By Jennifer R. Breuer and John D Andrea. Summary of Provisions Effective October 1, Fed. Reg. 51,087, 51,026 through 51,030 (Sept. 5, 2007).

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1 Health Law Client Memorandum October 10, 2008 Stark Update CMS Includes Significant Stark Rule Changes in the Final 2009 Inpatient Prospective Payment System (PPS) Rule By Jennifer R. Breuer and John D Andrea On Aug. 19, 2008, the Centers for Medicare and Medicaid Services (CMS) published the final 2009 Inpatient Prospective Payment System (PPS) Rule (Final Rule) in the Federal Register. CMS included several significant Stark rule changes in the Final Rule, including clarification to the stand in the shoes provisions first introduced in the Sept. 5, 2007 (Phase III) final rule, changes that will significantly limit under arrangement transactions and a prohibition on the use of per-click and percentage-based compensation arrangements for space and equipment leases. Several of the changes were effective Oct. 1, 2008; others will not be effective until Oct. 1, Summary of Provisions Effective October 1, 2008 Stand in the Shoes In 2007 s Phase III final rule, CMS included provisions under which a referring physician is deemed to stand in the shoes of his or her physician organization (a physician, a professional corporation in which the physician is the sole owner, a physician practice or a group practice) for purposes of analyzing direct and indirect compensation relationships under the Stark Law. 1 These provisions required that certain financial arrangements (where the only intervening entity between a physician and a DHS provider is his or her physician organization) previously analyzed as indirect compensation arrangements now be characterized as direct compensation arrangements. The Phase III changes caused a considerable amount of confusion about the application of stand in the shoes to financial arrangements between tax-exempt hospitals, health systems and academic medical center, and their affiliated or subsidiary physician practice entities. Because of the concerns raised by providers, CMS subsequently delayed the effective date of the application of the Phase III stand in the shoes provisions to academic medical centers and integrated health care delivery systems until Dec. 5, Fed. Reg. 51,087, 51,026 through 51,030 (Sept. 5, 2007).

2 The changes included in the Final Rule substantially clarify the application of the stand in the shoes provisions, and, in particular, should allow most compensation arrangements between hospitals, health systems and similar DHS entities and their affiliated or subsidiary physician practice organizations to continue to be treated as indirect compensation arrangements. Specifically, under the Final Rule, only a physician having an ownership or investment interest in a physician organization will be deemed to stand in the shoes of that physician organization (and would, thus, be deemed to have a direct compensation arrangement with a DHS entity if the only intervening entity between the physician and the DHS entity is his or her physician organization). 2 Moreover, a physician with only a titular ownership interest is not required to stand in the shoes of his or her physician organization. In this case, the parties to a transaction are permitted, but not required, to treat the physician as standing in the shoes of his or her physician organization, allowing for analysis of the arrangement as either an indirect compensation arrangement or a direct compensation arrangement. CMS considers an ownership or investment interest to be titular when the physician is not able or entitled to receive any of the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale or similar returns on investment. CMS has further indicated that the determination of whether a relationship is titular should not be based on whether a physician has a material right to receive profits from the physician organization s compensation arrangement with a DHS entity, but rather any right to receive the financial benefits through ownership or investment. 3 CMS further clarified in the Final Rule that the stand in the shoes provisions do not apply to arrangements that meet the requirements of the exception applicable to academic medical centers at 42 C.F.R (e). 4 Finally, CMS declined to finalize a parallel stand in the shoes provision where there is more than one intervening entity between the physician and the DHS entity (first proposed in the 2008 Physician Fee Schedule Proposed Rule and later modified in the 2009 IPPS Proposed Rule). CMS cautions that business structures that attempt to evade restrictions on payments for referrals by using shell organizations interposed between a DHS entity and a referring physician continue to be highly suspect and will be subject to close scrutiny. 5 As of Oct. 1, 2008, compensation relationships must comply with the requirements contained in the Final Rule as outlined above, with a few exceptions. First, arrangements that were structured to comply with an exception applicable to direct compensation arrangements (based on application of stand in the shoes prior to the latest changes in the Final Rule), but which would otherwise qualify as an indirect compensation arrangement under the Stark Law as of Aug. 18, 2008, need not be restructured until the expiration of the original term or current renewal term of the arrangement. In addition, the delay in the effective date of the stand in the shoes provisions that CMS granted to academic medical centers or integrated tax-exempt health care delivery systems under 2 73 Fed. Reg. 48,693 (Aug. 19, 2008); 42 C.F.R (c)(1)(ii)(B) Fed. Reg. 48,694 (Aug. 19, 2008) C.F.R (c)(3)(ii)(C) Fed. Reg. 48,699 (Aug. 19, 2008). 2

