Final Rule for Phase III of the Stark Regulation

Transcription

1 Health Care ADVISORY Final Rule for Phase III of the Stark Regulation September 6, 2007 On August 27, 2007, the Centers for Medicare & Medicaid Services (CMS) issued the final rule for Phase III of the Stark Regulation (Phase III rule) governing physician self-referrals. The final rule was published in the Federal Register on September 5, 2007, and will be effective on December 4, In the Phase III rule, CMS did not address the changes to the Stark Regulation proposed in the 2008 Medicare Physician Fee Schedule (2008 PFS) proposed rule ; rather, throughout the final rule, CMS obliquely references the issues raised in the 2008 PFS and indicated that it may make additional changes under a separate rulemaking. Therefore, the Phase III rule does not contain the final word on changes to the Stark Regulation that can be expected in the near future. This Advisory does not include a discussion of all clarifications, comments and responses in the Phase III rule. Rather, it contains a summary of the key changes and clarifications to the Stark Regulation. We strongly advise providers subject to the Stark Regulation to review with their legal counsel those portions of the final rule that are applicable to their particular financial relationships with physicians. Executive Summary of Major Changes to the Stark Regulation CMS noted that it did not make any major changes to provisions related to group practices, the prohibition on certain referrals by physicians, or exceptions to the referral prohibition related to ownership or investment interest provisions. Among changes highlighted by CMS are the following: Ownership interests in an entity no longer include a physician s security interest in an entity s equipment financed with a loan from the physician; however, CMS notes that such a security interest would constitute a compensation arrangement. A new stand in the shoes provision imputes compensation relationships of a physician practice to the individual physician members, converting many previous indirect compensation arrangements into direct compensation arrangements. The full text of the final rule is available at F.pdf. Please see Alston & Bird s July 12, 2007 Health Care Advisory for a discussion of the changes to the Stark Regulation proposed in the 2008 PFS. This advisory is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.

2 Academic medical centers must set in advance the total compensation from each center component to the faculty physician but cannot set this total compensation in a manner that takes into account the volume/value of referrals. In addition, when calculating whether the majority of physicians on staff are faculty members, hospitals must either include or exclude all physicians holding a particular class of privileges. In a patient emergency situation, where no person or entity can provide the DHS within 45 minutes of transportation time from the patient s home, CMS permits physicians to make referrals to immediate family members or entities with which family members have financial relationships (if the other requirements for this exception are met). CMS also preserved its 25-mile test from the Phase II rule as an alternative method for compliance. A number of changes and clarifications were made to the physician recruitment exception. Among other changes, the definition of geographic area was revised to permit hospitals to use noncontiguous zip codes in certain situations. A group practice in a rural area or HPSA may provide an income guarantee (based on the actual additional costs that the practice attributes to the recruited physicians or the lower of a per capita allocation or 20 percent of the practice s aggregate costs) to relocating physicians for the replacement of physicians in its practice who have retired, died or relocated in the previous 12 months. Group practices may impose limited, reasonable non-compete provisions, provided that the restrictions do not unreasonably restrict the recruited physician s ability to practice medicine in the geographic area served by the hospital. CMS expanded the exception for retention payments in underserved areas to allow hospitals to pay for physician retention even without a bona fide written recruitment offer if the physician provides a certification which meets certain requirements. Hospitals may make retention payments to physicians with bona fide written employment offers with academic medical centers or physician organizations. In addition, hospitals may make retention payments to physicians whose practices are not located in an HPSA, including physicians located in rural areas or areas with a demonstrated need for physicians (as the Secretary may so determine in an advisory opinion). Physicians, in certain circumstances, may repay excess nonmonetary compensation and a DHS entity may hold one medical staff appreciation event per year (separate from the entity s per physician limit). A DHS entity may not solicit, and a physician may not offer, charitable donations in a manner that takes into account the volume/value of referrals. The fair market value compensation exception was expanded to include compensation that an entity provides to a physician as well as compensation that a physician provides to an entity. Except in very limited circumstances, the exception does not apply to rental of office space, rental of equipment or physician recruitment.

