Significant Final Stark Law Changes Cannot be Ignored!

By Sandra P. Greenblatt, Esq. 


It is hard to believe, but the Federal statute known as the “Stark Law” or physician self-referral law has been in effect since January 1, 1992! Since that date, physicians, health care providers and their health lawyers have faced the mounting challenges presented by the increasingly complex and evolving set of regulations that implement the statute. Initially applicable only to physician referrals for clinical laboratory services, the Stark Law today (i) prohibits a physician from making referrals for a list of 11 designated health services[i] (“DHS”) payable by Medicare to an entity with which the physician (or an immediate family member) has a financial relationship, either through ownership or a compensation arrangement, unless an exception applies; and (ii) prohibits the DHS entity from filing claims with Medicare (or billing another individual, entity, or third party payer) and receiving reimbursement for those DHS rendered as a result of a prohibited referral. Penalties are severe and include payment denials, refunds, fines, civil money penalties, exclusion from Medicare and possible prosecution under the Federal False Claims Act, both a civil and criminal statute. The Stark Law establishes a number of specific exceptions for financial relationships that the Federal government believes pose no risk of program or patient abuse, the latest of which are the subject of this article.

On Aug. 19, 2008, CMS published a final rule to implement the 2009 Hospital Inpatient Prospective Payment System (the “IPPS Final Rule”[ii]), which includes significant changes to the Stark Law regulations, some of which are effective as early as Oct. 1, 2008. Other even more significant changes, which will require many joint venture arrangements between physicians or physician groups and hospitals “under arrangements,” or between physicians or their groups and suppliers of DHS, to be dissolved or restructured, have an extended effective date of Oct. 1, 2009. There is no grandfathering provision. This article will summarize for you the significant final Stark Law changes and their implications, so that you may begin reviewing with your health lawyers any existing financial arrangements and take timely corrective action, if required.

These changes to the Stark Law regulations become effective Oct. 1, 2008:

Revisions to the “stand in the shoes” provisions;
Requirement that hospitals disclose physician-ownership to patients on request;
Requirement that hospitals disclose to CMS financial relationships with physicians;
Revisions to the exception for payment of obstetrical malpractice insurance subsidies;
Clarification regarding physician ownership in a retirement plan;
Creation of a new exception for technical non-compliance with signature requirements;
Revision to “set in advance” and amendments to multi-year agreements;
Definition of the “period of disallowance” resulting from non-compliance; and
Burden of proof for establishing that DHS were not furnished pursuant to a prohibited referral.
The following changes have a delayed effective date of Oct. 1, 2009, since they are likely to substantially impact joint ventures between physicians and hospitals or other DHS entities and may require the parties to restructure or dissolve existing financial arrangements in order to comply with the Stark Law:

Prohibition on percentage-based compensation formulas for equipment and office lease arrangements;
Prohibition on unit-of-service (“per click”) payments in office space and equipment lease arrangements that reflect referrals between the parties; and
Expanded definition of “entity” to include not only the entity that submits claims to Medicare for DHS, but also the “person or entity that performs the DHS” in an effort to restrict the provision of DHS to hospitals by physician or physician organizations “under arrangements.”

A. “Stand in the Shoes” Provisions.
In the IPPS Final Rule, CMS eases the physician “stand in the shoes” rule to require its application only to physician-owners of physician organizations (other than those with a mere titular interest) and to permit (but not require) its application to non-owner physicians. Titular ownership is an interest that excludes the ability or right to receive any of the financial benefits of ownership, such as distribution of profits, dividends, proceeds of sale or similar returns on investment. As a result, beginning Oct. 1, 2008, in order for a physician who is an employee or independent contractor (but not an owner) of a physician organization to refer to a DHS entity that has a compensation arrangement with the physician organization, the compensation arrangement between the physician organization and the DHS entity will no longer need to meet a direct-compensation-arrangement exception. Rather, such referrals may be analyzed under the more flexible indirect-compensation-arrangement approach. However, if a physician who is an owner of a physician organization refers to a DHS entity with which the physician organization has a compensation arrangement, that compensation arrangement will need to satisfy one of the exceptions for direct-compensation-arrangements, since the physician-owner “stands in the shoes” of the physician organization. This final CMS rule provides relief principally for academic medical centers, not-for-profit physician organizations and hospital-affiliated integrated health systems with no (or only titular) physician ownership.

