirectly to group practice physicians through overall shares of profit or productivity bonuses. 29 A productivity bonus, including Medicare and Medicaid DHS performed by others incident to the referring physician s personally performed services, is permissible if it is calculated in a reasonable and verifiable manner that is not directly related to the volume or value of DHS referrals by any referring physician to the group practice. Any of the following bonus methodologies is permitted: The bonus is based on the physician s total patient encounters, or relative value units (RVUs). The bonus is based on the allocation of the physician s compensation attributable to services that are not DHS. Revenues derived from DHS are less than five percent of the group practice s total revenue, and the allocated portion of those revenues to each physician in the group practice constitutes five percent or less of his or her total compensation from the group practice. A share of the group practice s overall profits is permissible if it is divided in a reasonable and verifiable manner that is not directly related to the volume or value of DHS referrals by any referring physician to the group practice. Any of the following profit distribution methodologies is permissible: The group s profits are divided per capita (e.g., per physician in the group). Revenues derived from DHS are distributed based on the distribution of the group s revenues attributed to services that are not DHS.

34 Massachusetts Medical Society Revenues derived from DHS constitute less than five percent of the group practice s total revenue and the allocated portion of those revenues to each physician in the group practice constitutes five percent or less of his or her total compensation from the group practice. The Stark rules also permit profit allocations to be divided within a component of the group practice that consists of at least five physicians. Supporting documentation verifying the method used to calculate the profit share or productivity bonus and the resulting amount of compensation must be made available to the government upon request. A reproduction of a physician compensation grid issued by the CMS in the final Stark II Phase II rules is included as Exhibit B in the back of this publication. INDIVIDUAL PHYSICIAN COMPENSATION RELATIONSHIPS Referring physicians can have compensation arrangements with DHS entities, including medical practices that do not meet the Stark group practice requirements, under the exceptions for employment, personal services, or fair-market-value arrangements. Under Stark II, CMS has established fairly uniform rules on permissible compensation under these exceptions, as well as the academic medical center exception. 30 Under these exceptions, referring physicians can be compensated in any of the following ways as long as the overall compensation is not in excess of fair market value: On an aggregate basis On a per-unit-of-service or per-time basis With a percentage of revenues or collections for personally performed services With a productivity bonus on any personally performed services With incentives tied to utilization as part of a physician incentive plan related to health plan enrollees There are additional, unique conditions within each of these exceptions that also must be satisfied to utilize these permissible forms of compensation as explained below. Bona Fide Employment Relationship Exception Under this exception, any amount paid by a DHS entity/employer to a referring physician with a bona fide employment relationship for the provision of services is permitted if all of the following are true: It is for identifiable services. The amount of remuneration is consistent with fair market value and not determined in a manner that takes into account the volume or value of referrals. The remuneration is provided pursuant to a commercially reasonable agreement, even if no referrals were made to the employer.

35 Making Sense of the Stark Law: Compliance for the Medical Practice In addition to the payment of a productivity bonus or percentage compensation based on services performed personally by the physician/employee, a bona fide employee of any DHS entity could also be paid directly based on any non-dhs referrals by the employee (although such compensation directly based on the volume or value of any private pay referrals or non-dhs Medicare or Medicaid referrals could implicate various federal or state fraud and abuse statutes, including the anti-kickback statutes). Stark references the common law rules as applied under the Internal Revenue Code in determining whether a physician is an employee. Personal Service Arrangements Exception Any remuneration paid to a referring physician by a DHS entity under an arrangement for personal services is permitted if all of the following criteria are met: The arrangement is set out in writing, signed by the parties, specifies the services covered by the arrangement, and is for a term of at least one year. The arrangement covers all of the services to be provided to the DHS entity. The aggregate services contracted do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement. The compensation to be paid over the term is set in advance in the initial agreement in sufficient detail so that it can be objectively verified, does not exceed fair market value, and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. 31 The services to be performed under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law. A key liberalization of this exception under the final Stark II regulations is that the physician or immediate family member can furnish services, as well as related items (such as supplies), to the DHS entity through the services of employees or locum tenens physicians, but not independent contractors. Thus, this exception now can comprehensively cover hospital service contracts with medical groups to cover various hospital divisions, such as the emergency room. Under this exception, terminations with or without cause are allowed if the parties enter into no further contract for services within the first year of the original term. The arrangement can also consist of multiple contracts if each meets the requirements under the exception, and if the contracts either incorporate each other by reference, or if there is a historical master list of contracts that is maintained and updated centrally and is available to the government upon request. The payment of a productivity bonus based on services performed personally by the contracted physician as well as payments based on a unit of service or time are also permitted. Under the final Stark II regulations, the CMS also created two ways to be automatically deemed in compliance with this exception s requirement for fair-market-value compensation for hourly payments for a physician s personal services (i.e., those provided by the physician personally and not by others under his or her direction or control). Such payments are deemed to be fair market value if they are established using either of the following two methodologies:

