Proposed Stark Regulations Unveiled

HCFA Interpretation of Self-Referral Rules Recognize Circumstances of Dialysis Providers
On January 9,1998, the Health Care Financing Administration published proposed regulations concerning the federal physician self-referral law commonly known as Stark II. These regulations occupied 70 pages of the Federal Register. Stark II, which became effective on January 1, 1995, prohibits a physician who has a financial relationship with an entity from referring patients to that entity for certain "designated health services" for which payment may be made under Medicare or Medicaid programs. Stark II covers 10 different categories of designated health services, including durable medical equipment, outpatient prescription drugs, and inpatient and outpatient hospital services.

Under the Stark II provisions, an entity is prohibited from claiming payment under the Medicare or Medicaid programs for services provided based on prohibited referral and is liable for the refund of amounts received pursuant to prohibited claims. In addition to being obligated to refund such payments, physicians can also incur civil penalties of up to $15,000 per improper claim and $10,000 per day for each day that the physician fails to comply with ownership reporting obligations. Exclusion from participation in federally funded insurance programs is also possible. The Stark II provisions also set forth certain reporting criteria that require entities providing services to Medicare beneficiaries to report certain ownership arrangements to the Secretary of Health and Human Services.

Renal dialysis services and certain services ancillary to dialysis received special attention in the proposed Stark II rule. In general, the rules are favorable to nephrologist. There can be no assurance that final Spark II regulations consistent with the proposed rule will be adopted. It is quite plausible, however, that when final Stark II regulations are published, they will contain similar exceptions for the various dialysis related items.

- Inpatient Dialysis Services Programs

Prior to publication of the proposed rule, it was uncertain as to whether arrangements for the provision of dialysis services to inpatients by a physician or a physician-owned entity at hospitals where such physicians were active medical staff members created potential problems under Stark II. Usually, an agreement for inpatient dialysis services provides for the payment of a per treatment fee by a hospital to an outside provider. Such arrangement creates a financial arrangement between an entity providing inpatient hospital services (one of the designated health services) and physicians who refer to the entity for inpatient hospital services. Such an arrangement is impermissible under the Stark II legislation unless that arrangement meets one or more of the law's exceptions to the prohibition constraining such financial relationships.

The Proposed rule modifies the definition of inpatient hospital services to exclude inpatient dialysis services furnished by a hospital so long as the hospital in question is not certified under the Medicare program to operate an outpatient dialysis facility. This modification means that if a nephrologist refers a patient for inpatient dialysis services to a hospital which does not have a chronic dialysis facility, the nephrologist will not be making a referral for a designated health service.

In most cases, however, this change in the definition if designated health services alone will not be sufficient to permit physician ownership of an inpatient dialysis provider. That is, a nephrologist's referral for dialysis services at the hospital will not constitute a referral requisite for a violation of the Stark II legislation. It is highly likely, however, that the nephrologist will make referral for other inpatient hospital services in connection with the admission of a renal dialysis patient. For example, the order for an individual's admission as an inpatient in and of itself may create the requisite referral relationship between the physician and the provider if designated health services.

Since the change in the definition of designated health services is probably not sufficient to permit a compensation arrangement between a hospital and a contracted dialysis service provider, other exceptions to the general prohibition against compensation arrangements need to be examined to develop a basis for permitting such arrangements.

The proposed rule contains two other exceptions, which have the potential to protect inpatient dialysis arrangements.

First, the personal services exception exempts from the definition of a compensation arrangement remuneration paid by an entity to a physician for physician services provided that certain conditions are satisfied. Prior to the publication of the proposed rule, the application of this exception to inpatient dialysis agreements was unclear; as a general rule, inpatient dialysis services rendered by a team of nurses and technicians. In the proposed rule, the personal services exception is modified to provide that services rendered under a covered arrangement can be furnished either by a physician or through employees whom the physician has hired for the purpose of providing services.

Second, HCFA created a new exception for fair market value compensation arrangements. This "general compensation" exception applies broadly to many payment arrangements between physicians and providers of designated health services, provided that the arrangement is properly structured to satisfy all of the elements of the exception which are set forth below. HCFA developed this exception to the general compensation arrangement prohibition by employing a provision of the Stark law which does not pose a risk of abuse to the Medicare program or to the patients served by that program.

