I. INTRODUCTION
On April 30, 2008, the Centers for Medicare & Medicaid Services (“CMS”) published a proposed rule to implement the Fiscal Year 2009 Hospital Inpatient Prospective Payment System (the “IPPS proposed rule”). 73 Fed. Reg. 23528. The IPPS proposed rule includes possible changes to certain provisions of the federal Physician Self-Referral Law, or “Stark Law,” regulations. Under the Stark Law, if a physician or a member of a physician’s immediate family has a financial relationship with an entity, the physician may not make referrals to that entity for the furnishing of certain “designated health services” (“DHS”) under Medicare, unless an exception applies. A DHS entity is prohibited from seeking or keeping payment for services furnished as a result of a prohibited referral. The IPPS proposed rule’s changes to the Stark Law regulations come on the heels of two other significant Stark Law regulatory developments – the July 2007 proposed Stark Law changes contained in the proposed 2008 Medicare Physician Fee Schedule (“2008 proposed MPFS”) regulations and the September 2007 final Phase III Stark Law regulations1. CMS will accept comments from the public on these proposed regulations until June 13, 2008.
As discussed below, the proposed changes in the IPPS proposed rule could significantly affect Stark Law compliance for physicians and entities that have financial relationships with physicians. The key proposals involving the Stark Law regulations would: address when a physician is deemed to “stand in the shoes” of a physician organization and when an entity furnishing DHS is deemed to “stand in the shoes” of another entity that it owns or controls; establish the time periods during which referrals are prohibited and claims for services pursuant to such referrals are disallowed following certain types of Stark Law violations; supplement existing regulations involving disclosure to patients of physician ownership of hospitals and lack of 24/7 physician presence at hospitals; and provide for mandatory reporting by hospitals to CMS of financial relationships with physicians. Additionally, CMS solicited comments on other Stark Law-related topics, including the possibility of a new exception for hospital-physician “gainsharing,” and the regulation under the Stark Law of physician-owned device or implant companies.
Because several of the proposals would involve a new, fundamentally different and more complex analytical approach to the Stark Law, and other provisions would require comprehensive reporting of physician financial relationships, we believe that these provisions, if implemented, could have a significant impact on certain health care providers. In particular, the “stand in the shoes” or “SITS” provisions, whereby a physician or entity would be deemed to have a financial relationship that, in fact, it does not have, may increase the complexity, uncertainty and burden of Stark Law compliance. Additionally, CMS’s new interpretations and proposals reinforce that harsh penalties may result from mere technical violations of the Stark Law. Finally, the proposed new comprehensive reporting obligations for hospitals will likely be significantly more costly and burdensome than CMS projects. Although it is possible that CMS will not ultimately implement all of these proposed changes2, because of the magnitude of the consequences that could befall some health industry participants if CMS does adopt these proposed provisions, they warrant careful consideration. Indeed, for some providers, the potential compliance problems raised by these proposed regulations will be so significant that they may want to submit formal comments to CMS.
This memorandum describes the key provisions of the IPPS proposed rule and provides our commentary on aspects of the proposals that we expect to be of greatest interest to our clients.
II. STARK LAW PROVISIONS IN THE IPPS PROPOSED RULE
A. “Stand in the Shoes” Provisions
1. Physician “Stand in the Shoes” Provisions
a. Background
The Stark Law prohibits referrals where a physician has not only a direct, but also an indirect, financial relationship (whether an ownership or investment interest or a compensation arrangement) with a DHS entity, unless an exception applies. Most of the Stark Law’s exceptions for compensation arrangements are applicable only where the physician has a direct relationship with the DHS entity. Therefore, in the Phase I regulations under the Stark Law published in 2001, CMS developed an analytical approach for addressing indirect compensation arrangements. First, it established a three-part test to determine whether an indirect compensation arrangement exists; if an indirect compensation arrangement is not found to exist because of the application of the test, the Stark Law referral prohibition would be inapplicable. Specifically, under that test, an indirect compensation arrangement exists only if there is an unbroken chain of financial relationships between the DHS entity and the referring physician; the aggregate compensation to the referring physician (from the entity in the chain closest to the physician) varies with or takes into account in any manner the volume or value of referrals to, or other business generated for, the DHS entity; and the DHS entity knows or should know that the referring physician receives such compensation. Second, CMS created an indirect compensation arrangements exception; that exception applies if, among other things, the compensation is fair market value for services and items actually provided, and is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS. This method of analysis, therefore, focused on whether the individual referring physician has an inappropriate financial interest in referring to the DHS entity.
