Publications

Stark Version 2.5: Back To The Future Again

By W. Bradley Tully, Esq.

On July 12, 2007, the Centers for Medicare and Medicaid Services (“CMS”) published the Medicare Physician Fee Schedule (“MPFS”) Proposed Rule for the 2007-2008 fiscal year. Although, on June 14, CMS filed for review the long awaited (and, as yet, unpreviewed) Phase III of the Stark regulations with the Office of Management & Budget, CMS, as it did last year, pushed its more urgent self-related concerns through the more time-driven MPFS Proposed Rule. This vehicle also made sense because CMS also wanted to address some self-referral related issues technically beyond the scope of the Stark Law by tightening up its reassignment and purchased diagnostic service rules and the enrollment standards for Independent Diagnostic Testing Facilities (“IDTFs”).¹

If finalized in their current form (with possible additional technical tightening coming in response to comments), CMS’ proposals will disrupt a large number of arrangements that had been structured and implemented in good faith reliance on the existing rules. Most importantly, indirect forms of self-referral through “pod” laboratories, shared imaging facilities, “per-click” leasing, percentage compensation arrangements and “under arrangements” services contracts are all targeted for extinction by CMS’ proposals.

CMS’ proposed changes therefore are by no means mere technical twiddling.² They instead radically re-envision some of the major compromises that were made through the fifteen-year history that led to 2004’s final Phase II regulations – compromises that defined a delicate balance between a ban on outright self-referral on the one hand, and physicians performing ancillary services through their own office practices and by selling ancillary services “under arrangements” on the other. The new proposals clearly reflect general uneasiness on CMS’ part with the simultaneously (and paradoxically) complicated and simple structure CMS created in Phase II for analyzing indirect financial relationships. CMS has taken up a sharp stick and is now digging the mud from cracks that it left in the Stark law that many had thought or hoped was to be left undisturbed.

The comment period for the proposed changes closes on August 31, 2007. Taking them up in the order in which they were presented by CMS, we will now turn our discussion to the specifics of CMS’ proposals.

I. LIMITATION ON MARKUPS OF PURCHASED DIAGNOSTIC SERVICES IS PROPOSED TO BE EXTENDED TO PROFESSIONAL SERVICES AND TO ALL SERVICES NOT PERFORMED BY FULL-TIME EMPLOYEES

Right off the bat, CMS tackled what is probably its most significant area of proposed change – the ability of physicians to purchase diagnostic services from other entities and bill for those services at marked-up prices. The trend towards the “in-sourcing” of diagnostic testing has generally been encouraged, or at least facilitated, by the Stark law’s “in-office ancillary services” (“IOAS”) exception. However, when pushed to its outer margins, that exception has led to the creation of various types of “pod” businesses which CMS believes encourage overutilization and are abusive.³

Outright markups of technical components of diagnostic services have been prohibited for physicians for many years.⁴ However, professional services previously have not been subject to this rule, and the anti- markup rule has never applied when the billing physician or group “supervises” the performance of a diagnostic service. CMS has struggled for years to define what supervision means in this context. Although CMS at one time required the services to be performed by employees for the supervision requirement to be satisfied, it subsequently liberalized its standard to accommodate the reality of leased employees and independent contractors. However, an ill-defined current flowed against the use of “supplier personnel.”

As it hinted it would do in the commentary to the final MPFS update last year, CMS has now addressed what it characterizes as “revenue driven arrangements that may be facilitating over-utilization of diagnostic services”⁵ by coming back to purchased services with a vengeance through (1) a proposal to extend the markup prohibition to professional services and (2) by turning the clock back beyond where it had originally been by defining “supervision” to require that the services be provided by full-time employees. Thus, under CMS’ proposal, if the professional or technical component of a diagnostic service is not performed by a physician or group’s full-time employee, the anti-markup rule will apply to that service.⁶ The consequence is that the billing physician or group would be paid the lowest of its actual charges, the Medicare fee schedule amount for the service or the charge made to it by the outside supplier. These limitations are to apply regardless of whether the billing physician purchases the component or the right to payment for the component is reassigned to the billing physician.⁷

Many of these purchased service arrangements have involved the billing physician’s providing the space and/or equipment used to furnish the test. If there can be no markup of the charge made by an outside supplier for personnel, there is no way for the billing physician to directly recover these costs, because they cannot be billed to Medicare separately from the total service. To prevent what it views as “gaming” of the anti-markup provision through a billing physician or group indirectly recovering these costs from Medicare by charging the outside supplier for such space or equipment, CMS proposes to apply the anti-markup rule on the basis of the supplier’s charges net of any equipment or space rental payments made by the supplier to the billing physician or entity.

