What Providers Need to Know about New "Stark II" Regulations

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By Elizabeth E. Hogue, Esq.

As many providers already know, the so-called "Stark Law" prohibits physicians from making referrals to providers who render "designated health services" (DHS) if referring physicians have an ownership or investment interest in or compensation arrangement with the provider. Designated health services generally include home health, home medical equipment (HME), infusion services and outpatient hospital services. Likewise, providers of DHS generally cannot bill for services provided to patients referred by physicians who have ownership or investment interests in or compensations arrangements with them that violate the Stark law.

Exceptions to these general rules were published in the form of final regulations on January 4, 2001, the so-called "Phase I" Stark rules. On March 26, 2004, so-called "Phase II" Stark regulations were published as interim final rules in the Federal Register. These Phase II regulations further clarify exceptions to the statute described above.

Following are some of the provisions of the Phase II regulations that providers need to know about:

(1) Many providers utilize the services of referring physicians as consulting physicians to their organizations. These consulting physicians perform a wide variety of appropriate services to providers. There is an exception for personal service arrangements that may include payments to referring physicians for consulting services. In order to meet the requirements of this exception, providers must:

Enter into a written agreement with physicians that is signed by providers and physicians that specifies the services covered by the arrangement.
The arrangement must cover all of the services to be furnished by referring physicians to providers. This requirement is met if all separate arrangements between providers and physicians and providers and any family members of physicians incorporate each other by reference or if they cross-reference a master list of contracts that is maintained and updated centrally and is available for review by the Secretary of the U.S. Department of Health and Human Services upon request.
Aggregate services provided do not exceed those that are reasonable and necessary for the legitimate business purposes of providers.
The term of each arrangement is for at least one (1) year. To meet this requirement, if an arrangement is terminated during the term with or without cause, the parties may not enter into the same or substantially the same arrangement during the remainder of the first year of the original term of the agreement.
Compensation paid over the term of the agreement is set in advance, does not exceed fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.
The services to be furnished under each arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates any State or Federal law.

(2) As described above, compensation paid to referring physicians who have a compensation arrangements with providers must be "set in advance" based upon a unit of time such as per hour or a unit of service. The formula providers choose must be included in the written agreement described above and providers must be able to verify that services were actually rendered. In addition, the formula may not be changed or modified during the term of the agreement in any manner that reflects the volume or value of referrals or other business generated by referring physicians.

Use of a formula for payment based upon units of service appears to allow providers to pay a flat fee for actual participation in each of a variety of meetings such as Professional Advisory Board (PAB) meetings, team meetings, case conferences, interdisciplinary team meetings, ethics committee meetings, etc.

(3) Also, as described above, providers must pay for services from consulting physicians at fair market value. Many providers have asked how they should determine fair market value.

The new Stark II rules make it clear that fees paid to referring physicians for their services will be considered to be at fair market value if an hourly payment is established using either of the following two methodologies:

The hourly rate is less than or equal to the average hourly rate for emergency room physician services in the relevant physician market, provided there are at least three hospitals providing emergency room services in the market.

As a practical matter, this means that providers must obtain the rates at which at least three local hospitals pay physicians who staff their emergency rooms. This information must be documented in writing and maintained by providers to demonstrate compliance. Providers should update this information periodically. Updates to this information should be documented in writing, too.

If there are fewer than three hospitals that provide emergency room services in the geographic area where the provider operates or if providers choose to do so, they may pay physicians at an hourly rate that is determined by averaging the 50th percentile national compensation level for physicians with the same physician specialty or, if the specialty is not identified in the survey, for general practice in at least four of the following surveys divided by 2,000 hours.

The surveys are:

Sullivan, Cotter and Associates, Inc. - Physician Compensation and Productivity Survey
Hay Group - Physicians Compensation Survey
Hospital and Healthcare Compensation Services - Physician Salary Survey Report
Medical Group Management Association - Physician Compensation and Productivity Survey
ECS Watson Wyatt - Hospital and Health Care Management Compensation Report
William M. Mercer - Integrated Health Networks Compensation Survey.

(4) The Phase II Stark rules also include an exception for "compliance training" which appears to allow organizations to provide a variety of types of training and education to providers from whom they receive referrals.

According to this exception, providers may provide such training to physicians, their immediate family members and office staff who practice in the provider's local community or service area so long as the training is held in the local community or service area. "Compliance Training" means:

Training regarding the basic elements of a compliance program such as establishing policies and procedures, training of staff, internal monitoring, or reporting;
Specific training regarding the requirements of Federal and State health care programs such as billing, coding, reasonable and necessary services, documentation, unlawful referral arrangements; or
Training regarding other Federal, State or local laws, regulations, or rules governing the conduct of the party for whom the training is provided.

This exception does not, however, include medical education.

(5) Finally, all providers that furnish services for which payment may be made under the Medicare Program will be required to submit information to the Centers for Medicare and Medicaid Services (CMS) or to the Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services about financial relationships covered by the Stark law and regulations.

Providers should promptly review their financial arrangements with referring physicians and make any needed modifications in order to comply with the Stark laws and regulations.

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