With the Phase III regulations, CMS articulated its concern that this method of analysis for indirect compensation arrangements creates an “unintended loophole” that results “in determinations that arrangements that involve financial incentives for referring physicians fall outside the ambit of the [Stark Law].” As a result, in Phase III, CMS adopted the physician “stand in the shoes,” or “SITS” concept, whereby a physician is deemed to “stand in the shoes” of his or her physician organization. The consequence of this approach is that, unlike the prior indirect compensation arrangement approach, a compensation arrangement between the physician organization and the DHS entity would have to meet the requirements of a direct compensation exception in order for the physician to refer to the DHS entity. The fact that the relationship between the physicians and the physician organization might not create any financial incentive for the physician to refer to the DHS entity would no longer be relevant.
After publishing the Phase III regulations, CMS received informal feedback concerning the application of the SITS rule to academic medical centers3 and nonprofit integrated health care systems, where support payments among the components of such systems are common. Often, these entities relied on the indirect compensation arrangement analysis to allow physician referrals from faculty physicians. As a result of the feedback, in November 2007, CMS announced that, in order to provide more time to evaluate any unintended impact of the SITS rule, it would delay for one year implementation of the physician SITS rule for academic medical centers and nonprofit integrated health care systems.
The IPPS proposed rule reflects CMS’s continuing efforts to understand and attempt to address these and other concerns with the physician SITS rule. CMS sets forth two alternative proposals to modify the Phase III physician SITS concept. The first approach, the “Multi-Faceted Approach”, would reformulate and limit the physician SITS analysis. The second approach proposes to leave the Phase III SITS analysis in place, but to create a new exception or exceptions to prevent the overly broad application of the SITS doctrine.
b. Alternative 1: Multi-Faceted Approach
As one alternative, CMS has proposed a comprehensive approach to modify the physician SITS provisions. Under this alternative, a physician would not “stand in the shoes” of his or her physician organization if the compensation arrangement between the physician and the physician organization satisfies one of the exceptions for bona fide employment arrangements, personal services arrangements or fair market value compensation. Each of these exceptions requires, among other things, that the compensation to the physician be consistent with fair market value and not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the physician to the physician organization. Where the physician does not stand in the shoes of the physician organization by reason of the application of one of these exceptions, the indirect compensation analysis, discussed above, would be applied to determine whether the Stark Law would prohibit referrals from the physician to a DHS entity having a financial relationship with the physician organization.
Where the physician’s compensation arrangement with his or her physician organization does not meet one of these exceptions, the physician is deemed to stand in the shoes of the physician organization, and the physician organization’s arrangement with the DHS entity would have to satisfy a direct compensation arrangements exception. Thus, for example, if an employed physician leases space or equipment to his physician organization, the physician would apparently stand in the shoes of the physician organization, even if the lease satisfied the requirements of an applicable Stark Law exception. Additionally, and even more significantly, a physician who relies on the “in-office ancillary services” exception to permit the physician’s referrals to his or her physician organization would be deemed to stand in the shoes of the physician organization for purposes of any referrals to a DHS entity with which the physician organization has a financial relationship. CMS claims that, because the in-office ancillary exception does not require fair market value compensation to physicians, compensation from a DHS entity to a physician organization relying on that exception could be channeled to physicians for referrals to the DHS entity.
The multi-faceted proposal also includes a clarification that the physician SITS concept would not apply where the physician’s referrals are protected under the academic medical center exception (the “AMC exception”). If the AMC exception is not satisfied, the same SITS rules discussed above would apply to a physician organization that is part of an academic medical center. In addition, CMS is proposing that the physician SITS rule will not apply where a component of an academic medical center has a written agreement with a physician organization to satisfy the academic medical center’s obligations under the Medicare graduate medical education rules, such as where a teaching hospital has an agreement with a community physician group to serve as a teaching site.
