HCFA Implementation of Stark II Law Examines Motive in Payment Review

The Stark II regulations allow many forms of physician compensation, as long as they are “commercially reasonable.” But the ambiguity of the law may spur some concern among physicians, who must try to determine how that phrase will be defined.

This requirement shows up under Stark II’s approvals of employment relationships, isolated transactions, space rentals, equipment rentals and existing group-practice arrangements with hospitals. It is also part of the new definition of “fair market value,” which we will discuss in a later column. Under all of these circumstances, the Health Care Financing Administration has stated in new regulations that it will interpret “commercially reasonable” as a “sensible, prudent business arrangement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”

In certain respects, this definition poses real dangers for physicians. By focusing on whether an arrangement is sensible or prudent, and by analyzing these concepts “from the perspective of the … parties,” HCFA relies on an inherently subjective analysis. This is unprecedented in the history of the Stark law. Despite all of the gray areas of interpretation and complexities that have arisen as the law evolved over the years, the Stark rules still were created as an alternative to the alleged vagaries of the antikickback law’s subjective tests. These new Stark regulations mark, perhaps, the first time that the Stark law expressly abandons its pretense of objectivity.

Practically speaking, this means that parties that want to establish relationships that comply with the Stark law now need to create the same sort of protective documentation that health lawyers recommend for relationships subject to antikickback laws. Parties must document legitimate reasons for their arrangements with one another, and must establish a paper trail — with operational details — that demonstrates that the arrangement is consistent only with sensible and prudent decision making. In short, motives have become an important component of the Stark law, and they must be clearly documented.

Volume or value of referrals

Another issue in the new regulations concerns prohibitions against dividing income according to the volume or value of referrals.

We have discussed in prior months that Stark II prohibits physicians from dividing certain income this way. We further noted that HCFA says that this prohibition only applies in certain contexts. Specifically, HCFA contends that the Stark regulations pertain only to its list of designated health services, not all ancillary services.

HCFA also contends that it intends to prohibit such referrals only for Medicare or Medicaid patients.

However, HCFA has made a number of conflicting statements about this, making it dangerous for physicians to receive compensation based on the volume or value of referrals of nondesignated health services, or referrals of designated health services for non- Medicare or Medicaid patients. (One example of this inconsistency is HCFA’s decision to include referrals of “other business between the parties” in the prohibition. We will analyze this requirement in a later column.)

Interpretation issues

The regulations raise additional issues about the volume-or-value-of-referrals standard. For example, HCFA intends to interpret this similarly wherever it applies (group practice, remuneration, fair market value and de minimis.) It will be applied even when the Stark law uses the phrase “directly or indirectly” for some of these categories but not for others. In other words, the phrases “directly or indirectly” and “other business generated between the parties” — used in the statute — will be implied in each situation.

Further, HCFA intends to interpret this rule to apply not only to situations where physicians’ compensation entitlement fluctuates “in a manner that reflects referrals,” but also “in situations where the physician’s payments are stable … [but are] predicated, expressly or otherwise, on the physician making referrals to a particular provider.” Therefore, if a physician’s compensation entitlement is dependent on whether the physician is loyal to a particular provider, the arrangement may violate the volume-or-value standard.

As an example of a prohibitive arrangement, HCFA cites some hospitals’ requirement that a physician (including a physician employed by the hospital) refer only within the hospital’s own network for ancillary services, such as the hospital’s home health agency.

Here, according to HCFA, the “physician’s compensation reflects the volume or value of his or her referrals in the sense that the physician will receive no future compensation if he or she fails to refer as required.” In other words, HCFA believes a Stark issue arises when the physician’s employer (medical group, hospital, clinic) requires the physician to use its own ancillary services, where the physician might prefer to refer the business to a different provider in certain circumstances. Similarly, a hospital cannot require its medical staff to use its facilities, at least when those medical staff physicians have some sort of financial relationship with the hospital, such as employment, an equipment lease, management services or billing services.

Similar dangers arise with covenants not to compete that involve designated health services. One example of this would be a restriction on a laboratory medical director from sending lab business elsewhere. Fortunately, most restrictive covenants only prohibit the party from actively establishing businesses in competition with the protected entity.

Blurred distinctions

But these distinctions can blur easily. For example, suppose a hospital prohibited a departing physician from working for another area hospital after termination. Will HCFA consider this an improper restriction? Or, suppose a group practice, network or hospital terminates a physician because of disloyalty on the grounds of excessive outside referrals? Will this be prohibited? At present, there are no answers to these questions.

But until the rules are clear, physicians should avoid these situations where possible.

Neil Caesar is president of The Health Law Center (Neil B. Caesar Law Associates), a national health law consulting practice in Greenville, S.C.

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