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STARK II PROPOSED REGULATIONS:

Rule Offers Additional Guidance While Regulators Seek More Input From Health Care Community

By: Andrew B. Wachler and Phyllis A. Avery

On January 9, 1998, the Health Care Financing Administration ("HCFA") finally issued proposed regulations implementing the Stark II amendments to the ban on physician self-referral. 63 Fed. Reg. 1659 (1998). What these regulations and the accompanying preamble make obvious is the extreme difficulty the regulators face in applying the complex and often convoluted self-referral prohibitions to actual health care relationships.

The Stark II proposed regulations will have a broad impact on those individuals and entities which must contend with the self-referral prohibition. However, the regulations are only proposed regulations and do not have the force and effect of law. Indeed, as was the case with the publication of the Stark I final rule, some of the most noteworthy aspects of the publication are drawn from the discussion in the preamble rather than the actual proposed changes to the text of the regulations. This article reviews the proposed changes to the regulations and includes references to many of the interpretations of the regulations found in the preamble.

The Stark II regulations include a comment period. Throughout the preamble to the rule, HCFA has specifically solicited comments on a number of topics. Affected parties may also be interested in submitting comments on other aspects of the regulations. Any comments must be received by no later than March 10, 1998. Interested individuals must submit one original and three copies of any comments by (1) mail to Health Care Financing Administration, Department of Health and Human Services, Attention HCFA-1809-P, P.O. Box 26688, Baltimore, MD 21207, or (2) hand delivery to Room 309-G, Hubert H. Humphrey Building, 200 Independence Ave, SW, Washington, DC 20201 or Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244. Comments may also be submitted electronically to HCFA's e-mail address at hcfa1809p.hcfa.gov. The preamble to the proposed rule reflects that any comments received in connection with the proposed rule, as well as those received in response to the Stark I final rule, will be considered in connection with publication of the Stark II final rule. Notably, although the proposed rule does not include a comment section per se, it is clear throughout the preamble that comments received since the publication of the Stark I final rule were on the regulators' minds as they drafted the proposed regulations.

BACKGROUND.

The self-referral prohibition was originally enacted in 1989 as a result of Congressional concern that health care decision making can be unduly influenced by profit motives. The self-referral ban, now known as "Stark I", was intended to address the suspicion, supported by a number of studies, that physicians who have a financial interest in clinical laboratories order excessive and unnecessary testing in order to reap a profit from their interest in the laboratories. Effective January 1, 1992, Stark I prohibited physicians from referring Medicare beneficiaries for clinical laboratory services to entities in which they or members of their immediate family had a financial interest. It also prohibited entities from making a claim for payment under the Medicare program for clinical laboratory services furnished pursuant to a prohibited referral. 42 U.S.C. 1395nn.

In 1993, Congress amended the Stark statute and expanded the self-referral ban to include numerous additional health care services deemed to be particularly susceptible to overutilization driven by profit motives. The amendments, now known as "Stark II," also applied aspects of the ban to Medicaid beneficiaries.

Specifically, the Stark II amendments prohibit Medicaid payments to a State for designated health services furnished pursuant to a referral that would result in the denial of payment under Medicare if Medicare provided for coverage of the service to the same extent and under the same terms and conditions as under the State plan. 42 U.S.C. 1396b.

As a result of the Stark II amendments, effective January 1, 1995, the ban covers physician referrals of Medicare or Medicaid beneficiaries to entities in which they or members of their immediate family have a financial interest for designated health services including: clinical laboratory services; physical therapy services; occupational therapy services; radiology services, including MRI, CAT scans, and ultrasound services; radiation therapy services and supplies; durable medical equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospitalization services. The ban also encompasses entities which make a claim for payment under the Medicare or Medicaid programs for the provision of a designated health service furnished pursuant to a prohibited referral. 42 U.S.C. 1395nn.

In August 1995, HCFA published the Stark I final regulations. 60 Fed. Reg. 41923 (1995). While the Stark I final rule applied directly only to referrals for clinical laboratory services, it included those provisions in Stark II which applied retroactively for clinical laboratory services as of January 1, 1992. As a result, the regulators expected that many of the interpretations in the Stark I final rule would apply to the other designated health services as well. 60 Fed. Reg. at 41915-16. Not surprisingly, with notable exceptions, the Stark II proposed rule reflects that many of the interpretations in the Stark I final rule do indeed apply to the remaining designated health services. However, since Stark I did not include referrals of Medicaid beneficiaries, the Stark I final rule does not address issues specific to Medicaid. As a result, the Stark II proposed rule addresses, for the first time, the application of the Stark referral ban to Medicaid.

Thus, when examining the Stark law and regulations, it is necessary to consider both the Stark I final rule and the Stark II proposed rule in conjunction with each other. It should also be kept in mind that the Stark II rule is only a proposed rule and does not have the force and effect of law, while the Stark I rule is final and does have this force and effect.

ADDITIONS AND MODIFICATIONS TO THE DEFINITIONS SECTION.

The Stark I final rule set forth numerous definitions necessary for a better understanding of the law. For example, the Stark I final rule adopted definitions of key terms including: referral, entity, financial relationships, immediate family member, clinical laboratory services, and a number of terms related to qualifying for the varying exceptions to the ban. The Stark II proposed rule revisits and amends some of these definitions, while adding new definitions for each of the designated health services. 63 Fed. Reg. at 1720-23. Some of these changes are discussed immediately below, while other changes are discussed in connection with the exceptions the changes impact.

Designated Health Services.

The Stark II proposed rule adds definitions for each of the designated health services. The preamble recognizes that the list of designated health services was compiled by Congress based upon perceived abuses or potential abuses with regard to specific types of services. As a result, the designated health services do not exactly track service categories as they are defined under either Medicare or Medicaid. 63 Fed. Reg. 1659, 1673. Many of the definitions include cross references to the Medicare statute, other regulations, and the Medicare Coverage Issues Manual. A few notable examples of these definitions are discussed below.

Inpatient and Outpatient Hospital Services. The proposed definitions of inpatient and outpatient hospital services include services provided in a psychiatric hospital and a rural primary care hospital. The proposed rule also defines inpatient and outpatient hospital services to include services that a hospital provides for its patients that are furnished by the hospital or by others under arrangements with the hospital, for which the hospital bills. The definitions specifically exclude services of other physicians, physician assistants, nurse practitioners, clinical nurse specialists, certified nurse midwives, and certified registered nurse anesthetists and qualified psychologists who bill independently.

Home Health Services. The definition of home health services included in the proposed regulation simply states that they are the services described in section 1861(m) of the Medicare Act and in 42 CFR 409 subpart E. However, there is a lengthy discussion of what constitutes home health services in the preamble. Specifically, it notes that since home health services may only be provided by a home health agency it will not consider home health services as provided by any other entity. One impact of this determination is that if a hospital owns a home health agency, the exception for hospital ownership would not apply to the home health services. 63 Fed. Reg. at 1679. Of further note, as discussed below, the Stark II proposed regulations seek to reconcile the Stark self-referral prohibitions with the certification requirements imposed on home health services under 42 CFR 424.22(d).

Radiology Services. The proposed regulation defines radiology services to include any diagnostic test or therapeutic procedure using x-rays, ultrasound or other imaging services, CAT scans and MRIs, but specifically excludes any invasive radiology procedure in which the imaging modality is used to guide a needle, probe, or catheter accurately. The basis for the exclusion of invasive radiology services from the definition is the theory that these radiology service are merely incidental or secondary to another procedure that the physician has ordered. The preamble takes the view that it is unlikely that a physician would routinely refer patients for procedures such as angioplasty in order to profit from unnecessary radiology services. It then reflects that HCFA is specifically soliciting comments on other types of services that would qualify as a designated health service, but are actually incidental to other procedures. 63 Fed. Reg. at 1676. Presumably, HCFA could be convinced that other "incidental" services should also be exempted from the definitions of designated health services.