Despite CMS’s proposal for a more relaxed SITS approach, CMS has expressed concern that some parties might be applying the indirect compensation arrangements improperly. Specifically, CMS believes that, even where compensation to a physician is on a fixed periodic basis, it may nevertheless vary with or take into account the volume or value of referrals to or business generated for DHS entities. This concern undoubtedly sparked CMS’s broad physician SITS rule and is causing CMS’s reluctance to relax the SITS concept even more. Further, CMS indicated that it may provide additional guidance on the application of the three elements of the definition of indirect compensation arrangement.
c. Alternative 2: Exceptions to SITS
CMS’s second alternative to addressing the physician SITS concept would not revise the existing SITS regulatory provisions, but would establish specific exceptions to the SITS provisions to protect non-abusive arrangements not covered by other Stark Law exceptions. One specific exception that CMS is considering would cover “mission support” payments (or similar compensation arrangements) between DHS entities and physician organizations and physicians. CMS is soliciting comments on this proposal, including such aspects as whether an exception should be limited to “mission support” or whether it should also cover other specific types of payments or compensation arrangements, the types of parties that should be permitted to use the exception, and the conditions that should apply to such an exception.
CMS stated that this exception might address compensation arrangements between components of an “integrated delivery system,” perhaps containing conditions similar to the AMC exception. CMS expressed concern that the term “integrated delivery system” is used to describe a wide variety of systems with varying degrees of actual integration, and is therefore soliciting comments on defining a “fully integrated health care delivery system,” what types of compensation arrangements should be protected, and what conditions should be included in an exception. Based on feedback from industry stakeholders, CMS stated that an integrated delivery system could be defined as a system comprised of two or more entities that are related and substantially integrated by common ownership or control. CMS noted, among other things, that it would be necessary to develop definitions of “ownership” and “control,” and solicited comments on these issues, other aspects and conditions to an integrated delivery system exception, and alternative approaches.
d. Reed Smith Commentary
The Multi-Faceted Approach likely would enable more physician arrangements to avoid the application of the physician SITS rule than would the Exceptions alternative. For that reason, it is likely to be the more desirable of the two alternatives for many. Both alternatives are limited, however, and would require the continued application of the physician SITS rule in many circumstances.
For example, under either approach, a physician relying on the in-office ancillary services exception for referrals to his physician organization (a very common situation) would still stand in the shoes of his physician organization for purposes of referrals to a hospital with which the physician organization has a contract. This would require the physician organization-hospital contract to meet a direct compensation exception. While CMS explains that this is to ensure that the physicians do not receive compensation for their referrals to the hospital, even without the physician SITS rule, under the indirect compensation arrangements analysis, Stark Law compliance would prohibit the referring physician from receiving compensation that is determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the hospital. Thus, if CMS’s principal concern is that some parties are misapplying the indirect compensation analysis, a simpler and less disruptive approach would have been to clarify the indirect compensation analysis rather than to pursue the complexity of the physician SITS rules. Further, CMS’s application of the physician SITS approach arguably expands the Stark Law beyond its original intent to proscribe referrals from individual physicians who have a financial incentive to refer.
2. Entity “Stand in the Shoes” Provisions
a. Summary
In the 2008 proposed MPFS, CMS proposed a new Stark Law regulatory concept whereby a DHS entity should “stand in the shoes” of an entity that it owns or controls. Under this entity SITS proposal, the DHS entity would be deemed to have the same compensation arrangements with the same parties and on the same terms as does the entity that it owns or controls. Thus, a compensation arrangement between the owned or controlled entity and the physician would have to satisfy a direct compensation arrangement, rather than be evaluated under the indirect compensation analysis discussed above. CMS gave the example of a hospital that owns or controls a medical foundation that contracts with a physician to provide physician services to a medical foundation clinic; in such a case, CMS said that the hospital would stand in the shoes of the medical foundation and would be deemed to have a direct compensation relationship with the contractor physician.