36 Massachusetts Medical Society The hourly rate is less than or equal to the average hourly rate for emergency room physician services in the relevant physician market, provided there are at least three hospitals providing emergency room services in the market. The hourly rate is determined by averaging the 50th percentile national compensation level for physicians within the same specialty (or if the specialty is not identified in the survey, for general practice) in surveys conducted by at least four of the following groups and dividing by 2,000 hours: Sullivan, Cotter & Associates; Hay Group; Hospital and Healthcare Compensation Services; Medical Group Management Association; ECS Watson Wyatt; and William M. Mercer. Physician compensation that does not meet either of these deemed compliant methodologies may still be demonstrated to be consistent with the fair-market-value requirement through other means. Fair-Market-Value Compensation Exception 32 Under the final Stark II regulations, the CMS added a fair-market-value compensation exception. This is a useful compensation exception for arrangements that do not fall within any of the other exceptions to the Stark prohibitions. This exception allows compensation resulting from an arrangement between a DHS entity and a referring physician, immediate family member, or group of physicians (regardless of whether or not the group meets the definition of group practice) if the arrangement meets the following conditions: The arrangement is in writing, is signed by the parties, and covers only identifiable items or services, all of which are specified in the agreement. The writing specifies the time frame for the arrangement, which can be for any period of time and may contain a termination clause, provided the parties enter into only one arrangement for the same items or services during the course of a year. An arrangement made for less than one year may be renewed any number of times if the terms of the arrangement and the compensation for the same items or services do not change. The writing specifies the compensation that will be provided under the arrangement. The compensation must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician. The arrangement would be commercially reasonable (taking into account the nature and scope of the transaction) and furthers the legitimate business purposes of the parties. The arrangement does not violate the anti-kickback statute or any federal or state law or regulation governing billing or claims submission. The services to be performed under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates a state or federal law. If the physician s compensation is paid as an employee of the DHS entity, a written agreement would not be required.

