Doctors urged to review referral practices

Physicians must review their contracts and professional arrangements immediately to make sure they comply with the new Stark self-referral rules, experts tell Massachusetts Medical Law Report.

The Stark law prohibits physicians from referring Medicare patients to hospitals or other entities in which they have a financial relationship, unless the arrangement fits into one of a number of specific exceptions.
“This is a unique law and it’s very important that my clients know that these changes create new law,” said William Mandell, a Boston health care attorney who practices with Pierce & Mandell.

The new Stark III regulations went into effect on Dec. 4.

The most controversial provision says that a physician “stands in the shoes” of his or her group practice for the purpose of determining whether Stark covers the doctor’s relationship with another entity.

After the new regs were released by the Centers for Medicare and Medicaid Services, the agency realized that the provision could wreak havoc on certain academic medical centers and non-profit health systems that subsidize group or family practices. CMS therefore decided to delay the provision only as it applies to those institutions for one year, until Dec. 4, 2008.

Unlike other regs, such as those for the anti-kickback statute, the Stark regs are not simply agency guidance – they have the force of law.

Reading between the lines of the new regs, CMS has signaled that more enforcement is likely and physicians and health care providers should be prepared, attorneys said.

One indication is that CMS plans to send letters to one out of every five hospitals in the country, starting with 500 hospitals, requiring them to report within 45 days the names and provider numbers of all physicians with whom they have a financial relationship.

“Any hospital will be fined $10,000 every day it does not meet the deadline. Even a small community hospital is best advised to start doing inventory now if it hasn’t already. All the more reason to get your ducks in a row now,” said Mandell.

Michael Blau, a Boston health care attorney with Foley & Lardner, predicts that Stark violations will be incorporated into more whistleblower lawsuits.

“If a referral violates Stark, then the designated health services entity is not supposed to bill for it. If they do bill for it, it’s a false claim and the whistleblower can sue both the entity and the physician group,” he said.

Here’s a look at the key changes included in the Stark phase III regs:

• A physician “stands in the shoes” of the group practice.

The most significant provision in the new regs states that a physician “stands in the shoes” of his or her group practice for the purpose of evaluating whether Stark covers a relationship between the group practice and an entity, such as a hospital.

In the past, many relationships between a group practice and a hospital fell under the “indirect compensation” exception – which carves out an exception for certain relationships that are not directly between an individual doctor and a hospital.

Typical examples of this type of relationship would be where a medical group leases office space from a hospital, owns a piece of medical equipment leased to the hospital, or contracts to head a department of the hospital.

Under the new “stand in the shoes” rule, each transaction between a group practice and a hospital must be viewed as a direct relationship between each of the individual doctors in the group and the hospital.

“They’re basically taking away the indirect compensation exception,” said Michael Manthei, a Boston attorney with the Holland & Knight health care team.

Now, these arrangements must be scrutinized to make sure they meet each of the requirements of one of the enumerated “direct compensation” exceptions, such as the office lease exception, rental equipment exception or personal services exception.

“Stark is a zero-tolerance law, so even an inadvertent technical violation, such as a lease that is not at fair market value or not in writing, will result in [requiring] Medicare reimbursement [for the fees that were billed in violation] or worse,” said Mandell.

Contracts that don’t currently fall within the new rules are grandfathered until the end of the contract term.

An unintended consequence of the “stand in the shoes” rule is that it would be a “disaster” for teaching hospitals and other non-profit entities which often subsidize physician or faculty medical groups, because these relationships would not be able to fit into one of the direct compensation exceptions, said Blau.

“There is no clear and easy exception that would allow a community hospital or an academic medical center to flow a subsidy to a tax-exempt affiliated medical or faculty practice under this rule,” he added.

After health law attorneys voiced these concerns, CMS decided to delay this provision’s effective date for one year, until Dec. 4, 2008, with respect to these entities.

• Group practice must contract directly with independent contractor physicians.

A group practice that uses an independent contractor physician must now contract directly with the physician in order to bill for his services as a “physician in the group practice.”

This eliminates group-to-group contracting as well as contracting through a staffing company.

The rule is troubling to some attorneys in Massachusetts due to the state’s strict independent contractor law, which requires that a person engaged in the primary business of the company be classified as an employee.

“It’s virtually impossible to say that a physician is not engaged in the primary business [of a medical practice] in order to meet the test to classify a physician as an independent contractor, so you have to consider whether you want a physician to be an employee, which has a lot of business implications,” said Carol Phillips, a health care attorney in Lexington.

• Revenue from “incident to” services can be included in physician’s bonus.

Under the new rules, “incident to” services – which are services performed as an extension of the designated health services personally performed by a physician – can be included in a productivity bonus correlated to the physician who ordered the test, even if the test was administered by a non-physician in the practice, such as a nurse or therapist.

This is a much more liberal rule and will be important to group practices that do a lot of incident-to billing, said Mandell.

The new rules clarify that “incident to” services do not include diagnostic tests (such as X-rays that have their own billing category), but do include the use of supplies, such as drugs.

• Recruitment rules are more flexible.

Recruitment and retention of physicians will be slightly more flexible under the new rules.

For example, CMS clarified that new physician recruits who have not yet established a practice and can qualify for a recruitment subsidy include physicians employed full-time for at least two years at certain agencies such as a federal or state prison, the U.S. Department of Defense or Veteran Affairs, or the Indian Health Service.

This new list calls into question other categories that attorneys had argued qualified as “new recruits,” namely doctors who are employees of HMOs or hospitals, said Blau.

Attorneys and hospitals now may have to ask for an advisory opinion for new recruits that fall outside the specified category, he said.

CMS also clarified that under the rule that a physician must relocate at least 25 miles, the 25 miles can include mileage inside the hospital’s service area.

• Safe harbor for hourly rate is eliminated.

The safe harbor has been eliminated with respect to what is considered a fair market hourly rate for service agreements, such as a physician hired as an independent contractor.

In the previous set of regs, CMS created a safe harbor for the hourly rate on service agreements based on certain compensation benchmarks.

But as a result of much criticism and a lawsuit against CMS over the safe harbor, it was eliminated from the new regs.

“A lot of specialties were concerned the safe harbor put an economic drag on medical directorships and other fees,” Mandell said.

Determining fair market value will now be left to consultants and financial gurus, as it was before the safe harbor, he added.

“Now you can use any benchmarks for what is a fair market value in your marketplace. It’s a better rule,” Blau said.

• Six-month grace period for expired contracts.

Another provision gives health care providers a six-month grace period to renew and renegotiate contracts for personal service arrangements, such as a contract between a medical director and a hospital, or a part-time physician and a group practice where the physician is ordering and referring Stark-covered services.

In the past, “if a contract for personal services expired for even one day, out of inadvertence or inability to agree, but the relationship continued, you were in technical violation of Stark,” said Mandell.

The six-month rule already applies to space and equipment lease contracts.

Questions or comments should be directed to the editor at: reni.gertner@lawyersweekly.com