The proposed changes to the purchased diagnostic services rule would effectively remove any financial incentive for purchasing either the professional or technical components of diagnostic tests. The proposed changes, however, would also affect how physicians and group practices will pay their independent contactors and part-time employees. For example, an issue that CMS does not appear to have considered is that a part-time employee most likely will not be making a unit of service charge to his or her employer. It is therefore not clear how the cost to the billing entity is to be determined when the “supplier personnel” is a part-time employee of the billing physician or entity.

II. BURDEN OF PROOF THAT REFERRAL IS NOT PROHIBITED IS TO BE ON THE PARTY SUBMITTING THE CLAIM

CMS proposes to add a new 42 C.F.R. § 411.353(g) to clarify that, in any appeal of a denial of payment for a designated health service under Stark (“DHS”) made on the basis that the service was furnished as a result of a prohibited referral, the burden is on the entity submitting the claim for payment to establish that the service was not furnished as a result of a prohibited referral. Although the Stark statute and regulations currently do not address the burden of proof, CMS’ proposal is consistent with its general policy concerning the burden of proof in connection with claims denials.

III. IN-OFFICE ANCILLARY SERVICES EXCEPTION PROVISIONALLY REMAINS UNCHANGED

The Stark law’s in-office ancillary services exception allows physicians to provide ancillary services through their own medical practices. Its creation inevitably led physicians to shelter various types of arrangements from the self-referral ban by pulling the services closer to themselves and providing them through the auspices of the IOAS exception in their own offices. CMS now indicates that utilization of this exception has grown beyond its intended purpose of allowing “for the provision of certain services necessary to the diagnosis or treatment of the medical condition that brought the patient to the physician’s office” in the first place. As an example of what it believes the exception was intended to protect, CMS describes an arrangement under which “a staff member would take a urine or blood sample to the clinical laboratory, create a slide, perform the test, and obtain the result for the physician while the patient waited.”

Despite CMS’ concern that physicians have relied on the IOAS exception to expand the ancillary services they provide through their practices by using various arrangements that “appear to be nothing more than enterprises established for the self-referral of DHS,” and despite CMS’ grumblings about the breadth that CMS itself has created for the IOAS exception in the past, CMS declined to propose any specific changes to the IOAS exception in the MPFS Proposed Rule. Instead, CMS solicited comments on the following issues:

Should “certain services” no longer qualify for the exception (for example, therapy services not provided on an “incident to” basis, services not needed at the time of the office visit to assist the physician in his or her diagnosis or plan of treatment, or complex laboratory services)?
Should changes be made to the definitions of “same building” and “centralized building” to make sure that services are part of the group’s core practice, and are not being tacked on to the group’s offerings?
Should non-specialists be able to rely upon the exception to provide specialized services involving the use of equipment owned by nonspecialists?
Should other limitations be imposed to protect against abuse?

The IOAS exception had appeared to be a natural and necessary political compromise when the Stark law was created – physicians could not passively invest in and refer to other ancillary businesses, but they would be allowed to continue to provide such services through their own bona fide practice entities so long as they respected certain restrictions on tying physician compensation directly to such internal referrals. Any effort now by CMS to close the gate of the IOAS exception though a revisionist view of it being limited to “while-u-wait” services will have a very adverse impact on physicians, and will surely be vigorously opposed by them.

IV. EXCEPTION FOR OBSTETRICAL MALPRACTICE INSURANCE SUBSIDIES TO BE LIBERALIZED

The Stark law’s exception for obstetrical malpractice insurance subsidies⁸ currently requires compliance with the anti-kickback regulatory “safe harbor” for such subsidies.⁹ The anti-kickback safe harbor limits its protection to obstetricians who practice in a primary care health professional shortage area (“HPSA”) and requires that 75% of the physician’s obstetrical patients reside in either a HPSA or a medically underserved area (“MUA”) or be members of a medically underserved population (“MUP”).