B.         No Percentage-Based Compensation.
Effective Oct. 1, 2009, for both new and existing arrangements, CMS prohibits compensation arrangements based on a percentage of revenues in the Stark Law exceptions for office and equipment leases and in the exceptions for fair market value (“FMV”) compensation and indirect compensation arrangements. In each of these exceptions, the IPPS Final Rule provides that compensation for the rental of office space or equipment may not be determined using a formula based on a percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the leased office space, or to the services performed or business generated through the use of the leased equipment. By adding the language not only to the exceptions for lease of office space and equipment but also to indirect compensation and FMV exceptions, CMS is addressing situations where physicians lease space or equipment to DHS entities by forming a separate investment entity that is not a “physician organization” and, thus, would not be subject to the requirements of the office or equipment lease exceptions. CMS is closing a loophole that physicians could have used to avoid the new prohibition on the use of percentage compensation in lease arrangements. CMS is requiring existing leases of office space and equipment with percentage-based compensation to be amended to provide a flat fee. This prohibition on percentage-based compensation is viewed by CMS as a “targeted approach” that does not extend to other types of non-professional services, such as billing and management services arrangements between physicians and DHS entities, which CMS intends to watch for abuse. It is important to note that some states, includingFlorida, prohibit percentage based management services arrangements with physicians, where the entity performs practice enhancement activities for the physician organizations.
C.         No “Per Click” Lease Arrangements.
CMS revised the Stark Law exceptions for office and equipment leases, FMV compensation and indirect compensation arrangements to provide that compensation for the rental of office space or equipment may not be determined using a formula based on per-unit-of-service rental charges, to the extent that such charges reflect services provided to patients referred between the parties (DHS entity and physicians). The prohibition on per-unit leases applies equally to situations where the DHS entity is the lessor or lessee. Like the prohibition on percentage-based compensation, this new limitation becomes effective Oct. 1, 2009 and applies to all existing and future compensation arrangements. Nothing in the Final Rule prohibits leasing equipment or space on a per-use basis for services rendered to patients referred by others. The preamble acknowledges that a physician may have a per-use compensation arrangement for services rendered to patients referred by others and another compensation arrangement for services rendered to patients referred by the physician lessor.
For the time being, time-based rental payments, such as block-time leases, can still be structured to meet the requirements of a Stark Law exception. However, CMS remains concerned with block-time arrangements for very small amounts of time (e.g., once a week for four hours). CMS considers these so-called “on demand” leases to be “per click” arrangements that are now prohibited by the new rule.
D.         Definition of “Entity”/Services Furnished “Under Arrangements”
This move to expand the definition of a DHS “entity”is one of the most significant changes CMS made to the Stark regulations. Medicare permits providers, such as hospitals, skilled nursing facilities, home health agencies, and hospices to furnish services to beneficiaries “under arrangements” with third party entities/vendors that have a contractual relationship with the provider under which the provider bills Medicare for the service provided by the vendor and reimburses the vendor. CMS has expressed concern that hospital outpatient services furnished by an “under arrangements” entity owned by referring physicians creates a risk of overutilization and a way to circumvent the prohibition on physicians profiting from their referrals. In the IPPS Final Rule, CMS expands the definition of “entity” to include both the entity that bills Medicare for the DHS (former definition) and the “person or entity that performed the DHS.” CMS declined to define the phrase “performed the DHS”, however, in the preamble discussion, CMS stated that it does not consider an entity that: a) leases or sells space or equipment used for the performance of the DHS; b) furnishes supplies that are not separately billable but are used in the performance of DHS; or c) provides management, billing services or personnel to an entity that is performing the DHS, to itself be “performing” DHS. As a result of the expanded “entity” definition, a physician referring a single Medicare patient to a hospital for DHS provided “under arrangements” by a hospital-physician joint venture would actually be making a referral to two different DHS “entities” (the hospital which bills for the DHS and the joint venture which performs it), each of which needs to be protected under an exception to the Stark Law if the physician has a financial relationship with each entity. It is likely that many such hospital-physician joint ventures for DHS, including cardiac cath labs and imaging services, will need to be unwound or dissolved before Oct. 1, 2009 to ensure Stark Law compliance.
E.         Financial Relationships Between Hospitals and Physicians.
1.     Disclosure of Physician-Ownership to Patients.
