New Stark II Rules on Referrals Will Further Restrict Medical Practices

This month I want to share with you some late-breaking news about upcoming changes to the Stark law that affect all physicians and, indirectly, most other providers.

The Omnibus Budget Reconciliation Act of 1989 (“Stark I”) disallowed physician referral of Medicare patients to clinical laboratories in which the physicians or members of their families had a financial relationship, absent certain conditions being met. The Omnibus Budget Reconciliation Act of 1993 (“Stark II”) expanded Stark I’s laboratory referral prohibition to include a number of “designated health services” and Medicaid services. Added to this DHS list were physical and occupational therapy; radiology; durable medical equipment, parenteral/enteral and prosthetic items; home health services; outpatient prescription drugs and hospital services. Stark II took effect Jan. 1, 1995.

Long-awaited regulations implementing Stark I were published the following August. While they were official only for laboratory referrals, commentary indicated the government’s then-current intent that these regulations would also set parameters for the Stark II-designated health services, subject to specific differences between laboratory services and those other DHSs.

The Health Care Financing Administration should propose regulations for Stark II this year (supposedly, this spring). However, at a national meeting in April on Medicare and Medicaid payment issues, HCFA representatives gave some indication as to what we should expect from these regulations. Their disclosures indicate that the Stark II regulations will have dramatic effects on the referral and utilization activities of many physicians.

Let’s first put this in perspective. The following items reflect the understanding of a few HCFA representatives about draft regulations that may undergo further modification prior to release. Further, when released, they will be proposed rules, subject to public comment and possible revision.

Nonetheless, some of these regulations affect present activity by many physicians. It is important to discuss them now, because there is no assurance that HCFA will allow activity that takes place before the regulations are released, but violates the regulations. Do not assume that any of these regulations will “grandfather” prior violations. Physicians who are out of compliance with these proposed regulations should immediately evaluate their options with competent health care counsel.

1. False claims. HCFA and the Office of Inspector General continue to maintain that a claim that violates the Stark requirements also violates the federal False Claims Act and related fraud and abuse statutes. This subjects those who violate Stark to additional civil and criminal fines (as much as $10,000 per line item) and penalties that can triple the base fine. Clearly, Stark law violations immediately become prohibitively expensive when deemed to have “false claim” status.

If, for example, a medical group divides compensation in a manner that credits its physicians for their referrals of the group’s in-house X-ray and ultrasound services, that compensation system probably does not comply with the Stark rules. Thus, the group probably cannot justify its entitlement to provide those X-ray and ultrasound services. Further, every time it submits a claim for X-ray or ultrasound services, it would constitute a “false claim” subjecting the group to as much as $30,000 in fine and penalties. Proactive compliance is essential.

2. Income division. The “group practice,” “employment” and “personal services arrangement” exceptions to the Stark law all require, among other criteria, that the physicians not divide income among themselves in a manner “directly related to the volume or value of referrals by the physician.” I have counseled clients that this broad language probably applies to more than just tracking utilization of the prohibited designated health services. Rather, I argued, the language of the statute applies to all referrals, even if not tied to designated health services, and may well apply to any business between the parties, even if not related to health care.

However, the HCFA representatives indicated that the proposed regulations would narrow that requirement substantially, but only by preventing the group from crediting referrals when the referrals apply specifically to prohibited designated health services. So a group would be legally permitted, for example, to credit its physicians for referrals to other physicians, as long as those referrals relate to non-DHS activities. This is an important relaxation of the rules for groups struggling to create practical and safe compensa- tion arrangements.

3. Outpatient prescription drugs. One of the prohibited designated health services is referral of “outpatient prescription drugs.” HCFA representatives indicate that the regulations presently contemplate that this prohibition applies both to take-home pharmaceutical prescriptions and to drugs administered at the direction of physicians in their offices as part of office treatment protocols. Thus, all in-office drug utilization must fall into one of the specific exceptions to be permitted.