As a result of advisory opinion requests and anecdotes suggesting that patients continue to have difficulty obtaining obstetrical care in some states where malpractice premiums are high and that obstetricians are migrating to communities with lower malpractice insurance premiums, CMS now seeks comments concerning the severity of limitations on patient access to obstetrical care and on whether CMS’ changing the exception’s requirements would more effectively ensure beneficiary access to obstetrical care without risking program abuse. CMS has also asked for comment as to whether the current exception based on the antikickback statute should be replaced with an exception crafted along the following lines:

A written agreement between the parties.
Physician certification (or, in subsequent years, actual data) indicating that a specified percent of the physician’s obstetrical patients either reside in a HPSA or MUA or are part of a MUP.
Restrictions on the location of the entity providing the subsidy.
Restrictions on the location of the physician receiving the subsidy.
A requirement that the payment not be conditioned on the physician’s making referrals to, or otherwise generating business for, the entity.
A requirement that the physician not be prevented from establishing staff privileges at, referring any service to, or otherwise generating any business for any other entity.
A requirement that payment may not vary based upon the volume or value of the physician’s previous or expected referrals to, or business otherwise generated for, the entity.
A requirement that the physician must treat obstetrical patients receiving federal healthcare program medical benefits in a nondiscriminatory manner (whatever that may mean).
A requirement that the insurance be a bona fide malpractice insurance policy or program, and the premium, if any, be calculated based upon a bona fide assessment of the liability risk covered under the insurance.
A requirement that the arrangement must not violate the antikickback statute or any federal or state law or regulation governing billing or claims submission.

V. UNIT-OF-SERVICE PAYMENTS TO BE DISALL OWED IN SPACE AND EQUIPMENT LEASES

The Stark law’s space and equipment leasing exceptions currently permit a physician to receive unit-of-service-based payments (commonly known as “per-click” payments) when leasing space or equipment to a DHS entity. This is so despite the fact that the total payments to the physician increase as the DHS entity utilizes the space or equipment to furnish services to its patients, including those who are referred by the physician lessor, thereby creating an incentive to refer. However, CMS has suddenly regained religion with respect to such leases,¹⁰ and is now concerned that they are abusive:

Such arrangements could take the form of a physician leasing equipment that he or she owns to a hospital, and receiving a per-use (per-click) fee each time a patient is referred by the physician-owner to the hospital for the use of the equipment.

To address such abuse, CMS proposes to add the following language to both the space and rental exceptions:

Per unit-of-service rental charges are not allowed to the extent that such payments reflect services provided to patients referred by the lessor to the lessee.

This proposed change would require that per-click rental arrangements currently existing directly between physicians and DHS entities be modified to either provide for fixed-rate rent or to exclude the per-click payments for services furnished by the DHS entity to patients referred by the physician-lessor. However, one would expect that these changes would have limited impact, because the exceptions which are proposed to be amended apply only to direct relationships with physicians, and it is rare for physicians, as individuals, to enter into arrangements by which they lease space or equipment to other entities.

The more common arrangements in which physicians invest in companies that lease space or equipment to hospitals (or in which they do so through their group practices) do not rely on these space and equipment leasing exemptions, and instead rely on the Stark law’s framework for analyzing indirect financial relationships. Indeed, the “volume or value” standard and, more importantly, the previously existing exemption for unit-of-service arrangements, is still left as part of the regulations by CMS’ proposal.¹¹ That provision appears to continue to allow indirect per unit leasing arrangements, despite the fact that the space and equipment lease exceptions would not allow such arrangements under CMS’ proposal. If CMS had intended a different result, it appears that it would have accomplished it simply by removing the exception for unit-of-service payments from the regulations. However, it did not do so. Allowing unit-of -service payments in the context of joint ventures would appear to be justifiable from a policy perspective on the ground that the financial interests to refer are much more attenuated when the physicians receive rental payments as a group. Nevertheless, it appears that CMS will likely deny such favorable treatment to a group practice that leases space or equipment in Phase III.