3 Phase III remains in place. Accordingly, to the extent applicable at all, arrangements involving academic medical centers or integrated tax-exempt health care delivery systems need not comply with the stand in the shoes requirements until Dec. 4, Obstetrical Malpractice Subsidies The Final Rule includes a new exception for obstetrical malpractice insurance subsidies. Currently, the Stark rules contain an exception for obstetrical malpractice insurance subsidies provided the arrangement satisfies the requirements of the Anti-Kickback Statute safe harbor for malpractice subsidies. The Final Rule includes an additional exception for obstetrical malpractice insurance subsidies. The existing exception based on the Anti-Kickback safe harbor remains available. The new exception sets forth 10 requirements for payments from a hospital, federally qualified health center or rural health clinic to subsidize a physician s malpractice premium costs, including: (i) that the physician generally serves an underserved population the physician s medical practice must be located in a rural area, a primary care HPSA or an area with demonstrated need for physician obstetrical services (as determined by the Secretary of the Department of Health and Human Services (DHHS) in an advisory opinion), or at least 75 percent of the physician s obstetrical patients treated during the coverage period for the subsidy payments reside in a medically underserved area or are members of a medically underserved population; (ii) the arrangement is not conditioned upon the physician s referral of patients to the DHS entity and the amount of the payment is not based on the volume or value of referrals by the physician or any other business generated between the parties; and (iii) the arrangement does not violate the Anti-Kickback Statute or any federal or state law or regulation governing billing or claims submission. Under the new exception, DHS entities will be permitted to pay the entire cost of malpractice insurance premiums for physicians practicing obstetrics on a full-time basis. For physicians practicing obstetrics on a part-time basis, DHS entities may subsidize only the costs attributable to the obstetrical portion of the physician s practice, and only for services satisfying the specific conditions in the Final Rule relating to serving an underserved patient population. As a practical matter, the new exception for obstetrical malpractice subsidies will have limited application to providers not located in a rural area, a primary care HPSA, or an area having demonstrated need for physician obstetrical services. The new additional exception for obstetrical malpractice insurance subsidies became effective Oct. 1, Period of Disallowance In the Final Rule, CMS expressly specifies a beginning and an end for the period of disallowance for a noncompliant relationship. Prior to the Final Rule, there was no express statement in the Stark statute, or in the regulations (or other guidance) about what events defined the period of disallowance for a noncompliant relationship. The changes implemented with respect to the period of disallowance became effective Oct. 1, The period of disallowance refers to the period of time when a physician is prohibited from making referrals for DHS to an entity, and the entity with which there is a 3

4 noncompliant relationship is prohibited from billing Medicare for DHS referred by such physician. 6 The Final Rule provides that the period of disallowance ends no later than: 1) 2) where the noncompliance is not related to the payment of compensation, the date that the financial relationship satisfies all requirements of an applicable exception; or where the noncompliance is related to the payment of compensation, the date on which all excess compensation is returned to the party that paid it, or the date on which all required compensation is paid to the party to which it is owed, and the financial relationship satisfies all requirements of an applicable exception. 7 The changes implemented in the Final Rule regarding the period of disallowance do not purport to address the complete range of penalties or remedies that may be imposed for prohibited DHS referrals during the period of disallowance or for the submission of claims to Medicare for such prohibited referrals. Rather, such changes are intended to specify an outside limit on the period of disallowance for noncompliant relationships. 8 Temporary Noncompliance with Signature Requirements In the Final Rule, CMS promulgated a special rule for financial relationships that otherwise would be in compliance with a stated exception except for the fact that such relationships are missing a required signature. The new rule states that such relationships will be deemed to comply with the stated exception (assuming all other requirements are satisfied), provided that one of the following conditions is met: 1) 2) if the failure to comply with the signature requirement was inadvertent, the entity rectifies the failure to comply with the signature requirement within 90 days after the commencement of the financial relationship (without regard to whether any referrals have occurred or compensation has been paid during such 90-day period); or if the failure to comply with the signature requirement was not inadvertent, the entity rectifies the failure to comply with the signature requirement within 30 days after the commencement of the financial relationship (without regard to whether any referrals have occurred or compensation has been paid during such 30-day period). 9 The above rule regarding temporary noncompliance became effective Oct. 1, 2008 and does not require the entity to self-report in order to take advantage of the specified protections. 10 It should be noted, however, that the exception may be used by an entity only once every three years with respect to the same referring physician Fed. Reg. 48,705 (Aug. 19, 2008) C.F.R (c) Fed. Reg (Aug. 19, 2008) C.F.R (g) Fed. Reg. 48,708 (Aug. 19, 2008) C.F.R (g)(2). 4

5 Provisions Effective October 1, 2009 Under Arrangement Transactions The Final Rule includes a modification to the definition of entity that will have a significant impact on arrangements between DHS providers and physician-owned entities where the physician-owned entities provide services to the DHS provider under arrangement. The current Stark rule defines an entity as the entity that bills and receives payment for DHS. This definition generally excludes providers that furnish DHS under arrangement to an entity that bills for the services. Under the Final Rule, the definition of entity includes both the entity that bills for the services and the entity that performs the services. The modification to the definition of entity will become effective Oct. 1, 2009, allowing for restructuring of existing under arrangement and similar transactions. Under the new definition in the Final Rule, physician-owned entities providing DHS under arrangement for another entity will be deemed to be furnishing DHS, and physicians who have ownership interests in or compensation arrangements with such entities will be prohibited from making referrals to such entities for the services provided under arrangement, unless both the relationship between the physician and the physicianowned entity, and the relationship between the physician and the entity billing for the services, are covered by a Stark Law exception. As a practical matter, it will be difficult to fit many under arrangement relationships within a Stark Law exception. To ensure compliance, hospitals, physician-owned entities and physicians should review their under arrangement relationships and consider whether they can be appropriately restructured prior to Oct. 1, Per-Click and Percentage of Revenue Leases The Final Rule includes changes in the exceptions for rental of office space, rental of equipment, fair-market value (related to fair-market value compensation for the rental of equipment 12 ) and indirect compensation arrangements (related to compensation for the rental of office space or equipment). Specifically, under the Final Rule, compensation under these exceptions may not be determined using a formula based on: (i) a percentage of revenue raised, earned, billed, collected or otherwise attributable to the services performed or business generated using the office space or equipment; or (ii) a per-unit of service (per-click) rental charge to the extent such charges reflect services provided to patients referred between the parties. These changes apply whether the physician is the lessor or the lessee under the space or equipment rental arrangement. * * * Please contact Jennifer Breuer, John D Andrea or any other member of Drinker Biddle s if you have questions regarding this client memorandum, or if we can be of assistance in any other matter. 12 Note that the exception for fair market value compensation may not be used for arrangements involving the rental of office space. 5

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