Prosthetic Device and Supplies. Notwithstanding the exclusion of invasive radiology procedures as incidental services, the Stark II proposed definition of prosthetic device and supplies would include intraocular lenses inserted after cataract surgery. In the preamble, it discusses the requests that were made to define prosthetic devices to exclude intraocular lenses since they are only a small component of a central procedure. The rational behind the request was that physicians would not unnecessarily subject patients to a surgical procedure just to boost profits on intraocular lenses or other implantable devices. The preamble explains that such requests were rejected based upon the feeling that it was not uncommon for physicians to receive compensation from companies that manufacture or supply these devices, sometimes in the form of consulting fees, in exchange for the physician's agreement to use that company's device exclusively, or physician's might also have an ownership interest in a supplier, thus realizing a profit every time the device is used. Although the regulators recognized that this might not lead to overutilization, they determined that there could be abuse in that the cost of services could be driven up or the device chosen might not be in the best interest of the patient. 63 Fed. Reg. at 1678-79.

Entity.

The term entity was defined in the Stark I final rule as a sole proprietorship, trust, corporation, partnership, foundation, not-for-profit corporation, or unincorporated association. The preamble to the Stark I final rule explained that the definition of entity was meant to include all possible organizations and associations. 60 Fed. Reg. at 41930. The proposed rule would amend the definition of entity to also include a "physician's sole practice or a practice of multiple physicians that provides for the furnishing of designated health services." 63 Fed. Reg. at 1721. As discussed further below, this change was made to allow physicians to qualify as one legal entity under the group practice definition even if the group practice entity is composed of owners who are actually individual professional corporations or physicians who are individually incorporated. 63 Fed. Reg. at 1687.

Interestingly, although the regulations clearly define entities to include non-profit corporations, the preamble to the proposed rule states that since members of a non-profit organization exempt under section 501(c)(3) or (4) of the Internal Revenue Code do not have the pecuniary incentive that for-profit investors do, HCFA will not regard being a member of these kinds of non-profit corporations as an ownership or investment interest analogous to being a shareholder in a for-profit corporation. Any remuneration the physician (family member) receives from such a non-profit corporation, however, would instead be considered a compensation arrangement. 63 Fed. Reg. at 1707.

Financial Relationship.

A financial relationship was defined in the Stark I final rule as a direct or indirect relationship between a physician (family member) and an entity in which the physician (family member) has an ownership or investment interest or with which the physician has a compensation arrangement. The Stark I final rule specified that ownership or investment interests may exist through equity, debt, or other means. The definition also included interests in an entity that holds an ownership or investment interest in any entity providing laboratory services.

The Stark II proposed rule would make two changes to clarify the definition further. The first change involves adding that an ownership or investment interest includes options and nonvested interests. 63 Fed. Reg. at 1721. The preamble reflects that these types of interests are inchoate or partial ownership interests that qualify as ownership for purposes of Stark. This reflects a concern that there is an incentive to refer to an entity regardless of whether the ownership interest is a present or future one. 63 Fed. Reg. at 1708.

The second change to the definition of financial relationship addresses indirect ownership or investment interests. The change reflects that it does not matter how many levels the indirect interest is removed from the direct interest. 63 Fed. Reg. at 1721. Thus, as noted in the preamble, a physician has a financial relationship with an entity for purposes of the Stark prohibition if the physician has an interest in an entity that has an interest in another entity that in turn holds an ownership interest in an entity providing designated health services. This holds true regardless of how many levels of intervening entities exist. The rationale for the limitless layering results from an effort to prevent physicians from evading the prohibition by use of holding companies. 63 Fed. Reg. at 1686.

In addition, the preamble discusses ownership through equity or debt. It explains that ownership through equity refers to a direct ownership interest that does not involve debt. Examples of such interest could be in the form of stock or investment in a partnership. 63 Fed. Reg. at 1707. The preamble also sheds light on HCFA's interpretation of ownership through debt. There is ownership through debt anytime a physician (family member) has lent money or given other valuable consideration to an entity and the debt is secured in whole or in part by the entity or by the entity's assets or property. By way of example, debt may take the form of a note, mortgage or bond. Interestingly, the preamble reflects that ownership may exist through debt in other debtor-creditor relationships that have some indicia of control such as a creditor's participation in revenue or profits, subordinated payment terms, low or no interest terms, or ownership of convertible debentures. The preamble specifically states, however, that debt with no indicia of ownership such as an unsecured or nonconvertible loan is not an ownership interest. It notes such a loan would probably qualify as a compensation arrangement. Id.

Referral.

The Stark I final rule defined referral, with certain exceptions, as either (1) a request by a physician for, or the ordering of, any item or service for which payment may be made under Medicare Part B (including the request for a consultation with another physician and any test or procedure ordered by, performed by, or supervised by that other physician); or (2) a request by a physician that includes the provision of laboratory services or the establishment of a plan of care that includes laboratory services. The Stark II proposed rule would amend the definition to include comparable Medicaid services. It would also add certifying or recertifying the need for designated health services to the definition in order to reconcile Stark with the home health agency regulations as discussed further below. 63 Fed. Reg. at 1722-23. The proposed rule would replace the reference to laboratory services with designated health services to reflect the changes made by Stark II.

The preamble discusses the fact that the statutory language in subpart (1) above is broader than that in subpart (2) since subpart (1) does not limit itself to the request or ordering of designated health services. It notes that the distinction is not relevant in terms of the prohibition itself since only the referral of designated health services is prohibited. It does recognize that the term referral appears in other provisions of the Stark law, such as in a number of the exceptions based on compensation arrangements. The preamble reflects that HCFA is taking the position that the definition of referrals relates only to referrals of designated health services. Thus, compensation arrangements may fall within an exception if they are not related to the volume or value of referrals of designated health services provided to Medicare or Medicaid patients. 63 Fed. Reg. at 1692.

As noted, the definition of referral in the Stark I final rule includes an exception for requests by pathologists for diagnostic laboratory tests and pathological examination services as long as the request results from a consultation initiated by another physician and the test or service is furnished by or under the supervision of the pathologist. The Stark II proposed rule would add the two additional exceptions included in the Stark II law (requests by radiologists for diagnostic radiology services and requests by radiation oncologists for radiation therapy). The preamble to the proposed rule also reflects that the supervision element discussed above does not require direct supervision, but only that level of supervision ordinarily required for payment and coverage. 63 Fed. Reg. at 1693.

Referring Physician.

The Stark I final rule defined a referring physician as a physician or a group practice who makes a referral. As a result, according to the preamble to the final rule, if one member of a group practice has a financial relationship with an entity which would prohibit that member's referral to the entity, no one in the group could refer to that entity. 60 Fed. Reg. at 41938. The preamble explains that HCFA has reconsidered this issue and determined that there is no clear reason to extend the effects of one physician's relationships on all other members of the group. 63 Fed. Reg. at 1709. As a result, the Stark II proposed rule would remove the reference to group practice in the definition of referring physician. 63 Fed. Reg. at 1723. The preamble does note that in any instance in which a group member is in a position to exert influence or control over the referrals of other group physicians, the prohibition could still apply. For example, the prohibition might apply as a result of a determination that such referrals represent a circumvention scheme. It could also apply if a group practice owner who conditions payment to employees on referrals to the owner's laboratory is considered to have a compensation arrangement that triggers the prohibition. Id.

Fair Market Value.

The term fair market value was defined in the Stark I final rule as the value in arm's length transactions, consistent with the general market value. The proposed rule adds to the definition of fair market value by defining "general market value" as the price that an asset or service would bring as a result of bona fide bargaining between well-informed parties. It also adds that fair market price is usually the price at which bona fide sales or service agreements have been consummated for assets of like type, quality and quantity or for services of comparable terms. This definition was drawn from the definition of fair market value in the regulations governing reasonable cost reimbursement related to end stage renal disease services. 63 Fed. Reg. at 1686.

