On September 5, 2007, the Centers for Medicare and Medicaid Services (CMS) published the Phase III Final Rule (Phase III) to the Stark Law (Section 1877 of the Social Security Act). The Stark Law prohibits a physician from referring Medicare patients for certain designated health services to entities with which the physician or his or her immediate family member have a financial relationship, unless an exception applies. The statute also prohibits an entity from billing for services provided pursuant to an improper referral. Phase III becomes effective on December 4, 2007.

In this alert, we will discuss various concerns under the new regulations regarding hospital medical staffs.

Definitions
Entities with medical staffs should be aware of the new definition in Stark, “Physician Organization.” This term includes a professional corporation, physician practice or group practice. This is a new term that has wide-ranging implications in the very significant “Stand in the Shoes” approach taken by CMS with regard to direct and indirect compensation arrangements (discussed in the Section 411.354 changes below). Essentially, the term was meant to mean a “physician’s medical practice” as commonly understood. CMS officials have clarified that a hospital would not be considered a physician organization. However, a wholly owned subsidiary of the hospital, meant to be a physician practice or group practice, would be considered a physician organization.

Academic Medical Centers
The exception for academic medical centers was changed in three substantive ways. First, CMS clarified that the compensation paid to a referring physician by all academic medical center components must not, in the aggregate, exceed fair market value for services provided by that physician. Next, for purposes of determining whether the majority of physicians on staff at an affiliated hospital are faculty members, “the affiliated hospital must include or exclude all individual physicians with the same class of privileges at the affiliated hospital.” Additionally, CMS changed language to recognize that “one or more” written agreements or documents may be needed to show the relationship of the components of the academic medical center. This should help many academic medical centers with multiple documents evidencing various relationships.

In early November, CMS delayed the effective date of the “stand in the shoes” provision under direct compensation arrangements with respect to academic medical centers. Widespread inquiries to CMS apparently alerted the agency that several unanticipated consequences of the stand in the shoes doctrine would adversely affect many academic medical centers and their various relationships with physician organizations. The application of the stand in the shoes doctrine to academic medical centers will take effect one year later than all other provisions on December 4, 2008.

Personal Service Arrangements
The personal service arrangements exception, like many of the exceptions in Stark, requires agreements in writing with terms of at least one year. Now, “holdover personal service arrangements” of up to six months following the expiration of an agreement of at least one year, which met the conditions of the personal service arrangements exception, satisfies the requirement provided that it is on the same terms and conditions as the immediately preceding agreement. Thus, CMS has written into the exception additional flexibility for those parties who fail to renew an agreement prior to its expiration date. This coincides with other holdover exceptions found in Stark, including those for rentals of office space and equipment.

Physician Recruitment
The physician recruitment exception received many substantive changes relevant to medical staffs. These changes can be found in both the full summary of the Stark Phase III changes found below, and the recent alert of November 5, “CMS Publishes New Stark Law Regulations Regarding Physician Recruitment.”

Charitable Donations
Regarding charitable donations by medical staff members, CMS added language to clarify that charitable donations may neither be solicited nor offered in any manner that takes into account the volume or value of referrals or other business generated between the physician and the entity.

Non-Monetary Compensation
CMS amended the non-monetary compensation exception to clarify that the aggregate annual dollar amount of $300 (adjusted this year to $329) in value permitted for non-monetary compensation is determined on a calendar year basis. More importantly, there is now a “payback” provision, which allows entities to remain within the exception despite inadvertant noncompliance with the annual limit. This “payback” provision is allowed by an entity only once every three years with respect to the same physician.

CMS also revised the non-monetary compensation exception to allow entities that have formal medical staffs to provide a local “medical staff appreciation event” (for example, a holiday party) once per year for the entire medical staff. This “one party per year” rule is in addition to the annual aggregate limit, though gifts or gratuities provided to physicians at the event are subject to the limit.

Compliance Training
Prior to Phase III, the compliance training exception could not be used for medical staffs’ continuing medical education (CME). Under the new regulations, CME is included, so long as the primary purpose of the CME is compliance training.

Professional Courtesy
Regarding professional courtesy, CMS clarified that the professional courtesy exception applies not to all entities but only those with a formal medical staff 

Hinshaw & Culbertson LLP has prepared a summary of the significant changes and proposed changes to the Stark Regulations made in Phase III. This summary is available below. Next week, Hinshaw will release the final of a series of Alerts focusing on important aspects of Phase III, including changes affecting physician recruitment, direct compensation arrangements, physician group practices and rural providers.

Hospitals are encouraged to review and monitor their medical staff policies and agreements to be consistent with the changes discussed in this alert. These changes become effective December 4, 2007.

To view or download information related to this alert, click on "Download PDF"

For further information please contact 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.