37 Making Sense of the Stark Law: Compliance for the Medical Practice The payment of a productivity bonus or percentage compensation based on services performed personally by the contracted physician as well as payments based on a unit of service or time are also permitted. CMS did include a comment in the final Stark II regulations that would seem to suggest that a referring physician could be paid for his or her supervisory services by a DHS entity under this exception. Physician Payments Exception Payments by a physician (or immediate family member) to a laboratory in exchange for the provision of clinical laboratory services or to an entity as compensation for other items or services are excepted if the items or services are furnished at a price that is consistent with fair market value, and are not items or services covered by another exception (e.g., equipment lease). COMPENSATION TO NON-GROUP PRACTICE PHYSICIANS All compensation to referring physicians who are not owners of their medical practices must be fair market value. Fair market value is defined as the value in arm s length transactions, consistent with the general market value. General market value is defined as the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. 33 There are several common standards imposed under the personal services, employment, academic medical centers (AMC) services, and fair market value compensation exceptions namely that the compensation is set in advance and is not determined in a manner that takes into account the volume or value of DHS referrals or (except for employed physicians) other business generated by the referring physician. Under the final Stark II regulations, the CMS liberalized the meanings of these standards to permit incentive compensation as well as percentage-based, per click, and time-based compensation under these exceptions, provided that the compensation is tied only to the services personally furnished by the physician. Unlike the overall profit distributions permitted by Stark within a group practice, such incentive compensation paid to employed or contracted physicians cannot include any measure of DHS services or items rendered by others, including incident to services. Any form of compensation, including productivity bonuses and percentage-based compensation, is considered to be set in advance under Stark if the aggregate compensation, a time-based or perunit-of-service-based (whether per-use or per-service) amount, or a specific formula for calculating the compensation, is set in an agreement between the parties before the furnishing of the items or services for which the compensation is to be paid; the formula for determining the compensation is set forth in sufficient detail so that it can be objectively verified, and the formula is not changed or modified during the course of the agreement in any manner that reflects the volume or value of referrals or other business generated by the referring physician. Unit-based compensation (including time-based or per-unit-of-service-based compensation) will be deemed not to take into account the volume or value of referrals or other business generated

38 Massachusetts Medical Society between the parties if the compensation is fair market value for services or items actually provided, and does not vary during the course of the compensation agreement in any manner that takes into account referrals of DHS or referrals or other business generated by the referring physician, including private pay health care business (except for services personally performed by the referring physician, which will not be considered other business generated by the referring physician). Even if a compensation arrangement does not violate the Stark Law, it still must be analyzed for compliance under both federal and state anti-kickback laws, as well as other state laws that may regulate physician financial interests. Such incentive-based or volume variable compensation may not pass muster under these other types of fraud and abuse laws (see the discussion of anti-kickback safe harbors under Compliance With the Anti-kickback Laws.) The CMS also liberalized the Stark exceptions to allow for physician contract terms that direct the physician s clinical activity. A physician s compensation from a bona fide employer or under a managed care or other contract may be conditioned on the physician s referrals to a particular provider, practitioner, or supplier, as long as the compensation arrangement meets the following criteria: Is set in advance for the term of the agreement Is consistent with fair market value for services performed (i.e., the payment does not take into account the volume or value of anticipated or required referrals) 34 Otherwise complies with an applicable exception The requirement to make referrals to a particular provider, practitioner, or supplier is set forth in a written agreement signed by the parties. The requirement to make referrals to a particular provider, practitioner, or supplier does not apply if the patient expresses a preference for a different provider, practitioner, or supplier; the patient s insurer determines the provider, practitioner, or supplier; or the referral is not in the patient s best medical interest in the physician s judgment. The required referrals relate solely to the physician s services covered by the scope of the employment or the contract, and the referral requirement is reasonably necessary to effectuate the legitimate business purposes of the compensation relationship. In no event may the physician be required to make referrals that relate to services that are not provided by the physician under the scope of his or her employment or contract. Thus, under Stark, a restrictive covenant in a physician employment contract may be permissible, unless the physician was also covered by a physician recruitment arrangement. See the discussion of the Stark physician recruitment exception under the section entitled Physician-Hospital Relationships, but note that certain restrictive covenants are unenforceable under Massachusetts law.