3 CME-related compliance training programs are permitted under the compliance training exception as long as compliance training is the primary purpose. Detailed Summary of Key Changes and Clarifications Definitions Entity CMS did not make any substantive changes to the definition of entity. However, CMS expressed concern with arrangements (such as an under arrangements relationship) where physicians own entities that derive a substantial portion of their revenue from the provision of equipment and services to DHS entities, saying this type of arrangement is particularly problematic. CMS stated that it would make any change to address this issue in a separate rulemaking that is subject to public comment, an apparent reference to its under arrangements proposal in the 2008 PFS. CMS also said that while this type of arrangement could be structured to meet the indirect compensation exception, they appear highly suspect under the anti-kickback statute and recommended that providers scrutinize this type of arrangement to ensure compliance with the anti-kickback statute. Fair Market Value In Phase II, CMS included a provision in the definition of fair market value (FMV) that created a safe harbor for hourly payments to physicians that would be deemed to be FMV if the compensation was based upon one of two specified methodologies. In Phase III, CMS eliminated that safe harbor provision because of the lack of availability or unavailability of several compensation surveys and information for emergency room physician compensation at competitor hospitals. CMS will analyze FMV based on the nature of the transaction, its location, and other factors, but noted reference to multiple, objective, independently published salary surveys remains a prudent practice. Incident to Services In its efforts to interpret the Stark physician self-referral law to conform with the Medicare coverage and payment rules, CMS revised the definition of incident to services to clarify that both services and supplies provided incident to a physician s professional service are included, provided that such services and supplies do not have their own independent and separately listed statutory benefit category. CMS noted that regardless of whether certain services (like diagnostic x-rays, diagnostic laboratory tests and other diagnostic tests) potentially could be performed under the direct supervision of a physician and meet the requirements of billing rules, such services have an independent and separately listed benefit category, cannot be billed as incident to services, and may not be included in productivity bonuses under the Stark exception.

4 Physician in the Group Practice The definition of physician in the group practice was modified to clarify that an independent contractor must have a direct contractual arrangement with the group practice to be considered a physician in the group. CMS refused to expand the definition to any arrangements where the independent contractor does not have a direct contractual arrangement with the group practice, such as leased employee arrangements. CMS also explicitly stated that to be considered a physician in the group, the independent contractor must be performing services in the group practice s facilities and not a non-group facility. CMS also clarified that independent contractors may qualify as a physician in the group practice if such contractors provide less than the full range of patient care services in the group practice s facilities. CMS also noted its intent to issue final rules on proposed changes to the reassignment rules and the definition of centralized billing published in the proposed 2007 PFS. Those changes would address what CMS considers potentially abusive arrangements in which a group practice contracts with a physician in a location that nominally meets the centralized building requirement of the in-office ancillary services exception, refers patients for DHS to such physician and realizes profits based on services referred to such independent contractor as a physician in the group practice. Radiology and Certain Other Imaging Services and Radiation Therapy CMS made no changes to radiology and certain other imaging services in the Phase III rule. CMS retained the Phase II inclusion of diagnostic nuclear medicine services and therapeutic nuclear medicine services within the applicable definitions. CMS highlighted the 2008 Outpatient Prospective Payment System proposed rules, in which it excluded covered ancillary services from the definition of radiology and certain other imaging services to address certain radiology services that are integral to and performed on the same day as, but prior to, a covered ASC procedure. Referral CMS did not make any changes to the definition of referral. However, CMS did make several clarifications and observations. CMS reinforced the concept that requests for incident to DHS performed by a physician s employees or independent contractors are referrals, but such referrals may satisfy the requirements of another exception, such as the in-office ancillary services exception. CMS noted that DME provided incident to would likely constitute a referral, since it is unlikely that a physician would, among other things, personally provide all the required services associated with the furnishing of DME. CMS declined to make changes to the definition of referral to exclude ancillary testing necessary and integral to interventional radiology procedures, to exclude referrals made by anesthesiologists (or any other specialist other than radiologists, radiation oncologists and pathologists) for DHS or to extend the consultation exception for patients who self-refer. Group Practice CMS made changes to clarify that physicians in a group practice may be paid a productivity bonus based directly on the services a physician personally performs, or services incident to such personally performed services, or both (but not other DHS). CMS retracted its earlier statement in Phase II that overall profit