A physician who provides chemotherapy in the office, for example, will need to make sure that the services conform to the Stark exceptions. This typically will not be a problem if an oncologist provides the chemotherapy service directly, or directly supervises the service by support personnel. (Note that “direct supervision” is defined under the “incident to” Medicare reimbursement rules, thus necessitating that the physician be present in the office, among other criteria.) But the physician may not delegate the responsibility without direct supervision.

Another example of this problem would arise with infusion therapy or intravenous therapy administered in the physician’s office. Any medical protocol involving pharmaceuticals must comply with one of the specific Stark exceptions.

Note that this also may mean that a medical group’s compensation arrangement may not give credit for chemotherapy or infusion therapy referrals among the physicians.

4. Broad definition of radiologic services. HCFA representatives indicated that they will not look to CPT coding to determine whether services fall into the prohibited list of certain radiology services (X-ray, CT, ultrasound, MRI). Rather, they will look to the nature of the service and whether imaging is involved.

Thus, for example, HCFA plans to take the position that echocardiograms are prohibited by Stark. Cardiologists and primary care physicians involved with this sort of activity need to rethink their actions immediately. Note, though, that the prohibition will only apply to noninvasive, noninterventional imaging. Thus, for example, cardiac catheterization referrals will not be prohibited.

5. Exclusive referrals. The proposed regulations will prohibit rules that obligate physicians to refer services to specific providers. HCFA believes that this indirectly ties the physicians’ compensation to designated health services referrals, even if their compensation arrangement does not incrementally track or reward those referrals.

So, for example, a medical group could not require its physicians to utilize its own laboratory or imaging services when a physician preferred to refer to an outside provider. One of the most important applications of this change will apply to hospitals that acquire practices and then seek to require the doctors to use the hospital as their only source for acute care and/or outpatient services. Because “inpatient and outpatient hospital services” are included on the DHS list, any such mandatory referral requirement would violate the Stark law. Under certain circumstances, similar issues may arise with physician-hospital organizations that require physicians to use specific DHS providers within the network.

When the proposed regulations are finally released, there undoubtedly will be a number of additional issues of immediate import for physicians and those who deal with physicians. Prompt attention to these rules will be essential. Readers who suspect that they are engaged in activities contrary to the requirements suggested by these proposed regulations should discuss their concerns immediately with competent health care counsel.

6. Bonus pools. I and other advisers have suggested to clients structuring compensation arrangements that it might be permitted under Stark to allocate revenues tied to designated health services to departments within the medical practice in a manner that reflected aggregate departmental utilization of those ancillary services, as long as the department bonus pool thereafter were allocated to the department’s physicians in a manner that did not track the in- dividual physician’s utilization of those services. I felt that the department would have to be of sufficient size to dilute the incentive of any individual department member to refer in exchange for compensation credit. But, if the department had 10 or more physicians, a credible argument could be made that this did not constitute a violation of the compensation arrangement requirement under Stark. But no more. HCFA representatives indicated that bonus pools based on aggregate referrals or utilization of designated health services will not comply with the Stark laws regarding compensation arrangements. It does not matter that the physicians divide the departmental money equally, or on the basis of individual clinical productivity, or by seniority. The department may not aggregate those revenues based on utilization.

7. Defining a group practice. To qualify as a group practice for purposes of the Stark law exceptions to the general prohibitions, a medical group must deliver 75 percent or more of its total patient care through the group. All physicians who provide services through the “group” are included. If a part-time physician provides 40 percent of his or her time to the medical group (and 60 percent to other providers), this physician would count as a 0.4 full-time-equivalent in determining the group’s aggregate compliance with the 75-percent rule.

The Stark I regulations stated that the “members” of a group for purposes of a group practice exception include independent contractors who provide services to the group, at the time they are actually providing those services. Thus, this 75-percent rule includes intermittent contract services, work by radiologists who do readings under reassignment, locum tenens and others. Because of these inclusions, many groups have been out of compliance, with potentially disastrous consequences.

But perhaps no more. HCFA representatives have indicated that the coming regulations will exclude independent contractors from the definition of group “members.” Only employees will count toward the 75-percent rule. The regs will continue to include part-time employees, so groups with significant use of part-timers must carefully evaluate their compliance. Stay tuned, however; this regulation may yet be changed.

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


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