September 19, 2008

Implications of Stark Rule Changes and Proposals for Integrated Delivery Systems

The Centers for Medicare & Medicaid Services (CMS) has been at it again. Over the course of a single year, the agency has taken one of the most complicated sets of regulations ever imposed—the federal physician self-referral Stark Law—and announced multiple actual or proposed changes to it.

The 2009 Inpatient Prospective Payment System final rule (2009 IPPS final rule) issued on July 31, 2008, made changes to the Stark rules. These final rules relate to previous final rules from the Stark II, Phase III final rule issued in September 2007 and several proposals from the 2008 Physician Fee Schedule proposed rule (2008 PFS proposed rule) issued in July 2007. CMS also proposed additional changes in the 2009 Physician Fee Schedule proposed rule (2009 PFS proposed rule) published in July 2008, so additional changes may be on the horizon.

This article outlines some implications these final and proposed rules may have for hospital-physician integrated delivery systems. The changes generally fall within two broad categories: (1) concerns with physician-owned entities, and the drawing of distinctions between those that are physician-owned and those that are not; and (2) the importance of technical regulatory compliance.

Drawing Distinctions Based on Physician Ownership

Changes to the Stark rules resulting from the 2009 IPPS final rule draw important distinctions based on whether an organization is owned, in whole or in part, by physicians.

Stand in the Shoes. CMS addressed a provision that was first finalized in the Phase III final rule published in September 2007, but subsequently delayed. Under that provision, referring physicians were considered to stand in the shoes of their physician organizations—meaning he referring physician was treated as having the same compensation arrangements with the entity billing or performing the designated health services as did his or her physician organization.

The Phase III stand-in-the-shoes provision changed how many physicians and physician organizations comply with the Stark Law. Arrangements that were previously compliant under the indirect compensation arrangements definition must now fit within one of the Stark Law's exceptions for direct compensation arrangements. More pertinent to integrated delivery systems, the provision also called into question mission support payments involving components of hospitals, integrated delivery systems and academic medical centers (AMCs). Widespread outcry over this change prompted CMS to delay the provision's application to AMCs and nonprofit integrated delivery systems until December 4, 2008.

Under the new provisions set forth in the 2009 IPPS final rule, with one exception, only physicians who have an ownership or investment interest in a physician organization are deemed to stand in the shoes of that physician organization. The exception is in the case of physicians with only titular ownership interests in the physician organization (i.e., the physician does not receive any of the financial benefits of ownership through the distribution of profits, dividends, proceeds of sale or similar returns).

In the case of physicians who are not owners of their physician organization—including physicians who are part of integrated delivery systems which are affiliated with tax-exempt hospitals or health care systems—the 2009 IPPS final rule provides the flexibility to continue using the indirect compensation exception under Stark for non-owner physician employees (including titular owners) of physician organizations. And, by excepting titular owners from the stand in the shoes analysis, CMS accommodates the friendly professional corporation structure used in states where physician groups may not be employed by hospitals or other than physician-owned entities due to so-called corporate practice of medicine doctrines.

Under Arrangements Models. CMS also adopted changes first discussed in the 2008 PFS proposed rule to clarify the definition of "entity" in a manner that will prevent many under arrangements service delivery models involving physician‑owned entities. As a general matter, under arrangements service delivery models involve one entity furnishing services to hospital patients, coupled with the hospital's billing and reimbursement for those services under the Medicare reimbursement systems for either inpatient or outpatient hospital services. CMS took aim at these arrangements because many physician‑owned and joint venture entities began using under arrangements models, for services previously furnished directly by hospitals. CMS concluded that, [t]here appears to be no legitimate reason for these arranged for services other than to allow referring physicians to make money on referrals… 72 Fed. Reg. 38122, 38186 (July 12, 2007).

CMS redefined "entity" in the Inpatient Prospective Payment System final rule to encompass most physician-owned joint ventures providing services under arrangements with a hospital. Under the new rule, an entity for purposes of the Stark Law includes the person or entity that bills and is paid for designated health services (DHS). The entity definition also includes the person or entity that actually performs the service—thereby including the under arrangements entity as an entity under the Stark Law. And where a physician has an ownership interest in the under arrangements entity, the physician may not make referrals to that entity absent compliance with one of the Stark Law's ownership exceptions—the exception for rural providers being the only one available. The change is effective on October 1, 2009.