39 Making Sense of the Stark Law: Compliance for the Medical Practice OTHER MEDICAL PRACTICE/PHYSICIAN RELATIONSHIPS WITH DHS ENTITIES Rental of Office Space Exception Payments made by a lessee to a lessor for the use of premises are excepted if the following criteria are met: There is a written, executed lease with a term of at least one year. The lease specifies the premises covered. The lease would be commercially reasonable even if there were no referrals made between the parties. The space rented does not exceed that which is reasonable and necessary for the legitimate business purpose of the lease and used exclusively by the lessee when being used by the lessee, except that the lessee may make pro rata common areas expense payments. Rental charges over the term are set in advance, consistent with fair market value, and are not determined in a manner that accounts for the volume or value of any referrals or other business generated between the parties. With respect to leases, fair market value is the value of rental property for general commercial purposes (not taking into account its intended use). Space rentals may not be adjusted to reflect additional value attributable to the parties proximity if the lessor is a potential source of referrals to the lessee. Relevant factors in determining fair market value for purposes of Stark and anti-kickback compliance include not only the rental rate, but also the length and scope of the negotiations; the space, amenities, and additional rental costs included in the rental rate; and termination and exclusivity rights. 35 Rental of Equipment Exception Payments made by a lessee to a lessor for the use of equipment are excepted if the following criteria are met: There is a written, executed lease with a term of one year. The equipment rented does not exceed that which is reasonable and necessary for the legitimate business purpose of the lease and is used exclusively by the lessee when being used by the lessee. The rental charges over the term are set in advance, consistent with fair market value, and are not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. The lease would be commercially reasonable even if no referrals were made between parties. As to both space and equipment leases, the following rules apply: Per service or per click rental payments are permitted if all other conditions of the exception are met (but note that such payments do not meet the applicable anti-kickback safe harbors, which require the aggregate amount of rent to be stated in the lease or contract). Termination with or without cause clauses are allowed if the parties enter into no further leases within the first year of the original lease term.

40 Massachusetts Medical Society Month-to-month holdovers are allowed for up to six months if there are no changes in the terms and conditions. Subleases are permitted as long as the rented space or equipment is not shared during the same rental period. OTHER GENERAL EXCEPTIONS There are other Stark exceptions that apply to unique situations that protect both physician ownership/ investment interest in and compensation with the following DHS entities: Implants Provided in Ambulatory Surgical Centers Implants furnished in an ambulatory surgical center (ASC), such as cochlear implants, intraocular lenses, and other implanted prosthetics or DME, fall within an exception if the implant is implanted by the referring physician or a member of the physician s group practice in a Medicare-certified ASC; the implant is implanted during a surgical procedure payable by Medicare as an ASC procedure; and the arrangement does not violate the anti-kickback statute or other laws or regulations governing billing or claims submission. 36 ESRD Drugs EPO and other dialysis drugs furnished in an end-stage renal disease (ESRD) that are listed by their CPT and HCPCS codes are excepted if the arrangement does not violate the anti-kickback statute or other laws or regulations governing billing or claims submission. Preventive Tests and Immunizations Medicare-covered preventive screening tests, immunizations, and vaccines listed by their CPT and HCPCS codes are excepted if the arrangement does not violate the anti-kickback statute or other laws or regulations governing billing or claims submission. Eyeglasses/Contact Lenses Medicare covered eyeglasses and contact lenses, when given following cataract surgery, are excepted if the arrangement does not violate the anti-kickback statute or other laws or regulations governing billing or claims submission. Intra-family Rural Referrals This exception protects referrals from a referring physician to his or her immediate family member or to an DHS entity with which an immediate family member has a financial relationship if the patient referred resides in a rural area (as defined under Medicare regulations) and no other person or entity is available to furnish the services in a timely manner in light of the patient s condition within 25 miles of the patient s residence or at the patient s home, and the arrangement does not violate the anti-kickback statute or other laws or regulations governing billing or claims submission. The referring physician

