On July 31, 2008, the Centers for Medicare and Medicaid Services (CMS) released the 2009 Inpatient Prospective Payment System Final Rule (Final Rule). The Final Rule, scheduled to be published in the Federal Register on August 19, 2008, contains over 200 pages of commentary and response regarding previously proposed rules and several major revisions to the Stark regulations. CMS finalized revisions to the “stand in the shoes” provisions of the Stark III regulations and restricted the ability of hospitals and physicians to enter into “under arrangement” transactions, unit of service based leasing arrangements, and percentage-based leasing arrangements. Several of these changes will take effect October 1, 2008. Others do not become effective until October 1, 2009, giving entities and physicians time to restructure relationships as necessary for compliance. The remainder of this Alert will summarize the most significant revisions to the Stark regulations discussed in the Final Rule.
Stand in the Shoes Provisions (Effective October 1, 2008)
The “stand in the shoes” provisions of the Stark Phase III regulations were revised. CMS will now require only those physicians who have ownership or investment interests in their physician organizations to stand in the shoes of their organizations.
The original stand in the shoes doctrine, unveiled by CMS in the Phase III regulations last year, deemed all physicians who are part of a “physician organization” (whether owners, employees or otherwise) to have the same financial relationships with designated health services (DHS) entities as their physician organization. Thus, any financial arrangements directly between physician organizations and DHS providers needed to be structured to satisfy Stark exceptions specific to direct compensation arrangements, rather than the more simplified exceptions for indirect compensation arrangements.
The revision to the stand in the shoes doctrine came about after industry response following last year’s publication of the original stand in the shoes concept. Academic medical centers (AMCs), integrated tax-exempt healthcare delivery systems and others communicated their concerns to CMS that compensation arrangements such as “mission support payments,” which were previously analyzed under the indirect compensation arrangement provisions prior to Phase III, now needed to meet a direct compensation arrangement exception—something these entities viewed as practically impossible given the nature of mission support payments. In response to these and other concerns, CMS quickly delayed the effective date of the stand in the shoes provisions with respect to certain AMC arrangements and integrated tax-exempt health care systems.
The revision to the stand in the shoes rule provides greater flexibility to entities and resolves much of the industry concern. Now, only physicians with ownership or investment interests in their physician organizations must stand in the shoes of the organization. Those with no such interest, and those with “titular” interests (those physicians with ownership but without the ability or right to receive financial benefits of ownership or investment) are now permitted, but not required, to stand in the shoes of their physician organizations. Moreover, the physician stand in the shoes provisions are inapplicable in an arrangement that satisfies all requirements of the exception for AMCs. Thus, mission support payments and other similar arrangements can in many cases again be analyzed under the provisions for indirect compensation arrangements.
Services Provided “Under Arrangement” (Effective October 1, 2009)
CMS has adopted a revised definition of the term “entity” to clarify that a person or entity is considered to be “furnishing” DHS if it is the person or entity that has performed the DHS, (notwithstanding that another person or entity actually billed the services as DHS) or presented a claim for Medicare benefits for the DHS. Consequently, where an entity performs a service that is billed by another entity, both entities are considered DHS entities with respect to that service. In the 2008 Physician Fee Schedule Proposed Rule, CMS noted its continued concern about the risk of overutilization with respect to services provided “under arrangement” to hospitals and other providers, particularly with respect to hospital outpatient services for which Medicare pays on a per-service basis.
Presently, the definition of “entity” provides that only the person or entity that bills for DHS is considered to be furnishing the DHS. As a result of this revised definition of entity, the ability of referring physicians to hold an ownership interest in entities providing services “under arrangement” will be extremely limited. CMS has delayed the effective date of the amendment to the definition of “entity” until October 1, 2009 to allow parties adequate time to restructure existing under arrangements.
Unit of Service “Per-Click” Leasing Arrangements (Effective October 1, 2009)
CMS has finalized its proposal to prohibit certain unit-of-service (“per-click” or “per-use”) payments in lease agreements. The provision has a delayed effective date of October 1, 2009, so that parties have adequate time to restructure current arrangements. In the 2008 Physician Fee Schedule Proposed Rule, CMS acknowledged that arrangements involving a physician lessor to an entity lessee under which the physician receives per-click or per-use payments are inherently susceptible to abuse because the physician has an incentive to profit from referring a higher volume of patients to the lessee.
