Health Law Perspectives
November 2007
In this issue:
New Phase III Stark Regulations May Require Restructuring of Physician Agreements CMS Announces A Temporary “Pause” in RAC Reviews Of Inpatient Rehab Facilities News BriefsNew Phase III Stark Regulations May Require Restructuring of Physician Agreements
On September 5, 2007, the Centers for Medicare and Medicaid Services (CMS) issued the third installment of its regulations implementing the federal Stark Law. The Stark Law prohibits a physician from referring Medicare patients to entities with which the physician has a financial relationship unless an exception under the law is available to protect that relationship. This new final rule, commonly referred to as “Phase III,” will be effective December 4, 2007.
Probably the most significant change to the Stark Law regulations made in Phase III is a new provision under which a physician who is a member of a group practice (or other physician organization) will be deemed to “stand in the shoes” of that organization for purposes of determining financial relationships under the Stark Law,meaning that the physician will be deemed to have the same compensation arrangements as the group practice in which he is a member. This change could require that certain compensation arrangements between physicians and entities to which they refer be re-evaluated,and perhaps restructured.
Prior to Phase III, physician members of group practices were considered to have indirect compensation relationships with any entity with which the group practice had a compensation arrangement. For example, where a group practice contracted with a hospital to provide professional medical services in a unit of the hospital, the physician members of that group practice would have an indirect compensation arrangement with the hospital. The distinction between direct and indirect compensation arrangements is significant because where a compensation arrangement is indirect, it is either not considered a compensation arrangement at all for purposes of the Stark Law, or it can be protected by meeting the relatively simple requirements of a specific exception for indirect compensation arrangements. Under the above example of a professional services agreement, there would be no indirect compensation arrangement at all for purposes of the Stark Law as long as the payments to the group practice by the hospital did not vary with referrals by group member physicians to the hospital. In particular, there would be no requirement that the compensation paid to the group practice be set in advance or be consistent with fair market value.
Under the new “stand in the shoes” concept, the physician members of the group practice in the example would be considered to have direct, rather than indirect, compensation arrangements with the hospital. This means that in order for the physicians to be permitted to make Medicare referrals to the hospital the more restrictive requirements of one of the exceptions for direct compensation arrangements under the Stark Law would have to be met. There are a number of exceptions for direct compensation arrangements, such as exceptions for space and equipment leases, personal services arrangements and fair market value compensation, but for the most part these exceptions require that the arrangement be in writing and that the compensation paid or received be fixed in advance and consistent with fair market value.
This change in Phase III could have important implications for many financial relationships now in place between physician group practices and entities to which their physician members make referrals, such as hospitals. Because those relationships were analyzed as indirect compensation arrangements with the physician members of the group practice prior to Phase III, it may not have been necessary to determine whether the compensation arrangement with the hospital or other entity is set in advance or consistent with fair market value. However, it will now be necessary to assure that payments to group practices under those previously indirect arrangements are set in advance and consistent with fair market value, and further that any additional requirements of the relevant direct compensation arrangement exceptions be met as well. The Phase III rules on “stand in the shoes” did grandfather in existing indirect compensation arrangements meeting the requirements of the indirect compensation exception which were entered into before Phase III was published on September 5, so for those grandfathered arrangements no restructuring will be required until the term of those arrangements terminate.
In addition to Phase III, CMS has proposed a number of other important amendments both to the Stark regulations and other Medicare coverage and payment rules, in the 2008 Medicare Proposed Physician Fee Schedule (MPPFS) issued in July of 2007. Although the changes proposed in the MPPFS are not yet final, many of those changes will have significant consequences for physicians and entities to which they make referrals if they are implemented as proposed. For a complete discussion of the changes proposed in the MPPFS, please refer to an article by HLB Attorney Brad Tully, in the Summer 2007 edition of the California Health Law News, a publication of the California Society of Health Care Attorneys, entitled Stark Version 2.5: Back To The Future Again. That article may be viewed via the following link to the firm website: http://www.health-law.com/publications/200710tully.shtml.
If you have further questions regarding Phase III or the proposed changes in the MPPFS, please contact Brad Tully at (310) 551-8160 or David Henninger at (310) 551-8177.
CMS Announces A Temporary “Pause”in RAC Reviews Of Inpatient Rehab Facilities
On September 26, 2007, the Centers for Medicare and Medicaid Services (CMS) announced that it was instituting a “pause” with respect to the reviews of inpatient rehabilitation services undertaken by PRG-Schultz International, Inc. (PRG Schultz), the Recovery Audit Contractor (RAC) for California. The purpose of the “pause” is to put a temporary halt on pending review requests made by PRG Schultz while an organization known as Advance Med conducts a “validation review” of the determinations already made by PRG Schultz. The “pause” was initiated as a number of decisions made by PRG Schultz were being reversed on appeal by Administrative Law Judges for the Department of Health and Human Services. Of the appeals heard by the Administrative Law Judges,a significant number of the decisions made by PRG Schultz were being reversed on the grounds PRG Schultz impermissibly re-opened claims that were more than a year old without “good cause.” Given the financial incentives created by the RAC program for RACs like PRG Schultz to detect and recover overpayments, these outcomes cannot be characterized as surprising.
In March of 2005, pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, CMS announced a three-year demonstration project under which CMS would contract with RACs in California, New York, and Florida, to identify and recover Medicare overpayments from providers in exchange for payment on a contingent fee basis: that is, CMS would pay the RACs a percentage of every dollar that they recovered for the Medicare Program.