41 Making Sense of the Stark Law: Compliance for the Medical Practice or immediate family member must make reasonable inquiries as to the availability of other persons or entities to furnish the DHS within 25 miles of the patient s residence. PHYSICIAN-HOSPITAL RELATIONSHIPS Exceptions to Ownership Arrangement Prohibitions The Stark Law was originally drafted to provide very narrow exceptions to the prohibition of ownership or investment interests in hospitals and other non-group practice DHS entities. There are exceptions for rural providers, hospitals in Puerto Rico, and publicly traded securities and mutual funds. Another original Stark ownership arrangement exception for whole hospital ownership has undergone extensive scrutiny, as it has been utilized as a means for physicians to own and operate specialty hospitals. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 amended the whole hospital and rural provider exceptions by imposing an 18-month moratorium, effective through June 7, 2005, on specialty hospitals, and thus prevents them from being eligible for a Stark exception unless they are grandfathered as having been in operation or under development as of November 18, This moratorium expired on June 8, 2005, but the CMS announced its intention not to issue new specialty hospital provider agreements, pending its review of its procedures for enrolling specialty hospitals in Medicare. This review is to be completed by January In the meantime, legislation has been filed in Congress (with a June 8, 2005 effective date, if enacted) to prohibit physicians from referring Medicare and Medicaid patients to new specialty hospitals in which they have an ownership interest. 37 A specialty hospital is defined as a hospital that is primarily or exclusively engaged in the care and treatment of one of the following: (i) patients with a cardiac condition, (ii) patients with an orthopedic condition, (iii) patients receiving a surgical procedure, or (iv) patients receiving any other specialized category of services that HHS designates as being inconsistent with the purpose of permitting physician ownership and investment interests in a hospital. The effect of this moratorium is to prohibit such specialty hospitals from seeking Medicare or Medicaid reimbursement for services or items referred by any physician owners. Academic Medical Center Services Exception This exception, added by the CMS in the regulations, applies to both ownership/investment interests and compensation arrangements. It is intended to address the unique physician relationships found within the academic medical center (AMC) setting related to research, teaching, and other administrative tasks. An AMC is defined as an accredited medical school or accredited academic hospital that sponsors four or more approved programs, one or more faculty practice plans affiliated with the medical school, the affiliated hospital(s), or the accredited academic hospital, or one or more affiliated hospitals if the majority of the medical staff members consists of physicians who are faculty members, and a majority of all hospital admissions, not counting those of residents and non-physician professionals, are made by faculty members. AMCs may bill for Medicare and Medicaid DHS referred by academic physicians who have (or whose immediate family members have) a compensation arrangement or ownership interest with the AMC, provided that the following criteria are met:

42 Massachusetts Medical Society The referring physician is a bona fide full-time or substantial part-time employee of a component of the AMC licensed in the state, with a bona fide faculty appointment at an affiliated medical school or one or more educational programs at an accredited academic hospital. The referring physician provides substantial academic or clinical teaching services (or a combination) for compensation, and there is a reasonable and consistent method for calculating the physician s academic and clinical teaching services (a physician who performs such services at least 20 percent of his or her professional time or for at least eight hours per week is deemed to meet this requirement). The total compensation paid to the referring physician from all AMC components is set in advance, does not exceed fair market value, and does not take into account volume or value of referrals or other business generated by the referring physician within the AMC. Transfers of funds between AMC components directly or indirectly support the missions of teaching, indigent care, research, or community service; the relationships between AMC components are in written form and adopted by governing bodies, or if there is only one AMC entity, transferred funds are reflected in its financial reports; and all grants paid to the referring physician for research are used solely to support bona fide research or teaching and are consistent with the terms and conditions of the grant. 38 The referring physician s compensation arrangement does not violate the anti-kickback statute or any other federal or state law governing billing or claims. As with the other non-group practice physician compensation exceptions, AMCs may pay their referring academic physicians on a percentage basis of services personally performed. Payments based on a unit of service or time are also permitted. Physician Recruitment Exception This exception covers various forms of remuneration provided by a hospital to induce a physician to relocate to the geographic area served by the hospital in order to be a member of the medical staff of the hospital. Relocation is defined as moving the physician s practice at least 25 miles or, in the alternative, as deriving at least 75 percent of revenues in the new practice from new patients. Residents and physicians who have been in practice one year or less are not subject to the relocation requirement and may be recruited locally, provided that the recruited resident or new physician establishes his or her medical practice in the geographic area served by the hospital, and the recruitment package satisfies the other applicable physician recruitment exception standards below. Remuneration paid directly to a physician to recruit him or her to relocate his or her medical practice to the geographic area served by the hospital in order to become a member of its medical staff is excepted from the Stark prohibitions if the following requirements are met: The arrangement is set out in writing and signed by both parties. The arrangement is not conditioned on the physician s referral of patients to the hospital. The hospital does not determine (directly or indirectly) the amount of the remuneration to the physician based on the volume or value of any actual or anticipated referrals by the physician or other business generated between the parties. The physician is allowed to establish staff privileges at any other hospital and to refer business to any other entities (except as referrals may be restricted under a separate employment or

