CMS Releases Stark Phase III Regulations

More Fizzle than Fireworks

On Aug. 27, 2007, the Centers for Medicare & Medicaid Services (CMS) released an inspection copy of the long-awaited Stark II Phase III Regulations. Overall, healthcare providers should be pleased with the Phase III Stark rules. Despite fears that the landscape for physician-hospital relationships would be drastically altered, the Phase III revisions are for the most part positive and provide greater flexibility for providers. On the negative side, any provider that has relied heavily on the Stark indirect compensation exception needs to review this relationship in light of the new rule that will "collapse" many former indirect relationships into direct relationships.

Perhaps the biggest news from Phase III, however, is what CMS chose not to say. Phase III makes no mention at all of the Stark revisions recently proposed in the Medicare 2008 Physician Fee Schedule that would make many current "under arrangements," per-click, and percentage compensation contracts illegal. Providers should expect to see the real fireworks when CMS further addresses these areas.

• New Permission for Certain Temporary Noncompliance. In an important change, a provider or a physician that inadvertently allows a physician's personal services agreement to expire will no longer be automatically in violation of Stark. A new provision of Stark Phase III allows "holdover" of a personal services arrangement for up to six months following the expiration of a personal services agreement as long as the personal services agreement met the conditions of the personal services exception. The holdover personal services arrangement must be on the same terms and conditions as the original agreement. Additionally, CMS indicates that in the event a hospital provides a physician with non-monetary compensation in excess of the limit, the parties can cure the non-compliance if the physician repays the excess value within 180 days of receipt or by the end of the calendar year in which it was received, whichever is earlier.

• Let's Party! Phase III allows hospitals to host one annual "staff appreciation event" for hospital staff and physicians without including the cost of the party as compensation to physicians. Any gifts or giveaways at the party, however, are still subject to Stark, and must fit within the annual per physician "non-monetary compensation" limit (currently $329 per year). You can have a red carpet, but Oscar-party type gift bags will not be allowed.

• Physician Recruitment. The government expanded the scope and flexibility of the Stark physician recruitment and physician retention exceptions, with the result that more physicians than ever before should qualify for hospital recruitment and retention assistance. Also, Phase III significantly loosens the prior rule against groups imposing practice restrictions on new physicians who receive hospital recruitment assistance. Phase III now prohibits only "unreasonable" practice restrictions. Rural hospitals receive more flexibility in determining the "geographic area served by the hospital" for purposes of recruitment. They can also pay more expenses associated with the practice of a recruited physician who joins an existing group to replace a member of the group who left the area or died within the previous 12 months.

• Physician Retention. The physician retention exception currently requires a bona fide written recruitment offer to relocate the physician outside the area currently served. Phase III adds flexibility by allowing this exception to be used when the physician has either an employment offer or a recruitment offer. Payments under this exception going forward are limited to the lower of 25 percent of the physician's income or the hospital's cost to recruit a new physician.

• Hourly Rate Safe Harbor Eliminated. CMS recognizes that a safe harbor provided in the Phase II regulations for setting the hourly compensation rate for medical directors has some shortcomings due to the cost and unavailability of the listed surveys. As a result, CMS deleted the safe harbor in the Phase III regulations. The likely result is that medical director fees may creep upward for some specialties, since the surveys tended to have hourly rates that are on the low side.

• Stand in the Shoes. Phase III revises the way various exceptions apply by requiring physicians to "stand in the shoes" of certain affiliates so that the relationship is analyzed as a direct ownership or compensation relationship rather than indirect relationship. This will clarify the decision-making path for many physician relationships.

• Physician Sale of Equipment to Hospitals. Under Phase II, if a physician sold a piece of equipment to a hospital on an installment basis and retained a security interest in the equipment to secure the hospital's payment, he or she would have been deemed to have an ownership interest in the hospital. Phase III addresses this issue by expressly stating that the security interest creates only a compensation relationship between the physician and the hospital, not an ownership relationship.

Notably, Phase III does not address the application of the Stark Law to "under arrangements" relationships, "per click" or per unit of service leases or percentage compensation arrangements. CMS proposed significant changes in these areas in the proposed 2008 Medicare Physician Fee Schedule, but chose not to include these changes in Phase III. Providers should be cautious when contemplating relationships (such as under arrangements transactions) that appear to comply with the Phase III regulations but may not meet the standards of the proposed Stark changes included in the Physician Fee Schedule. Those changes are the fireworks on the horizon.

CMS anticipates publishing Phase III as a final rule in the Federal Register on Sept. 5, 2007, with the effective date Dec. 4, 2007.

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