CMS also is soliciting comments as to whether it “should prohibit time-based or unit-of-service based payments by a physician lessee to an entity lessor by a physician lessee, to the extent that such payments reflect services rendered to patients sent to the physician lessee by the entity lessor.” The commentary clarifies that CMS’ concern is with arrangements where the physician initially refers the patient to the entity lessor, and the entity lessor then refers the patient back to the physician:

We are also concerned about arrangements where the physician is the lessee and rents space or equipment from a hospital or other DHS entity on a per-click basis. For example, if a physician rents an MRI machine from a hospital only when the physician refers a patient for an MRI and then provides the facility portion of the MRI service under arrangements with the hospital, the physician benefits financially and the arrangement could provide an incentive for overutilization or other program abuse.

VI. PERIOD OF DISALLOWANCE TO BE CLARIFIED

There has always been some confusion under the Stark law as to the questions of how long non-excepted financial relationships last and for how long they disqualify referrals. CMS now uses the MPFS Proposed Rule as a vehicle to request public comment on how CMS should define the “period of disallowance” (i.e., the period for which referrals would be barred) that results from a non-exempt financial relationship.

However, CMS does offer some guidance by stating

“[a]s a general matter, we believe that the statute contemplates that the period of disallowance should begin with the date that a financial relationship failed to comply with the statute and the regulations and end with the date that the arrangement came into compliance or ended.”

In essence, CMS is taking the common sense position that the period of disallowance is the same as the period of the financial relationship.

The challenge is determining when the financial relationship begins and ends. In essence, the question is whether the bell that is rung by a payment can continue to ring after the payment has been completed. CMS uses the example of a below-market lease that could be perceived as consideration for future referrals after the lease term. CMS requests comment as to whether, when it is not clear when a relationship has ended, “we should always employ a case-by-case approach, or deem certain types of financial relationships to continue for a prescribed period of time.” CMS apparently envisions an intent-based inquiry which would certainly be inconsistent with the Stark law’s general approach of drawing (or at least attempting to draw) bright lines.

CMS also requests comment as to whether parties should be able to terminate the period of disallowance by returning prohibited consideration, and whether parties should be disqualified for a period of time from using an exception when an arrangement has failed to satisfy the requirements of that exception. For example, if the compensation for a year that would have been exempt under the “de minimus” exception was $300, but $900 was paid, the parties might be prohibited from using the $300 exception for a total period of three years. However, CMS does not seem to be saying that referrals could not be made during that entire three-year period as a result of the single excessive payment. The question of when the (presumably lump sum) $900 payment would “end” is therefore one that CMS may wish to take up in Phase III.

VII. PROTECTION FOR INTERESTS IN RETIREMENT PLANS IS LIMITED TO PLAN SPONSOR, AND DOES NOT PROTECT INDIRECT INVESTMENTS IN THIRD PARTIES

The 1998 proposed rule took the position that stock options and interests in retirement plans were inchoate or partial ownership interests that would still be treated as ownership for Stark law purposes. Because there generally would not appear any reason to consider an interest in an employer-sponsored retirement plan to be an ownership interest in the employer, Phase I reversed this stance on retirement plans, taking the position that both employer and employee contributions to retirement plans would be considered part of the overall compensation relationship with the employer.

CMS has now received comments causing it to believe that some physicians are using retirement plans as vehicles by which to indirectly purchase interests in DHS entities to which they make referrals. CMS indicated that it was never its intent to protect such indirect investments in third parties, and that it only intended to protect interests in the plan sponsor. CMS therefore now proposes to modify the definition of ownership interests so that the retirement plan exception will be limited to protect only interests in the plan sponsor.¹² Thus, for example, if a physician who is employed by a hospital participates in the hospital’s pension plan, that would not result in the physician’s being considered to have an ownership interest in the hospital. However, if the retirement plan made investments in the shares of a DHS provider, the physician would be considered to have an ownership interest in that DHS provider.¹³

VIII. SET IN ADVANCE STANDARD TO LIMIT PERCENTAGE ARRANGEMENTS TO THOSE COMPENSATING PHYSICIANS FOR THEIR OWN SERVICES

Several of the Stark law’s exceptions specify that compensation must be “set in advance.”¹⁴ Unlike the unwieldy approach taken by the anti-kickback statute’s safe harbor regulations, which require service and lease payments to be fixed in advance in their aggregate amounts, Phase I interpreted the Stark law’s “set in advance” standard to require that the compensation formula, but not the aggregate amount to be paid, be established at the onset of an arrangement.