CMS makes clear that the prohibition on per-click payments for space or equipment used in the treatment of a patient referred to the lessee by a physician applies regardless of whether the physician is the lessor of whether the lessor is an entity in which the referring physician has an ownership or investment interest. Moreover, the prohibition applies to situations where the lessor is a DHS entity that refers patients to a physician lessee or a physician organization lessee. The Final Rule also contains a reminder for all parties to per-use leasing arrangements that the existing exceptions include the requirements that the leasing agreement be at fair market value and that it be commercially reasonable even if no referrals were made between the parties.
Percentage – Based Compensation Formulae (Effective October 1, 2009)
CMS has amended the exceptions for rentals of office space, rental of equipment, fair market value compensation arrangements and indirect compensation arrangements to prohibit the use of percentage-based compensation formulae.
In the 2008 Physician Fee Schedule Proposed Rule, CMS proposed revisions to all Stark regulations regarding compensation that is “set in advance.” CMS wanted to clarify that the compensation determined using a percentage-based formula could only be used for personally performed physician services, and must be based on revenues directly resulting from the physician services. CMS considers its new amendments regarding the prohibition of percentage-based compensation formulae to be a “narrow, targeted approach to address [the] most significant concerns with percentage-based compensation formulae.” CMS reiterates that it will continue to monitor arrangements for non-professional services that are based on a percentage of revenue raised, earned, billed, collected, or otherwise attributable to a physician’s professional services.
Parties are free to structure arrangements using other permissible compensation methodologies including flat fee payments at fair market value and, unless otherwise prohibited (as in per-click lease arrangements discussed below) per-procedure compensation for physician services.
Period of Disallowance (Effective October 1, 2008)
In the Final Rule, CMS has established an outside limit on the duration of the period of disallowance in certain circumstances. CMS’ interpretation of the Stark law has generally been that the period of disallowance begins on the date the financial relationship failed to comply with the statute and regulations and ends on the date the relationship comes back into compliance. The period of disallowance refers to the period of time for which an entity cannot bill Medicare for DHS provided pursuant to a physician referral because the financial relationship between the referring physician and the entity fails to satisfy all of the requirements of a Stark exception.
The Final Rule specifically states that the period of disallowance ends no later than: (1) the date that the financial relationship satisfies all of the requirements of an applicable exception, where the noncompliance is unrelated to compensation; (2) the date on which all excess compensation is returned to the party that paid it and the financial relationship satisfies all of the requirements of an applicable exception, where the noncompliance is due to the payment of excess compensation; or (3) the date on which all additional required compensation is paid to the party to which it is owed such that the financial relationship would satisfy all of the requirements of the exception, where the noncompliance is due to the payment of compensation that is of an amount insufficient to satisfy the requirements of an applicable exception. Accordingly, it is not sufficient for the party receiving excess compensation under a financial relationship to repay some of the excess compensation. Rather, the party receiving it must repay all of the excess compensation.
Disclosure of Financial Relationships Report (DFRR)
In the Final Rule, CMS offers additional information related to the Disclosure of Financial Relationships Report (DFRR), but stops short of adopting a regular reporting or disclosure process. The DFRR was created as in information collection instrument to assist in the enforcement of the Stark law. The DFRR was designed to collect information concerning the ownership and investment interests and the compensation arrangements between hospitals and physicians. In the proposed rule released earlier this year, CMS proposed to send the DFRR to 500 hospitals in order to identify arrangements that potentially may not be in compliance with the physician self-referral statute and regulations and to identify practices that may assist CMS in future rulemaking. CMS has adopted its proposal and plans to send the DFRR to 500 hospitals (both general acute care hospitals and specialty hospitals). At this time, the DFRR will be used as a one-time collection effort, however, depending on the information CMS receives as a result of this effort, CMS may propose future rulemaking to use the DFRR as a regular collection instrument. Accordingly, hospitals may want to consider developing a system to collect information concerning the ownership and investment interests and compensation arrangements between the hospital and physicians in anticipation of receiving a DFRR.