EXCEPTIONS APPLICABLE TO ANY FINANCIAL RELATIONSHIP.

There are four types of exceptions that apply to exempt any type of financial relationship (be it an ownership or investment interest or a compensation arrangement). These four exemptions from the ban include the physicians' services exception, the in-office ancillary services exception, the prepaid plan exception, and the exception for services furnished in an ambulatory surgical center, end stage renal disease facility, or by a hospice.

Physicians' Services Exception.

The physicians' services exception exempts physician services that are furnished personally by (or under the personal supervision of ) another physician in the same group practice as the referring physician. 42 CFR 411.355(a). Although there are no proposed changes to the text of this exception which is drawn directly from the language in the statute, the preamble to the Stark II proposed rule sheds light on the personal supervision requirement. Since physician services encompass professional services performed by physicians (including diagnosis, therapy, surgery, consultation, and home, office and institutional calls), the reference to physician services furnished under the personal supervision of another physician in the same group practice is interpreted to mean that the service is furnished by a nongroup member physician under the supervision of a physician who is a member of the group practice. The preamble interprets personal supervision to mean that the group practice physician is legally responsible for monitoring the results of any test or other designated health service and is available to assist the physician who is furnishing the service, even though the group practice physician need not be present while the service is being furnished. 63 Fed. Reg. at 1695. Since, as discussed below, independent contractor physicians no longer qualify as group members, this exception may exempt physician services performed by independent contractors as long as they are performed under the personal supervision of a group member physician.

In-Office Ancillary Services Exception.

The in-office ancillary services exception exempts services personally provided by the referring physician, personally provided by a physician member of the same group practice as the referring physician, or personally by individuals who are directly supervised by the referring physician or another group practice physician. The in-office ancillary services exception also includes a location requirement and a billing requirement.

Direct Supervision Requirement Relaxed. As noted, the in-office ancillary services exception allows for the exemption of services performed by nonphysicians as long as these services are directly supervised by the referring physician or another group practice physician. The term direct supervision was defined in the Stark I final rule as supervision by a physician who is present in the office suite and immediately available to provide assistance and direction throughout the time services are being performed. The proposed regulation clarifies that "present in the office suite" means that the physician must be actually physically present in the office suite. However, it also provides that a physician would still be considered "present" during brief and unexpected absences as well as during routine absences of short duration, such as a lunch break. The absences are acceptable as long as they occur during time periods in which the physician is otherwise scheduled and is ordinarily expected to be present. The regulation states that the physician must still comply with any other Medicare requirements related to supervision. 63 Fed. Reg. at 1720.

Such other requirements would include the supervision requirements mandated under the physician fee schedule regulations published October 31, 1997. 62 Fed. Reg. 59059 (1997). These regulations provide, with limited exceptions, that all diagnostic x-rays and other diagnostic tests covered under section 1861(s)(3) of the Medicare Act and payable under the physician fee schedule must be furnished under the appropriate level of supervision by a physician. 42 CFR 410.32(b). The fee schedule rule sets forth three levels of supervision: general, direct and personal. General supervision under the fee schedule regulations means that the procedure is furnished under the physician's overall direction and control, but the physician's presence is not required during the performance of the procedure. The fee schedule regulation defines direct supervision as meaning the physician must be present in the office suite and immediately available to furnish assistance and direction throughout the performance of the procedure. It does not mean the physician must be present in the room when the procedure is performed. Finally, the fee schedule regulations define personal supervision as meaning a physician must be in attendance in the room during the performance of the procedure. The preamble to the fee schedule final rule specifies that other statutory provisions such as Stark are not affected by this rule and continue to be required if applicable.

As a result for those designated health services which encompass diagnostic tests under section 1861(s)(3) of the Medicare Act, the physician will have to determine the most stringent level of supervision required by the Stark law and the fee schedule and comply the most stringent requirement. For example, compliance with the in-office ancillary services exception may only require direct supervision as defined in the Stark regulations, while the fee schedule may require personal supervision as defined in the fee schedule regulations.

Importantly, it must be recognized that the definitions of supervision are different in the different regulations. Unlike the proposed Stark definition of direct supervision, the definition of direct supervision in the fee schedule regulations does not include brief, unexpected or routine absences of short duration. Further, personal supervision as defined in connection with the discussion of the physicians' services exception under Stark II is very different than personal supervision under the fee schedule rule. The preamble to the Stark II proposed rule defines personal supervision to mean that the group practice physician is legally responsible for monitoring the results of any test or other designated health service and is available to assist the physician who is furnishing the service, even though the group practice physician need not be present while the service is being furnished. In sharp contrast, as noted above, the fee schedule rule defines personal supervision as meaning the physician must be in attendance in the room during the performance of the procedure. The distinctions between the two sets of regulations are particularly important for radiology services, which are specifically defined in the Stark proposed regulations as services covered under section 1861(s)(3) of the Medicare Act. It is this section which is also governed by the fee schedule supervision rules.

Location. The location requirement in the in-office ancillary services exception mandates that the designated health services must be furnished (1) in a building in which the referring physician or another group practice member furnishes services unrelated to designated health services; (2) in a building that is used by the group for the provision of some or all of it's clinical laboratory services; or (3) in a building that is used by the group for the centralized provision of the group's designated health services. The Stark II proposed rule adds the word "same" before building under the first option and defines "same building" in the regulation to mean the same physical structure, with one address, and not multiple structures connected by tunnels or walkways. 63 Fed. Reg. at 1723.

The preamble addresses the centralized location requirement. It specifies that a location can meet this requirement if it services more than one of a group's offices, and if it furnishes one or any combination of designated health services. The preamble also reflects HCFA's position that a group can have more than one centralized location. Further, the group would have to have at least one physician member present at the centralized location to perform or directly supervise the performance of the designated health services, but that physician would not be required to perform physician services unrelated to designated health services at the centralized location. 63 Fed. Reg. at 1696.

The preamble also discusses examples of where it considers a service is actually furnished. It states that it is HCFA's view that a service is furnished wherever a procedure is actually performed on a patient or at the location in which the patient receives and begins using an item. The preamble provides the following examples. An MRI provided in a physician's office has been furnished in the office. A patient who is fitted for and receives a brace in the physician's office has been furnished with the brace in the office. Services given to a patient to be used at home or outside the physician's office have not been furnished in the physician's office and thus would not qualify for the in-office ancillary services exception. 63 Fed. Reg. at 1695.

Billing. In order to qualify for the in-office ancillary services exception, the services must be billed by (1) the physician performing or supervising the service; (2) the group practice of which the performing or supervising physician is a member; or (3) an entity that is wholly owned by the physician or the physician's group practice. As discussed in connection with the definition of group practice, the proposed rule would amend the second billing option to clarify that the billing must be done under a billing number assigned to the group.

The preamble to the Stark II final rule addresses billing by a wholly owned entity. It reflects that the service does not have to be billed under the group number if the wholly owned entity can bill under its own provider number. The preamble also reflects the interpretation that a wholly owned entity can include an entity that provides billing or administrative services to a physician or group practice. It further states that the wholly owned entity can also be a provider of designated health services, such as a laboratory or radiology facility, that bills for its own services. The preamble clarifies that the wholly owned entity must be just that, it cannot be a joint venture owned with other individuals or entities. 63 Fed. Reg. at 1696.

Crutches Receive Special Mention. In a pointed example of the difficulty faced by the regulators in implementing the Stark prohibitions while recognizing the realities of medical practice, the Stark II proposed rule would add a specific category to the in-office ancillary services exception for crutches (which would not otherwise qualify for the exception since they are durable medical equipment). In order for the furnishing of crutches to qualify for the exception, the physician may not realize a direct or indirect profit for furnishing the crutches to a patient. 63 Fed. Reg. at 1723. The preamble recognizes that crutches are often supplied by a physician in the office to a patient whose broken leg has just been set. The regulators recognize the inconvenience that would be caused by requiring the patient to obtain the crutches elsewhere. In order to address this issue while avoiding potential abuse, HCFA adopted the no profit concept. 63 Fed. Reg. at 1711. The regulations reflect a proposed change for this one service on this basis. Question whether the same reasoning could justify excepting most any service from which the referring physician receives no profit.