In the IPPS Final Rule, CMS adopted requirements that each physician-owned hospital: i) provide written notice to patients that the hospital is physician-owned; ii) make available a list of the hospital¿s physician (or immediate family member) owners or investors at the time the patient or someone on the patient¿s behalf requests it; and iii) provide written notice to patients if the hospital does not have a physician present in the hospital 24 hours per day, 7 days per week and indicate how the hospital will meet the medical needs of any patient who develops an emergency medical condition when no physician is present. CMS created an exception to the disclosure requirement if none of the physician-owners refers patients to the hospital and the hospital attests to this fact in writing and added a significant new requirement that all physicians who are members of the hospital¿s medical staff must agree, as a condition of continued medical staff membership or admitting privileges, to disclose in writing to all patients who they refer to the hospital, any ownership or investment interest in the hospital held by themselves or by an immediate family member. The Final Rule permits CMS to terminate the Medicare provider agreement of any hospital that fails to comply with the physician ownership disclosure requirements or the 24/7 physician presence disclosure requirements.
2.     Hospital Reporting of Financial Relationships with Physicians.
The Stark Law requires DHS “entities” to provide the Secretary of the Department of Health and Human Services with information concerning the entityies ownership, investment and compensation arrangements in such form and at such times at the Secretary specifies. In the IPPS Final Rule, CMS stated that it intends to proceed with sending out the Disclosure of Financial Relationships Report (“DFRR”) to 500 general acute care and specialty hospitals. CMS indicated that this will be a one-time collection effort rather than a regular reporting or updating requirement. Hospitals receiving the DFRR may need to re-evaluate and, in some cases, restructure their financial relationships with referring physicians prior to submitting the DFRR. This could be time consuming and costly, particularly because older agreements may have been analyzed under regulations and guidance available at the time, rather than under more current Stark Law regulations and guidance.
F.         Obstetrical Malpractice Insurance Subsidies.
The IPPS Final Rule retains the provisions of the current exception and provides an additional more flexible set of requirements under which hospitals, federally qualified health centers (“FCQCs”), and rural health clinics may provide obstetrical malpractice insurance subsidies. The new alternative requirements permit only hospitals, FCQCs, and rural health clinics to provide an obstetrical malpractice insurance subsidy to a physician who regularly engages in obstetrical practice as a routine part of a medical practice that is: (i) located in a primary care Health Professional Shortage Area (“HPSA”), rural area, or an area with a demonstrated need (as determined by the HHS Secretary); or (ii) comprised of patients at least 75 percent of whom reside in a Medically Underserved Area (“MUA”) or are part of a Medically Underserved Population (“MUP”).
G.         Ownership or Investment Interest in Retirement Plans
Current Stark Law regulations[iii] exclude an ¿interest in a retirement plan¿ from the definition of ownership and investment interests. CMS reported that it received information indicating that some physicians are using retirement plans to purchase DHS entities to which the physicians refer patients. In the IPPS Final Rule, CMS clarifies that the exception covers only a retirement plan owned by a physician or immediate family member through their employment by a DHS entity. When a retirement plan offered by an employer purchases or invests in another DHS entity, the physician¿s interest (or that of the physician¿s immediate family members) in that other DHS entity through a retirement plan does not qualify for protection under the exception for ownership or investment interests in a retirement plan.
H.         Technical Non-Compliance with Signature Requirements.
CMS adopted only a single exception relating to technical non-compliance with a Stark Law exception: for missing signatures. This new exception provides that a financial relationship that otherwise would be out of compliance with an exception because of a missing signature will remain in compliance with that exception (assuming all other requirements are satisfied), if certain conditions are met: (i) if there has been an inadvertent failure to obtain a signature, the parties have 90 days from the date the arrangement becomes non-compliant to have the agreement signed; or (ii) if there has been a failure to obtain a signature that is not inadvertent, the parties have 30 days from the date the arrangement became non-compliant to have the agreement signed. CMS has not attached the requirement of self-disclosure of the technical noncompliance to CMS as a condition to using the new exception. However, this signature special exception can be used only once every three years per physician.
I.         Period of Disallowance.