5 shares could be based on incident to services, stating that profit sharing can no longer be based directly on any DHS, including incident to services. CMS clarified that a variety of corporate structures, such as a separate corporation formed by a hospital to employ physicians, a medical foundation and a faculty practice plan, may qualify as a group practice, as long as the arrangement meets the requirements of 42 C.F.R CMS also noted that with the new stand in the shoes provision, corporate structures that do not qualify as a group practice may meet other exceptions, such as the personal services exception. CMS declined to reduce the number of physicians for the purposes of profit sharing below 5, citing that a smaller number increases the risk of overutilization of DHS and other abuse by strengthening the ties between the individual physician s compensation and his or her referrals. Prohibition on Certain Referrals by Physicians and Limitations on Billing CMS made no substantive changes to 42 C.F.R (e) and (f), the physician identity knowledge exception and the temporary noncompliance exception, respectively. CMS noted that it would be addressing in a separate rulemaking the issues related to billing limitations and claims submission in situations where a financial relationship with a physician does not meet the temporary noncompliance exception or the isolated transactions exception. CMS refused to incorporate a discovery based standard to toll application of the 90-day period to rectify a temporary noncompliance situation, noting that such a standard would be impossible to enforce and would incentivize lax monitoring of physician relationships. CMS also declined to remove the requirement that the noncompliance be beyond the reasonable control of the hospital. While CMS declined to waive the nonpayment sanctions for minor and technical violations, CMS did express willingness to consider additional exceptions that pose no risk of program or patient abuse. Financial Relationship, Compensation and Ownership or Investment Interest In Phase III, CMS made no changes to this exception, although CMS did provide additional guidance about the application of this exception in its responses to comments. Ownership Reiterating its Phase II position, CMS stated that loans or bonds secured by, or otherwise linked to, a particular piece of equipment or the revenue of a department or other discrete hospital operations would be considered an ownership interest in a part of a hospital. CMS also stated, as it did in Phase II, that a one-time sale of property (e.g., equipment), using installment payments that are appropriately secured, for example by a security interest taken in the property, could qualify for the isolated transactions exception. In the Phase III rule, however, CMS has reconsidered its position. CMS does not believe that Congress intended a security interest, taken by a physician in equipment sold to a hospital and financed by a loan from the physician to the hospital, to create an ownership or investment interest in the hospital s property. Rather, such a transaction is more appropriately analyzed as a compensation arrangement that will need to satisfy the requirements of an applicable exception if the physician-seller refers DHS to the hospital-purchaser.