CMS did not finalize the entity SITS proposal in the final Medicare Physician Fee Schedule regulations, but has re-proposed a more limited entity SITS approach in the IPPS proposed rule. CMS claims that an entity SITS rule, in combination with the physician SITS rule, would simplify the Stark Law analysis and reduce program abuse. Specifically, CMS is proposing that a DHS entity would be deemed to stand in the shoes of an organization in which it has a 100 percent ownership interest. This proposal is narrower than the MPFS proposal, in that it would not apply the entity SITS concept to entities in a control-but-not-ownership relationship, such as a nonprofit corporation whose sole member is a DHS entity. Yet, this rule is broader than the MPFS proposal because it would apply whether or not the wholly owned entity is itself a DHS entity. In connection with this proposal, CMS is soliciting comments as to whether the SITS approach should be applied to a DHS entity that owns less than 100 percent of another entity, and to a DHS entity that controls another entity (by having the power, directly or indirectly, significantly to influence or direct the actions or policies of the organization).
b. Reed Smith Commentary
The entity SITS proposal, if adopted, would also complicate the Stark Law analysis for some indirect compensation arrangements, particularly if CMS extends this concept to entities that are not wholly owned by a DHS entity. In that connection, any definition of “control” adopted by CMS will likely not produce bright lines, and the analytical approach to Stark Law compliance could be uncertain in some cases. Yet, if the proposal is adopted as proposed, it would result in substantially differing Stark Law analyses for nonprofit health systems (to which the entity SITS rule would not apply) as compared with profit health systems (to which it would often apply). It would seem hard to justify this disparate treatment on that basis.
3. Conventions for Application of “Stand in the Shoes” Provisions
a. Summary
The need to apply both the physician SITS rule and an entity SITS rule to a chain of financial relationships could, in some cases, lead to anomalous or inconsistent results. Therefore, CMS has proposed a set of “conventions” describing how the two SITS concepts would work together. These conventions would ensure that at least one compensation arrangement remains between the DHS entity and the referring physician, which would then be tested for compliance with a direct exception. The conventions call for the two rules to be applied as follows:
- If the physician SITS rule applies, the physician SITS provisions would be applied first, resulting in the physician “standing in the shoes” of his or her physician organization.
- However, if applying the physician SITS provisions would result in only one financial relationship remaining between the DHS entity and the “collapsed” physician/physician organization, and that relationship is an ownership interest, the physician SITS provisions would not be applied, and the entity SITS provisions instead would be applied first.
- If, after first “collapsing” the physician and the physician organization by applying the physician SITS rule, at least two links remain in the chain of financial relationships between the physician who is standing in the shoes of his or her physician organization and the DHS entity, the next step would be to apply the entity SITS provisions.
CMS provides a series of examples that illustrate the application of these conventions. First, if a chain of financial relationship runs hospital → wholly owned home health agency → group practice → physician owner, the physician SITS rule would be applied first, resulting in the physician standing in the shoes of the group practice. Then the entity SITS rule would be applied so that the hospital stands in the shoes of the home health agency. If the remaining financial relationship between the home health agency and the group practice is a compensation arrangement, it would be deemed to be a direct compensation arrangement between the hospital and the physician, and would have to satisfy a direct Stark Law exception in order for the physician to refer to the hospital.
A second example involved the following chain of financial relationships: hospital → group practice wholly owned by the hospital → employed physician (with a compensation arrangement that does not satisfy the bona fide employment exception). CMS says that, if the only financial relationship between the hospital and the group practice is the ownership interest, the physician SITS rule would not be applied first because of the second convention. Rather, the entity SITS provision would be applied to cause the hospital to stand in the shoes of the group practice, and the remaining financial relationship would be a direct compensation arrangement between the hospital and the employed physician. In this case, CMS notes that no direct compensation arrangement exception would be available because the physician’s employment would not have satisfied the bona fide employment exception.
CMS’s third example uses the same chain of financial relationships as the second, but the group practice would have an office space rental agreement with the group practice (in addition to owning the group practice). CMS concludes that the existence of the compensation arrangement between the hospital and the group practice would preclude application of the second convention, and that therefore the physician would stand in the shoes of the group practice. The rental agreement then would have to meet the requirements of a direct Stark Law exception.
b. Reed Smith Commentary
The necessity for conventions of the sort discussed by CMS illustrates, perhaps more than anything else, the complex analysis of indirect financial relationships that will become necessary as a result of the application of the SITS rules. The analysis will be all the more difficult because relationships among participants in the health care industry are not static; as illustrated by the second and third examples above, the fundamental approach to Stark compliance could change simply by the addition of another agreement between two parties in a chain of financial relationships. For hospitals and other entities with possibly hundreds of direct and indirect financial relationships with physicians, the compliance burden will be tremendous.
