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CMS Proposes Significant Changes To Stark Law and Other Regulations Governing Physician-Hospital Business Arrangements

Summer 2007 | Volume 2, Issue 2

On July 2, the Centers for Medicare and Medicaid Services (CMS) issued its Medicare Physician Fee Schedule Proposed Rule (proposed rule), which appears at 72 Fed. Reg. 38122 (July 12, 2007). Buried in the 924 pages of the proposed rule are proposed changes, comments, and requests for comments affecting the Stark Law, reassignment rules, purchased diagnostic test rule, independent diagnostic testing facilities (IDTFs), and services provided “under arrangements.”

If the rules proposed by CMS become final in the proposed form or as contemplated by CMS, many existing arrangements structured to comply with current law would be affected and require change. Providers with shared laboratory and imaging facilities, per-click leasing arrangements, IDTFs, percentage compensation arrangements, block leases, under arrangement service agreements, and those who utilize the in-office ancillary services exception under the Stark Law, need to review their activities and arrangements in anticipation of the changes forecast by CMS.

What follows is our overview of the major proposed changes and concerns announced by CMS in the proposed rule.

1. Reassignment; Purchased Diagnostic Test Rules (Anti-Markup Provisions); Stark In-Office Ancillary Services Exception.

Medicare rules currently prohibit the markup of the technical component of certain diagnostic tests that are performed by outside suppliers (i.e., someone other than a full-time employee of the billing physician or medical group) and billed to Medicare by a different individual or entity.

CMS now proposes a revision to the anti-markup rule that would extend the prohibition on markups to the interpretation or professional component of diagnostic tests provided by outside suppliers. This proposed rule would apply whether a component is purchased outright, or the physician or other supplier performing the technical or professional component reassigns his or her right to bill to the billing physician or medical group purchasing the component. The only exception would be reassignment from a full-time employee of the medical practice.

Under the anti-markup rule, the billing physician or medical group cannot bill to Medicare more than the lowest of: (1) the “supplier’s net charge” to the billing physician or group, (2) the billing physician’s or group’s actual charge; or (3) the fee schedule amount for the test that would be allowed if the supplier billed Medicare directly. To prevent gaming, CMS proposes to define the “supplier’s net charge” to be an amount determined without regard to any charge that is intended to reflect the cost of equipment or space leased to the outside supplier by or through the billing physician or medical group.

CMS recognizes that its proposed rule change to the anti-markup rule described above would not cover the technical component of diagnostic tests performed by part-time or leased employees of the billing physician in a centralized building that are billed to Medicare in reliance on the in-office ancillary services exception. CMS also notes that the in-office ancillary services exception increasingly is being used by physician groups for ancillary services provided in a centralized building, but which are not as closely connected to the physician group’s practice as CMS says was the historical reason for the exception. In particular, CMS expresses concern about arrangements where non-specialists use the exception to bill for specialized services, and cites as an example, an entity with its own staff located in a medical office building that furnishes an array of diagnostic services, including clinical laboratory services and radiology services, to patients of physicians who practice in the building and own either the equipment or the entity providing the diagnostic services.

In response to these concerns, CMS invites comments (but does not at this time make a proposal) as to whether an anti-markup provision should be applied to technical components that are performed in a centralized building and billed to Medicare in reliance upon the ancillary services exception.

One of the targets of CMS concerns are the pathology pod labs that through contractual arrangements with physician groups, give such groups the shared use of equipment, technologists and interpreting pathologists. Physician groups that utilize pathology services can bring these services in-house in reliance on the Stark in-office ancillary services exception for centralized buildings, and bill for such services at a markup. However, CMS indicates that its concerns do not extend to professional components ordered by independent laboratories.