6 In addition, CMS addressed the improper interpretation of language in the Phase I rule excluding any interest in a retirement plan from the definition of ownership or investment interest, as well as the issue of physicians using their retirement plans to purchase DHS entities to which they refer patients for DHS. CMS made clear in the Phase III rule that the purchase of ownership interests in DHS entities by physicians through their retirement funds is inconsistent with the statutory intent. Notably, in the 2008 PFS, CMS proposed revisions to address the issue of ownership in a retirement plan. CMS stated that it may finalize that proposal or make similar changes in future rulemaking. Compensation CMS has included new provisions that address compensation arrangements in which a group practice is directly linked to the physician in a chain of financial relationships between the referring physician and a DHS entity. Under Phases I and II, such arrangements did not fit in the definition of a direct compensation arrangement and, instead, were analyzed as indirect compensation arrangements. In effect, CMS has extended the stand in the shoes policy to permit the referring physician to stand in the shoes of other physician organizations beyond his or her wholly-owned PC, which was established under the Phase II regulations. By permitting referring physicians to stand in the shoes of their physician organization (e.g., PC, physician practice, group practice), the parties 3 involved in the arrangement are able to analyze the arrangement between the DHS entity and the group practice under the various direct compensation arrangements exceptions, without using the indirect compensation arrangements definition or exception. According to CMS, the new stand in the shoes provisions should close the unintended loophole where the arrangements between DHS entities and group practices are often viewed as outside the scope of the Stark Law, by treating such compensation arrangements as arrangements with the group s referring physicians. More specifically, under the new provisions, a physician will be deemed to have a direct compensation arrangement with an entity furnishing DHS so long as the only intervening entity between the physician and the DHS entity is his or her physician organization. Of note, with respect to these new stand in the shoes provisions, CMS stated that it is not its intent to require that existing arrangements that involve an interposed physician organization between the DHS entity and the referring physician be reexamined and revised to comply with a direct compensation arrangements exception. Instead, CMS explained that arrangements entered into prior to September 5, 2007, that satisfied the requirements of the indirect compensation arrangements exception on that date need not be amended during the original term or the current renewal term (i.e., the renewal term that the arrangement is in on the date of publication) of the arrangement to comply with the requirements of another exception. By implication, existing arrangements may continue to use the indirect compensation arrangements exception during the original or current renewal term of the agreement as if the stand in the shoes policy does not apply. However, such arrangements ultimately will need to be restructured when the current terms expire. 3 CMS makes clear that parties refers to the physician organization and all of its physician members, employees and independent contractors. 42 C.F.R (c)(3)(i).

7 Special Rules on Compensation In the Phase III rule, CMS amended (d)(4), which allows physician compensation in certain limited situations to be based on referrals to a particular provider, practitioner or supplier, to expressly include contracts for personal services. In addition, CMS clarified that an agreement between an entity furnishing DHS and a referring physician could be amended during the first year of the agreement and still satisfy the set in advance requirement if such amendments are made for bona fide reasons that are unrelated to the volume and value of referrals. General Exceptions to the Referral Prohibition Related to Both Ownership/ Investment and Compensation Physician Services To conform to the changes made to the definition of incident to services (discussed above), CMS deleted (a)(5), which incorrectly indicates that diagnostic tests may be considered incident to services. CMS also reinforced that professional services performed by an independent contractor physician must be performed in the group practice s facilities and, therefore, the exception is inapplicable to independent contractors performing services at off-site locations. In-office Ancillary Services CMS made only one minor change to this exception. CMS amended to state clearly that nothing in the physician self-referral rules alters a party s obligation to comply with the reassignment rules, the rules regarding purchased diagnostic tests, the incident to rules, or any other applicable Medicare laws, rules, or regulations, making clear that the Stark Regulation does not supersede Medicare payment and billing rules and policies. CMS did provide clarification on several issues. First, CMS reinforced the position that a physician or a group practice may use this exception, but is not available to hospitals for hospital inpatient or outpatient services rendered by physician employees. CMS makes clear that the billing entity must be wholly-owned by the supervising physician, the referring physician or the group practice. Second, with respect to the same building requirement, CMS refused to quantify the amount of services unrelated to DHS that must be provided, but noted that the evaluation would focus on the nature of the group s overall practice and the referring physician s full range of practice. In addition, CMS noted that the three alternative tests under the same building requirement provided sufficient flexibility to allow physicians to furnish some services via telemedicine. CMS also cautioned that shared facility arrangements must be carefully structured and operated to ensure that the facility and staffing be under the control of the physician at the time the DHS is furnished. Importantly, CMS indicated that it likely would require the lease arrangement for the space and equipment used to provide the DHS to be for specific blocks of time determined in advance (i.e., block lease arrangements). Finally, with respect to the centralized building requirement, CMS noted again that it will address concerns related to potentially abusive arrangements in a separate rulemaking, presumably the 2008 PFS. Meanwhile, however, CMS cautions that condominium arrangements are particularly