Group Practice Definition.

Both the physicians' services exception and the in-office ancillary services exception refer to group practices and to members of the group practice. In order for any group of physicians to take advantage of these exceptions, the group must qualify as a group practice under the Stark definition. The proposed rule would make a number of changes to the group practice definition. 63 Fed. Reg. at 1721.

Two or More Physicians. A group practice is defined in the statute as a group of two or more physicians legally organized as a partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan, or similar association. The Stark II proposed rule would amend this definition to include that a group can consist of physicians who are individually incorporated as professional corporations. 63 Fed. Reg. at 1721. As noted above, this change was made to allow physicians to qualify as one legal entity under the group practice definition even if the group practice entity is composed of owners who are actually individual professional corporations or physicians who are individually incorporated. 63 Fed. Reg. at 1687. The regulators recognized that this type of configuration is common in group practice settings as a result of tax and pension advantages. The regulators recognized that such a structure can constitute a true group practice without being a conglomeration of multiple separate groups simply trying to take advantage of the exceptions available for group practice members. Id.

Nonetheless, the definition of a group practice may still exclude practices in which one physician holds 100% of the ownership interests but employs a number of physicians. While the employee physicians may qualify for the bona fide employee exception and the owner could qualify for the in-office ancillary services exception for services he/she personally performs or supervises, the physician owner may still be prohibited from referring Medicare or Medicaid patients for designated health services to his/her employees if he/she cannot meet an ownership exception. Single owner practices should examine carefully whether they need to qualify as a group practice under Stark and whether, accordingly, they should change their ownership structure to comply with the group practice definition. The group practice definition does not impose any particular requirements regarding the division of or percentage of ownership interests as long as there are two or more physicians legally organized.

Full Range of Services and Substantially All Tests. In order to qualify as a group practice, each physician who is a member of the group must furnish substantially the full range of patient care services that the physician routinely furnishes through the joint use of shared office space, facilities, equipment and personnel. The group practice definition also requires that substantially all of the patient care services of physician group members are furnished through the group, billed in the name of the group, and amounts received treated as receipts of the group. The Stark I final rule reflects that substantially all means at least 75% of the total patient care services of the group practice members. The Stark II proposed rule would amend the definitions of key terms used in both these group practice tests as described below.

Patient Care Services Redefined. The Stark I final rule defined patient care services as any tasks performed by a group member that address the medical needs of specific patients, regardless of whether they involve direct patient encounters. According to the Stark I final rule, patient care services can include the services of physicians who do not directly treat patients, time spent by a physician consulting with other physicians, or time spent reviewing laboratory tests. 42 CFR 411.351. The Stark II proposed rule would broaden this definition to reflect that patient care tasks include tasks that address the medical needs of patients in general or that generally benefit the practice. The Stark II proposed rule would add the following examples of patient care services: time spent training staff members, arranging for equipment, or performing administrative or management tasks. 63 Fed. Reg. at 1722. The full range of services and substantially all provisions were designed to ensure that the physician group member is actually practicing medicine for the group as he/she would normally and has not simply joined the group in name only to qualify for the exception. This proposed change results from the recognition that physician members can legitimately furnish other kinds of services to the group beyond services benefiting only specific patients. 63 Fed. Reg. at 1688.

Of note, the preamble reflects that certain types of tasks fall outside the definition of patient care services and thus would not be counted in a determination of the physician's total time spent on patient care services. For example, physician time spent teaching at a medical school or performing outside research do not qualify as patient care services. The preamble states that a physician who spends 3 days a week furnishing patient care services as part of the group practice and 2 days a week doing research outside the practice is providing 100 percent of his/her patient care services through the group. Thus, this type of work does not count against the physician for calculation of the substantially all test. Id.

Group Member Redefined. The Stark I final rule defined member of the group to include physician partners and full-time and part-time physician contractors and employees during the time they furnish services to patients of the group practice that are furnished through the group and are billed in the name of the group. 42 CFR 411.351. The Stark II proposed rule would amend this definition to clarify that it includes other types of ownership interests besides partnerships. 63 Fed. Reg. at 1721. The preamble reflects that the proposed rule would also consider as members, physicians who belong to individual professional corporations that in turn own the group practice. 63 Fed. Reg. at 1687, 89.

The proposed rule would also exclude physician contractors from the definition of group members. 63 Fed. Reg. at 1721. The rationale behind excluding physician contractors from the definition of group members reflects a concern that many group practices would have difficulty meeting the substantially all requirement if the groups had to include specialist contractors whom they utilize on a part time basis. 63 Fed. Reg. at 1687, 1689.

In addition, the proposed rule would drop the requirement that physicians are members only during the time they furnish services to patients of the group practice that are furnished through the group and are billed in the name of the group. 63 Fed. Reg. at 1721. Rather, the preamble explains that physicians are members during any time they furnish patient care services to the group, and are not limited to times in which the services are furnished through the group and billed in the name of the group. This reflects the proposed change in the definition of patient care services to include time spent for which the physician cannot directly bill, such as during the performance of administrative functions. 63 Fed. Reg. at 1689.

Since independent contractors would no longer qualify as group members, they cannot perform physicians' services under the physicians' services exception without the personal supervision of a group member. They also cannot personally perform or directly supervise services under the in-office ancillary services exception. The preamble does note that independent contractors may qualify for the personal services exception or the new fair market value exception. Id.

Multiple Group Numbers Acceptable. As noted, under the Stark I final rule, the substantially all test requires that services must be billed in the name of the group. The Stark II proposed rule would amend this requirement to utilize the language in Stark II that requires billings to be under a billing number assigned to the group. The preamble to the proposed rule clarifies that a group may properly utilize more than one billing number and still qualify as a group practice under the definition. It is believed this will accommodate groups which have multiple numbers because they have many locations or operate in more than one State. 63 Fed. Reg. at 1689. The preamble also states that it is appropriate for another entity, such as a management services organization or billing agent (which is not wholly owned) to bill for the group under a number assigned to the group. Such separate entity cannot, however, bill under its own name and number even if it ultimately turns receipts over to the group. Id.

Distribution of Overhead and Expenses. In order to qualify as a group practice, the Stark I final rule requires that practice expenses and income are distributed in accordance with methods previously determined. The Stark II proposed rule would clarify this requirement by changing the language to reflect that overhead expenses and practice income must be distributed in accordance with methods that are determined prior to the time period during which the group has earned the income or incurred the costs. 63 Fed. Reg. at 1721. The purpose of such a rule is to avoid allowing groups to make ad hoc decisions just prior to distribution. The condition imposes a requirement that groups have an established plan for making their distribution. 63 Fed. Reg. at 1690.

The proposed rule would also add an additional component to the group practice definition that would require that overhead expenses and practice income be distributed according to methods that indicate that the practice is a unified business. The methods must reflect centralized decision making, pooling of expenses and revenues, and a distribution system that does not treat each satellite office as if it were a separate enterprise. 63 Fed. Reg. at 1721.

Compensation Payable to Group Members. Stark II imposed the requirement that physician members of group practices cannot directly or indirectly receive compensation based upon the volume or value of referrals. The statute also created a special rule that would allow a physician in a group practice to be paid a share of overall profits of the group, or a productivity bonus based on services personally performed or services incident to such personally performed services, as long as the share or bonus was not determined in any manner which is directly related to the volume or value of referrals by the physician. 42 U.S.C. 1395nn(h)(4). This requirement, which was absent from the Stark I final rule, is incorporated in the Stark II proposed rule. 63 Fed. Reg. at 1721.