CMS established an outside limit on the time period (referred to as the “period of disallowance”), during which a physician would be prohibited from referring Medicare patients to a DHS entity and for which the DHS entity would be prohibited from billing Medicare, if a financial relationship between the referring physician and the DHS entity failed to satisfy a Stark Law exception with respect to only the following three circumstances: (i) if the reason for noncompliance is not related to compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the arrangement was brought into compliance; (ii) if the reason for noncompliance is related to the payment or receipt of excess compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date all excess compensation (including interest, as appropriate) was returned by the party receiving it to the party that provided it, and all other requirements of the applicable exception are met; or (iii) if the reason for noncompliance is related to the payment or receipt of insufficient compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the entire shortfall was paid to the party to which it is owed, and all other requirements of the applicable exception are met.
While CMS’s Final Rule provides certainty as to the period of disallowance under some circumstances, it leaves this question unanswered for the many circumstances other than those specified in the three areas identified. The best that CMS can say about such circumstances is that the period of disallowance will be made on a case-by-case basis considering applicable facts and circumstances.
J.         ” Set in Advance” and Amendments to Agreements.
In the preamble to the IPPS Final Rule, CMS states that it is reversing its prior position and will permit amendments to multi-year agreements after the first year without violating the Stark Law’s requirement that compensation arrangements be “set in advance” in the exceptions for space and equipment leases and personal service agreements. There are specific requirements that must be met for such amendments to qualify as “set in advance.”
K.         Burden of Proof
Where Medicare claims are denied for Stark-based reasons, the Final Rule puts the burden of proof on the DHS entity submitting the claim to establish that the DHS service was not furnished pursuant to a prohibited referral. The burden of production (coming forward with evidence) also is initially on the provider/claimant, but may shift to CMS during the course of the appeal proceedings. CMS also notes that this clarification is generally consistent with the agency’s policy for claims denials. As a result, your proper document retention and recordkeeping policies assume even greater importance since, when challenged by CMS, providers will have to prove they were operating in compliance with the Stark Law and its exceptions, rather than CMS having to prove that the provider is guilty of violating the law.
The final Stark Law regulations published by CMS in the August 19th Federal Register and effective in part Oct. 1, 2008 and Oct. 1, 2009, have major implications for the health care industry. While the Final Rule provides some bright line rules for compliance, such as for periods of disallowance and technical violations resulting from missing signatures, other changes are far broader than proposed and more complex. CMS ominously has indicated the regulations will be strictly applied, regardless of the parties intent or knowledge, or the financial impact on the Medicare program and that it will continue to enact future regulations to tighten the Stark Law in areas where it continues to perceive program abuses.
Hospitals and other health care providers that have “under arrangements” contracts, equipment or facility leasing arrangements, joint ventures, or any other financial arrangements with entities owned by referring physicians that involve the provision of DHS should begin now to carefully review those arrangements for compliance with the revised Stark Law regulations. It is likely that many financial relationships with service or leasing companies owned by referring physicians or group practices may need to be dissolved or restructured within the next year in order to assure compliance with the Final Rule’s expanded definition of DHS “entity” and the prohibitions on percentage compensation and “per click” lease payments that take effect as of Oct. 1, 2009.
If you think CMS isn¿t serious, you should note that on August 15, 2008, CMS announced that, effective Jan. 1, 2009, it will begin to use a new Claim Adjustment Reason Code (“CARC No. 213”) to notify DHS providers when claims are being denied due to non-compliance with the Stark Law! The CARC No. 213 will only be used when a claim is denied because the physician or immediate family member has a financial interest in the DHS provider and fails to meet one of the Stark Law¿s exceptions. It is likely that much of the information CMS will need in order to support this new code will come from the Disclosure of Financial Relationships Report (“DFRR”) that CMS intends to send to up to 500 acute care and specialty hospitals to collect information concerning the ownership and compensation arrangements between the hospitals and physicians.


[i] DHS include clinical lab services, physical therapy, occupational therapy, speech language pathology, radiology and certain other imaging services, radiation therapy services and supplies, durable medical equipment and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices and supplies, home health services, outpatient prescription drugs and inpatient and outpatient hospital services.
[ii] 73FedReg 48433 (Aug. 19, 2008). 
[iii] 42 CFR Section 411.354(b)(3)(i).
Sandra P. Greenblatt is a Board Certified Health Lawyer and President of Sandra Greenblatt, PA, a boutique health law firm in Miami, FL, which has advised physicians and health care providers for over 20 years regarding their regulatory and transactional legal needs. She may be reached at (305) 577-9995 or [email protected]This article is an overview of a complex area of the law and is not intended as legal advice, which requires specific analysis of your individual facts and circumstances.