The Center for Medicare and Medicaid Services (CMS) has proposed 11 significant changes to the Ethics in Patient Referral Act (Stark) regulations. Many of these proposed changes, which were published in the Federal Register on July 12, 2007, involve joint venture activity that hospitals and physician groups have engaged in or compensation arrangements involving physicians. The comment period for the proposed changes extends through August 31, 2007.

It is not known whether these proposed changes will become final and, if so, when. Those contemplating arrangements involving designated health services (DHS) under Stark and those with existing joint venture or other types of arrangements that may be impacted by the proposed changes should review those arrangements. This alert discusses the proposed changes that are particularly pertinent to many hospitals and physicians:

“Under Arrangement” Joint Venture Models
Stark prohibits a physician from making a referral for DHS to an entity with which he or she has a financial relationship. It prohibits the entity from billing Medicare for the DHS unless an exception applies. In an “under arrangement” model, a hospital contracts with a separate provider, often a joint venture in which the hospital holds an interest, to perform services for the hospital’s patients for which the hospital will ultimately bill. This model permits a physician to financially participate in a joint venture that provides the DHS because the hospital, not the joint venture, submits the bill for services rendered.

In its comments relating to the proposed rules, CMS notes its concern about services provided “under arrangement” to hospitals and other providers and says that there appears to be no legitimate reason for these arranged for services other than to provide physicians an opportunity to make money for separately payable services. CMS indicates that “under arrangement” ventures that furnish items and services to entities providing DHS, but which do not submit claims, raise significant concerns under fraud and abuse laws. The agency then comments that those arrangements could be contrary to the plain intent of the physician self-referral laws. Thus, CMS proposes to revise the definition of “entity” so that a DHS entity includes both the person or entity that performs the DHS, as well as the person or entity that submits claims or causes claims to be submitted to Medicare for DHS.

Unit of Service (Per-Click) Arrangements
CMS also expresses concern that a unit of service or per-click payment for space and equipment may reward a physician for each referral he or she makes for DHS. In the Phase I rulemaking, CMS indicated that it permitted time-based or unit service-based payments even when the physician receiving the payment had generated it through a DHS referral. In the July 12, 2007, notice, CMS indicates that it is reconsidering this issue. It further notes that it is proposing that space and equipment leases may not include unit of service-based payments to a physician lessor for DHS services rendered by an entity lessee to patients who are referred by a physician lessor to the entity. CMS points out that such arrangements are inherently susceptible to abuse because the physician lessor has an incentive to profit from referring a higher volume of patients to the lessee. The agency would disallow such payment, even if the statute does not expressly forbid payments to a lessor for a patient referred to the lessee. CMS also indicates that it is soliciting comments on whether it should prohibit time-based or unit of service-based payments to an entity lessor by a physician lessee to the extent that such payments reflect services rendered to patients seen by the physician lessee or the entity lessor. The agency is concerned that if a physician rents machinery from a hospital only when he or she refers a patient for a particular procedure utilizing that machinery, and then provides the facility portion of the service “under arrangement” with the hospital, then he or she benefits financially and the arrangement could provide an incentive for over-utilization or other program abuses.

In-Office Ancillary Services
CMS expresses certain concerns with respect to the scope and complexity of services being provided under the in-office ancillary services exception, but has declined to issue a specific proposal for amending the exception. Instead, the agency is seeking public comment on suggested changes.

Set in Advance and Percentage Based Compensation Arrangements
Under current regulations, compensation is considered “set in advance” if the aggregate compensation, the time-based or per unit of service-based amount, or a specific formula for calculating compensation, is set forth in the agreement between the parties before furnishing the items or services for which compensation is to be paid. CMS is concerned that despite its intent that percentage compensation arrangements be used only for compensating physicians for the physician services they perform, they are instead being used for the provision of other services and items (such as equipment and office space leased) on the basis of the percentage of the revenues raised by the equipment from the medical office space. Therefore, CMS has proposed that percentage-based compensation arrangements should be limited to pay for personally performed physician services from revenues resulting from such services and should not be based on other factors.

There are many other items discussed in the July 12, 2007, notice, including proposed revisions to the obstetrical malpractice insurance exception, burden of proof requirements, and anti-markup provisions that would prohibit physicians from marking up the technical component or the professional component of diagnostic services which were purchased or billed under reassignment. Hospitals and physicians may submit comments regarding the proposed changes to CMS through August 31, 2007. Hinshaw & Culbertson LLP will continue to monitor the proposed rules, and will issue additional alerts as developments arise.

For further information, please contact Roy M. Bossen or your regular Hinshaw attorney.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.