Does Stark Phase III Ring the Death Knell for Physician-Owned Perfusion Groups?
By: Victor J. Lich, Jr., Attorney at Law and General Counsel for Perfusion.com, Inc.
Disclaimer: This Article is for informational purposes only and does not constitute and should not be taken as legal advice. The information contained herein should not be used to form the basis of a legal opinion or strategy. The writer of this Article makes no warranty as to the accuracy of the information contained herein. Persons or entities affected by Stark Phase III should contact their own legal counsel for advice regarding their particular factual situation.
I. Basic Stark Prohibitions.
The Stark Law, and the rules and regulations promulgated there under, is administered by the Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS). Unless there is a specific exemption contained in the law or regulations, a physician cannot refer a Medicare patient for “designated health services” (those listed in the law or regulations) to an entity in which the physician or an immediate family member has a financial relationship. The “financial relationship” can be by ownership or a compensation relationship. Such an entity is prohibited from presenting a claim to Medicare for payment for services.
II. Designated Health Services.
The “Designated Health Services” (DHS) include inpatient and outpatient hospital services. We must presume that perfusionists perform inpatient hospital services that qualify as DHS.
III. Violation Penalties.
A. Violation penalties include the following:
1. Denial of Medicare claim.
2. Civil penalty of up to $15,000 per prohibited service.
3. Civil penalty of up to $100,000 for a circumvention scheme.
4. Exclusion from Medicare/Medicaid participation.
IV. Changes in Stark III.
A. Indirect compensation.
1. Stark II allowed physicians to own an entity that was paid by a hospital and did not directly bill Medicare. The theory was that because the physician-owned entity did not bill Medicare, the physicians did not have a financial interest in an entity that provided “designated health services”. The physicians were considered to have permissible “indirect compensation”.
2. Stark III changes the above rule and the prohibition now includes the physician owned entity that performs the “designated health services” in addition to hospital that bills for the services. This change creates a Stark ownership or direct compensation relationship between the hospital and the physician owners of the entity performing the DHS. Essentially, a physician now “stands in the shoes” of the entity in which he/she has an ownership interest and any compensation received is now considered to be “direct compensation” to the physician that must qualify for an exception to the rules in order to not be prohibited.
3. The exceptions to the “direct compensation” prohibition are complicated and generally fall into the following categories:
a. Academic medical centers.
b. Intra-family rural referrals.
c. Personal service arrangements.
d. Non-monetary compensation.
e. Charitable donations.
f. Professional courtesy.
g. Fair market value compensation.
h. Compliance training.
The foregoing exceptions will not, except in rare cases, be helpful in resolving issues raised by Stark III as they relate to the perfusion business.
B. Percentage-Based Fees.
1. Stark I and II allowed percentage-based compensation as long as it was
“set in advance” pursuant to a written agreement. This rule covered physician professional services, lease arrangements, and presumably other financial arrangements that physicians could enter into.
2. Stark III limits the definition of “set in advance” to physician professional services and so agreements for other type of services are no longer protected.
C. Anti-Kickback Statute. 42 USC §1320a-7b
1. Stark III now requires that physician financial arrangements do not violate anti-kickback laws. The federal anti-kickback law is a criminal statute that generally prohibits anyone or any entity from knowingly and willfully offering, paying, soliciting or receiving remuneration to induce referrals regarding items or services covered by Medicare. The Florida Supreme Court has recently held that the Florida anti-kickback statute is inapplicable to Medicare matters as it is preempted by the federal statute. The Florida statute was in some areas more restrictive than the federal statue and the person being prosecuted successfully argued that what he did was legal under the federal statute and that he could not be prosecuted under the Florida statute (Fla. Stat. 409.920). At least in Florida, we do not have to worry about prosecutions by State authorities.
D. Disclosure requirements.
In the very near future, 500 hospitals will be selected and be required to disclose all financial relationships with physicians by filing a Disclosure of Financial Relationships Report (DFRR). Later, all hospitals will be required to make the same disclosures.
IV. Stark III Problems.
A. Physician-Owned Entities.
1. Indirect Compensation. Prior to Stark III, some reliance could be placed on two sections of the rules. The section that permitted indirect compensation appeared to protect some agreements because they were made with an entity owned by the physicians and not with the physicians personally. The physicians now “stand in the shoes” of their corporations and this section of the rules no longer offers any protection.
2. Percentage Compensation. Some perfusion agreements between hospitals and physician owned perfusion groups may contain provisions for percentage compensation. Prior to Stark III, some reliance could be placed on the rule that allowed percentage compensation if the Agreement was in writing and the percentage was stated in advance in the Agreement. This section of the rules can no longer be relied upon as “compensation” is now limited to physician professional services.
3. Grandfathering. Stark III does contain a grandfathering provision that allows some financial arrangements to continue, only during their current terms, if they were originally structured to comply with Stark Phases I and II. I am reluctant to place total reliance on this grandfathering provision, however, because it is going to result in even more scrutiny of financial arrangements made prior to the implementation of Stark III. One would have to affirmatively show that the Agreement meets all the requirements of Stark I and II in order to claim grandfather rights under Stark III.
B. Perfusion Business Generally.
It appears that Stark III may be ringing the death knell of physician-owned perfusion groups. A physician group that contracts with a hospital to provide perfusion services would have a compensation financial relationship with the hospital at which it also provided professional medical services. With the possible exception of academic hospitals and hospitals in underserved rural areas, it is difficult to envision a contractual relationship between a hospital and physician-owned perfusion group that would not violate Stark III.
V. Summary and Conclusion.
Stark III has imposed more restrictions on the financial arrangements that physicians can enter into in connection with their medical practices. The rules are so vast and complex that it is somewhat akin to walking in a minefield blindfolded. The best solution is probably to stay out of the minefield. While Stark III is primarily directed at physicians, other parties to their financial arrangements can also be implicated. Physicians who own or operate perfusion groups should seek legal counsel at their earliest opportunity.