Based upon the proposed rule's definition of referral (as described above), the preamble reflects that a group practice cannot compensate its members based on the volume or value of referrals for designated health services for Medicare or Medicaid patients, but could do so for other services or other patients. The preamble does state that the most straightforward way to demonstrate that the group meets the exception would be to avoid a link between physician compensation and the volume or value of any referrals for any patients. However, groups may compensate physicians either through profit sharing or productivity bonuses based on the volume or value of referrals of services not constituting designated health services or not involving Medicare or Medicaid patients. Practices wishing to compensate based on non Medicare or Medicaid patient referrals must separately account for revenues and distributions related to referrals for designated health services for Medicare and Medicaid patients. 63 Fed. Reg. at 1690-91.

Group Members Can Receive Share of Over-all Profits. Physicians members can be paid a share of the over-all profits of the group as long as the share is not based directly on the volume or value of the physician's own referrals of Medicare/Medicaid patients for designated health services. A physician can receive a portion of the group's overall pooled revenues from services which constitute a referral of a Medicare/Medicaid patient for a designated health service, as long as the portion is not determined in a manner that directly relates to who made the referrals. The preamble provides examples of the ways in which such profits can be shared appropriately: based on an even split, based on a physician's investment in the group, based on the number of hours the physician devotes to the group, or based on the difficulty of the physicians work. 63 Fed. Reg. at 1691.

The preamble reminds that self-referrals include designated health services personally performed or supervised by the ordering physician, and specifies that physicians should not receive extra, specific compensation from the pooled profits for performing these designated health services. Nor should the physician's compensation relate directly to the number of referrals of designated health services he/she has made to other group physicians. It is also noted that over-all profits of the group means all profits or revenues a group can distribute as a whole even if the group is located in different States or in different locations. The preamble states that any narrower pooling base, such as pooling based on subspecialty group or satellite locations, would more likely reflect that a physician is inappropriately receiving compensation for referrals of Medicare/Medicaid patients for designated health services. Id.

Members May Receive Productivity Bonuses. Productivity bonuses must be based on services that the physician member personally performs or that are incident to personally performed services. According to the preamble to the proposed rule, a productivity bonus cannot count the performance of designated health services provided to Medicare or Medicaid patients that the physician self-refers, i.e. orders. A productivity bonus may include compensation for designated health services provided to Medicare or Medicaid patients that the physician personally performs or that are incident to the services the physician directly supervises, as long as the services result from the referral of another physician. The regulators do not view such compensation as related to the volume or value of the physician's own referrals. Id. Groups must keep in mind that in order to provide compensation based upon incident to services, the incident to requirements must be met. Thus, not only must the physician directly supervise the service, the nonphysician providing the service must be an employee (including a leased employee) of the group.

Group Practice Attestation.

The Stark I final rule included a requirement that a physician group wishing to rely upon qualification as a group practice under the Stark laws must submit an attestation statement that it qualifies (or for new groups will qualify) as a group practice under Stark. The Stark I final rule requires that the attestation statement be signed by a group representative and must include a statement that the information furnished is true and accurate. The Stark II proposed rule sets forth in writing what many suspected. It proposes to change the attestation requirement to reflect that that attestation statement must be signed by an authorized representative of the group, must contain a statement that the information furnished is true and accurate to the best of the representative's knowledge and belief, and specifies that any person filing a false statement will be subject to applicable criminal and/or civil penalties. 63 Fed. Reg. at 1726.

Attestation statements must be submitted no later than 60 days after receipt of the attestation instructions from the group's carrier. The regulation does not indicate when carriers may be expected to send out attestation instructions. Health care attorneys should have a good understanding of the Stark self-referral ban and the regulations in order to advise clients who will have to demonstrate compliance through the submission of a group practice attestation.

Prepaid Plan Exception.

The Stark II proposed rule would not alter the text of the prepaid plan exception which exempts services provided by health maintenance organizations and competitive medical plans that have contracts with Medicare, certain prepaid organizations functioning under a demonstration project, and Federally qualified health maintenance organizations. However, the preamble to the proposed rule states HCFA's intent to interpret this exception broadly to include physicians, providers, or suppliers that contract with these prepaid plans for the provision of services to their enrollees. Indeed, HCFA interprets the exception to encompass physicians, providers or suppliers with whom the contracting physicians, providers or suppliers have subcontracted to provide services to the prepaid plan's enrollees. 63 Fed. Reg. at 1697.

However, the preamble indicates that when physician who contracts with, for example, a Federally qualified HMO refer fee-for-service patients to the HMO's laboratory this referral would not be covered by the prepaid plan exception. In order for the referral of the non-enrollees not to be prohibited, the compensation arrangement between the physician and the HMO would have to meet another exception such as the personal services exception. 63 Fed. Reg. at 1712.

The Stark II proposed regulation would also add a prepaid plan exception for services furnished to Medicaid enrollees analogous to that available for Medicare managed care plans. The exemption would cover services provided to enrollees of health maintenance organizations with a State contract, prepaid health plans with a State contract, or pursuant to a health insuring organizations contract. 63 Fed. Reg. at 1727. Of note, while the preamble to the proposed regulation also states that it proposes to include an exception for entities receiving payments on a prepaid captitation basis under Medicaid demonstration projects, the proposed regulation, 42 CFR 435(b), does not include demonstration projects. 63 Fed. Reg. 1697.

Composite Rate Exception.

The Stark I final rule created an exception for services furnished in an ambulatory surgical center (ASC), end stage renal disease facility (ESRD), or by a hospice provided the services were included within a composite rate. These services were excepted because they are furnished as part of a composite rate that cannot vary in response to utilization. The Stark II proposed rule expands this exception to allow the Secretary to except additional services furnished under other payment rates the Secretary determines provide no incentive for underutilization or overutilization. HCFA is soliciting comments on whether there are analogous composite rates under the Medicaid program similar to Medicare's ASC, ESRD and hospice rates. 63 Fed. Reg. at 1666.

OWNERSHIP OR INVESTMENT INTERESTS EXCEPTIONS.

There are additional exceptions that apply only to exempt ownership or investment interests. These include exceptions for publicly-traded securities and mutual funds, rural providers, and certain types of hospital ownership.

Publicly-traded Securities and Mutual Funds.

The exemption for publicly-traded securities exempts ownership or investment interests in a corporation that has stockholder equity exceeding $75 million at the end of the corporation's most recent fiscal year or on average during the previous 3 fiscal years. The Stark II proposed rule would amend this exemption to specify that "stockholder equity" is the difference in value between a corporation's total assets and total liabilities. 63 Fed. Reg. at 1724.

The exception for publicly-traded securities also exempts ownership or investment interests in a corporation that is either (1) listed on the New York Stock Exchange, the American Stock Exchange or specified other exchange, or (2) traded under an automated interdeal quotation system operated by the National Association of Securities Dealers. This exemption would not be changed by the Stark II proposal. In addition, the exception for mutual funds with total assets exceeding $75 million is also unchanged by the proposed rule.

Rural Provider Exception.

The Stark I final rule exempted laboratory services furnished by rural providers, defined as non-urban providers, provided certain conditions were met. The Stark I final rule required that substantially all of the tests (meaning no less than 75%) furnished by the rural provider must be furnished to residents of a rural area. It also required that the testing be performed on the premises of the rural laboratory. If the testing was performed off the premises of the rural laboratory, the laboratory performing the testing had to bill Medicare directly. The Stark II proposed rule would amend the final rule to reflect that the designated health services are exempt if furnished in a rural area by a rural provider. A rural provider would be defined as one who furnishes substantially all (not less than 75%) of the designated health services to rural residents. Since the exemption would require that all designated health services be furnished on the premises of the rural provider, the proposed rule would drop the requirement in the final rule that related to testing performed off the premises. 63 Fed. Reg. at 1724.

Hospital Ownership Exceptions.