CMS has nevertheless struggled with the question of how to treat percentage-based compensation formulas. Under Phase I, payments based on “a percentage of a fluctuating or indeterminate amount, such as revenues, collections or expenses” did not satisfy the “set in advance” standard. In response to the objections of many commenters that percentage-based compensation formulas were commonly used in compensating physicians for their own professional services and should be allowed, CMS delayed the effective date of the Phase I limitation on percentage compensation. Eventually, in Phase II, CMS conceded the issue entirely, and deleted the language that would exclude percentage-based compensation under the “set in advance” standard.

In the MPFS Proposed Rule, CMS now takes a more granular approach to percentage arrangements. In addition to arrangements by which a physician’s compensation is determined as a percentage of the collections or billings from his or her own personal services, CMS suggests that it has for the first time learned that percentage compensation arrangements are also being used with equipment and office spaces, with a physician lessor being compensated by a third party to which the physician makes referrals for DHS on the basis of a percentage of the revenues resulting from the use of equipment or the leased space. The resulting incentive is apparently too similar for CMS’ comfort to the physician having an ownership interest in the third party’s business. CMS therefore now proposes that percentage compensation arrangements “may only be used for paying for personally performed physician services” and “must be based on the revenues directly resulting from physician services. . . .”¹⁵

IX. COMMENT IS REQUESTED AS TO WHETHER DHS ENTITIES MUST “STAND IN THE SHOES” OF THEIR AFFILIATES

CMS has long struggled with defining indirect financial relationships and determining when it will regulate indirect relationships as though they were direct relationships. Most of the focus in this area has been on compensation that flows directly from a DHS entity to the individual physicians through some kind of intermediary. For example, a physician and his or her solely owned professional corporation will be considered to be the same entity, but indirect analysis applies to physicians who are in a group practice.¹⁶

The MPFS Proposed Rule refocuses the analysis of indirect relationships away from physicians and onto DHS entities. Specifically, CMS expresses concern over one DHS entity to which a physician refers patients owning or controlling another entity.¹⁷ CMS provides the example of a hospital that is the sole member of a foundation that operates clinics and contracts with physicians for services. CMS expresses concern that simply inserting an entity or contract into the chain between the entities could lead to abuse. CMS’ unarticulated concern is apparently that the second entity could compensate the physicians in a manner that related to their DHS referrals to the first entity, and that this would be permitted so long as it did not compensate the physicians in a manner relating to their referrals to itself. CMS therefore proposes to collapse the two entities in the example given, and to view the hospital as “standing in the shoes” of its foundation. The foundation’s compensation relationship with the physician is then analyzed as though it were one running directly between the physician and the hospital.

X. AN ALTERNATIVE METHOD IS BEING CONSIDERED FOR SATISFYING STARK EXCEPTIONS

One major problem with the Stark law is that even innocent and trivial noncompliance, such as the failure to obtain a signature on an agreement, can expose a provider to huge penalties. To address this, CMS solicits comments as to whether it should create a new provision to protect arrangements that would have qualified for protection under one of the exceptions set forth in 42 C.F.R. sections 411.355 through 411.357 but for “technical” lapses resulting from innocent mistakes.¹⁸ Notably, however, CMS prefaces its discussion with the statement (which it repeats for emphasis later) that “[w]e do not have discretion to waive violations of the self-referral statute.” This suggests that CMS would feel itself compelled to seek repayment if even technical non-compliance comes to its attention, unless and until a regulation protecting technical non-compliance as “alternative” compliance is created.

CMS indicates that the alternative method for compliance it is considering would protect arrangements when the following conditions are satisfied:

The noncompliance is not with a substantive requirement, such as that compensation be at fair market value and not relate the volume or value of referrals.
The facts and circumstances of the arrangement are self-disclosed by the parties to CMS.
CMS determines that the arrangement satisfied all but the prescribed procedural or “form” requirements of the exception at the time of the referral for the DHS at issue and at the time of the claim of payment for such DHS.
The failure to meet all of the prescribed criteria of the exception was inadvertent.
The referral for the DHS and the claims for payment for the DHS were not made with knowledge that one or more of the prescribed criteria of the relevant exception were not met.
The parties have brought (or will bring as soon as possible) the arrangement into complete compliance with the prescribed criteria of the exception or have terminated (or will terminate as soon as possible) the financial relationship between or among them.
The arrangement did not pose a risk of program or patient abuse.
No more than a specified (not yet defined) amount of time had passed since the time of the original noncompliance with the prescribed criteria.
The arrangement at issue is not the subject of an ongoing federal investigation or other proceeding.