Furthermore, the application of these rules will be highly technical and the results will not be intuitive. For example, it is hard to understand why referrals to the hospital from the physician in the second example would be prohibited, but those same referrals would be permitted under the third example, simply because the hospital also has an office lease arrangement with the group practice that meets the office lease arrangements exception.
4. PCs Wholly Owned by Physicians
In the Phase II regulations, recognizing that some physicians (even those who are employed by group practices) practice through a wholly-owned professional corporation, CMS established the rule that a physician is deemed to stand in the shoes of his or her wholly owned PC. In the IPPS proposed rule, CMS expressed concern that, with the development of the physician SITS provisions in Phase III, some parties may not apply the Phase II policy concerning wholly owned PCs. Specifically, CMS indicates that some parties, in applying the definition of “physician organization” from Phase III, might deem a physician to stand in the shoes of his or her wholly owned PC, but not further collapsing the physician/PC with the physician organization. CMS is therefore proposing revisions to clarify that a physician and wholly owned PC are always treated the same under the Stark Law, and that a physician who stands in the shoes of his or her wholly owned PC also stands in the shoes of his or her physician organization.
B. Period of Disallowance
1. Background
With this proposal, CMS seeks to address the time period (referred to as the “period of disallowance”) during which a physician would be prohibited from referring patients to a DHS entity and for which the DHS entity would be prohibited from billing Medicare if a financial relationship between the referring physician and the DHS entity failed to satisfy a Stark Law exception. Generally, CMS has stated that the Stark Law contemplates that the period of disallowance begins when the financial relationship failed to comply with the Stark Law, and ends when the arrangement came into compliance. Yet, CMS observes, in some cases if may not be clear when a financial relationship has ended. For example, if a DHS entity leases space to a physician for substantially less than fair market value, there may be an inference that the below-market rent was in exchange for future referrals, including those made long after the lease expired.
In the 2008 proposed MPFS, CMS solicited comments on this issue, but received few responses. In the IPPS proposed rule, CMS proposes to establish an outside period of disallowance in the following three circumstances:
- If the reason for noncompliance is not related to compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the arrangement was brought into compliance. For example, if a signature is missing or an agreement is not in writing as required by the applicable exception, the period of disallowance would continue until no later than the date that the missing signature is obtained or a written agreement is executed. CMS notes that it is possible that the financial arrangement might end prior to the arrangement being brought into compliance, and in such circumstances, the period of disallowance would be made on a case-by-case basis.
- If the reason for noncompliance is related to the payment or receipt of excess compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the excess compensation (including interest, as appropriate) was returned by the party receiving it to the party that provided it and all other requirements of the applicable exception are met. For example, if on Feb. 1 a hospital provided nonmonetary compensation to a physician in excess by $100 of the annual regulatory limit, and noncompliance was not discovered until Oct. 1, the period of disallowance would begin Feb. 1 and end no later than the date on which the physician returned the excess nonmonetary compensation (or its value). (CMS notes that, if the noncompliance was discovered and the excess returned within 180 days of its receipt, existing regulations permit the parties to maintain compliance.)
- If the reason for noncompliance is related to the payment or receipt of insufficient compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the shortfall was paid to the party to which it is owed, and all other requirements of the applicable exception are met. CMS provides an example of a hospital and physician that entered into a two-year office space rental agreement that provides for a CPI rent adjustment after the first year, but the physician continued to pay the same rate during the second year until noncompliance was discovered in the middle of the second year. CMS stated that the period of disallowance would run from the first day of the second year of the lease until no later than the date on which noncompliance was discovered, as long as the physician paid the hospital rent shortfall on that date, paid the CPI adjusted rate for the remainder of the term, and the arrangement otherwise satisfied the requirements of the space lease arrangements exception.
CMS is not proposing a prescribed period of disallowance for arrangements that are noncompliant for reasons other than those specified above. For example, the periods of disallowance specified above are inapplicable to a compensation arrangement that fails to meet an exception because the compensation takes into account the volume or value of referrals in violation of an applicable exception, and to a noncompliance arrangement that ends before it is brought into compliance. With respect to these and all other instances of noncompliance not covered by the three circumstances described above, the period of disallowance will depend on the facts and circumstances.