The Stark I final rule provides an exception for ownership in hospitals in Puerto Rico. It also provides an exception for ownership in a hospital so long as the referring physician is authorized to perform services in the hospital and his/her investment or ownership interest is in the hospital as a whole. The Stark II proposed rule would amend this provision to reflect that it encompasses referrals of all designated health services, not just laboratory services. The proposed rule makes no other changes to these exceptions.

COMPENSATION ARRANGEMENT EXCEPTIONS.

The Stark II proposed rule adds three new exceptions applicable to compensation arrangements only. These exceptions deal with discounts, de minimis compensation, and fair market value compensation. Notably, the Stark II proposed rule does not include a new exception for shared laboratories or shared facilities.

Exception for Discounts.

The proposed regulation would exempt discounts to physicians which are passed on in full to either the patient or the patient's insurers (including Medicare). Such discounts cannot enure to the benefit of the referring physician. 63 Fed. Reg. at 1725. The preamble reflects that the Stark I final rule defined remuneration to include discounts which, according to the preamble to the final rule, would not qualify for the exception for items or services purchased by a physician since a discounted price would not reflect fair market value. The Stark II proposed rule adopts the new exception on the basis that discounts meeting this standard would not pose a risk of program or patient abuse. 63 Fed. Reg. at 1694.

De Minimis Compensation Exception.

The second new exception deals with de minimis compensation. 63 Fed. Reg. at 1725. This exception provides that compensation in the form of items or services (not including cash or cash equivalents) that does not exceed a value of $50 per gift and an aggregate of $300 per year are excepted from the ban if (1) the entity providing the compensation makes it available to all similarly situated individuals, regardless of whether they refer patients to the entity or not; and (2) the compensation is not determined in any way that takes into account the volume or value of the physician's referrals to the entity providing the compensation. Thus, the proposed rule would allow for physicians to receive such items as "coffee mugs or note pads" from providers without the risk of a Stark violation. The preamble specifies that cash equivalents, which cannot qualify as de minimis compensation, include items such as gift certificates, stocks or bonds, and airline frequent flier miles. 63 Fed. Reg. at 1699.

Fair Market Value Compensation Exception.

Perhaps the most intriguing new exception exempts any compensation arrangement that meets the following criteria. The arrangement is set forth in an agreement that is in writing, signed by the parties, and covers only identifiable items or services. The agreement must cover all items or services to be provided by the physician (or family member) to the entity, or must contain a cross reference to any other agreements for items or services between the parties. The agreement must specify a time frame for the arrangement (which can be for any period of time and which may contain a termination clause) provided the parties enter into only one arrangement for the same items or services during the course of a year. However, an arrangement that is made for less than one year may be renewed any number of times if the terms of the arrangement and the compensation for the same items and services do not change. The agreement must specify the compensation that will be provided under the arrangement. The compensation, or method for determining the compensation, must be set in advance and be consistent with fair market value. The compensation may not be determined in a manner that takes into account the volume or value of any referrals, payment for referrals for medical services that are not covered under Medicare or Medicaid, or any other business generated between the parties. The transaction must be commercially reasonable and must further the legitimate business purposes of the parties. Finally, the agreement must meet a safe harbor under the anti-kickback statue or otherwise be in compliance with the anti-kickback statute, 42 U.S.C. 1320a-7b. 63 Fed. Reg. at 1725-26.

The preamble explains the rationale behind this new exception as a recognition of the fact that the existing exceptions do not cover some compensation arrangements even though they may be common, may be based on fair market value and are otherwise commercially reasonable and do not reflect the volume or value of referrals. The preamble provides the example that under 42 CFR 411.357(i) a physician's fair market value payment to an entity for items and services is exempted, while an entity's fair market value payment to a physician for items and services is not. HCFA also reasoned that due to the increase in integrated delivery systems and the complex nature of financial arrangements between physicians and entities, other compensation arrangements may exist that should be exempted provided they meet certain criteria. 63 Fed. Reg. at 1699. The preamble advises parties involved in compensation arrangements to look to this new exception if they have any doubts about whether they meet the requirements in the other exceptions. Id.

While, in general, the other requirements track the language in many of the compensation arrangement exceptions, the final requirement, however, adds a requirement distinct to this new exception, that of compliance with the anti-kickback statute or coverage by a safe harbor. Initially, as the preamble reflects, the civil Stark laws and the criminal anti-kickback statute are separate and both must be complied with to operate lawfully. 63 Fed. Reg. at 1662. Thus, regardless of the Stark prohibitions, any compensation arrangement between parties who may refer Medicare or Medicaid patients for services would arguably implicate the anti-kickback statute and need to be in compliance with that law. However, since the regulators may only create a new exception if they determine that there is no risk of program or patient abuse, this requirement makes sure that no financial relationships that come within the protection of this exception would be prohibited under the anti-kickback statute. Of note, later in the preamble HCFA requests comments on whether satisfying a safe harbor alone should be sufficient to except the financial relationship from the Stark prohibition. 63 Fed. Reg. at 1712.

Space and Equipment Lease Exceptions. In general, the space and equipment lease exceptions exempt these compensation arrangements if they meet the following conditions. There must be a signed, written agreement which specifies the premises/equipment covered by the lease and includes a term of at least one year. The leased space/equipment cannot exceed that which is reasonable and necessary for the legitimate business purpose of the rental and must be used exclusively by the lessee when being used by the lessee (with an exception for the lease of common areas). The rental changes must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties. The lease must be commercially reasonable even if no referrals were made between the parties. 42 CFR 411.357(a) and (b).

Although the proposed rule contains no changes to the text of these exceptions, the preamble does interpret a number of the elements of the exceptions. For example, in an apparent response to practical concerns raised by providers, the preamble interprets the exceptions to allow for the termination of lease agreements (and other agreements including the one year requirement) in less than a year for good cause, provided that the parties do no enter into a new arrangement within the originally established one year time period. However, the preamble also notes that lease agreements which provide for renewal must be renewed in at least one year increments. In other words, a lease cannot convert to a month to month lease after the first year of the agreement ends. 63 Fed. Reg. at 1713. While many such agreements might otherwise have an at will termination provision, the good cause requirement may stem from concern that allowing for terminations without cause within a year could mask inappropriate terminations resulting from insufficient referrals.

In addition, the preamble addresses the issue of subleasing and determines that subleases are not permitted by the space and equipment lease exceptions. The rationale for this decision is the language in both exceptions that requires that the space or equipment be used exclusively by the lessee when being used by the lessee. Subleases may, however, be exempted under the new fair market value exception. 63 Fed. Reg. at 1714.

According to the preamble, capital leases would also not qualify for the space or equipment lease exception. Capital leases, which are like installment sales contracts, provide the lessee with the benefits and obligations of ownership upon entry into the lease although title may not pass until the end of the lease term. Property under a capital lease is treated as if the lessee has purchased the property or is in the process of purchasing the property. The preamble notes that such leases fall outside the space and equipment lease exceptions which only except payment for the use of equipment or space. Id. Query whether capital leases, like subleases, may be subject to exemption under the new fair market value exception or would instead be considered indicia of an ownership interest which would not qualify for this exception.

The preamble also responds to questions regarding whether payments for an equipment lease can be based on a per usage or "per click" charge. HCFA answers that payments can be based on a per click basis as long as the physician lessor is not receiving a per click payment for any patients referred to the lessee for the designated health service by the physician lessor. Id.

Employee Exception.

The Stark I final rule includes the exception for compensation arrangements resulting from bona fide employment relationships. 42 CFR 411.357(c). In order to qualify for this exception, the relationship must be for identifiable services, must be consistent with fair market value, must be commercially reasonable even if no referrals were involved, and cannot take into account the volume or value of referrals. The exception does allow for the payment of productivity bonuses based on services personally performed by the physician.

