Multiple office group practice

How are the physicians compensated under the Stark Law?

Issue: May 1, 2004

ByJeffrey S. Peters, JD

Facts

Nine ophthalmologists, comprising three separate practices, decide to form a larger group practice. The combined group will continue to practice at all three locations, with three ophthalmologists working principally at each of the separate office locations. The members of the group agree that each member shall be compensated on the basis of his or her own individual collections, minus an allocation of the expenses for the office at which they work. In addition, each ophthalmologist will receive the net profits from the A-scans, B-scans and post-cataract lenses and spectacles that he or she orders.

Is there any limitation on the way in which physicians can structure a compensation relationship within their practice?

The major issue for this arrangement is compliance with the Federal Physician Anti-Self-Referral Law, also known as the Stark Law. The Stark Law prohibits physicians from referring Medicare or Medicaid patients for certain “designated health services” to entities with which they have financial relationships. Among the designated health services are radiology services, including MRI, computerized axial tomography scans and ultrasound services. Radiology services include A-scans and B-scans.

Under the Stark Law, a physician has made a referral simply by ordering a service. Thus, when physicians order A-scans and B-scans, the Stark Law is triggered, and the physicians would be prohibited from making such a referral within the practice unless an exception to the Stark Law applies. The relevant exception is one for the provision of “in-office ancillary service,” which requires that the services be provided by, or under, the supervision of a physician who is a member of the group practice. Although initially this requirement appears simple and straightforward, it is not; the Stark Law has a detailed and restrictive definition of what qualifies as a group practice.

First, in order to qualify as a Stark group practice, a group must function as an integrated, unified business and not merely as separate practices bound together in name or referrals alone. In the proposed regulation published by the Center for Medicare and Medicaid Services (CMS), this practice’s site-by-site allocation of expenses would have caused concern, as CMS had taken the position that an entity could not be a unified business if it shared expenses based on “cost centers.” In response to criticism that the proposed regulation would have excluded many bona fide group practices and intruded too far into the financial operations of physician practices, CMS substantially revised the group practice definition in the final rule, and separate cost centers are permitted. However, a group practice still must be organized and operated on a bona fide basis as a single integrated business enterprise with legal and organizational integration, among other requirements. There are additional requirements that would have to be met for the group to qualify as a group practice as well, including:

Each physician who is a member of the group must furnish substantially the “full range of patient care services” that the physician routinely furnishes, including medical care, consultation, diagnosis and treatment, through the joint use of shared office space, facilities, equipment and personnel.

At least 75% of the total patient care services of the group practice members must be furnished through the group and billed under a billing number assigned to the group, and the amounts received must be treated as receipts of the group.

The overhead expenses and income from the practice must be distributed according to methods that are determined before the receipt of payment for the services giving rise to the overhead expense or producing the income.

Members of the group must personally conduct no less than 75% of the physician-patient encounters of the group practice.

The group practice definition also imposes certain limitations on how physician compensation may be determined. Specifically, the physician members of a group are prohibited from directly receiving compensation based on the volume or value of their own referrals, unless they perform the services themselves or the services are “incident to” the individual physician’s services. Applying this limitation to the fact pattern described above, it is acceptable to compensate the physicians based on their collections, reduced by an allocation of expenses to reflect the overhead of their office. Unless the physicians personally perform the A-scans or B-scans, however, because they are designated health services, the proposed compensation methodology is not acceptable under Stark. Instead, profits derived from designated health services should be shared equally among the physician partners or distributed consistent with each physician’s respective ownership in the practice.

Finally, payment of a bonus based on the volume of post-cataract spectacles ordered is permissible under the Stark Law. Despite the technical categorization of post-cataract surgery spectacles as a “prosthetic device” and therefore a designated health service under Stark, under the final regulation CMS exempted post-cataract spectacles from the list of designated health services.