2. Reed Smith Commentary
While CMS’s proposal attempts to provide some degree of certainty as to the period of disallowance under some circumstances, it leaves this question unaddressed for a great many circumstances, such as where an arrangement was noncompliant for reasons other than those specified in the three scenarios identified. The best that CMS can say about such circumstances is that the period of disallowance will be made on a case-by-case basis considering the facts and circumstances, but CMS provides no guidance as to what facts or circumstances would bear on the period of disallowance. This will leave open in many cases the question of whether a physician with a noncompliant arrangement could ever again refer to the DHS entity without violating the Stark Law. Furthermore, in discussing the three scenarios identified, CMS implied that even the most trivial deficiencies in arrangements with referring physicians cannot be corrected and therefore would cause referrals from physicians to violate the Stark Law.
C. Gainsharing Arrangements
1. Background
The term “gainsharing” refers to a variety of arrangements by which hospitals encourage physicians to practice more efficiently in the hospital by sharing some portion (typically measured by a percentage) of the hospital’s cost savings attributable to changes in physician behavior. The Office of Inspector General (“OIG”) had expressed significant concern that gainsharing arrangements could violate civil monetary penalty laws prohibiting hospitals from paying physicians to induce them to limit or reduce items or services furnished to Medicare or Medicare beneficiaries, and could violate the Anti-Kickback Statute if one purpose of the gainsharing arrangement is to influence referrals for federal health program reimbursable business. Nevertheless, in recent years, the OIG has issued favorable advisory opinions protecting from sanction under these laws specific gainsharing arrangements that include various safeguards. Further, in its March 2005 “Report to Congress on Physician-Owned Specialty Hospitals,” the Medicare Payment Advisory Committee recommended allowing certain gainsharing arrangements between physicians and hospitals, and CMS has initiated certain gainsharing demonstration projects, some of which have been mandated by Congress. Yet, whether and how such gainsharing arrangements could comply with the Stark Law has remained uncertain, particularly in view of CMS’s concern about percentage compensation arrangements generally. In view of these developments, in the IPPS proposed rule, CMS is soliciting comments as to whether a specific exception for gainsharing arrangements should be developed, what types of requirements and safeguards should be included in the exception, and whether certain services, clinical protocols or other arrangements should not qualify for the exception.
2. Reed Smith Commentary
While the Stark Law compliance of gainsharing arrangements of the type approved by the OIG has been uncertain, one approach to compliance for many such arrangements may have been application of the indirect compensation analysis. With the physician and entity SITS rules, this analysis may be unavailable. As a result, the development of an appropriate Stark Law exception for gainsharing arrangements could be valuable to many hospitals and physicians. CMS has not set forth a particular proposal with respect to such an exception. Hopefully, if CMS develops a gainsharing exception, it will include only requirements consistent with those considered necessary for compliance with the civil monetary penalty laws and Anti-Kickback Statute.
D. Physician-Owned Implant and Medical Device Companies
1. Background
In the 2008 proposed MPFS, CMS proposed to change the definition of “entity” to include entities that, although not themselves submitting claims for DHS, furnish DHS to a DHS entity. Although the scope of this new concept was uncertain, and the proposal has not been finalized, the proposal could have been interpreted to expand the Stark Law to cover a physician’s ownership of a medical device manufacturer, distributor or group purchasing organization (a “POC”) that furnishes medical devices to hospitals to which the physician refers. In response, CMS received several comments seeking clarification.
In the IPPS proposed rule, CMS states that the Stark Law and existing regulations, including the indirect compensation arrangements analysis discussed above, address many arrangements between the physician and these in soliciting POCs. However, CMS is soliciting comments as to whether specific provisions should be developed to address POCs and similar physician-owned entities. In particular, CMS solicits comments as to whether, and to what degree, physician investment in POCs is detrimental to federal health programs and their beneficiaries, and whether the Stark rules should address POCs more specifically or whether existing fraud and abuse laws adequately address the issues they raise.
