Stark II Phase II Final Regulations

What You Need to Know Now

On March 26, 2004, CMS published the long-awaited Phase II of the Stark II Final Regulations. These regulations affect virtually all relationships involving physicians and health care entities. The following discussion highlights the issues that are likely to be of greatest significance concerning the daily operations of most providers and their efforts to assure compliance with Stark II.

ISSUES OF IMPORTANCE TO ALL PROVIDERS

• Two New Fair Market Value Compensation Safe Harbors for Hourly Payments to Physicians
• Hourly payment must be less than or equal to the average hourly rate for emergency department physicians in the market (data from at least 3 local hospitals required); or
• Hourly payment is average of the 50th percentile salary for physician’s specialty as determined by four specified national salary surveys (six are specified in the regulations, e.g., MGMA) divided by 2,000 hours.

• Clarification of "Set in Advance" Requirement
• Percentage based compensation arrangements (including "per click") are permissible if the compensation methodology is determined in advance and does not change over the course of the arrangement based on the volume or value of referrals or other business generated by the referring physician.
• Equipment/Space Leases
• As long as new agreement is not entered into during the first year of original lease, equipment/space leases can be terminated with or without cause within one year.
• Month to month holdover leases are permitted for up to 6 months following expiration of lease term as long as on same terms as initial lease.
• Subleases are permitted.
• The lease exceptions are applicable to both capital and operating leases.
• Confirmation is given that the Fair Market Value exception can be used to cover an equipment lease but not a space lease.
• Personal Services Arrangements
• Agreement must either incorporate all other agreements with the physician or cross-reference to a master list of contracts that is maintained and updated centrally by the health care entity, and made available to the Secretary of HHS upon request.
• Termination with or without cause in less than one year is permissible as long as the arrangement is not renewed within the first year.
• The personal services exception can cover an arrangement which includes the contractor providing both services and equipment, but for purposes of determining fair market value the services and the equipment must be accounted for separately.
• Bona Fide Employment Exception
• Employees cannot be paid any profit distributions (i.e., no allocation of Medicare/Medicaid designated health services revenue).
• Productivity bonuses may be made solely on services personally performed by the physician.
• Isolated Transactions
• Installment payments are permitted as long as the aggregate payment is set before the first payment is made, the physician’s referrals to the entity are not taken into account, and the transaction is accompanied by a guarantee sufficient to assure payment in the event of default.
• Commercially reasonable post closing reconciliation payments are permitted within 6 months following the closing date (e.g., to reconcile pre-closing projected collections of accounts receivable with actual collections of accounts receivable).
• Temporary Noncompliance
• A new exception has been added for temporary noncompliance lasting up to 90 days for arrangements that have satisfied an exception but have fallen out of compliance for reasons beyond the control of the entity.
• New Regulatory Exception For Provision of Information Technology Items & Services By an Entity to a Physician
• New exception is applicable only to allow physician to participate in a community-wide health information system (i.e., a system that is available to all providers, practitioners and residents of the community).
• Reporting
• No affirmative reporting is required.
• Information regarding all financial relationships subject to the Stark Law (except those meeting the exceptions for publicly traded securities and mutual funds) must be retained by the entity and provided to CMS or the OIG upon request.

• Professional Courtesy Discounts
• Professional courtesy is defined as the provision of free or discounted items or services to physicians, immediate family members, and office staff.
• Certain conditions must be met to permit the discounts, including the following:
• Professional courtesy is offered to all physicians on the hospital’s bona fide medical staff or in the local community, without regard to volume or value of referrals;
• Professional courtesy policy must be in writing and approved in advance by hospital governing body;
• Professional courtesy may not be offered to physician or immediate family member who is a federal health care program beneficiary; and
• Insurer must be informed in writing of the arrangement.
• Physician Recruitment
• Exception is applicable to physicians relocating to the hospital’s geographic area, which is defined as the lowest number of contiguous postal zip codes from which the hospital draws at least 75% of its inpatients. Geographic relocation is defined as moving practice (not residence) at least 25 miles or 75% of the revenues in new practice are derived from new patients.
• Exception is extended to residents participating in programs located in area and physicians in practice for less than one year.
• Recruitment of physician to join an existing group (whether contract is with group or recruited physician) is allowed subject to conditions including:
• Cost allocated by the group to the recruited physician under income guarantee may not exceed the actual additional incremental costs to the practice; and
• Group may not impose additional practice restrictions, such as a non-competition covenant.
• Limited exception permits retention payments to physicians practicing in health professional shortage areas.
• Specialty Hospital Ownership
• Recent 18-month statutory moratorium prohibiting physician owners from referring to specialty hospitals is reaffirmed.
• No additional guidance is provided on this issue other than that contained in CMS’ recently issued March 19, 2004, One-Time Notification.
• Non-Monetary Compensation
• Annual limit of $300 will be adjusted annually for inflation.

• Definition of Academic Medical Center
• Majority tests for affiliated hospitals (i.e., majority of physicians on medical staff are faculty and majority of admissions made by faculty) can include courtesy and volunteer, as well as full-time faculty.
• Faculty practice plan may be organized in any manner.
• Medical school or "accredited academic hospital," defined as one that sponsors 4 or more approved medical education programs, is permitted.
• Faculty Physician Requirement
• Percentage-based compensation is permitted.
• "Substantial academic or clinical services" to be furnished by faculty is defined as 20% of physician’s professional time or 8 hours per week providing academic or clinical teaching services.

• In-Office Ancillary Services Exception
• Former "same building" test is eliminated, and replaced by three new alternative tests for meeting the "same building" requirement:
• Referring physician or group practice has an office in the building open to patients at least 35 hours a week and group member furnishes physician services to patients at least 30 hours a week in the office, including some (rather than substantial) physician services unrelated to federal or private pay designated health services (DHS);
• Referring physician or group practice has an office in the building open to patients at least 8 hours a week and referring physician furnishes physician services to patients at least 6 hours a week in office, including some services unrelated to DHS, and the patient receiving the DHS usually sees the physician for physician services in the same building; or
• Referring physician or group practice has an office in the building open to patients at least 8 hours a week and group member furnishes physician services to patients at least 6 hours a week in office, including some services unrelated to furnishing DHS, and referring physician is present in the building when the DHS is ordered or group member is present in the building when the DHS is furnished.
• Physicians or group practices who bill for purchased diagnostic tests in accordance with Medicare rules are excluded from the definition of "entity" (permitting the purchaser to bill Medicare in accordance with Medicare rules regarding the billing of purchased diagnostic tests).
• Group Practice Definition
• Definition is extended to "mirror" entities with identical ownership and governance in separate states.
• Group may directly bonus all physicians (owners, employees, and independent contractors) based upon services furnished "incident to."
• Requirement that the group engage in centralized utilization review under the unified business test is eliminated.
• The "2 or more physicians" requirement for groups may include part-time employed physicians.
• New exception is created permitting a group to continue to qualify as a "group practice" during temporary periods of non-compliance with the "substantially all" test due to the addition of a new physician relocating from another area

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