Medicine, Law & Policy
Changes to the Federal Stark Law that Affect Diagnostic Imaging Arrangements
By Karolyn Stirewalt, J.D.
Abstract
The Omnibus Budget Reconciliation Act of 1989 included an effort to prohibit self-referrals for services that has come to be known as the Stark law. Since its passage, the law has been modified a number of times to clarify ambiguity and address loopholes. This article describes changes made in 2007, specifically focusing on how those changes affect physicians who provide and refer for imaging services.
The federal Stark law (section 1877 of the Social Security Act) is a broad statute that prohibits physicians from referring Medicare and Medicaid patients to entities with which the referring physician or members of his or her immediate family have a financial relationship for services identified in the statute as “designated health services.” It also prohibits an entity from billing or filing a claim for a designated health service as a result of a prohibited referral.
Originally passed as part of the Omnibus Budget Reconciliation Act of 1989 to prohibit self-referrals for clinical laboratory services under the Medicare program, the federal Stark law took effect in 1992. The following year, it was applied to the list of designated health services paid for by Medicare and Medicaid. Radiology services including magnetic resonance imaging, CT scans, and ultrasound services are included in the list of designated health services.1
Although the law is broad, there are several exceptions to the prohibitions in it to accommodate legitimate business arrangements. Three of these exceptions are of particular interest to diagnostic imaging arrangements. The first is the in-office ancillary services exception, which allows physicians to refer and provide imaging services within their practices to their patients if they satisfy a supervisory, location, and billing requirement as outlined in 42 C.F.R. § 411.355.2 An example of how this exemption works would be the case of a referring group of physicians who purchase a CT scanner for the location where they regularly treat patients. Whether a group of physicians qualifies for this exception is a question that should be assessed with the assistance of counsel knowledgeable about the Stark law and the particulars of the situation.
The second is invasive radiology procedures or ultrasound procedures that require insertion of a needle, catheter, tube, or probe and that are integral to the performance of nonradiological medical procedures. These are excluded from the designated health services list and are therefore legal under Stark.3 Cardiac catheterizations and endoscopies are two procedures that are not considered designated health services.
The third is a referral by a radiologist for diagnostic radiology services pursuant to a consultation requested by another physician. This is not considered a referral under Stark so long as the referring radiologist either supervises or provides the service.4
Recent Changes to Stark
The Centers for Medicare and Medicaid Services (CMS) published Phase III of the Stark regulations in 2007 and the Final Hospital Inpatient Prospective Payment Systems Rule in 2008. These publications detail several modifications to the Stark regulations that affect imaging providers. The following is a summary of those modifications.
〉 Under Arrangements
“Under arrangements” refers to the practice of a hospital contracting with an outside entity to supply a designated health service (eg, a hospital that bills for radiology services furnished by a radiology group). In the past, the Stark law considered under arrangements to be an indirect compensation relationship between the hospital and the outside entity (ie, there was no billing of Medicare for designated health services by the outside entity). Therefore, the outside entity did not need to meet an ownership exception under Stark if it had an investment interest in the hospital.
Now, however, CMS has begun curtailing many under arrangements in which physicians supply items and services to designated health services entities. It has redefined the term “entities” to include both individuals or organizations that bill for the designated health services under Medicare as well as the person or organization that performs the designated health service. In a situation where one entity performs a service that is billed by another entity, both entities are considered designated health service entities with respect to that service and, therefore, fall within the Stark law.5 As a practical matter, this change means that referring physicians will not be able to have an ownership or investment interest in under arrangements for imaging and other services.
〉 Physician Stands in the Shoes
Under the Stark Phase III regulations, an owner of (or investor in) a physician organization is considered by CMS to “stand in the shoes” of that physician organization. The owner or investor holds the same compensation arrangement (with the same parties and on the same terms) as the physician organization itself if the owner or investor is eligible to receive the financial benefits of ownership or investment. This means that some payment arrangements that might previously have been considered indirect compensation arrangements are now considered to be direct ones, and must fall under a Stark law exception to be legal.6 An example would be a hospital that owns a radiology clinic that employs physicians. The relationship between the hospital and the employed physicians was formerly considered indirect and, therefore, did not implicate the Stark law. Now, under Stark Phase III, the hospital owner of the clinic would “stand in the shoes” of the clinic, and the relationship between the hospital and the physicians would need to meet a Stark law exception, as if the hospital were a direct employer of the physicians.
〉 Percentage Compensation Arrangements
CMS now prohibits use of percentage-based compensation formulae for determining rental charges for the lease of office space or equipment. Under a percentage-based lease, charges fluctuate based on the percentage of time that space or equipment is used. CMS amended the former Stark exceptions so that rental charges for office space or equipment can no longer be determined using a formula based on “a percentage of revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated.”