2. Reed Smith Commentary
It is not clear how serious CMS is about addressing physician ownership of medical device companies through Stark Law regulation. Certainly, this could reflect a substantial expansion of the Stark Law to cover entities that themselves do not directly provide designated health services, and could also create a precedent for even further expansion of the Stark Law. Without specific proposed regulatory provisions, however, it is not possible to determine the potential impact on any particular physician or medical device company.
E. Physician and Hospital Disclosure and Reporting
The IPPS proposed rule contains new proposals relating to required hospital and physician disclosures to patients of physician ownership and availability at a hospital, and required hospital reporting of financial relationships with physicians.
1. Hospital and Physician Disclosures to Patients
a. Summary
In last year’s IPPS final rule, CMS adopted requirements that each physician-owned hospital provide written notice to patients that the hospital is physician-owned and that a list of the hospital’s physician owners or investors is available upon request, and that any hospital that does not have a physician present in the hospital 24 hours per day, 7 days per week, provide written notice to patients of this fact and indicate how the hospital will meet the medical needs of any patient who develops an emergency medical condition when no physician is present. In the IPPS proposed rule, CMS is proposing several clarifications and additional provisions relating to these requirements, including:
- Expanding the requirements relating to physician-owned hospitals to apply also when an immediate family member of a physician holds an ownership or investment interest in the hospital.
- Creating an exception to the requirements relating to physician-owned hospitals where none of the physician owners refers patients to the hospital if the hospital attests to this fact in writing.
- Clarifying that the list of physician owners and investors must be furnished at the time that the patient or someone on the patient’s behalf requests it.
- Adding a requirement that physician-owned hospitals must require all physicians who are members of the hospital’s medical staff to agree, as a condition of continued medical staff membership or admitting privileges, to disclose in writing to all patients who they refer to the hospital, any ownership or investment interest in the hospital held by themselves or by an immediate family member.
- Permitting CMS to terminate the Medicare provider agreement of any hospital that fails to comply with the physician ownership disclosure requirements or the 24/7 physician presence disclosure requirements.
b. Reed Smith Commentary
The proposal with the most practical significance for hospitals with physician ownership is the requirement to condition medical staff membership and clinical privileges on physician disclosure to patients. Currently, most state medical licensing acts or regulations already require physician disclosure to patients of ownership in health care facilities to which they refer. In the preamble to the IPPS proposed rule, CMS fails to explain why such state laws are insufficient to accomplish the required disclosure. If adopted, a hospital with physician ownership will need to consider how it would implement the new requirement, such as through agreements with the physician owners or provisions in the hospital’s medical staff bylaws, rules or regulations, and the implications of these alternative approaches on such things as medical staff due process rights. Furthermore, the addition of this requirement could imply some obligation on the part of the hospital to enforce physician disclosure to patients.
2. Hospital Reporting of Financial Relationships with Physicians
a. Summary
The Stark Law requires DHS entities to provide the Secretary of the Department of Health and Human Services with information concerning the entities’ ownership, investment and compensation arrangements in such form and at such times at the Secretary specifies. Currently, Stark Law regulations require entities to make such information available only upon request. In connection with the requirements of the Deficit Reduction Act of 2005 for the Secretary to address issues relating to physician-owned specialty hospitals, CMS sent a voluntary survey to 130 specialty hospitals and 220 competitor hospitals seeking certain information about their physician relationships, and included in its Report to Congress a statement that CMS would require all hospitals to provide this information on a periodic basis.
Thereafter, CMS prepared a collection instrument, called the “Disclosure of Financial Relationships Report” or “DFRR,” which it intended to send to 500 hospitals to determine their compliance with the Stark Law and to assist in developing future regulations. Although CMS initially intended to go forward with mandatory DFRR reporting for the 500 hospitals, in the IPPS proposed rule, CMS indicates that it seeks further comments prior to proceeding with this initiative. Attached to the IPPS proposed rule is the DFRR collection instrument, which requires, among other things, completion of worksheets listing all of the hospital’s direct and indirect physician ownership or investment relationships; a listing of its rental, personal services and recruitment arrangements; and certain information relating to other types of compensation arrangements. It is unclear from the preamble to the IPPS proposed rule, the instructions to the DFRR, or the forms themselves whether the required information extends to indirect compensation arrangements with physicians.