Taken together, these proposed rule changes and changes on which comments are invited would result in the closure of numerous centralized building facilities for the shared provision of diagnostic tests to physician groups using the in-office ancillary services Stark Law exception, and would apply to the full range of diagnostic imaging tests in addition to the pathology pod lab, which has been a central focus of CMS concern. It also would eliminate the economic incentive for medical practices to bill Medicare for the professional component of diagnostic tests not performed by full-time employees of the billing practice, resulting in the unwind of many current arrangements with part-time or independent contractor physicians engaged by billing physician groups to provide interpretations of diagnostic tests.

2. Per-Click Leases; Stand in the Shoes.

Under current law, a physician may lease space and/or equipment owned by the physician to a hospital or other entity that provides Stark Law designated health services (DHS), pursuant to which the hospital or other DHS provider pays rent to the lessor physician based on each use it makes of the leased space or equipment (referred to as “per-click” payments). Such leases are permitted under the Stark Law (even if the physician refers patients to the hospital for services using the equipment) so long as the unit of payment per click is consistent with fair market value, is set in advance, and does not change during the term of the lease in a manner that takes into account the referrals of designated health services.

CMS is now proposing language to the Stark regulations for space and equipment leases that bars payment of rent to a leasing physician that is calculated on a per-click basis for services provided to patients referred by the lessor physician to the lessee hospital or other DHS provider.

The proposed rule change would only apply when the lessor is an individual physician, and would not apply to lessors that are entities owned by physicians who make referrals to the lessee. Such per-click lease arrangements by physician entities would continue to be subject to the indirect compensation analysis under the Stark Law. However, CMS commentary states that it is considering additional rule changes that would have individual physicians “stand in the shoes” of their practice groups and other entities in which they have an interest, presumably including entities formed to acquire and lease space and/or equipment to hospitals and other DHS providers. If and when such further changes are made, numerous per-click leasing arrangements will need restructuring to comply with the Stark Law.

Finally, CMS asks for comments on whether it should also prohibit per-click leases where the physician is the lessee of equipment. CMS cites as an example a physician who rents an MRI machine from a hospital only when the physician refers a patient to the hospital for an MRI scan and then provides the facility portion of the MRI service “under arrangements” with the hospital. Such a lease, CMS believes, could provide an incentive for over-utilization.

3. “Set in Advance” and Percentage-Based Compensation Arrangements.

Several of the compensation exceptions to the Stark Law require that compensation be “set in advance,” including the space and equipment lease exceptions, the personal service arrangement exception, the fair market value exception, and the academic medical center exception. Under current law, compensation is considered set in advance if the aggregate compensation, a time-based or per-unit-of-service-based amount, or a specific formula for calculating the compensation, is set forth in an agreement.

Now CMS says that despite its intent that percentage compensation arrangements be used only for compensating physicians for the physician services they perform, CMS has learned that percentage compensation arrangements are being used for the provision of other services and items, such as equipment and office space that is leased on the basis of a percentage of the revenues raised by the equipment or in the medical office space. CMS expresses its concern that percentage compensation in the context of equipment and office space rentals is potentially abusive.

So, CMS proposes additional language to the Stark regulations setting forth special rules that limit permissible percentage-based compensation to compensation based on revenues directly resulting from personally performed physician services. CMS notes that this proposed limitation would preclude the use of other factors for percentage compensation, such as a percentage of the saving by a hospital department (which is not directly or indirectly related to the physician services provided), in addition to percentage compensation in the context of space and equipment leases described above.

4. Stand in the Shoes; Indirect Compensation Exception.

As discussed above, CMS is considering additional rule changes that would have individual physicians “stand in the shoes” of their practice groups and other entities in which they have an interest. This presumably would include entities formed to acquire and lease space and/or equipment to hospitals and other designated health entities. The effect of the change would be that the Stark Law exemption used for such arrangements would be the space and equipment lease exceptions rather than the indirect compensation exception. In effect, a physician rather than his or her practice group would be treated as the direct lessor of the space or equipment.