- Method II Suppliers

Until the proposed rule was published, there was a question as to whether home dialysis equipment and supplies would be classified as durable medical equipment. If so, such equipment and supplies would constitute designated health services. In the proposed rule, HCFA states that, based on its interpretation of the law, home dialysis equipment and supplies should not be classified as durable medical equipment. Since, the Stark Act only applies to designated health services, the legislation, based on the proposed rules, does not prohibit physicians from owning Method II supply companies and referring patients to those companies for home dialysis equipment and supplies.

- Epogen and Calcijex

Outpatient dialysis services are not contained on the list if designated health services. When the Stark II legislation became effective, however, an issue existed as to whether drugs administered in conjunction with dialysis treatments constituted "outpatient prescription drugs" which are another designated health service. If Epogen, Calcijex, and other prescription drugs commonly administered to patients receiving dialysis constitute

designated health services, a nephrologist would be effectively prohibited from owning a dialysis facility if, in the administration of dialysis, such physician prescribed these drugs to a dialysis patients.

In the proposed rule, HCFA acknowledged that Epogen and other drugs administered as a part of a dialysis treatment are an essential part of the treatment process, and that, as a general matter, patients cannot be dialyzed safely and effectively without these drugs. HCFA also stated that limitations on payment for Epogen are already contained for abuse with regard to Epogen billing is low. For these reasons, HCFA published a new proposed definition of outpatient prescription drugs which specifically states that "erythropoietin and other drugs furnished as a part of the dialysis treatment for an individual who dialyzes at home or in a facility" are not considered prescription drugs for the purposes of the Stark Act.

Other Highlights

The proposed rules address a number of other issues that may be related to a nephrologist's practice but which are not specific to renal care. The following issues are examples of some significant interpretations of the law:

In the definition of group practice, HCFA proposes to remove the requirement that substantially all of the services must be billed in the name if the group. It would specify instead that substantially all of the services be billed under a billing number assigned to the group.

The exception for in-office ancillary services restricted to services furnished personally by a referring physician, by another physician in the same group practice, or by individuals directly supervised by one of these individuals. The individual must be supervised by a physician who is present in the office suite and immediately available to assist and direct the services. Physicians who provide services to a group practice are excluded from qualifying as a member of the group practice. Such independent contractors cannot supervise the provision of designated health services under the in-office ancillary services exception.

The fair market value compensation exception is generally designed to insure that compensation is consistent with fair market value and does not fluctuate based on the value or volume of referrals between parties. The elements of this exception are as follows:

*The agreement is in writing, signed by the parties, and covers only items and services identified therein.

*The agreement covers all of the items and services to be provided by the physician to the entity, or cross-refers to any other agreements between any of the parties.

The agreement specifies the time frame for the arrangement, which can be for any period of time and contain a termination clause, provided that the parties enter into only one arrangement for the same items or services during the course of a year.

*The agreement specifies the compensation that will be provided under the arrangement, which has been set in advance. The compensation must be consistent with fair market value.

*The arrangement involves a transaction that is commercially reasonable and furthers the legitimate business purposes of the parties.

*The arrangement meets a safe harbor under the anti-kickback statute or otherwise is in compliance with the anti-kickback statute. Designated health services may be subsumed within another service. That is, a designated health service remains as one, even if it is billed as something else or is part of another service category by being bundled with other services for billing purposes. For example, skilled nursing services which are not in and of themselves designated health services, may encompass a variety of designated health services, such as physical therapy or laboratory services.

The exception for compensation paid for physician recruiting was limited to those situations in which a physician resides outside the geographic area and must actually relocate in order to join a hospital's medical staff.

The proposed rule did not contain a description of the procedure for complying with the legislation's reporting requirements. HCFA stated that it had not fully developed such procedure as of the date of publication of the proposed rule. Until HCFA communicates such procedure, compliance with the reporting guidelines is not required.

Conclusion

The proposed rule liberalizes some of the aspects of the general ban on physician ownership of certain health care services and compensation arrangements with providers of designated health services, and limits others. Physicians and their attorneys should be cautioned, however, to closely scrutinize each proposed or existing arrangement providing potential economic benefit to referring physicians and entities. Compliance with the Stark II legislation, generally, does not ensure that such an arrangement will comply with other state or federal laws prohibiting certain remuneration in return for, or to induce, the referral of a patient for treatment, ordering, purchasing, or leasing items or services that my be paid for by Medicare Medicaid, or other federal health care programs. These laws must be reviewed independent of an analysis of the Stark II legislation.