KATHRYN GILCHRIST AND DAVID DONNELL

Like the saying about Mississippi’s weather, if you do not care for the “Stark Law” (the regulations prohibiting physician’s self referrals), you need not wait long until it changes. In September, the Centers for Medicare & Medicaid Services (CMS) announced the “final rule” for Phase III of the Stark Law. This new leg of the Stark II journey is not as revolutionary as those that came before it, but it nevertheless requires the close attention of all those health care providers affected by its regulations. (Which includes almost everyone reading this publication). The Phase III regulations will go into effect in early December.

Changes having the most wide spread impact on providers include areas relating to personal services arrangements and the compensation that accompanies them, direct and indirect compensation arrangements, and physician recruitment. Other less used exceptions like the non-monetary compensation and retention payment exceptions, which may be used often in our market, were altered enough to require serious consideration by those who have or may depend on these issues.

One of the most important changes comes in the way of an elimination of what many considered a “safe harbor” for physician compensation for personal services. Since the Phase II regulations went into effect in 2004, physician compensation for personal services was deemed fair market value if it met one of two simple tests. The first test only required that the compensation be equal to emergency room physician compensation in the relevant market (if at least three hospitals served the market). The second test required that the compensation be based on an average of the published median rates for such services in three of six national publications (like the one MGMA produces). These were simple ways to have comfort with the compensation hospitals and other entities were paying to physicians for miscellaneous services. With the withdrawal of this “safe harbor” for calculating physician compensation, hospitals and others will have to find new ways to value services to ensure compliance with Stark’s fair market value requirements.

CMS also unveiled a new concept for addressing various compensation arrangements. Up until now, links between a physician and the entity performing the designated health services (“DHS”) generally required scrutiny under the tests for indirect arrangements. CMS has now made clear that so long as the only entity between the physician and the

DHS entity is the physician’s organization (which is defined as the physician’s professional entity, a physician practice or a “group practice”), a direct compensation arrangement can still exist, or at least a much simpler indirect relationship. CMS set forth that in limited circumstances, physicians are deemed to “stand in the shoes” of their physician organizations. This relatively simple concept may have broad application to many health law practitioners.

Physician recruitment rules were also changed. The scope of the “geographic area served by the hospital” into which a physician could be recruited to establish a medical practice was expanded somewhat. The “geographic area” now can include one or more zip codes from which the hospital draws no patients, so long as the surrounding counties make up 75 percent of the hospital’s inpatients. Hospitals located in rural areas (as defined by the regulations) are may recruit physicians into a contiguous zip code area from which the hospital draws 90 percent of its inpatients, or from noncontiguous zip code areas based on a simple formula.

In a related change, CMS has strengthened the certification requirements for retention payments in underserved areas. Now both the physician being recruited and the entities seeking to retain the physicians must take extra steps/precautions to ensure that retention payments are being made based on legitimate motivation and opportunities.

Given the difficulties many hospitals have in keeping up with non-monetary compensation provided to their medical staff, CMS has softened its stance somewhat. First, the $300 per year cap can be adjusted annually for inflation. Next, if an inadvertent provision of more than the $300 minimum has been provided, CMS will forgive the amount if it does not exceed the limit by more than 50 percent and the excess is returned. This forgiveness will only be allowed once every three years for each physician. Finally, there is a somewhat ambiguous provision for an annual medical staff appreciation event. This will allow hospitals with formal medical staffs to provide gifts or gratuities at an annual event (still limited to the $300/physician cap) in addition to the individual non-monetary cap of $300.
Other changes have been made in Phase III, but those above are most likely to have the broadest impact on the market. Given the strict liability (meaning even innocent mistakes are sanctionable) imposed for violating the Stark Law, it is very important that you keep your attorneys aware of your business relationships.



November 2007