43 Making Sense of the Stark Law: Compliance for the Medical Practice services contract that complies with the permissible scope of physician restrictions under Stark (see the section entitled Compensation to Non-group Physicians ). Remuneration provided by a hospital to a physician either indirectly, through payments made to another physician or physician practice, or directly, to a physician who joins a physician practice, must also meet the following additional conditions: The written recruitment agreement is also signed by the party to whom the payments are directly made. Except for actual costs incurred by the physician or physician practice in recruiting the new physician, the remuneration is passed directly through to or remains with the recruited physician. In the case of an income guarantee made by the hospital to a recruited physician who joins a physician or physician practice, the costs allocated by the physician or physician practice to the recruited physician do not exceed the actual additional incremental costs attributable to the recruited physician. Records of the actual costs and the passed-through amounts are maintained for a period of at least five years and made available to HHS upon request. The remuneration from the hospital under the arrangement is not determined in a manner that takes into account (directly or indirectly) the volume or value of any actual or anticipated referrals by the recruited physician or the physician practice (or any physician affiliated with the physician practice) receiving the direct payments from the hospital. 39 The physician or physician practice does not impose additional practice restrictions on the recruited physician other than conditions related to quality of care. The arrangement does not violate the anti-kickback statute or any federal or state law or regulation governing billing or claims submission. This exception also applies to recruitment packages offered by federally qualified health centers (FQHCs). Physician retention payments are not permitted, except for physicians in federally designated health professional shortage areas. Professional Courtesy Exception In the final Stark II regulations, CMS added a new exception covering professional courtesy, which is defined as free or discounted health care services or items furnished by a DHS entity, including a hospital or a group practice, to a physician or a member of the physician s immediate family or office staff. This common but in recent times increasingly questioned practice has typically included waiving co-pay and deductible amounts. Under this Stark exception, the professional courtesy must be offered to all physicians on the DHS entity s bona fide medical staff or in the DHS entity s local community (without regard to the volume or value of referrals or other business generated between the parties). Importantly, the entity s professional courtesy policy must be documented in writing and adopted by the entity s governing body. The health care items and services included in the policy must be of a type routinely provided by the entity. Professional courtesy cannot be offered to any physician, immediate family member, or member of the office staff who is a federal health care program beneficiary, unless there is a good-faith showing of financial need. If any waiver of co-pay or deductibles is involved, the