CMS in its comments states that it also wishes to focus on the DHS provider side of these relationships, such as hospitals. Accordingly, CMS proposes a rule that when providers of DHS own or control another entity to which physicians refer Medicare patients for DHS, the DHS entity would stand in the shoes of the entity that it owns or controls. As such, 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. For example, a hospital would stand in the shoes of a medical group that it owns or controls, such that if the medical group contracts with a physician to provide physician services at a clinic owned by the medical group, the hospital would stand in the shoes of the medical group. The hospital therefore would be deemed to have a direct compensation relationship with the contractor physician, and would need to use the direct compensation exception for the relationship with the physician.

CMS has not proposed specific language for the rule revision to accomplish this, but invites comments on its desired change. Could this concept apply to joint ventures between hospitals and physicians, and if so, what level of control is required before the proposed rule would apply? If CMS adopts the changes it either proposes or discusses on per-click leases, percentage arrangements, and “stand in the shoes” proposals, many existing hospital-physician joint ventures and lease and management arrangements would need restructuring.

5. Services Furnished “Under Arrangements.”

In unusually strong language, CMS expresses its concern in the proposed rule over DHS furnished “under arrangements” by physician-owned entities to hospitals and other DHS entities. CMS’ concern arises when DHS are provided by entities in which a referring physician has a financial interest, but which are provided to patients of hospitals and other entities that directly bill Medicare for them. Under current Stark Law regulations, entities that provide DHS to hospitals and other DHS entities under arrangements are not deemed to be furnishing DHS. Rather, only those entities to which CMS makes payment for the DHS, i.e. the hospital or other entities that bill for those services, are considered to be the service provider. This allows physicians to have an ownership interest in these entities without qualifying for one of the Stark ownership exceptions.

CMS believes that such arrangements provide an incentive for physicians to over-utilize DHS. CMS cites as an example hospital outpatient services for which Medicare pays separately for each clinical laboratory test, for each therapy service, and for the vast majority of radiology and other imaging services. According to the commentary, CMS believes that there is no legitimate reason for these arranged-for services other than to allow referring physicians an opportunity to make money on referrals for separately payable services.

CMS also cites services furnished under arrangements to a hospital that are provided in a less medically intensive setting than the hospital (i.e. an ambulatory surgery center, an independent diagnostic testing facility, or a physician office), but billed at higher outpatient hospital system rates.

CMS is trying to determine the best approach to resolving its concerns. It says that one alternative is to adopt the March, 2005 recommendation of the Medicare Payment Advisory Commission (MedPAC) that CMS “expand the definition of physician ownership in the physician self-referral law to include interests in an entity that derives a substantial proportion of its revenue from a provider of designated health services.” CMS asks for comments on the MedPAC approach, but indicates that it takes a different approach to the issue that it believes may be more straightforward. CMS proposes to change the definition of DHS “entity” that would include in the definition not only the entity that presents a claim or causes a claim to be presented for Medicare benefits for DHS, but also the person or entity that has performed the DHS. Today, under arrangements services agreements between physicians and hospitals are analyzed as indirect compensation arrangements. Assuming CMS modifies the definition of DHS “entity” as suggested in the commentary, a physician ownership interest in an entity that furnishes DHS to a hospital under arrangements would be analyzed, in effect, as though the physician has an ownership interest in the hospital itself, and the physician would have a prohibited ownership interest in the entity that has contracted with the hospital to provide DHS under arrangements.

The CMS approach has some ambiguities. How will CMS deal with services that are not DHS when directly furnished, such as most cardiac catheterization procedures, endoscopy or lithotripsy, but which become DHS hospital services when furnished under arrangements? The proposed rule applies to an entity that performs DHS, even if it does not bill for them. But many under arrangements entities provide hospitals certain management services, supplies, and staff to enable hospitals to perform DHS. Hospital outpatient surgery departments are a good example. At what point will such entities be deemed to “perform the DHS” under the proposed rule?

