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Legal Update
Stark Phase II Spares Surgery Centers
Lorin Patterson
Publish Date: October 10, 2007

Lorin Patterson, Esq. If you were concerned about the latest physician self-referral laws, breathe easy. On March 26, the Centers for Medicare and Medicaid Services (CMS) published the massive Stark Phase II, which governs how physicians make referrals to entities in which they have a direct or indirect financial relationship. As you'll see, the new laws won't have much impact on most ambulatory surgery centers (ASCs).

Lorin Patterson, Esq.\ Stark II highlights
Stark Phase II, which takes effect July 24, is long and complex. Here's what participants in outpatient surgery ventures need to know.

  • The best news. Despite a troubling reference in Stark Phase I that Phase II might address ASC ownership, the statute doesn't define surgery performed in an ASC as a designated health service (DHS). In addition to the surgery itself, certain items, such as implants, in ASC surgery are excepted from the definitions of DHS.

What do we mean by DHS? The Stark Law prohibits physicians from referring Medicare patients for defined designated health services to entities with which they have a financial relationship - including ownership or investment interests or compensation arrangements - unless an exception is met. Surgery performed in an ASC is not considered a DHS. On the other hand, radiology services (MRI, CT and ultrasound), durable medical equipment, prosthetics and orthotics and outpatient prescription drugs are. If your facility provides such ancillary services, make sure you're operating within a Stark Law exception.

  • Hospital rule. Inpatient and outpatient hospital services are a DHS, so physicians with either ownership or compensation relationships with a hospital have to satisfy a Stark exception - or not refer to the hospital. Physician-investors in hospitals have long relied on the whole-hospital exception when making referrals.

What is the whole-hospital exception? Under the Stark Law, a physician who owns an interest in a hospital may refer patients there if he is authorized to perform services at the hospital, and the ownership or investment interest is in the hospital itself (as opposed to in a subdivision or subpart of the hospital). This exception is often referred to as the whole-hospital exception.

Considerable publicity has been given to the Medicare Reform Bill's moratorium on the opening of new specialty hospitals. Phase II incorporates that bill's provisions, but doesn't impose additional requirements. The regulations do clarify one very important issue for physicians owning interests in any hospital: A physician must have a bona fide intention to admit and treat patients in the facility. In other words, investment by primary care providers who won't admit or treat patients in the facility (but who will refer their patients to other physician-owners who will admit them to the hospital) can be a problem.

  • Office-service exception. More physician groups are trying to maximize income with additional services. The Stark Law exception that makes this possible is the "In-office Ancillary Services Exception." In Phase I, it let separate groups share DHS facilities (such as imaging facilities) in their office buildings. Although Phase II's rules are more intricate, legitimate office-sharing arrangements should be able to comply with one of the three options:

1. Full-time office. A referring physician or his group must have an office in the building at least 35 hours per week and regularly practice medicine in the building 30 hours a week.

2. Patient office site. The referring physician or his group must have an office open at least eight hours a week in the building where DHS facilities are located, and the patient receiving the DHS must be regularly treated at that site.

3. Physician presence. The referring physician or his group must have an office open at least eight hours a week in the building where the DHS facilities are located, and the referring physician must be present in the building when he orders a DHS or be present (or have a member of his group present) while the DHS is performed.

  • Compensation arrangement flexibility. Phase II demonstrates CMS will allow common practices it deems non-abusive. For example, the Stark Law has always provided that compensation relationships must not be based on "the volume or value of referrals" and compensation must have been fully "set in advance" - something difficult at best to accomplish under arrangements such as per-case equipment leases or physician/independent contractor agreements. Under Phase II, compensation will not be seen as varying by volume or value of referrals if the compensation is fair market value and the means for determining it is specified initially within the agreement. Contact your counsel to determine if you can take advantage of this in your compensation relationships with entities covered by the Stark Law (including equipment leases, and group practice compensation and independent contractor agreements).

An iffy prognosis
CMS is accepting comments until June 30, so you can expect some changes. Many of the Stark Law updates resulting from CMS's phased rulemaking have been positive, but not all developments will favor physicians. Expect that once the rules take effect and the statute's interpretation becomes more concrete, Stark Law enforcement will increase.

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