On March 26, 2004, the U.S. Centers for Medicare and Medicaid Services (CMS) issued Phase II of its two-part regulations implementing the federal physician self-referral law or "Stark Law." The following provides a brief introduction and background on the Stark Law and a brief overview of the subjects covered by Phase II.
Named after its legislative sponsor and proponent, Representative Pete Stark (D-Calif.), the Stark Law regulates financial arrangements between physicians and entities that furnish "designated health services" (DHS) paid by Medicare. It does this by prohibiting physicians from making referrals to an entity for Medicare-covered DHS if the physician or an immediate family member has a financial relationship with the entity, unless an exception applies. A financial relationship can arise from an ownership or investment interest or a compensation arrangement. Services rendered pursuant to a prohibited referral are not payable by Medicare, and anyone submitting claims to Medicare or billing any entity for such services has an obligation to make a prompt refund. Submission of such claims or failure to promptly refund payments is punishable by civil monetary penalties and, potentially, exclusion from the Medicare program.
First promulgated in 1989 with respect to clinical laboratory services only (Stark I, effective January 1, 1992), the Stark Law was expanded to 10 additional services in 1993 (Stark II, effective January 1, 1995). CMS (then Health Care Financing Administration) published final Stark I regulations in 1995, but the agency did not publish proposed regulations for Stark II until January 1998. The Stark II proposed regulations offered a number of important revisions to the existing Stark I regulations. CMS was deluged with comments on the Stark II proposed regulations by an industry that by 1998 was clearly perplexed and chagrined by the complexity and breadth of the law. CMS published what it refers to as Phase I of the final Stark II regulations as a final rule with comment period, generally effective January 4, 2002. In Phase I, CMS sought to simplify and clarify the regulations and to create new regulatory exceptions where it found no risk of abuse. The Phase I regulations only addressed part of the Stark Law. On March 26, 2004, CMS published the long-awaited sequel to the Phase I regulations (the Phase II regulations) as an interim final rule effective July 26, 2004.
Brief Overview of Phase II Coverage
The Phase I regulations covered the overall prohibition against self-referrals and what are referred to as the general exceptions to the prohibition on self-referrals. These exceptions apply to specified services, regardless of whether the financial relationship between the referring physician and an entity is one of ownership/investment or compensation. The Phase I regulations also defined many statutory and regulatory terms, addressed physician compensation generally and added a number of new exceptions under its statutory authority to promulgate new exceptions for arrangements that it determined do not present a risk of fraud and abuse of the Medicare program. CMS defined "indirect" financial arrangements and added a new exception for indirect compensation arrangements that satisfied certain criteria.
The Phase II regulations cover those parts of the Stark Law that were not covered by Phase I--the ownership and investment exceptions, the compensation arrangement exceptions and the Stark Law’s reporting provisions. Phase II also includes additional regulatory exceptions, definitions and CMS’s response to public comments on the Phase I Regulations. CMS has largely deferred addressing a Medicaid statutory provision that applies the Stark law to referrals for Medicaid-covered services.
The Phase II regulations provide new exceptions, additional flexibility in some areas and additional specificity in others. Strikingly, for the first time CMS has established a methodology by which certain hourly rates paid to physicians will be "deemed" to be equal to fair-market value. CMS also provided additional guidance on "three-party" relocation agreements, that is, physician recruitment into an existing group. As with the prior iterations of Stark regulations, these rules will expand the range of permissible arrangements for some providers and suppliers while limiting others.
Comments to the Phase II Stark regulations will be accepted through June 24, 2004. McDermott, Will & Emery will be publishing a Health Law Update soon that will discuss and analyze the effect of the new rules.
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