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 making referrals for designated health services (DHS) payable by Medicare to an entity with which the physician or his or her immediate family member has a financial relationship, unless an exception applies. The Stark Law 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 issues under the Phase III regulations applicable to rural health care providers.

Definition
CMS added a definition for “rural area” in Phase III. A “rural area” is defined as “[a]ny area that is not an urban area.” That is, any area outside of a metropolitan statistical area (MSA). This definition was added to clarify the changes applicable to such areas, all of which are highlighted in this alert.

Rural Hospital Changes in the Physician Recruitment Exception, Section 411.357(e)
The physician recruitment exception for rural hospitals (defined as those in a “rural area”), has been relaxed by expanding the geographic area served by the hospital into which a recruited physician must relocate and redefining the requirements for income guarantees for recruited physicians joining a practice in a rural area.

For rural hospitals, the “geographic area served by the hospital” is defined as the lowest number of contiguous zip codes from which the hospital draws at least 90 percent (instead of 75 percent for urban hospitals) of its inpatients. In the event that the hospital draws fewer than 90 percent of inpatients from contiguous zip codes, the calculation may include noncontiguous zip codes in decreasing order of the percentage of inpatients drawn. Rural hospitals may also recruit a physician to an area outside the geographic area served by the hospital if a CMS advisory opinion is issued determining that the area has a demonstrated need for the recruited physician.   

Another welcome change for rural area practice groups is the relaxation of income guarantees for those physicians recruited to join a physician practice in a rural area, and who were recruited to replace a physician who, within the previous 12 months, retired, relocated or died. In these situations, the income guarantee may now include either the actual additional incremental expenses attributable to the recruited physician, or the lesser of either the recruited physician’s per capita allocation or 20 percent of the practice’s total expenses.

Retention Payments in Underserved Areas, Section 411.357(t)
Phase III expands the previously promulgated Stark exception, which permits hospitals or federally qualified health centers (FQHCs) located in a health professional shortage area (HPSA) to make retention payments to a physician. In addition to hospitals and FQHCs, Phase III now allows rural health clinics to make payments under this exception.

This exception has been expanded to allow for retention payments to be made to physicians who either maintain a medical practice located in a HPSA or at least 75 percent of the physician’s patients reside either in a medically underserved area (MUA) or are members of a medically underserved population (MUP).

Increased flexibility has been added to the exception by allowing retention payments in the absence of written recruitment offers under certain circumstances. Phase III allows retention payments to be made on the basis of a written employment or recruitment offer, as well as a written certification by the physician that he or she has a bona fide recruitment or employment opportunity which requires relocation of at least 25 miles to a location outside the geographic area served by the hospital. The employment or recruitment offer may be from a hospital, academic medical center or physician organization.

As previously required under the exception, the retention payments may not exceed the lower of 25 percent of the physician’s current annual income or the reasonable costs the entity would otherwise have to expend to recruit a new physician to the geographic area served by the hospital.

Intrafamily Rural Referrals, Section 411.355(j)
The exception for intrafamily rural referrals has been updated to allow use of the exception when no other DHS providers are available to furnish the services in a timely manner within 25 miles or 45 minutes transportation time from the patient’s residence. The physician still must inquire, and keep records, as to the availability of other entities or persons to provide the DHS. The physician has no obligation to inquire into those entities further than 25 miles or 45 minutes transportation time (whichever test was used) from the patient’s residence.

Hinshaw & Culbertson LLP has prepared a summary of the significant changes and proposed changes to the Stark Law made in Phase III. This summary is available below.

Hospitals, FQHCs and rural health clinics are encouraged to review and monitor their current recruitment and retention practices to ensure consistency 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 privilege.