Stark “Phase III” Final Regulations Released by CMS to Become Effective December 4, 2007

On August 27, 2007, the Centers for Medicare and Medicaid Services ("CMS") released the long-awaited "Phase III" final regulations to the Stark Law by posting an advance copy on CMS's website. These final regulations are scheduled for formal publication in the Federal Register on September 5, 2007 and will become effective 90 days after publication (i.e., December 4, 2007). CMS also posted on its website a redline of the Phase III regulations against the current version of the regulations. Although a cursory review of the redline of the regulations themselves would lead one to believe that the Phase III final regulations encompass only a few significant changes, there are, in fact, a number of significant issues raised in the preamble to the regulations regarding how CMS interprets several provisions of the rules.

In addition to the new interpretations and changes to the regulations affecting future financial relationships between physicians and health care entities to which they refer patients, the more pressing issue may be that parties to current financial relationships must assess whether (and how) their arrangements should be restructured or unwound before the December effective date of the Phase III final regulations.

By way of background, the Physician Self Referral Law or the Stark Law, as it is commonly known, found at Section 1877 of the Social Security Act, prohibits a physician from making referrals for certain "designated health services" (DHS) payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship (ownership or compensation), unless an exception applies; and prohibits the entity from filing claims with Medicare (or billing another individual, entity, or third party payer) for those referred services. The statute establishes exceptions and grants the Secretary the authority to create regulatory exception for financial relationships that pose no risk of program or patient abuse.

Although these final Phase III regulations do not create any new exceptions, they do clarify the existing exceptions, in some case in substantive ways.

Among the significant compliance issues addressed in the Phase III final regulations and/or discussed in the preamble are:

  • Clarification that "incident to" services also includes supplies that meet applicable requirements, which is important to the rules governing group practice compensation
  • Modification of who qualifies as a "physician in the group practice" to address the structure of arrangements involving independent contractors
  • Elimination of the "safe harbor" within the definition of "fair market value" for hourly payments to physicians for personal services (although the changes do not prohibit hourly payments, they eliminate the protection created for determining the hourly amount)
  • New provisions affecting the analysis of security interests in hospital equipment which is sold by a physician who finances its purchase through a loan to the hospital
  • The addition of a "stand in the shoes" concept for physicians who are part of physician organizations for purposes of analyzing direct and indirect compensation arrangements, which CMS describes will have the effect of subjecting arrangements that previously did not constitute indirect compensation arrangements to the provisions governing direct compensation arrangements
  • Addition of "holdover" provision for personal services contracts similar to the one for rental of office space and equipment
  • Significant modifications to the physician recruitment exception to permit rural health clinics to utilize the exception, clarify how a hospital's "geographic service area" is determined, modify the rules for income guarantees for physicians recruited to replace a deceased, retiring or relocating physician, and permit group practices to impose certain practice restrictions on the recruited physician
  • Amending the "fair market value" exception" to apply to compensation to and from a physician and an entity, but clarifying that the exception does not apply to lease of office space

These Phase III final regulations are in addition to the modifications CMS proposed concerning Stark and which were separately issued in July 2007 as part of CMS's Calendar Year 2008 proposed Medicare Physician Fee Schedule (See 72 Fed. Reg. 38,122 (July 2, 2007)). These proposed regulations included a number of significant provisions related to services furnished "under arrangements"; the anti-markup rule related to purchased interpretations; unit-of-service (per-click) payments in space and equipment leases; percentage-based compensation arrangements; a new "stand in the shoes" rule (where a DHS entity owns or controls an entity to which a physician refers Medicare patients for DHS, the DHS entity would stand in the shoes of the entity that it owns or controls and would be deemed to have the same compensation arrangements with the same parties and on the same terms as does the entity that it owns or controls); and alternative criteria for satisfying certain exceptions.

If you have questions concerning the Stark Phase III final regulations or the proposed regulations in the 2008 Medicare Physician Fee Schedule, please contact David Matyas at [email protected] or 202-861-1833.

For a copy of the Phase III regulations and the redlined text click here.