Welcome to the inaugural edition of the Health Care Practice Group’s Health Law Review. The goal is to supplement the Firm’s primary newsletter with more focused articles, analysis and cutting edge information applicable to our health care clients.

We will publish this Newsletter periodically, with the focus on new laws and business issues that directly impact our health care clients. This edition is timely, as Stark II, Phase III Regulations and drastic new Medicare billing rules have been enacted by the Centers for Medicare & Medicaid Services (“CMS”). It is critically important for our clients to understand how these new regulations will impact their business. The regulations have created a great deal of confusion as many rules were promulgated in proposed form, while others are now final. Let’s sort it out in order of priority as follows:

I. Final Rule Applicable to Independent Diagnostic Testing Facilities (IDTFs). CMS ruled that IDTFs can no longer share facilities with other Medicare enrolled entities, lease or sublease its operations, or share diagnostic testing equipment. (The only exceptions to this prohibition include mobile IDTFs and hospital-based IDTFs.) CMS is concerned over the “proliferation of shared space agreements”. The rule is effective January 1, 2008, with a one year grace period for current arrangements in place. This sweeping change will impact many IDTFs that share their facilities and equipment through either block leases or shared arrangements. The Firm is currently in the process of unwinding several of these arrangements. Although CMS has not prohibited shared arrangements to other entities, in the Final 2008 Medicare Fee Schedule Rule, CMS states that it will consider extending this prohibition to all entities including, physicians, mobile units and hospitals. Hopefully this is not a precursor to further restrictions.

II. New Anti-Markup Rule Impacts Many Diagnostic Testing Arrangements. Under current law, when an independent contractor (such as a radiologist performing the professional component of a radiology procedure, considered a Stark designated health service “DHS”) for a Medicare patient that is billed by the self-referring physician’s group practice, Stark II requires that the performance of the DHS services by the independent contractor be performed on the group practice’s premises. Under current Stark, if the independent contractor performs the reads for a study from a remote location for a Medicare patient that was referred by a group practice, the independent contractor must bill separately for the interpretation.

CMS has amended Stark II pursuant to the 2008 Fee Schedule to clarify that a physician or group practice does not violate the Stark law when the physician or practice “bills Medicare for the technical or professional component of a diagnostic test for which the Anti-Markup Provision is applicable.” As a result, if an independent contractor performs reading services off-site from the referring physician’s practice, the referring physician will now be able to bill for the professional component services without violating the Stark law. However, any claims submitted to the Medicare program for the independent contractor services provided will be subject to the Anti-Markup Provision. Thus, although the referring physician may bill for the off-site services, the physician cannot profit from those services with respect to Medicare patients. In the alternative, if a group practice would rather bill globally for the diagnostic test, the services must still be read on site and the services should be reassigned to the referring physician group to avoid the anti-markup requirements. Under new Stark rules, the independent contractor in such circumstance must have a “direct contractual arrangement” with the referring physician group under Phase III Regulations. This means that the independent contractor must join in the primary agreement. CMS has also amended the Anti-Markup Rules by stating that it applies to the technical components for diagnostic tests ordered by the billing physician if the technical component is performed at a “site other than the office of the billing physician”. CMS states that “office” has its “common meaning” and means the space where the physician regularly provides the full range of patient care services that the physician provides generally. Interpreted literally, the diagnostic testing equipment must be located in the primary medical office space used by the billing physician. III.

Stark II, Phase III Final Rule.

a. Stand in the Shoes. A physician will be deemed to stand in the shoes of the “physician organization” with which he/she has a direct financial relationship. These new Stark Regulations treat the compensation arrangement between the DHS entity (such as a hospital) and physician organization as if the arrangement is with each physician in the organization. Each physician employee, and potentially independent contractor of a physician group, needs to be mindful of the financial relationships, such as contracts between a physician group and hospital. The effective date has been delayed for one year.

b. Profit Share & Productivity Bonuses. CMS revised the definition of “group practice” to make clear the productivity bonuses can be based directly on “incident to” services that are incidental to the physicians who personally perform services, even if those “incident to” services are otherwise DHS referrals. For example, a physician can be paid a productivity bonus based directly on physical therapy services provided “incident to” his or her services, however the productivity bonus cannot be directly related to any other DHS or DHS referrals, such as diagnostic tests. Further, CMS states that any profit share bonus from DHS must be allocated in a manner that does not relate directly to DHS referrals, including any DHS billed as an incident to service.

c. DME Referrals. In response to whether certain types of services can be personally performed by the referring physician (eliminating the need to meet a Stark exception) CMS noted that there are a few situations in which a referring physician could personally furnish DME, because doing so would require the physician to be enrolled in Medicare as a DME supplier and personally perform all of the duties of a supplier.

d. Physician Recruitment Exception Relaxed. The exception has been modified to allow group practices to impose practice restrictions if they do not “unreasonably restrict the recruited physician’s ability to practice in the geographic area served by the hospital.” For instance, while non competes are not permitted, a practice may require non solicit provisions, even if the employee is subject to a recruitment package.

e. Professional Courtesy Exception. Phase III modifies the professional courtesy exception by deleting the requirement that an entity notify an insurer when the professional courtesy involves the whole or partial reduction of any co-insurance obligation. Notwithstanding the deletion, CMS believes it is prudent to provide such notification; and in fact, insurers may require it. Phase III also clarified that the exception applies to hospitals and other providers with formal medical staffs (including Zother group practices) but it does not apply to suppliers, such as laboratories or DME companies.

III. Other Stark II Developments on the Horizon. While not final, CMS set forth many troubling proposals that the agency is considering.

  • In Office Ancillary Services Exception. The ability for a group practice to self-refer in-office ancillary services through this exception is arguably the single most important exception to the Stark Law. This exception allows physicians to furnish ancillary services (e.g., x-ray, lab, ultra sound, physical therapy) in their practices. CMS has expressed its concern that this exception is being inappropri- ately used for services that are not closely connected to the physician’s practice.
  • Limitations on Per Click Leases for Space and Equipment. CMS has proposed to prohibit the use of per click lease payments involving space and/or equipment leases in those situations where an entity owned by a physician leases space and/or equipment to another entity and the physician subsequently refers patients to that other entity for services. For example, the proposal would prohibit a cardiologist from leasing a CT scanner to the hospital on a per click basis if that cardiologist will be referring patients to the hospital.
  • Prohibition on Percentage Leases. CMS is proposing that percentage based compensation may only be used when paying for personally performed physician services. The percentage must be based on the revenues directly resulting from the physician services. If finalized, this proposal would prohibit many common compensation arrangements involving the use of percentage based rental and management fees.
  • “Under Arrangements” Under Attack. CMS expressed its concerns with “under arrangement” ventures between hospitals and physicians that appear to be designed to enable the physician-investor to profit from referrals to the hospital.