As would be expected, CMS has gone out of its way to cut this exemption very much in its favor. In addition to some of the above elements being discretionary with CMS, CMS indicates that it will have sole discretion, not subject to further administrative or judicial review, to determine whether a specific arrangement qualifies for grace. In addition, there would be no time limits placed on its determinations and CMS would have the option of simply declining to make a determination requested by a provider. CMS makes it clear that there could be no further billing under a non-compliant relationship while it is making its determinations. However, if non-compliance is truly technical, there does not seem to be any reason why the parties could not bring their relationship into actual compliance.

CMS specifically requested comments on many issues regarding this proposal, including, but not limited to, the following:

The procedure for CMS to use in making determinations (for example, an advisory opinion) that a technically non-compliant arrangement will be protected and the conditions that should be met to obtain a favorable determination.
The length of time that a party would have to discover its noncompliance and then seek protection.
Whether a party receiving a favorable determination regarding alternative compliance should be precluded from seeking another determination for an arrangement that (1) failed to meet the prescribed criteria under the same exception (or similar criteria under a different exception), and (2) was entered into after the date of the arrangement that received the favorable determination.
Whether the exceptions should specify which of the criteria could be cured by meeting the alternative method criteria.
Whether, if the “form” requirements of an exception are not met, CMS should require other documentary proof of the parties’ intent to contract (e.g., memoranda, electronic mail).

XI. CMS PROPOSES TO RESTRICT SERVICES FURNISHED “UNDER ARRANGEMENT”

Since 1998, CMS has been grappling with the question of how to address entities that provide services to other entities that bill for DHS. The 1998 proposed rule addressed this issue by applying the self-referral ban to the entity that performed the DHS, regardless of whether it was the entity that billed for it. However, CMS did not implement that approach and instead chose, in the 2001 Phase I final rule, to apply the self-referral ban based on the entity that billed the Medicare program for the DHS. Everyone recognized at the time that this approach opened up a wide range of arrangements by which physicians would invest in entities that would perform DHS on behalf of other entities. However, the rationale for permitting such arrangements was that the Stark law would require such arrangements to be at fair market value and, at least as defined by CMS, to provide for compensation that would not vary with the volume or value of referrals.

The MPFS Proposed Rule reflects CMS’ continuing concern with “under arrangement” contracts between physicians and hospitals. CMS believes that such arrangements increase the risks of over-utilization and increase costs by allowing services that would otherwise be performed in a less intensive nonhospital setting to be billed at hospital rates.¹⁹This leads not only to higher costs to the program, but, because costsharing is higher in the hospital setting, to higher costs to Medicare beneficiaries. CMS observes that “[i]t appears that the use of these arrangements may be little more than a method to share hospital revenues with referring physicians in spite of unnecessary costs to the program and to beneficiaries.” A definite undercurrent here is CMS’ concern that parties have been routinely inflating fair market value, but that CMS either cannot catch them at that or, perhaps, does not want to have to be bothered with doing so.

To deal with this issue, MedPAC, in a 2005 report to Congress, had concluded, somewhat vaguely, that CMS “should expand the definition of physician ownership in the physician self-referral law to include interests in an entity that derives a substantial portion of its revenue from a provider of designated health services.” In response, CMS hints that changes in this area will be coming in the Phase III regulations and, at least for now, proposes what it characterizes as a more straightforward approach of expanding the definition of an entity that furnishes DHS.²⁰ The new definition would include, as is presently the case, the person or entity that presents claims to Medicare for DHS. However, it would be expanded to also include any person or entity that “has performed the DHS.”²¹

In essence, doctors will now themselves be considered to make referrals to their own intermediary entities, when previously they were able to consider their referrals to be made only to the hospitals, and to then bask in the sun of the relatively benign analysis applicable to indirect remuneration relationships. If, as is proposed, an “under arrangement” service provider becomes an “entity” under the Stark law, physician owners of such entities would appear to have a prohibited ownership interest, at least where the DHS is one, such as laboratory testing or radiology services, that they could not refer to a free-standing entity if they held an ownership interest in it.²²