44 Massachusetts Medical Society insurer must be informed in writing of the discount. Finally, the arrangement cannot violate the antikickback statute or any federal or state law or regulation governing billing or claims submission. Health Information Networks Exception Another new exception added by CMS in the final Stark II regulations is one for information technology items and services (including both hardware and software) provided by a DHS entity to a physician to participate in a community-wide health information system. The health information system must be available to all providers, practitioners, and residents of the community who desire to participate, and must be one that allows community providers and practitioners to access and share electronic health care records. The exception covers only information technology items and services that are necessary to enable the physician to participate in the health information system, and the physician must principally use the items and services as part of the community-wide health information system. The items and services involved may not be provided in any manner that takes into account the volume or value of referrals or other business generated by the physician (e.g., the exception would not apply if items and services are only offered to referral sources). As with all the exceptions created by CMS regulation, this exception does not cover any arrangement that violates the federal anti-kickback law or that involves claims submission and billing that violates applicable federal and state laws and regulations. 40 Additional Compensation Exceptions for Hospital-Physician Relationships There is also an exception for remuneration provided by a hospital to a physician that is unrelated to the provision of DHS. The final Stark II regulations clarify that this exception is available only if remuneration is wholly unrelated to the provision of DHS. This statutory exception has been interpreted quite narrowly by the CMS, which views any item, service, or cost that could be allocated in whole or in part to Medicare or Medicaid under applicable cost reporting principles as related to the provision of DHS. Remuneration is also considered related to DHS if it is furnished in a selective manner to medical staff or other physicians who are in a position to make or influence referrals. Physicians can accept unsolicited non-monetary compensation in the form of items and services, but not cash or cash equivalents, if the benefits do not total more than $300 per year and provided that they are donated without regard to the volume or value of referrals and are in compliance with anti-kickback and other applicable laws. This $300 limit is subject to annual CPI adjustments, but cannot qualify for the 90-day grace period for temporary non-compliance. Certain low-value (i.e., less than $25 per occurrence, subject to annual CPI adjustments) medical staff incidental benefits between a hospital and its medical staff members are permissible, as well as compliance training. These exceptions, however, have left many lingering questions regarding the permissible extent of hospital-sponsored or -provided CME programs for its medical staff. The AMA has requested that the CMS develop an explicit exception within the Stark regulations that would permit physician compensation without financial limitation in the form of CME,offered for the purpose of ensuring quality patient care. Unsolicited charitable donations made by physicians or immediate family members to hospitals and other DHS entities that are Section 501(c)(3) organizations are allowed if donated without regard to the volume or value of referrals and are otherwise in compliance with anti-kickback and other billing laws. Referral services and obstetrical malpractice insurance subsidies that meet the applicable anti-kickback safe harbor standards are also excepted from Stark.

45 Making Sense of the Stark Law: Compliance for the Medical Practice INDIRECT COMPENSATION ARRANGEMENTS As discussed above, indirect compensation arrangements are defined very broadly. However, the CMS created a specific exception intended to conceptually follow the exceptions applicable to direct compensation arrangements. Any indirect compensation arrangement (as defined under the section entitled Financial Relationships ) between a referring physician (or immediate family member) and a DHS entity would not preclude the referral or billing of Medicare and Medicaid DHS services if the arrangement meets all of the following requirements of the indirect compensation arrangement exception: The compensation received by the referring physician (or immediate family member) is fair market value and not determined in any manner that takes into account the value or volume of referrals or other business generated (with time/unit-based payments permitted if the other two requirements noted immediately below are satisfied). The arrangement is set forth in a signed written contract specifying the services covered (which is not required for bona fide commercially reasonable employment relationships for identifiable services). There is no violation of the anti-kickback statute or any other laws governing billing or claims submission. MANAGED CARE RELATIONSHIPS The Stark prohibition, which is triggered by any type of compensation arrangement with a DHS entity, is broad enough to encompass common managed care type physician arrangements that include financial incentives to decrease utilization, lower costs, or improve quality. Therefore, whenever a physician or related practice has such a contract with a managed care plan or contracting entity that provides and bills for Medicare or Medicaid DHS, the financial relationship between the physician and the managed care entity is subject to Stark. 41 There are two exceptions designed to specifically cover managed care entities. Prepaid Plans Exception This exception protects referrals of DHS furnished to enrollees of Medicare and Medicaid managed care plans. Risk-Sharing Arrangement Exceptions Contracted physicians, under the personal services arrangement exception, and group practice, employee, and AMC physicians, under the CMS-added risk-sharing arrangements exception, are not precluded from referring DHS to entities that also pay the physician, directly or through a subcontractor, under a managed care risk-sharing arrangement. These exceptions apply broadly to risk-sharing payments made to physicians by managed care organizations (MCOs), including IPAs, PHOs, and other contracting provider networks, as well as other downstream provider contracting organizations.