In the IPPS proposed rule, CMS is proposing and soliciting comments relating to various aspects of the DFRR initiative, including:
-
Soliciting input as to whether CMS’s estimates of the time and cost burden to complete the DFRR (an average of 31 hours and cost of $1,550 per hospital) are accurate.
Proposing that the DFRR be completed and filed with CMS within 60 days after the date appearing on CMS’s transmittal letter or email, but indicating a hospital may, upon good cause, receive an extension of time so as to avoid the imposition of civil monetary penalties. - Soliciting comments as to whether the DFRR collection effort should be recurring and, if so, on what periodic basis, whether CMS is collecting too much or not enough information, whether the DFRR should be directed to all hospitals and, if so, on what kind of collection cycle.
- Soliciting comment on whether hospitals that receive the DFRR should have to provide yearly updates and report only changed information.
b. Reed Smith Commentary
We expect that CMS is significantly underestimating the burden on hospitals in completing the DFRR collection instrument, particularly if data concerning indirect compensation arrangements will have to be furnished. While most hospitals have some method of cataloging the majority of written agreements directly with physicians or physician groups, it is likely that many hospitals do not have processes and procedures in place to collect data concerning indirect compensation arrangements. Moreover, since CMS candidly states that the collected information may be used to determine whether the hospitals submitting the data are in compliance with the Stark Law (and therefore, by implication, for possible enforcement action), hospitals receiving the DFRR may decide to re-evaluate some or all disclosed arrangements for Stark Law compliance. This could be time consuming and costly, particularly because older agreements may have been analyzed under regulations and guidance available at the time, rather than under more current Stark Law regulations and guidance.
III. CONCLUSION
Given the magnitude of the potential negative consequences to providers that may result if the IPPS proposed rule were to be enacted, hospitals and other health care providers may wish to consider submitting a formal comment letter to CMS in response to the proposed changes, or asking that such a submission be made by a trade association of which they are members. Such comments are due by June 13, 2008.
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Please contact Karl A. Thallner, Jr. (215.851.8171, kthallner@reedsmith.com), Gina M. Cavalier (202.414.9288, gcavalier@reedsmith.com); Daniel A. Cody (415.659.5909, dcody@reedsmith.com); Heather M. Zimmerman (202.414.9341, hzimmerman@reedsmith.com); Suzanne K. Yurk (215.241.5470, syurk@reedsmith.com) or any other Reed Smith attorney with whom you work if you would like additional information or if you have any questions.
Footnotes
1 Our prior Client Memos describe each of these developments. For a discussion of the Stark Law provisions in the 2008 proposed MPFS regulations, see our July 24, 2007 Client Memo entitled, “Update on Important Stark Law Developments,” which is available on our website. Our Oct. 4, 2007 Client Memo entitled “Stark II (Phase III) Final Rule,” describes CMS’s Phase III regulations, which generally went into effect Dec. 4, 2007. That Client Memo is available on our website.
2 In the recent past, CMS has dispensed with some of its Stark Law initiatives. For example, CMS proposed some changes to the Stark regulations in the 2008 IPPS proposed rule, but then decided not to adopt them as final. Similarly, CMS did not finalize most of its proposals in the 2008 Medicare Physician Fee Schedule rule (although CMS indicates that those proposals are still under consideration). Additionally, CMS delayed the date of applicability for 12 months for the physician SITS provisions contained in the Phase III final rule for certain entities. Despite CMS’s failure to fully implement its proposed changes in some instances in the past, it is important to recognize that CMS is authorized to implement the proposed changes if it so chooses, and interested persons should not withhold comments on the assumption that CMS will not adopt these proposals.
3 Although a specific Stark Law exception exists for payment arrangements involving components of an AMC exception, the AMC exception is particularly complex and its contours are unresolved. Many academic medical centers have, therefore, relied principally on the indirect compensation arrangements analysis first articulated in the 2001 “Phase I” regulations under the Stark Law. The SITS provisions affect that analysis. Recently, a court concluded that the AMC exception was applicable to a particular funding arrangement between Kosair Children’s Hospital and the University of Louisville Research Foundation. U.S. ex rel. Villafane v. Solinger, No. 3:03-CV-519-H (April 8, 2008). Nevertheless, even following this case, the applicability of this exception to many academic medical centers remains, at best, uncertain.