Alternative Method for Compliance (Effective October 1, 2008)
CMS proposed in its 2008 Physician Fee Schedule Proposed Rule to amend some of the various Stark prohibition exceptions to address inadvertant violations in which a relationship fails to satisfy a procedural requirement such as a signature on a written agreement. The Final Rule now allows temporary noncompliance if the only outstanding element of one of the applicable exceptions is the signature on a written agreement.
Under the Final Rule, if an entity’s failure to comply with the signature requirement of an otherwise applicable exception was inadvertant and the entity obtains all signatures within 90 days after commencement of the financial relationship, the relationship will be considered to have met the exception. However, if the missing signature was not inadvertant, the entity has only 30 days after the commencement of the financial relationship to comply. This alternative method for compliance will exist only if the relationship satisfies all other elements of an applicable exception at the commencement of the financial relationship.
Amendments to Compensation Arrangements (Effective October 1, 2008)
CMS clarified that amendments to compensation terms of an agreement between a DHS entity and a physician during the term of the agreement will not cause the agreement to fail the “set in advance” requirement provided that all of the requirements of an applicable compensation exception are satisfied, the amended formula for rental charges or other compensation is determined before the amendment is actually implemented, and the amended rental charges or compensation formula remain in place for at least one year after the amendment.
Exception for Obstetrical Malpractice Insurance Subsidies (Effective October 1, 2008)
CMS has added another exception for subsidies provided by hospitals, federally qualified health centers and rural health clinics for obstetrical malpractice insurance subsidies.
CMS explained that it felt that the existing exception for obstetrical malpractice insurance premium subsidies which meet the Anti-Kickback Statute Safe Harbor is too narrow and limits access to obstetrical care in rural and underserved areas. The new exception allows for subsidies to be paid by hospitals, federally qualified health centers or rural health clinics if certain elements are met. These elements include that the physician’s medical practice must be located in a primary care health professional shortage area, rural area or area with a demonstrated need for obstetrical services as determined by the secretary of HHS in an Advisory Opinion; or comprised of patients among whom at least 75% reside in a medically underserved area or a part of a medically underserved population.
CMS believes that this additional alternative for obstetrical malpractice insurance subsidies will provide greater flexibility for hospitals and federally qualified health centers to facilitate continued patient access to obstetrical patient care services.
Ownership or Investment Interest in Retirement Plans (Effective October 1, 2008)
CMS adopted its proposed rule which clarifies that the exclusion from the definition of “ownership or investment interest” of an interest in an employer retirement plan pertains only to an interest in the physician’s employer.
CMS feels that this clarification regarding the carve out of the definition of “ownership or investment interests” in a retirement plan provides a clear standard that parties can look to to determine whether a physician possesses an “ownership or investment interest.” CMS was very careful to explain that this exception does not apply to investment interests in entities other than the entity for which the physician is employed. CMS felt that such a clear “per se” exclusion was necessary to provide employed physicians with employer-retirement plans and investment interests in the employer with no doubt that their financial relationships are in compliance. Without such a carve out, what would otherwise have been a compensation arrangement (based on the physician’s employment), could have been considered an ownership or investment interest by virtue of the physician’s retirement plan interest in the DHS entity.
Burden of Proof (Effective October 1, 2008)
CMS adopted its previous proposal to add a new regulatory provision to clarify that in any appeal of a denial of payment for a designated health service made on the basis that the service was furnished pursuant to a prohibited referral, the burden of proof (persuasion) is on the entity submitting the claim for payment. Further, the burden of production is initially also on the claimant, but it may shift to CMS or its contractors during the course of the proceeding based on the circumstances of each proceeding.
This clarification follows the burden of proof procedures on Medicare providers and suppliers appealing payment denials based on other reasons, including failure to meet a condition of coverage. CMS rejected concerns that the allocation of burden of proof becomes troublesome when determining what is and is not fair market value, stating that fair market value is usually expressed as a range. Because claimants can establish compensation based on a methodology that is reasonable under the facts and circumstances, this burden of persuasion should not pose “significant difficulty” for claimants trying to establish fair market value.
As mentioned, the changes discussed above will be published in the Federal Register on August 19, 2008, with effective dates of either October 1, 2008 or October 1, 2009. For further information, please contact your regular Hinshaw attorney.
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