The Stark II proposed rule would amend the employee exception to mandate that the compensation also cannot take into account other business generated between the parties. 63 Fed. Reg. at 1724. The preamble to the proposed rule discusses the fact that many of the existing compensation arrangement exceptions already exclude from exemption compensation that is directly or indirectly related to the volume or value of referrals and any other business generated between the parties. It is HCFA's belief that Congress which exempted arrangements involving fair market value compensation for an item or service may not have wished to exempt arrangements that include additional compensation for other business dealings. If a party's compensation contains payment for other business generated between the parties, HCFA expects that the parties will separately determine if this extra payment falls within one of the exceptions. 63 Fed. Reg. at 1700.

The proposed rule would also amend that part of the employee exception that allows for the payment of productivity bonuses. The preamble states that the exception as currently drafted in the Stark I final rule specifically allows remuneration in the form of a productivity bonus based on services performed personally by the physician or an immediate family member. It notes that under the terms of the statute, physician or family member employees can receive payments based on any work they actually personally perform, including designated health services that a physician refers to him or herself. 63 Fed. Reg. at 1700. In order to make payment of productivity bonuses under the employee exception consistent with those paid under the group practice definition, the proposed rule would add the requirement that the productivity bonus cannot be directly related to the volume or value of a physician's own referrals. 63 Fed. Reg. at 1724. The preamble interprets this requirement to prohibit the payment of a productivity bonus based on an employee's performance of designated health services provided to Medicare or Medicaid patients that the physician self-refers, i.e. orders. An employee's productivity bonus could still include nondesignated health services or noncovered Medicare or Medicaid services as well as the provision of designated health services referred by another physician. 63 Fed. Reg. at 1700-01.

Despite the effort toward equalizing the treatment of productivity bonuses for employees under the bona fide employee exception and under the group practice definition, the regulations still maintain distinctions between the two types of employees. As described in connection with the group practice discussion above, the group practice definition permits payment to group members, including employees, in the form of overall share of profits as long as the physicians' shares are not directly related to the volume or value of referrals. The bona fide employee exception does not permit this type of profit sharing with employees. In addition, the group practice definition permits payment to group members in the form of productivity bonuses based on services personally performed and incident to personally performed services as long as the productivity bonus does not directly relate to the volume or value of referrals. The bona fide employee exception does not permit the payment of productivity bonuses to reflect incident to services. Thus, employees who are not part of a group practice face greater compensation restrictions under Stark than their group practice counter-parts. The proposed regulations will not change this disparity. 63 Fed. Reg. at 1701.

Personal Service Arrangements Exception.

The Stark I final rule outlines the requirements to qualify for an exemption as a personal service arrangement. There must be a signed, written agreement which specifies services to be covered which must include all of the services to be furnished by the physician (or family member) to the entity. It must provide for a term of at least one year. The services cannot exceed those which are reasonable and necessary for the legitimate business purpose of the arrangement. The compensation must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties. The services cannot involve the counseling or promotion of a business arrangement or other activity that violates State or Federal law. 42 CFR 411.357(d)(1).

The proposed rule would amend the requirement that the arrangement must cover all of the services to be furnished by the physician (or family member) to the entity. The proposed rule would allow the parties to enter into multiple agreements, as long as each agreement incorporates any other agreement by reference. 63 Fed. Reg. at 1725. HCFA has made this change in order to give physician's and entities more flexibility while avoiding the potential for disguise of prohibited payments through utilization of multiple contracts. 63 Fed. Reg. at 1701.

The proposed rule would also clarify that a physician or family member can furnish personal services through employees they have hired for the purpose of performing this service. 63 Fed. Reg. at 1725. The preamble does note that it will not permit physician's to utilize the personal service exception to encompass equipment or other items. 63 Fed. Reg. at 1701.

Physician Incentive Plan Exception.

The physician incentive plan exception exempts compensation paid by an entity to a physician under a physician incentive plan that takes into account directly or indirectly the volume or value of any referrals or other business generated between the parties provided certain requirements are met. The payment may not be made to induce the reduction or limitation of medically necessary services. Plans that place a physician or physician group at financial risk must comply with the requirements imposed by the Secretary. Upon request by the Secretary, the plan must allow access to information regarding the plan to determine whether the compensation arrangement complies with these requirements. 42 CFR 411.357(d)(2).

The Stark II proposed rule would amend this exception to reference and incorporate the physician incentive plan regulations that were published March 27, 1996 at 60 Fed. Reg. 13430 (1996). The physician incentive plan regulations provide that organizations whose incentive plans place physician's at substantial financial risk (as defined in the regulation) for services the physician or group orders but does not furnish directly must provide stop-loss protection, conduct patient surveys, and disclose specific information regarding the incentive plan.

Physician Recruitment Exception.

The physician recruitment exception under the Stark I final rule exempts compensation paid by a hospital to a physician to induce the physician to relocate to the geographic area in order to be a member of the hospital medical staff. In order to qualify for the exemption there must be a written agreement signed by the parties which is not conditioned upon the physician's referral of patients to the hospital. In addition, the hospital cannot directly or indirectly determine the amount of compensation based on the volume or value of referrals by the physician and cannot preclude the physician from establishing staff privileges at another hospital or preclude the physician from referring to another entity. 42 CFR 411.357(e).

Like the employee exception, the proposed rule would amend the physician recruitment exception to reflect that the compensation also cannot take into account other business generated between the parties. 63 Fed. Reg. at 1725. While the physician recruitment exception would not apply to exempt recruitment payments to physicians already living in the hospital's geographic area, interestingly, the preamble indicates that such payments may be excepted under the new fair market value exception. 63 Fed. Reg. at 1702.

Isolated Transactions Exception.

The isolated transaction exception exempts compensation resulting from an isolated transaction defined as a transaction involving a single payment between two or more persons and which specifically excludes long-term or installment payments. 42 CFR 411.357(f). In order to qualify for the exception under the Stark I final rule, the remuneration must be consistent with the fair market value of the transaction and not determined in a manner that takes into account, directly or indirectly, the volume or value of any referrals by the referring physician. The remuneration must be commercially reasonable even if there were no referrals and no additional transactions make take place between the parties for six months after the isolated transaction (unless exempted under another exception).

Like the employee and recruitment exceptions, the proposed rule would also amend the isolated transaction exception to reflect that the compensation also cannot take into account other business generated between the parties. 63 Fed. Reg. at 1725.

Arrangements with Hospitals Exception.

The Stark I final rule included an exception for any remuneration provided by a hospital to a physician if the remuneration does not relate to the provision of clinical laboratory services. 42 CFR 411.357(g). The proposed rule would clarify that this now covers all designated health services and adds the requirement that in order to qualify as unrelated, the remuneration must not in any way reflect the volume or value of a physician's referrals. Id. The preamble states that this exception does not apply to remuneration from entities other than hospitals and it does not apply to payments to a physician's family members. The preamble provides the following examples of situations that may fall within this exception: rental payments by a teaching hospital to a physician for housing a visiting faculty member, and payments to a physician for teaching or for providing the hospital with general utilization review or administrative services. The preamble does warn that if the payments for the unrelated item or service appear to be inordinately high and the physician is also making referrals for designated health services, HCFA will presume that the excess payments are for these referrals. 63 Fed. Reg. at 1702. In addition, the preamble notes that payments that may have a nexus with the provision or referrals of designated health services are not unrelated. One such example relates to hospital payments of a physician's malpractice insurance which will enable the physician to provide designated health services. Id.

Group Practice Arrangements with Hospitals Exception.

The Stark I final rule included an exception for arrangements between a hospital and a group practice under which clinical laboratory services are furnished by the group but billed by the hospital as long as the arrangement began before December, 19, 1989 and has continued without interruption since December 1989. 42 CFR 411.357(h). In order to qualify for the exception, a number of specific requirements must be met including: that substantially all of the clinical laboratory services furnished to patients of the hospital must be furnished by the group under the arrangement; the agreement is set forth in writing, specifies the services to be provided, and the compensation for such services; the compensation paid is consistent with fair market value, and the per unit compensation is fixed in advanced and does not take into account the volume or value of referrals or other business generated between the parties; and the agreement is commercially reasonable even if there were not referrals to the entity.

