Stark II Makes It Easier To Terminate Bad Contracts

Neil Caesar, J.D.

Suppose you decide to contract for “designated health services,” such as diagnostic imaging, physical or occupational therapy, prescription drugs or hospital services, that are prohibited under the Stark law. Suppose further that the financial arrangement does not satisfy any of the Stark law’s exceptions. Is there any way you nonetheless may pursue this arrangement?

Probably not yet. But under a proposed exception contained in the recent regulations for Stark II, such arrangements may be permitted if they demonstrate “fair market value,” as defined by the Health Care Financing Administration. What sort of arrangements apply?

Suppose, for example, a hospital wanted to buy a medical practice through installments. Or, for another spin, suppose one designated-health-service provider wished to lend money to physicians. In both instances, no existing exception to the Stark law allows such periodic payments.

Providers previously justified this sort of arrangement under the “isolated-transaction” exception to the Stark law, which allows certain one-time arrangements between physicians and other providers.

Another way out

However, HCFA made clear in the 1998 regulations that installment payments and other ongoing financing activity precludes the use of the “isolated-transaction” exception. While certain third-party financing options can sometimes get around this problem, most such arrangements are prohibited by Stark. But the proposed new fair market value exception would allow this sort of arrangement.

Even though HCFA’s proposed fair market value exception to the Stark law is not yet in effect, study offers insight into HCFA’s approach to Stark. Essentially, the proposed exception allows payments that stay within commercially reasonable parameters, yet fail to conform to an existing Stark exception because of some technicality. In other words, the fair market value rule would permit physicians to pursue a financial arrangement that otherwise violates Stark. To satisfy the fair market value exception, six conditions must be satisfied. Let’s start with the first three:

  • The arrangement would have to be in writing, signed by the parties and cover only identifiable items or services specified in the agreement. This is the same requirement already present in the existing exceptions for space leases, for equipment leases and for the provision of ongoing items, support services and management.
  • The agreement would have to cover the entire financial arrangement between the parties or, alternatively, refer to other agreements between the parties. This means that someone reading the contract (for example, a government auditor) must be able to identify all of the financial arrangements between the parties by referring to a single document, either because that document discusses all of the arrangements or because it tells the reader where to find additional information. Again, this requirement is already part of the existing regulations for management- and support-service relationships between physicians and other providers (where designated health services are part of the relationship).
  • The written materials must specify the time frame for the arrangement. Further, the arrangement may be for any period of time, even less than one year, and may contain a termination clause, including termination without cause — as long as the parties enter into only one arrangement for the same items or services during the course of a year. (Arrangements made for less than one year may be renewed, as long as terms and compensation do not change.)

HCFA is clearly willing, with this proposed new exception, to allow parties to terminate contracts within a year. This early endorsement appears to clarify uncertainty about the meaning of the “one-year rule” throughout the Stark law. This same requirement shows up in the exceptions for space leases, equipment leases and management/support service arrangements. Thus, HCFA’s discussion of “less-than-one-year” contracts in the context of the proposed fair market value exception should also apply fully to these other exceptions. HCFA now appears to allow parties to abandon an unprofitable contract in less than one year without violating Stark, even if they simply walk away.

Was there ever an issue?

Personally, I never thought this was an appropriate issue for debate. It always seemed silly to suggest that physicians could not terminate an untenable contract, even when they did not subsequently enter into a revised arrangement. I never believed HCFA intended the one-year rule to require health care providers to stay in bad contracts. When my colleagues expressed concern about this requirement in the Stark law, I pointed out that this issue was discussed expressly several years ago in the government’s comments to the safe-harbor regulations for anti-kickback laws. There, when discussing certain safe harbors that mirror substantially the Stark law’s exceptions for space leases, equipment leases and personal services arrangements, official written comments made clear that the government never intended that health care providers remain in untenable contracts merely because of the one-year rule in those safe harbors. Rather, the rule would only prevent parties from repeatedly terminating and then revising their relationships, because this might suggest that the revised provisions of the subsequent contract reflected some sort of reward for referrals during the tenure of the prior contract.

In other words, when the rule now in the Stark law first appeared in safe-harbor regulations, the government made clear that true terminations were permitted, even if the contract was in force for less than one year.

Unfortunately, as my concerned colleagues pointed out, there was no such discussion or endorsement anywhere in prior government commentary on the Stark law. My reply was that the rule had already been discussed in safe-harbor regulations, and that it should not require explicit discussion under the new rules. Not all health lawyers were persuaded by this reasoning.

Fortunately, HCFA’s discussion in the new regulations, in the context of the proposed fair market value exception, seems to resolve this issue.

It should be perfectly safe now for physicians to enter into Stark-related contracts that allow termination without cause during the first year. Note, though, that one of the requirements for such early termination is that the parties do not enter into a new arrangement for some time after the early termination of the old arrangement. This rule probably applies only when the arrangement is terminated in its first year although, conceivably, the prohibition also applies when a contract is terminated prior to any “official” termination date.

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