CMS' expansion of the entity definition will significantly curtail under arrangements joint ventures involving physician-owned organizations. However, it will not affect under arrangements transactions involving physician organizations that are not physician owned, including, for example, those involved in many hospital-affiliated integrated delivery systems where the physicians are employees of a captive subsidiary of a hospital or a health system parent. Provided that physician employees are paid fair market value for the services they personally perform, and their employment otherwise meets the basic requirements of Stark's employment exception, such under arrangements transactions among integrated delivery system affiliates could provide additional revenue support for the physician component of the system.

Moreover, as alluded to above, CMS' expansion of the entity definition will not affect under arrangements entities that qualify as rural providers under Stark. The Stark rule defines a rural provider as an entity that furnishes at least 75 percent of the DHS it furnishes to residents of a rural area. "Rural" is defined as an area outside a metropolitan statistical area (MSA)—as defined by the federal Office of Management and Budget—without regard to whether the area or any of its population groups are medically underserved or whether the hospital has obtained geographic reclassification for Medicare reimbursement purposes. Provided that substantially all (at least 75 percent) of the patients receiving services from the under arrangements entity are not MSA residents, the rural exception provides continuing opportunities for non-metropolitan hospitals and physicians to co-invest or otherwise collaborate in the provision of ancillary services to hospital patients.

Changes Related to Relations Between Integrated Delivery System Components

Per-Click and Percentage-Based Arrangements. The 2009 IPPS final rule made changes to Stark rules governing rental of office space, equipment, fair market value and indirect compensation arrangements that will now prohibit per-use or per-unit of service leases (commonly referred to as per-click arrangements), and certain percentage-based payments involving lease and service arrangements. The changes are effective October 1, 2009.

Importantly, the new rules do not prohibit per-click payment arrangements outright. Instead, the rules bar physician-owned entities from receiving per-click rental fees where the physicians' own referrals are involved. Likewise, the new rules don't prohibit per-click arrangements involving organizations that are not physician-owned—such as arrangements involving physician organizations within many hospital-affiliated integrated delivery systems in which the physicians have no ownership interest in their host organization. Finally, the new rules don't affect so-called block time leases—i.e., leases that specify a pre-determined period or interval of use.

The changes, in combination with the under arrangements and stand-in-the-shoes provisions discussed above, will still permit integrated delivery system physician organization involvement in service and other arrangements—but those relationships must be structured very carefully with compliance in mind. This may be particularly relevant to the relationships that are likely to be created as hospitals and their affiliated physicians seek to align financial and other incentives related to cost control, quality and other concerns, as discussed below.

Proposals Directed at Shared Savings and Incentive Payments. CMS has clearly indicated its interest in incentive alignment along cost, quality and other grounds as evidenced by a proposed new exception to the Stark law published in the 2009 PFS proposed rule. In that proposal, CMS outlined a new exception that would permit new shared savings and incentive payment programs involving hospitals and physicians. Such programs would effectively build on gain-sharing, cost management and quality focused programs (e.g., PQRI, pay-for-performance) that are emerging as part of the agency's strategy to help control in health care costs and promote quality.

The proposed changes to Stark regarding shared savings and incentive payment programs are merely proposals, so a detailed discussion is not warranted here. Suffice it to say that the proposals are, like all thing related to Stark, detailed, lengthy and complex. Each would require documented programs focusing on patient care, quality, cost-savings or similar measures; independent review and similar requirements; unrestricted physician choice regarding treatment-related matters; requirements that the arrangements be set forth in writing and have specific minimum and maximum terms; and, requirements that the remuneration payable under the programs would need to be set in advance, not based on referrals and meet other compensation-related concerns.

Only time will tell whether the proposals will be finalized in their current form, modified significantly or shelved all together. Nonetheless, publishing a proposed rule indicates that CMS sees such arrangements and relationships as having potential future value in the delivery of health care services. For integrated delivery systems components, the proposal, combined with the new rules related to physician ownership and others, may open up new opportunities for physician‑hospital alignment in the context of integrated delivery systemss.

In particular, more robust shared savings and incentive payment programs might soon be possible between integrated delivery systems physician practice and hospital entities focusing on resource deployment, quality and cost management. Physician involvement and leadership will be key to the success of such programs, as well as sharing the financial benefits with the physicians.

Compliance Strategies and Best Practices

The 2009 IPPS final rule added a modicum of flexibility in some areas but more stringent standards in others, the net effect of which ramps up the importance of Stark compliance.