CMS awarded the RAC contract for California to PRG Schultz. Under the California RAC contract, PRG Schultz is expressly required to “identify Medicare overpayments and underpayments using the post payment claims review process.” As a result, pursuant to Medicare’s postpayment claims review process, PRG Schultz was required to establish “good cause” for the reopening of any paid claim more than 12 months from the date of payment or other “initial/review determination.” Such “good cause” required PRG Schultz to show either (a) “new and material evidence” regarding the claim, (b) a clerical error made in computing or recomputing the claim amount, or (c) an error in the initial claim determination by the Fiscal Intermediary that was clearly shown on the face of the evidence considered in making such determination.
The RAC contract for California allows PRG Schultz to keep its contingency fee as long as it was not reversed at the first level of appeal, known as “redetermination.” This creates a financial incentive for PRG Schultz to deny claims as PRG Schultz is only precluded from reaping a windfall from such activities if the decisions are unable to survive the low standard of review associated with such “redeterminations.” Simultaneously, this places providers at the unique disadvantage of having to spend the time and resources necessary to support appeals of numerous claims when the circumstances of the claims’ denials may neither be justified nor appropriate.
As a result of recent Congressional action extending the RAC program to all states by the year 2010, CMS put together a new RAC contract. One of the differences between the new RAC contract and the one governing PRG Schultz is that a RAC will now be precluded from retaining its contingency fee if its determination is reversed at any level of appeal asserted by the provider. However, PRG Schultz continues to operate under the RAC contract that allows it to keep its contingency fee so long as it was not reversed at the first level of appeal.
As numerous types of providers have experienced, PRG Schultz has for some time, among other things, apparently disregarded the time limitations and standards associated with the re-opening of claims. While the “pause” addresses the most egregious area of these attempts to re-open claims made by Inpatient Rehabilitation Facilities (IRFs) from as far back as 2002,we do not believe that the “pause” is being applied to reviews conducted of other types of providers. The “pause” is expected to continue through at least October, while Advance Med performs its “validation review.”
As a result of the “pause,” IRFs that have pending review requests should receive a letter informing them that they do not need to submit the requested records at the present time.
IRFs that have submitted records, but have not yet received determination letters should contact PRG Schultz to determine the status of those reviews. Most pending reviews will continue to be held,but providers should confirm this directly with PRG Schultz. Furthermore,pending recoupments from previously completed reviews will proceed.
Hooper, Lundy & Bookman (HLB) continues to actively represent providers with respect to RAC audits by PRG Schultz. As mentioned,the “pause” does not impact RAC audits that already have been completed and are under appeal. HLB is now representing providers in these appeals at the Administrative Law Judge level. The firm will continue to push for the reversal of PRG Schultz’s determined overpayments on the grounds there was no good cause to re-open the claims, among others. HLB will also continue to keep the health care community apprised of any significant developments with the RAC program.
For more information, please contact Lloyd Bookman, Jodi Berlin or Jordan Keville (310-551-8111).
News Briefs
Bookman Assists in Drafting Health Reform Legislation
Health Care Reform legislation intended to expand affordable health care coverage for the 4.8 Million uninsured individuals in California is moving forward along with the assistance of Hooper, Lundy & Bookman.
HLB Attorney Lloyd Bookman has been working with the California Hospital Association in negotiations regarding and drafting language for inclusion in Governor Schwarzenegger’s current proposal recently introduced in a Special Session of the Legislature. The Governor’s proposal intends to provide health care coverage of all Californians. The democrats competing proposal (AB 8) which intended to provide coverage for all working Californians was passed by the legislature but was then vetoed by the Governor.
Neroni Named Outstanding Young Healthcare Lawyer
HLB Attorney Stacie Neroni has been named one of only 12 Outstanding Young Healthcare Lawyers for 2007 by Nightingale’s Healthcare News.
Levy-Biehl Honored by Healthcare Auditors
HLB Attorney Hope Levy-Biehl has been presented with a plaque of appreciation from The Association of Healthcare Internal Auditors for her outstanding contributions. Ms. Levy Biehl currently writes a quarterly insights column for the Association’s Journal.
Mandatory Hospital-Physician Disclosure Obligations
HLB recently issued a client advisory regarding mandatory hospital-physician disclosure obligations for some hospitals. The mandatory reporting requirement followed a request was made of 500 hospitals, pursuant to a congressional directive to the Department of Health and Human Services contained in the Deficit Reduction Act of 2006. However, 290 hospitals failed to respond to this voluntary questionnaire. HHS has followed up with mandatory reporting for some hospitals. For more information on the CMS directive, please link to our website at www.healthlaw.com/publications/advisories/, or contact Hope Levy-Biehl or Stacie Neroni at 310.551.8111.
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Health Law Perspectives is produced monthly, 10 times per year and is provided as an educational service only to assist readers in recognizing potential problems in their health care matters. It does not attempt to offer solutions to individual problems but rather to provide information about current developments in California and federal health care law. Readers in need of legal assistance should retain the services of competent counsel. Occasionally articles produced in Health Law Perspectives will reference California Health Law Monitor, a biweekly publication covering legislation, litigation, and regulation. For more information on California Health Law Monitor, contact M. Lee Smith Publishers at (800) 274-6774.