New Stark rules add third layer to physician self-referral restrictions

Washington -- Physicians and health care facilities that have or want financial arrangements with each other are scrambling to contend with yet another installment in the federal rules against self-referral.

The Centers for Medicare & Medicaid Services on Aug. 27 unveiled the phase III, or final, version of the prohibitions known informally as the Stark II rules. The last major update to the regulations, the phase II interim final rule, was published more than three years ago. Under the statute, physicians cannot refer Medicare patients to facilities in which they have a financial interest unless the business arrangement meets one of a number of exceptions.

Attorneys who represent doctors and health facilities are busy poring over the latest release to determine what, if anything, their clients need to change about their business arrangements to avoid federal penalties.

In the final rule, CMS did not make any sweeping changes to the existing prohibitions. It contains no new exceptions for physicians, hospitals and others implementing business and referral arrangements. The agency did, however, revise and clarify the regulatory language in a number of areas in the hope of making compliance less burdensome.

"As guardians of the Medicare program, we must be mindful of the potential impact that physician conflicts of interest can have on the Medicare program and its beneficiaries," said Herb Kuhn, CMS acting deputy administrator. "The rule we released today strikes the proper balance between protecting patients and the program and providing needed flexibility to health care entities to ensure the provision of quality care to our beneficiaries without unnecessarily impeding nonabusive arrangements."

In one bid to make the rules more flexible, CMS expanded the physician recruiting exception to make it easier for hospitals to attract physicians to rural or underserved areas. The final rule also allows physicians and hospitals to slide on inadvertent violations of the self-referral limit on nonmonetary compensation, as long as they don't exceed the limit by too much and agree to pay back the overage within a designated time frame.

But in an effort to makes things easier for doctors and facilities, CMS has removed some of the "bright-line" rules under which health care entities have been operating, said Gina M. Cavalier, an attorney with Reed Smith in Washington, D.C.

For example, the regulation eliminates a safe harbor on hourly payments to physicians from the definition of fair market value. The government uses fair market value to determine if a doctor or a hospital has created an inappropriate financial inducement for patient referrals. The change does away with the need for hospitals to obtain expensive surveys to determine how their hourly physician compensation arrangements compare with other facilities. But it also eliminates one surefire option entities can pursue to have their arrangements meet the definition of fair market value.

"They're saying that there's more flexibility, but it actually ends up that there is less flexibility," Cavalier said.

The final rule also added a provision that changes the nature of many financial arrangements doctors have with hospitals and other entities. A hospital leasing space to a physician group, for example, in the past has been able to claim an indirect compensation exception to the Stark rules. But in the final version, such an arrangement would be considered direct compensation, and the entities would need to pursue a lease exception or another avenue for avoiding noncompliance, Cavalier said.

Although the primary job of Stark compliance typically falls to hospitals and other large entities, physicians need to remember that the rules -- and the penalties for violating them -- are designed to combat inappropriate referrals by doctors, she said.

Stark II phase III comes after a separate proposed Medicare physician payment rule, released in July, that lays out a number of new self-referral restrictions. In an Aug. 31 comment letter, the American Medical Association decried the prohibitions and asked CMS to withdraw all of them for further evaluation.

"The current self-referral laws are already too complex to be understood without legal assistance and too restrictive to be fair," AMA Executive Vice President and CEO Michael D. Maves, MD, MBA, wrote to Kuhn. "Adding more layers of confusion and regulation serves only to further confound physicians, shift more money to the attorneys that are required to interpret them, and discourage efficient, innovative, quality health care."

The inclusion of piecemeal Stark-like rule changes in the unrelated proposed physician fee schedule rule indicates that the agency has found a potential yearly vehicle for revisions, said Kevin D. Lyles, an attorney with Jones Day in Columbus, Ohio.

CMS noted in the latest Stark II rule that health care entities should consult the rules from all three phases -- totaling thousands of pages -- to get a complete picture of how the agency will enforce the self-referral prohibitions.

The release of a seemingly more conciliatory rule on the heels of much more restrictive language in the physician payment proposal sends mixed messages to the health care entities that are expected to keep track of all the various regulatory movements, Lyles said. CMS also has announced that it is launching a major review of 500 hospitals to look into what kind of financial arrangements they maintain with physicians.

"What are physicians and hospitals to do? The government is a little schizophrenic and just needs to tell people what they have to focus on," Lyles said.

The Stark II phase III rule goes into effect in December, though some types of existing contracts are protected by a grandfather clause until the end of the contract term.