Stark I and II final rules released

HCFA announced changes to the Stark II rules that revise self-referrals and direct supervision. The changes are “breathtaking,” a health care lawyer said.

WASHINGTON — Impetus for the Stark II final rules released by the Health Care Financing Administration (HCFA) in early January can be found in two proposals from the last congressional session that address complex issues under the Stark law prohibition on self-referrals. The two legislative proposals were made by House Ways and Means Health Subcommittee Chairman William M. Thomas, R-Calif., and Congressman Fortney “Pete” Stark, D-Calif.

The Stark II final rules represent a major change in federal policy, reflecting a significant retreat from a set of inflexible interpretations of the statute that HCFA announced in its proposed rules released in 1998. According to William Sarraille, JD, a partner with the Arent Fox law firm here, some of the most important changes contained in the final rules include the exclusion of post-cataract spectacles and lenses from the list of “designated health services.”

The final rules confirm that IOLs implanted in ASCs are not designated health services. The final rules also eliminate the demanding “direct supervision” rule under the critical in-office ancillary services exception to the self-referral law in favor of a “more flexible supervision standard” that requires “only the supervision called for under the Medicare payment and coverage rules,” Mr. Sarraille said.

Group practice concepts re-written

In another major set of revisions, HCFA redefines the important concept of a group practice under the law, permitting group practices (1) greater flexibility in distributing designated health service income and (2) the ability to use cost and revenue centers for its different sites.

Part-time itinerant sub-specialists are allowed, under the final rules, to supervise the delivery of designated health services and to be paid productivity bonuses akin to those payable to equity and employee members of a group practice. Compensation to an independent contractor may also consist of “per unit” and “per time” mechanisms under the final rules, Mr. Sarraille said.

These provisions “will bring greatly expanded flexibility in contracts with independent contractor physicians,” Mr. Sarraille noted. “Given the growing prevalence of part-time itinerant specialist relationships, this is a very significant change. All in all, the changes are breathtaking.”

The Stark law prohibits a physician from making a Medicare or Medicaid referral for “designated health services” to an entity with which the physician or an immediate family member of the physician has a financial relationship. The law covers two sets of financial relationships: ownership/investment interests and compensation arrangements.

There are two components to the Stark statute. Stark I deals with clinical laboratory services, and Stark II, which came out in 1995, extended the reach of the prohibition to 11 categories of designated health care services. This includes all Medicare and Medicaid hospital services, radiology and ultrasound services, prosthetics, outpatient prescription drugs, and physical and occupational therapy, among other services.

Even with the exclusions brought by the final rules, some ophthalmic designated health services remain, including A-scans, B-scans and clinical laboratory services. “Ophthalmologists still need to worry about the Stark law,” Mr. Sarraille said.

Direct supervision

“Before the final rules, there was a direct supervision requirement under this exception to the statute,” Mr. Sarraille said. “When a physician made a referral within his or her group practice, the physician or another physician member of the group practice had to supervise any non-physician performing the service. [The physician was supposed to be] in the office suite and readily available to give advice and directions during the entire time the service was provided. Direct supervision was a demanding standard.”

For ophthalmologists who went to a hospital or ambulatory surgery center to perform procedures or see patients in different office sites, it often presented a major problem. The abandonment of an inflexible direct supervision statement in favor of the applicable Medicare payment supervision rules applicable to a given service reflects congressional pressure.

Rep. Thomas’ bill would have changed the supervision from “direct” to “general.” Under general supervision a physician just has to generally supervise the service; he or she does not actually have to be there each and every time the service is being provided. Although Rep. Stark’s proposed bill used different language, it would essentially have made the same change to the direct supervision standard, Mr. Sarraille said.

“HCFA saw the writing on the wall and adopted a more flexible standard knowing that if it did not Congress would impose one,” Sarraille commented.

