CMS’ Proposed Rule Threatens Viability of Common Health Care Business Relationships
By: KATHERINE J. DOUGLAS
July 2007
On July 12, 2007, the Centers for Medicare and Medicaid Services (“CMS”) published the proposed 2008 Medicare Physician Fee Schedule (the “Proposed Rule”), which contains significant changes to the Stark law as well as the reassignment and purchased diagnostic test rules. If adopted, these proposed changes would greatly impact the structure of various arrangements that are common in the health care industry today. Specifically, physicians and other health care entities would need to restructure or eliminate completely per click leasing arrangements, under arrangements services contracts, percentage-based compensation provisions, and purchased diagnostic test arrangements.
“Per Click” Leasing Arrangements
Currently, space and equipment leases that provide for payment on a per use or per click basis are permissible under the Stark exceptions, as long as other conditions are satisfied. Citing its concern that certain of these arrangements are likely to result in over-utilization and program abuse, CMS has proposed to revise the exceptions by prohibiting per click charges for services provided to patients referred by the lessor to the lessee. As proposed, this revised exception would apply to leasing relationships where the physician is the lessor. Thus, the exception would prohibit a physician from leasing his or her MRI to a hospital and receiving per click payments for scans performed on patients referred by the physician. The payment provisions of any such leasing relationships would therefore need to be restructured to a fixed-rate rent. While the proposed prohibition is currently limited to leases with physician lessors, CMS is soliciting comments on expanding the prohibition to arrangements where the physician is the lessee.
Under Arrangements and the Definition of “Entity”
Stark applies to a physician’s financial relationship with an “entity,” which is defined as the person or entity that submits the claim for DHS to Medicare. In the Proposed Rule, CMS raises its concern with under arrangement relationships between referring physicians and hospitals, noting that the narrow definition of “entity” allows referring physicians to improperly profit as a result of financial relationships with under arrangement providers that do not submit claims. CMS has therefore suggested broadening the definition to include not only the person or entity that submits the claim to Medicare, but also the person or entity that provides the service and the entity that causes the claim to be presented. This broadened definition could have the effect of rendering illegal what are currently permissible physician-ownership interests in under arrangement service providers. An example of an under arrangements relationship that would be affected by this revision is one between a group of referring radiologists and a hospital. Since the hospital, rather than the group, submits the claims for the imaging services, the radiologists’ financial interest in the group is outside the scope of Stark. If the Proposed Rule were adopted and CMS determined that the group “caused the claim to be presented,” (a phrase not elaborated upon in the Proposed Rule), the radiologists’ financial relationship with the group would become subject to Stark analysis.
Percentage-based Compensation
Several Stark exceptions require compensation to be “set in advance.” Stark’s current definition of “set in advance” allows for percentage-based compensation. However, CMS has proposed to prohibit most percentage-based compensation structures by changing the definition of what it means for compensation to be “set in advance.” If this proposed change is adopted, the only percentage-based compensation that would meet the definition of “set in advance” would be compensation directly resulting from personally performed physician services. CMS notes that this change is consistent with its original intent in allowing percentage-based compensation. Thus, hospitals would still be able to pay physicians on a percentage basis, but space or equipment lease agreements that give the lessor a percentage of revenues generated by the leased space or equipment would be prohibited.
Purchased Diagnostic Tests/Reassignment
Under Medicare’s purchased diagnostic test rule, a physician is prohibited from “marking up” the charge for a purchased technical component of diagnostic test. In the Proposed Rule, CMS has suggested significant revisions to the anti-mark up provision, changing some fundamental definitions and expanding its scope to professional components. Currently, the mark-up prohibition does not apply to tests performed by a physician group or personnel (employed or contracted) who are supervised by a physician in the group. Under the proposed provision, the “supervision” concept appears to have been dropped and a physician would be prohibited from marking up either the technical or professional component performed by an “outside supplier,” which would be defined as anyone other than a “full-time” employee. Thus, a group would be prohibited from marking up the charge for a technical component performed by independent contractor or part-time technicians, regardless of whether the group supervised the technicians. With respect to the professional component, if a physician group contracts with an independent radiologist to perform reads and the radiologist reassigns the professional component to the group, the group would be prohibited from charging Medicare anything higher than the group’s net charge. “To prevent gaming,” CMS includes in the definition of “net charge” any charges between the outside supplier and the billing entity having anything to do with the service, such as rent for space or equipment.
Possible Limitation of In-Office Ancillary Services Exception
Although CMS has not set forth an explicit proposal, it is seeking comment on potential restrictions it may impose on the scope of the In-Office Ancillary Services (“IOAS”) exception. CMS believes that the IOAS exception is susceptible to abuse and is therefore soliciting comments as to whether certain services should no longer qualify for the exception, whether changes should be made to the “same building” and “centralized building” definitions, whether non-specialists should be able to use the exception to provide specialized services, and any other restrictions that would help prevent abuse.
Stand in the Shoes
CMS also discusses a “stand in the shoes” concept with respect to indirect compensation arrangements under Stark. CMS would amend the Stark regulations to provide that where a DHS entity (Entity X) owns or controls an entity (Entity Y) to which a physician refers patients, Entity X would “stand in the shoes” of Entity Y for purposes of analyzing a compensation relationship under Stark. So if Entity Y had a direct compensation relationship with a physician, the physician would be deemed to have a direct compensation relationship with Entity X. This could result in Stark prohibiting arrangements that were once outside Stark’s scope because no qualifying compensation relationship existed. CMS also hints that it “may have already finalized” a provision that treats physicians as standing in the shoes of their physician groups. This would have a significant impact on the analysis of direct and indirect financial relationships under Stark.
Alternative Criteria for Satisfying Certain Stark Exceptions
In addition to suggesting more restrictions on various Stark exceptions, CMS proposes an alternative method for satisfying certain exceptions. Such an alternative method would be intended to avoid the situation where an arrangement complies substantively with the exception, but a technical requirement (such as signing a personal services agreement) is inadvertently not satisfied. This alternative method would be available by meeting eight conditions: 1) the parties self-disclose the failure to comply with the exception; 2) only the “form” requirements are not satisfied; 3) the noncompliance was inadvertent; 4) the parties did not know that the arrangement did not satisfy the exception; 5) the parties have promptly corrected the problem; 6) the arrangement does not pose a risk of abuse; 7) the duration of noncompliance has been minimal; and 8) the arrangement is not the subject of an ongoing Federal investigation or proceeding.
Other Proposed Revisions and Request for Comments
Other revisions in the Proposed Rule relate to IDTF performance standards, ownership or investment interests in retirement plans and the burden of proof for establishing a prohibited referral. CMS is also soliciting comments on the “period of disallowance” for noncompliant financial relationships, during which referrals between a physician and entity are prohibited, and obstetrical malpractice insurance subsidies.
Conclusion
If adopted, the revisions contained in the Proposed Rule would have a significant impact on current business relationships between health care providers. However, CMS is soliciting comments on these rules until August 31, and much could change in light of the type and volume of comments CMS receives. In the meantime, it is important for health care providers to assess their current relationships and prepare for any restructuring that may be necessary.