46 Massachusetts Medical Society PURCHASE AND SALE OF MEDICAL PRACTICES Isolated Transactions Exception This exception for compensation arrangements applies to one-time sales of medical practice assets or equity, or other isolated transactions. The exception applies if the following criteria are met: The amount of remuneration is consistent with fair market value and not determined in a manner that takes into account the volume or value of referrals by the referring physician or other business generated between the parties. The remuneration is provided pursuant to an agreement that would be commercially reasonable even if the physician made no referrals. Any additional transactions between the parties beyond six months after the practice sale are prohibited, except for transactions that are specifically excepted by other Stark exceptions (e.g., selling physicians become bona fide employees of the purchaser) and except for commercially reasonable post-closing adjustments (e.g., an indemnification hold-back) that do not take into account (directly or indirectly) the volume or value of referrals or other business generated by the referring physician. 42 The final Stark II regulations define isolated transaction to permit installment payments to a seller by a buyer as long as the total aggregate payment is set before the first payment is made and does not vary to reflect referrals. The outstanding balance must also be guaranteed or secured to assure payment. Post-closing adjustments that are commercially reasonable and not dependent on referrals or other business generated by the parties will be permitted if they are made within six months of the date of the transaction. FINAL COMMENTS Since 1995, the Stark Law as it applies to all ten categories of DHS (Stark II) has been in effect. Not until 2004, however, have physicians and the health care community been provided with a final set of agency regulations implementing this Law. Many of the changes and additions to the Stark II regulations made by the CMS are intended to ease the burden of compliance with this physician selfreferral prohibition, and in many cases this has been effectively accomplished. In doing so, however, the Stark Law has become much more complex and harder to follow. Many of the originally intended bright lines are no more. With increasing financial burdens on the federal government to fund the Medicare and Medicaid programs expected to continue long into the future, the prospect of significant legislative repeal or curtailment of the Stark Law is highly unlikely. With the issuance of final Stark II regulations, and the expected issuance of final rules on the application of the law to the non-managed care Medicaid Program, scrutiny of physician relationships with medical practices, hospitals, and other providers that render DHS services and items by carriers, enforcement agencies, and private whistleblowers is expected to dramatically increase. Therefore, all medical practices should incorporate the Stark Law into their on-going internal compliance efforts. Prudent steps in this regard should include identification of all physician financial relationships that come within the scope of Stark, and confirmation of the application of a Stark exception. Paramount among this internal compliance exercise for group practices that render DHS to Medicare and Medicaid patients is a review of each requirement for Stark group practice qualification; confirmation that all

47 Making Sense of the Stark Law: Compliance for the Medical Practice referred DHS comes within a group practice exception, and a review and evaluation of current physician compensation methodologies for Stark compliance. Existing documents and contracts should also be periodically reviewed for Stark compliance, as both the group practice and non-group practice exceptions in many instances require the creation and retention of supporting documentation (or written contracts or leases) to satisfy their conditions. Finally, in any instance where there is uncertainty under Stark as to the permissibility of any physician financial relationship or internal medical practice financial arrangement, legal counsel should be consulted, and consideration may need to be given to the potential benefits of seeking a Stark advisory opinion. 43

48 Massachusetts Medical Society Exhibit A: Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 44

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64 Massachusetts Medical Society EXHIBIT B: Stark Law MD Compensation Grid From the Stark II, Phase II Interim Final Rule March 26, 2004, 69 Federal Register at TERMS OF EXCEPTION Group Practice Physicians Bona Fide Employment Personal Service Arrangements Fair Market Value Academic Medical Centers 60 Must compensation be fair market value? Must compensation be set in advance? no yes yes yes yes no no yes yes yes Scope of volume or value restriction DHS referrals DHS referrals DHS referrals or other business DHS referrals or other business DHS referrals or others business Scope of productivity bonuses allowed personally performed services and incident to, plus indirect personally performed services personally performed services personally performed services personally performed services Are overall profit shares allowed? yes no no no no Written agreement required? no no yes, minimum one year term yes (except for employment), no minimum term yes, written agreement(s) or other document(s) Physician incentive plan (PIP) exception for services to plan enrollees? no, but risk sharing arrangement exception may apply no, but risk sharing arrangement exception may apply yes, and risk sharing arrangement exception may also apply no, but risk sharing arrangement exception may apply no, but risk sharing arrangement exception may apply

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