Compensation still to be resolved

The final rules released in early January will be followed at a later date by another set of final rules that will deal largely with unanswered issues related to some of the compensation exceptions to the Stark law. Sarraille said one of the “major fights” between Reps. Thomas and Stark in these “dueling reform bills” was the issue of whether the Stark law would continue to target “compensation arrangements,” or focus only on “ownership interests.”

“Congressman Thomas wanted to eliminate compensation arrangements from the statute; Congressman Stark was adamantly opposed to this. HCFA’s delay in addressing a number of compensation issues may reflect the uncertainty surrounding the lack of a Congressional consensus on this issue and the added problem presented by a change in presidential administrations,” Mr. Sarraille said.

The final rules released in early January adopted a reform proposal from Rep. Stark and created a new “fair market value” exception to the law. The exceptions allow for compensation arrangements under the Stark law’s personal services exception, an approach that could provide ophthalmologists with significant additional flexibility in “testing the waters” with new relationships, Mr. Sarraille said.

“I think HCFA was convinced that no one would order cataract surgery for the ‘opportunity’ to provide post cataract spectacles and lenses,” he added.

Letters to Stark’s office

A surprising twist to the reform debate that played itself out in the final rules centered around two letters that were recently sent to Rep. Stark’s office, before the final rules were released, one from the Office of the Inspector General and one from the Department of Justice (DOJ).

Rep. Thomas’ proposed provision would have eliminated the risk of enforcement under Stark law until HCFA came out with final interpretive rules. However, the government — in particular the DOJ — took the position that the Stark law was not unclear and that the DOJ needed the Stark law as a tool in its arsenal, even before the final rules were released, to “ensure appropriate utilization,” Mr. Sarraille explained. In fact, the DOJ said it was investigating 50 cases under the False Claims Act that involve Stark law issues.

This was a “huge” announcement, Mr. Sarraille said. “Basically HCFA had previously said that it is not looking to enforce the Stark law until it released the final rules. But apparently the DOJ had a different view.” According to the DOJ, a Stark law violation may constitute a violation of the False Claims Act.

“I think a lot of people in the defense bar would challenge that assumption,” Mr. Sarraille said.

Sham compensation

The relevant paragraph of the DOJ letter states: “The department currently has more than 50 matters under investigation or litigation, in which whistle blowers have alleged conduct which could violate the physician self-referral prohibition. The vast majority of our open investigations concern sham compensation relationships with hospitals and other institutional providers: relationships in which physicians appear to receive money for no work, property for which the hospital has no use, or some other cover. Whether the evidence shows the purpose of the relationship is to induce or ensure referrals, or where the evidence or other circumstances preclude a criminal prosecution under the anti-kickback statute, the self-referral prohibition, and where appropriate, the False Claims Act, preserve for the government a remedy to restore to the Medicare program moneys improperly claimed as a result of these unlawful relationships.”

This means, Sarraille said, that when the DOJ cannot prove intent to pay for referrals, a critical requirement under the Federal Anti-kickback Statute, it will resort to the Stark self-referral law, where there is no intent requirement.

“Entering the fray in its final rules,” Mr. Sarraille said, “HCFA appears to support the DOJ’s position that a Stark law violation can create a False Claims Act violation. Health care attorneys are deeply disappointed by this component of the final rules and by HCFA’s suggestion that pre-final rules violations can be enforced.”

For Your Information:

• William Sarraille, JD, a member of the Ocular Surgery News Editorial Board, can be reached at 1050 Connecticut Ave. NW, Washington, DC 20036; (202) 857-6359; fax: (202) 857-6395; e-mail: sarrailw@arentfox.com.
• Rep. William M. Thomas can be reached at 2208 Rayburn Building, Washington, DC 20515; (202) 225-2915; fax: (202) 225-8798.
• Rep. Fortney “Pete” Stark can be reached at 239 Cannon House Office Building, Washington, DC 20515; (202) 225-5065; fax: (202) 226-3805; e-mail: petemail@hr.house.gov.
• The House Committee on Ways and Means, Subcommittee on Health can be reached at Room 1136, Longworth House Office Building, Washington, DC 20515; (202) 225-3943.