If CMS instead adopts the MedPAC approach and expands the definition of physician ownership to include interests in an entity that derives a substantial portion of its revenue from a provider of designated health services, the ambiguity described above would be resolved. However, the MedPAC approach would affect many arrangements now in place structured to comply with current law. These would include, for example, equipment leasing companies owned by physicians that lease an MRI to a hospital, or a management services company owned by physicians that manage a hospital service line, where such companies derive a substantial portion of their revenue from a provider of DHS. The MedPAC approach would end physician investment in any entity that derives a substantial portion of its revenue from the provision of services or items to a DHS entity.

CMS disregards any positive benefits of services provided under arrangements. Many existing arrangements have been formed for appropriate reasons, and in fact result in higher quality care, improved access, new services, and lower costs to Medicare. Given CMS’s strong language indicating its belief in the potential for abuse, and its apparent disregard for the potential positive benefits of services provided under arrangements, change in the rules is likely. Hospitals and physicians will need to review the services under arrangements they now have in place and decide how they will restructure, or unwind them if the changes CMS proposes are made.

6. Independent Diagnostic Testing Facilities.

CMS is proposing several changes and additions to the performance standards governing independent diagnostic testing facilities (IDTFs). One in particular, a ban on shared arrangements, was attempted by CMS in CMS Transmittal 187 issued in January 2007. CMS rescinded the transmittal due to concerns expressed by the imaging industry. The current proposal will elicit renewed expressions of concern from the industry, and if enacted as proposed, will likely have significant impact on the industry and arrangements established under current law.

CMS proposes a new standard that would require an IDTF to certify that it “does not share space, equipment, or staff or sublease its operations to another individual or organization.” In its comments in the proposed rule, CMS states that the commingling by an IDTF of office space, staff, and equipment, or the subleasing of its operation to another presents a significant risk to the Medicare program because it prohibits CMS and its contractors from ensuring that each IDTF establishes and maintains Medicare billing privileges as required.

CMS amplifies its proposed new standard by identifying shared space as including shared waiting rooms, shared staff as including supervising physicians, non-physician personnel and receptionists, and shared equipment as including equipment subleasing agreements. These types of arrangements, it concludes, also raise concerns because they may implicate the physician self-referral prohibition and the anti-kickback prohibition.

Will this standard apply to an IDTF wholly owned by a physician practice? No carve-out of these IDTFs appears in the proposed rule. Will the prohibition on subleasing be limited to concurrent use of the IDTF, leaving participants free to sublease in discrete periods such that one participant’s use can be distinguished from that of another sublessee? How these questions are resolved will affect block leasing and other shared arrangements. Those involved in shared use of IDTF space, staff, and equipment should have these arrangements reviewed now in anticipation of the new and revised IDTF performance standards.

Other changes proposed by CMS to the IDTF standards affect the responsibilities of the supervising physician, maintenance of liability insurance coverage, the effective date of billing privileges, notification of enrollment changes, and handling of patient questions and complaints.

7. Other Topics Addressed in the Proposed Rule.

In addition to the topics discussed above, CMS proposes to clarify that, when claims are denied based on a Stark law prohibition, the burden of proof will be on the entity submitting claims that the service was not furnished pursuant to a prohibited referral. CMS also seeks comments relating to the period of payment disallowance resulting from a Stark Law violation as well as on alternative criteria for satisfying Stark Law violations where the noncompliance is self-disclosed, only procedural or form requirements are violated, the failure to meet requirements was inadvertent and other criteria.


CMS’ proposals and requests for comment in the proposed rule reflect its nagging concerns about program abuse by many of the business arrangements that have been put into place in recent years. CMS seems determined to close the loopholes in current law that have allowed these arrangements. Taken in the aggregate, the changes in the proposed rule would require the restructuring or unwinding of many existing business arrangements, particularly between hospitals and physicians.

For further information or assistance regarding the proposed rule, contact Michael Skindrud (608-284-2619 or or Charles Vogel (414-287-9502 or or another member of the

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