Physicians who had been in percentage-based lease arrangements will, therefore, need to amend their lease terms so that payment for space or equipment use is based on fair market value. CMS noted that the new provision does not prohibit the use of percentage-based compensation formulae in management agreements, billing services arrangements, and gain-sharing (or shared savings) arrangements.7
〉 Per-Click Space and Leasing Arrangements
CMS now prohibits the use of unit-of-service (also known as “per-click”) fee payments in space and/or equipment leases when the payments are for services provided to patients that were referred between the physician and the hospital. For example, a physician may not lease radiology equipment to a hospital on a per-click basis if that physician refers patients to the hospital for radiologic services. This prohibition applies regardless of whether the lessor is the referring physician or an entity in which the referring physician has an ownership interest.
Additionally, “on-demand” rental agreements with very limited or flexible leasing requirements are considered per-click or per-use arrangements and are also prohibited under the rule. Note, however, that block time leases may still fall under the space and equipment lease exceptions, according to CMS.8
〉 Period of Disallowance for Noncompliant Arrangements
CMS has defined a period of disallowance during which referrals are prohibited based on failure to satisfy a Stark law exception. Medicare will not reimburse for such referrals. According to the rule, when noncompliance is not related to compensation, the period of disallowance ends on “the date that the financial relationship is brought into compliance” (ie, it meets all the requirements of an exception). For example, CMS stated that if an exception requires a signature for a written agreement and the signature is missing, the period of disallowance would end on the date that the signature is secured.9
With regard to noncompliance resulting from compensation-related issues (such as payment of excess compensation or failure to collect sufficient compensation), CMS has implemented an additional standard. Here, the period of disallowance would end on the date that the excess compensation is returned, all shortfall compensation is repaid (as applicable), and the arrangement otherwise complies with a Stark law exception.10
〉 Alternative Method for Compliance with Signature Requirements
Many Stark law compensation exceptions require a written agreement signed by the parties. For example, this is required for office space and equipment rental agreements, personal service arrangements, physician recruitment arrangements, group practice arrangements, and fair market value compensation arrangements.11 Parties who have failed to obtain the requisite signature are now allowed an alternative method to comply with the exception. To qualify for the alternative, the financial relationship between the entity and the referring physician must otherwise fully comply with an applicable exception, and one of the following conditions must be met: 1) in cases of an inadvertent failure to comply with the signature requirement, the entity will be allotted 90 days after the commencement of the financial relationship to rectify the error, regardless of whether any referrals have occurred or compensation has been paid during the 90-day period; or 2) where the failure to comply with the signature requirement was not inadvertent, the entity will be allotted 30 days to rectify the signature requirement regardless of whether any referrals have occurred or compensation has been paid during that 30-day period.
Note that this alternative method may only be used by an entity once every three years with respect to the same referring physician.12
〉 Ownership or Investment Interest in Retirement Plans
CMS expressed concern that some physicians were using money from their retirement plans to purchase or invest in unrelated entities to which they refer patients for designated health services. For example, physicians who participated in a retirement plan that invested its funds in an MRI center to which they could then refer their patients would be considered an abusive retirement holding by CMS. CMS, therefore, amended the Stark law so that only retirement plans sponsored by a physician’s employer qualify under a Stark law exemption.13
Conclusion
The federal Stark law was originally passed to help curtail unnecessary medical spending and reduce conflicts of interest that can occur with referrals. Since its inception 20 years ago, the statute has undergone many amendments that attempt to clarify ambiguity in the law and address loopholes where unforeseen conflicts of interest have been found to occur. Physicians who are in private practice or who are in partnerships are encouraged to work with an experienced attorney to ensure that they are in compliance with this law. MM
Karolyn Stirewalt serves as policy counsel for the MMA.
The following information is intended only as general information and should not be used as a substitute for legal advice. Physicians and clinic managers with specific legal questions should seek the advice of their attorney to interpret the new rules and apply them to existing or potential financial arrangements.
Further information about the federal Stark law can be found at: http://ftp.ssa.gov/OP_Home/ssact/title18/1877.htm.
References
1. 42 U.S.C.S § 1395 nn (h)(6)(D).
2. 42 U.SC.S. § 1395nn (b)(2).
3. 42 U.S.C.S. § 1395nn (h)(6).
4. 42 U.S.C.S. § 1395nn (h)(5).
5. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule, Section VIII.G. Available at: www.cms.hhs.gov/apps/media/press/factsheet.asp?Counter=3226&intNumPerPage=10&checkDate=&checkKey=&srchType=1&numDays=3500&srchOpt=0&srchData=
&keywordType=All&chkNewsType=6&intPage=&showAll=&pYear=&year=&desc=false&cboOrder=date. Accessed November 17, 2009.
6. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule, Section VIII.B.
7. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule, Section VIII.E.
8. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule, Section VIII.F.
9. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule.
10. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule section VIII.C.
11. 42 C.F.R. § 411.357.
12. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule, Section VIII.D.
13. Centers for Medicare and Medicaid Services. Physician Self-Referral and Hospital Ownership Disclosure Provisions in the IPPS FY 2009 Final Rule, Section VIII.I.