CONCLUSION

Just when you may have thought that it was safe to go back into the water, CMS has launched a second wave “take no prisoner” assault on the vestiges of self-referral that were left by its massive Phase I and Phase II regulatory efforts. Even further tightening can be expected when CMS releases its proposed Phase III regulations. The changes seems to be best explained by a new-found concern by CMS with indirect relationships and a loss of faith on CMS’ part in fair market value requirements as a means of appropriately checking inappropriate impulses toward self-referral. As one not-to-be identified CMS staffer has told the author, “we used to be stupid, but we have gotten a whole lot smarter.”

Each of the proposed changes, when taken in themselves, appear to be incremental. However, when taken together, they eliminate the flexibility that CMS had knowingly and willingly left in Phases I and II to let “real world” kinds of transactions still take place between DHS providers and referring physicians. If CMS’ proposals are implemented, the self-referral law will be moved much closer to the inflexibility that is found in the OIG’s antikickback safe harbor regulations. The goal of CMS, tacit or not, appears to be to use the self-referral laws to reform our health care system by defining the role of physicians, not as occasional entrepreneurs, but solely as providers of professional physician services. The significance of this for health care lawyers may be that although there will be more complex law than ever to analyze, the chilling effect that can be anticipated to result from Phase 2.5 will likely result in there being comparatively fewer transactions for them to apply those laws to.

W. Bradley Tully, Esq .
Brad Tully is a principal in Hooper, Lundy & Bookman, Inc. Mr. Tully’s practice involves advising hospitals, physicians, laboratories and other providers with respect to business transactions and regulatory issues, with specialization in the area of Medicare/Medicaid and private payor “fraud and abuse,” and antikickback and physician self-referral issues. In addition to his general business work, his expertise includes counseling clients during federal and state investigations and self-audits, conducting/managing fraud investigations and representing providers in governmental, qui tam “whistleblower” and private litigation involving regulatory compliance issues.

