No Moratorium On Stark II Enforcement
By: JAMES B. PLATT & STEVEN N. BECK
Winter 1995
The Office of Inspector General (OIG) recently announced that it does not intend to delay enforcement under Stark II, which went into effect January 1, 1995. Responding to a letter from the American Hospital Association, the OIG said that it did not have the authority to delay sanctions until after regulations are issued, as urged by AHA. The OIG hopes to issue proposed regulations under Stark II as soon as it can in 1995.
Many medical groups, hospitals and other health care providers have been scrambling to comply with Stark II. But Stark II is not well written, and leaves many questions unanswered.
1. What Does Stark II Prohibit? Stark II prohibits a physician who has an investment or compensation arrangement with an entity from referring Medicare patients to that entity to receive certain designated health services. In addition, the entity cannot bill Medicare, Medicaid, the patient or anyone else for those services.
2. What are "Designated Health Services?"
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Clinical laboratory services
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Physical therapy services
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Occupational therapy services
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Radiology services, including MRI, CAT scans and ultrasound services
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Durable medical equipment and supplies
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Parenteral and enteral nutrients, equipment and supplies
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Prosthetics, orthotics and prosthetic devices and supplies
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Home health services
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Outpatient prescription drugs
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Inpatient and outpatient hospital services
Unfortunately, many of these phrases are not further defined. For example, although x-rays are not specifically mentioned, they likely fall within the broad category of "radiology services."
3. Are There any Exceptions? Stark II has a number of fairly narrow exceptions. For example, physicians may have an ownership interest in certain rural ventures that provide designated health services. One of the most important exceptions applies to ancillary services provided in a group practice under the direct supervision of the physicians to be compensated from their group based on production, so long as a physician's production bonus or share of the profits is not directly related to his or her ancillary referrals. Unlike past legislation, Stark II is the first attempt to regulate physician compensation formulas within a group practice.
4. What are the Penalties? Violations of Stark II carry significant penalties. Not only must the physician refund any amounts billed in violation of the law, but civil money penalties and exclusion from Medicare may also apply. The civil money penalty is a maximum of $15,000 for each service.
5. What are Providers Doing to Comply? Most clinics are trying to restructure their physician compensation system to fit within the group practice exemption of Stark II. Instead of directly crediting each physician with his or her ancillary production, groups are attempting to allocate those revenues in a variety of different ways. For single specialty groups, an equal allocation among full-time physicians may be practical. Most multispecialty groups, however, have found this difficult to achieve and have considered other formulas, such as allocations among practice groups, use of specialty group multipliers, and seniority credits.
Other groups with related entities providing designated health services have had to consolidate those entities with the group practice. However, consolidation raises other concerns such as the possible conversion of the professional group from a cash-basis to accrual-basis taxpayer. In addition, even after the consolidation, revenues from the ancillary services must still be allocated in a manner to qualify under the group practice exemption. In addition, the remaining requirements for the in-office ancillary exception must be met. For example, if an optical shop provides special eyeglasses paid for under Part B (which may be covered by Stark as "prosthetic devices"), consolidating the optical shop with the ophthalmology practice may not allow the ophthalmologists to receive direct credit for those services since the physicians might not be directly supervising the optical shop employees.
6. What Constitutes a "Referral"? One of the uncertainties under Stark II is whether the group practice exemption would permit a clinic to eliminate ancillary credit for Medicare and Medicaid patients, but continue to provide credit for other payers. Although Stark II was enacted to protect federally funded Medicare and medicaid programs, the definition of "referral" is broad and covers requests for services or items covered by Medicare Part B as well as requests for a "plan of care" that includes designated health services. Because the statute does not expressly limit the latter type of referral to only medicare and Medicaid patients, clinics seeking the group practice exemption usually eliminate direct credit for ancillary services for any patient regardless of payor. In addition, from a practical standpoint, most clinics find it easier to implement changes to their compensation system for all types of payers.
Before you change your compensation formula for Stark II, talk to one of the health law lawyers at Fredrikson & Byron. We may be able to help you find a practical solution.