The Stark II proposed rule reflects the inclusion of all designated health services and replaces the substantially all language with a standard that 75% of the services covered under the arrangement must be furnished to patients of the hospital by the group. 63 Fed. Reg. at 1725. The change implements the 75% standard from the group practice substantially all test, while recognizing that the group's arrangement may not cover all such services provided to patients of the hospital.

Payments by a Physician Exception.

The final compensation arrangement exception involves payments made by a physician. 42 CFR 411.357 (i). Under the Stark I final rule, payments by a physician to a laboratory in exchange for the provision of clinical laboratory services are exempted, as are payments to an entity as compensation for any other items or services that are furnished at a fair market value price.

The Stark II proposed regulation would amend the fair market value component to reflect that the payments exempted thereunder are not specifically exempted under another exception. The proposed regulation would also specifically define services under this exception to mean services of any kind and not just Medicare services. 63 Fed. Reg. at 1725.

HOME HEALTH SERVICES.

The Stark II proposed regulations discuss the need to reconcile the Stark rules with the certification requirements for home health services under the regulations set forth at 42 CFR 424.22(d). The home health regulations prohibit a physician who has a significant ownership interest in or a significant contractual or financial relationship (including salaried employment) with a home health agency from certifying the need for home health services or establishing and reviewing a home health plan of care for the agency. In the home health context, significant ownership interests and significant financial relationships are defined on the basis of percentage of ownership and specific dollar values. In contrast, Stark does not set a specific level of ownership interest or compensation amounts required to trigger the ban. In order to avoid any confusion that the conflicting provisions may cause, the proposed regulation would use the Stark definition of financial relationship to replace the concept of significant ownership interest in or significant financial or contractual relationship with a home health agency in the home health agency regulations. As a result 42 CFR 424.22(d) would be amended to state that a physician cannot certify a patient's need to receive home health services from an agency if the physician has a financial relationship with that agency as defined under the Stark regulations, unless that financial relationship meets one of the Stark exceptions. 63 Fed. Reg. at 1679-80.

THE REPORTING REQUIREMENTS.

The Stark I final rule required all entities furnishing items or services for which payment may be made under Medicare to furnish information to HCFA concerning their financial relationships. 42 CFR 411.361. The rule defined reportable financial relationships to include any ownership or investment interest or any compensation arrangement as defined in the Stark statute. However, the definition of financial relationships in the Stark statute specifically excludes from the definition those relationships that qualify for certain exceptions. Accordingly, under the Stark I final rule, entities would not be required to report information regarding financial relationships that fell within certain exceptions. The Stark II proposed rule would amend the reporting requirements to reflect that reportable financial relationships also include those relationships that are excepted from the statute's definition of financial relationships. 63 Fed. Reg. at 1726. The purpose of this modification is to prohibit entities from self-determining that their relationships qualify for one of these exceptions and not reporting. 63 Fed. Reg. at 1703.

The Stark I final rule provided for the collection of detailed information related to physician relationships with the entities and covered items and services provided by the entities. According to the final rule, the information is to be submitted by the entities on a HCFA-prescribed form only after request by the relevant intermediary or carrier. The rule provides that entities shall be given at least 30 days from the date of the request to provide the information requested. To date, no such requests have been issued.

Except as noted above, the Stark II proposed rule adopts the reporting requirements without much change. However, the proposed rule would make one other significant change. While the final rule requires entities to provide updated information within 60 days from the date of any change in the information submitted, the proposed rule would instead require all entities to report once a year on all changes that have occurred in the previous twelve months. 63 Fed. Reg. at 1726.

HCFA does concede in the preamble that the administrative burden involved in meeting the reporting requirements could be enormous. The preamble reflects HCFA's intent to develop a streamlined reporting system that does not require entities to retain and submit large quantities of data. It also states that once a form for reporting is developed, HCFA plans first to publish it as a proposed notice with a comment period. 63 Fed. Reg. at 1704.

The preamble also states that Medicaid providers must report directly to the State plan rather than to HCFA. 63 Fed. Reg. at 1705. Since it is the State that is at risk of losing federal funds resulting from prohibited referrals, the States are given the responsibility for determining whether a prohibited referral exists. Interestingly, it can be questioned how motivated states will be to find prohibited referrals if it means losing federal funding for those services, particularly if there is no comparable State ban that would prohibit payment to the Medicaid providers.

The Stark II proposed. rule does reflect that Medicaid providers will be subject to the same reporting sanctions as Medicare providers who fail to report the required information, i.e. $10,000 per day for each day the information is late.

SANCTIONS.

Notably, the Stark II proposed rule determines that the sanctions which can be imposed upon physicians and entities for prohibited referrals are not applicable to physicians and entities when the referral involves Medicaid beneficiaries. 63 Fed. Reg. at 1704. Specifically, Stark II provides for imposition of the following sanctions: denial of payment; refund of payment; imposition of a $15,000 per service civil monetary penalty; and imposition of a $100,000 civil monetary penalty for each arrangement considered to be a circumvention scheme. According to the Stark II proposed rule, none of these sanctions could be imposed on a Medicaid provider violating the Stark ban. Instead, it reflects that the Stark II amendment to the Medicaid Act only prohibits the Secretary from paying federal funds to a State for services furnished pursuant to a prohibited referral. The preamble goes so far as to say that Medicaid physicians are not precluded from referring Medicaid patients for designated health services to entities in which they have a financial interest and entities are not precluded from billing for services furnished pursuant to such a referral. Indeed, the preamble reflects that States may choose to pay for these services, but simply will not receive payment of federal funds for these services. The preamble does note that States are free to impose their own sanctions in such situations based upon State law. Id.

CONCLUSION.

Like the Stark I final rule, the Stark II proposed rule seems to raise as many questions as it answers. It is clear that the regulators drafting the rule have tried to make implementation workable in the face of a statute that does not always reflect the current health care environment. It may, however, be quite some time before Stark II final regulations are issued. Providers and their counsel do have one tool that was not previously available, the advisory opinion process. On the same day the HCFA issued the Stark II proposed regulations, it also issued regulations implementing the advisory opinion process for Stark related requests. 63 Fed. Reg. 1646 (1998).

The advisory opinion regulations allow interested parties to request a written advisory opinion concerning whether a referral relating to designated health services (other than clinical laboratory services) is prohibited under Stark. Advisory opinions will not be issued regarding whether fair market value was paid or whether an individual is a bona fide employee. Requests for an advisory opinion must involve an existing arrangement or one into which the requestor in good faith plans to enter, hypothetical situations will not be considered. Requests must be made by a party to the arrangement and must include detailed information and documentation regarding the parties involved and the arrangement at issue. Advisory opinions will be binding on both the Secretary and the requestor, although under certain circumstances HCFA can rescind an advisory opinion.

Much of the Stark advisory opinion regulations parallel the Office of Inspector General ("OIG") advisory opinion process for requests pertaining to the anti-kickback statute, 42 CFR 1008. However, the Stark advisory opinion regulations do not include those provisions in the OIG process that specifically allow for the use of information provided by requestors for essentially any and all purposes the OIG sees fit. However, nor do the Stark regulations specifically state that they will not use the information submitted for other purposes. As a result, any request submitted by a health care provider or supplier may include some risk that the information submitted may be used against them later. Thus, before deciding to submit a request for a Stark advisory opinion, health care attorneys will want to fully analyze any and all risks of such a request, including the risk of receiving a negative opinion. Finally, although individuals and entities that are not parties to an advisory opinion may not rely upon the opinion, since advisory opinions are publicly available, health care attorneys and their clients can take advantage of information gleaned from others' requests.