¹ Although space limitations preclude a detailed discussion here of CMS’ proposals to modify the rules governing IDTFs, it should be noted that the Proposed Rule also contains provisions intended to prevent the sharing and “block leasing” of space, equipment and staff by IDTFs.
² The commentary in the Federal Register is sometimes unnecessarily confusing as the result of CMS’ habit with this rule of using the term “proposals” not only to describe concrete proposals that it has blocked out in proposed regulations, but also, in a more conversational way, to describe things that it is thinking of doing and wants comment on, even though it has not proposed any particular regulatory language.
³ In connection with last year’s MPFS updates, CMS had proposed to clarify that the fact that a contractual reassignment is permitted would not mean that the service could be marked-up. CMS also proposed that, to bill for a technical component, the billing entity also would have to perform the professional interpretation. CMS also considered restating certain limitations on purchased services that appear in its manuals as regulations. Finally, CMS proposed making a number of technical changes to the IOAS exception that would have tightened up the area of purchased testing. However, CMS did not actually implement any of these proposals in last year’s final rule.
⁴ 42 U.S.C. § 1395u(n)(1); 42 C.F.R. § 414.50. These rules do not apply to services paid for under the clinical laboratory services fee schedule (which are instead governed by 42 U.S.C. Section 1395l(h)(5)(A), which prohibits physicians from billing for laboratory tests unless they perform or supervise them). The markup prohibition does, however, apply to histology services that are paid for under the physician fee schedule. Somewhat paradoxically, a lower standard for supervision for laboratory tests may be created as a result of CMS’ proposal than exists for other diagnostic tests. Moreover, the purchased service rules apply only to physicians, and they therefore do not apply to purchases of services (such as professional interpretations) by IDTFs. CMS believes that such purchases by IDTFs pose only minimal risk of abuse because IDTFs do not order the technical component.
⁵ 71 Fed. Reg. 69624, 69688 (Dec. 1, 2006).
⁶ Given that physicians’ services are covered under Section 1861(s)(1) of the Social Security Act, it can be questioned whether CMS has any authority, under Section 1842(n) or otherwise, to prohibit markups of professional services other than by restricting its reassignment rules.
⁷ Interestingly, CMS requests comments as to whether it should develop a separate anti markup rule to cover services performed in centralized buildings utilized by group practices. CMS correctly believes that such services may not involve reassignments or outright purchases of services. However, in light of CMS’ straightforward proposals later discussed in the commentary to (i) bar markups whenever services are performed by an outside supplier, (ii) to define an outside supplier as anyone other than a full-time employee, and (iii) to apply the bar as so modified regardless of whether there has been a reassignment or a purchased test or interpretation, it seems clear that there is no need for any separate rule addressing centralized buildings. What appears to have happened is that CMS itself has lost track of the subtle differences between the IOAS exception, purchased services and reassignments. This has led, for example, to the facial absurdity of a rule titled “Physician billing for purchased diagnostic tests” that expressly states that it applies regardless of whether any test or interpretation has been purchased. Perhaps CMS should now rename the regulation “Physician billing for diagnostic services performed by outside suppliers.”
⁸ 42 C.F.R. § 411.357(r).
⁹ 42 C.F.R. § 1001.952(o).
¹⁰ Such per-click payments would have been prohibited by CMS’ 1998 proposed rule, but were subsequently expressly authorized by the Phase I rulemaking based on CMS’ conclusion “that the Congress intended that time-based or unit-of-service-based payments be protected, so long as the payment per unit is at fair market value at inception and does not subsequently change during the lease term in any manner that takes into account DHS referrals.”
¹¹ The general rule governing unit-of -service payments, which would survive the proposed changes, appears at 42 C.F.R. section 411.354(d)(4) as a part of the regulations defining the “volume or value standard” that must be satisfied by indirect remuneration relationships.
¹² 42 C.F.R. section 411.354(b)(3)(i).
¹³ CMS might want to consider protecting plan investments in third parties in those situations where physicians do not play a meaningful role in directing the plan’s investments.
¹⁴ The relevant exceptions are the personal services exception, the space and equipment leasing exceptions, the fair market value exception and the academic medical center exception.
¹⁵ Specifically prohibited are compensation relationships based on a percentage of savings by a hospital department.
¹⁶ CMS provides a strong hint that Phase III may change this approach by equating physicians with their group practices.
¹⁷ CMS at one point refers to the second entity as also being a DHS provider. However, this may be a mistake as it is not clear whether the second entity itself does or does not provide DHS should be relevant to the concerns that CMS has raised. In addition, the reference to “control” suggests that CMS is not limiting itself to situations involving wholly owned subsidiaries. However, the fact that the example refers to a sole member non-profit relationship may mean only that CMS wants to pick up non-profit entities, and not that it wants to apply a “stands in the shoes” rule to situations involving only partial ownership or control.
¹⁸ CMS indicates that this new provision is in addition to, and does not replace, the existing temporary non-compliance regulation at 42 C.F.R. section 411.353(f).
¹⁹ Although CMS’ discussion is focused on hospitals, the rule it creates is not limited to hospitals or to transactions that meet Medicare’s formal “under arrangements” requirements. The rule would instead extend to all service relationships. Therefore, although CMS does not appear to have recognized the issue, its proposal would seem to also impact entities that provide services to medical groups that bill under the IOAS exception.
²⁰ CMS does, however, solicit comments as to whether and how it should implement the MedPAC recommendation. Although subtle, a significant difference between the CMS and MedPAC approaches is that CMS’ approach may put an end only to physician-owned companies that provide hospitals with what is DHS in its own right, while the MedPAC approach would apparently also put an end to such companies when they only provide “inputs” to inpatient or outpatient hospital services or services that have no real relationship to DHS at all. For example, CMS’ proposal arguably would not affect a space or equipment leasing joint venture, while MedPACs could. It will be interesting to see how CMS addresses this issue in Phase III.
²¹ CMS proposes to even further expand the definition of entity to also include any person or entity that has “caused a claim to be presented” for the DHS. It is not clear what CMS intends to accomplish with this provision.
²² Less clear is the status of services that are DHS only as the result of their being more globally included into inpatient or outpatient hospital services. Also unclear is that status of services (such as intra-operative monitoring) that may not be covered by Medicare at all.

reproduced with permission of California Society of Healthcare Attorneys