Limited Compliance Flexibility. In terms of flexibility, the new rules provide limited relief for deals that would otherwise be compliant but for the lack of a signature arrangement. The 2009 IPPS final rule, under certain circumstances, allows an entity to bill for DHS when the financial relationship between the entity and the referring physician fully complies with a Stark exception, but for the applicable exception's signature requirement. The exception permits providers to avoid Stark Law penalties by obtaining the missing signature within a defined period (typically 30 days) after the start of the financial relationship. In all instances, the financial relationship must meet all the requirements of the applicable exception except for the signature requirement, and entities may only use the grace periods once every three years with respect to the same physician.

Mandating Strict Compliance. CMS also made a number of changes and is embarking on other initiatives that emphasize the importance of strict compliance.

  • Period of Disallowance. CMS finalized rules related to the applicable period of disallowance under the Stark law—defined as the period of time in which a physician cannot refer DHS to an entity, and the entity cannot bill Medicare, because the referring physician's financial relationship with the entity failed to satisfy an applicable Stark law exception. In the 2009 IPPS final rule, CMS creates an outside limit on the period of disallowance. Where the non-compliance is not related to the payment of compensation, the period of disallowance will end no later than the date that the financial relationship satisfies all of the requirements of an applicable exception. Where the noncompliance is related to the payment of compensation, then the period of non-compliance will end no later than the date on which all excess compensation is returned, and the financial relationship satisfies all of the requirements of an applicable exception. While CMS appears to be trying to create bright line rules concerning how a Stark violation can be remedied, the regulation does not address many situations of potential noncompliance that a integrated delivery systems may face.
  • Burden of Proof. In the 2009 IPPS final rule, CMS put in writing its long-stated contention that the burden of proof is on the provider when Medicare denies payment due to Stark violations. This means that when payment for DHS is denied on the basis of a purported Stark violation, and the denial is appealed, the ultimate burden of proof at each level of administrative appeal will be on the entity submitting the claim to establish that the service was not furnished pursuant to a prohibited referral (e.g., that the entity fully complied with a Stark exception). CMS maintains that this approach is appropriate because, in most instances, the question of whether a Stark exception is met will depend on facts within the control of the provider or supplier submitting the claims (and not CMS or its contractors). Note that in False Claims Act and whistleblower suits, the burden of proof remains on the plaintiff—including the government where it intervenes—regardless of whether the falsity of the claim is predicated on a purported Stark violation.
    Additionally, on August 15, 2008, CMS announced the implementation of a new Claims Adjustment Reason Code—No. 213—that Medicare contractors are to use when a DHS entity's claim should be denied because of Stark. Thus, the agency appears to believe that the law and its exceptions are sufficiently clear and understandable to permit its contractors to engage in claims denials (and require the provider seeking reimbursement to prove that the denied claim does not violate the Stark Law).
  • Disclosure of Financial Relationships. In the 2009 IPPS final rule, CMS also finalized provisions related to the use of a Disclosure of Financial Relationships Report (DFRR) to collect information concerning the ownership and investment interests and compensation arrangements between hospitals and physicians related to the Stark law.

CMS announced in the 2009 IPPS final rule that the DFRR will be sent to 500 hospitals, both general acute care hospitals and specialty hospitals, in order to (a) identify arrangements that may not comply with Stark, and (b) identify practices that may assist the agency in future rulemaking. The DFRR is characterized as a one-time information collection effort, although CMS reserved the right to use the DFRR or some another instrument to collect similar data in the future. Given that the DFRR requires hospitals (including those involved in integrated delivery systems) to disclose detailed information regarding their relationships with physicians, the new disclosures are likely to lead to new enforcement initiatives in addition to providing information to CMS regarding potential adjustments to the regulatory scheme.


CMS continues to make changes to the Stark regulations in an effort to address perceived loopholes and abuses that it believes are fueling overutilization of diagnostic and other ancillary services. Unfortunately for physicians attempting to make the most of traditional practice models while enhancing their income through the various arrangements discussed above, these changes coincide with significant cuts both in professional and ancillary service reimbursement and a tightening of other regulatory requirements. By illustration, in addition to the Stark changes, in recent years CMS has changed the reimbursement provided to ambulatory surgical centers, and adopted reimbursement and other changes related to diagnostic tests (including several actual or proposed changes to the diagnostic test anti-markup rule).

On the whole, these changes could significantly impact physicians' interest and ability to remain in a traditional private practice model. Many may look to hospitals and integrated delivery systems as a more desirable location for their practices, as these entities continue to take advantage of Stark rule exceptions no longer be available to physicians and the entities they own.

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