8 vulnerable to non-compliance, and urged participants in such arrangements to monitor closely the staff and operations at such off-site facilities. Academic Medical Centers CMS adopted the academic medical center (AMC) exception as proposed in the Phase II interim rule with a number of clarifications. CMS clarified, among other things, that: (i) for purposes of determining whether the majority of physicians on the medical staff of the affiliated hospital consists of faculty members, the affiliated hospital must include or exclude all physicians holding the same class of privileges at the affiliated hospital; (ii) an AMC may compensate faculty members for indigent care or community service so long as the money used does not derive from research funding, the total compensation is fair market value and the physician performs the requisite clinical teaching or academic services; (iii) the dollar amount of the aggregate compensation does not need to be set in advance so long as the contribution of each component of the AMC to the aggregate compensation uses a methodology approved under 42 C.F.R (d), each payment arrangement does not take into account the value or volume of referrals and the aggregate compensation does not exceed fair market value; and (iv) each payment arrangement with the different components does not necessarily have to satisfy the fair market value test so long as the aggregate compensation does not exceed fair market value. EPO and Other Dialysis-related Drugs Furnished in or by an End-Stage Renal Dialysis Facility CMS did not make any changes to this exception. CMS declined to expand the list of ESRD drugs, noting the list of ESRD drugs is updated annually, is considered by CMS to be complete and that the exception was created to carve out those drugs which it believes pose no risk of program or patient abuse. Intra-family Rural Referrals CMS made one modification to this exception. In addition to the 25-mile distance test, the exception may also be met if no other person or entity is available to furnish services to the person in a timely manner within 45 minutes transportation time from the patient s residence. Exceptions to the Referral Prohibition Related to Ownership or Investment Interests Ownership Interest in a Whole Hospital In the Phase III rule, CMS makes no changes to this exception. CMS clarified that a security interest in equipment sold to a hospital by a physician and financed through a loan to the hospital by the physician is not an ownership interest in the hospital, but, instead, constitutes a compensation arrangement. By contrast, a security interest in the hospital itself is an ownership interest in the hospital. As such, CMS declined to expand the exception to protect the referrals of a physician who, due to a security interest in the hospital, has an ownership interest in DHS entities owned by the hospital.

9 Exceptions to the Referral Prohibition Related to Compensation Arrangements Rental of Office Space and Equipment CMS made no substantive changes to the text of the exceptions for either office space rentals or equipment rentals, but did provide clarifications. Notably, CMS did not reference the per-click payment issues raised in the 2008 PFS. CMS reinforced its position that all office space leases must comply with the office space rental exception and are not eligible for the fair market value exception or payments by physicians exception. This includes time-share leasing arrangements. Further, CMS stressed that a lessee must have exclusive use of the leased space or equipment when the lessee is using the leased item in order to met the rental exceptions. Accordingly, for shared office space arrangements, the exception requires space or equipment leases to be for established blocks of time. Common areas may be shared if the rent is appropriately prorated. Common areas, however, may not include exam rooms. Equipment in common areas, such as scales, also may be shared, provided that the equipment is of the type that is not usually leased separately. With respect to the written agreement requirement, CMS noted that since rental charges must be set in advance, an existing lease agreement must be terminated (only after the first full year) and a new agreement (that complies with the applicable exception) must be executed if the parties wish to change the rent charged. Generally, however, parties may amend a rental agreement multiple times during or after the first year term, as long as the rental charges are not changed (or are otherwise affected) and all other requirements of the exception are met. Finally, CMS noted that lessors can charge a holdover rental premium, provided that the amount of the premium was set in advance in the agreement (or in any subsequent renewal) at the time of execution, the premium rate remains consistent with FMV and the premium rate does not take into account referrals or other business generated between the parties. Personal Service Arrangements The Stark Law establishes an exception for personal services arrangements that satisfy certain requirements. The Phase III rule modifies this exception, including the addition of an element to permit a six-month holdover period following the expiration of an agreement of at least one year, which is similar to the holdover provisions in the exceptions for rental of office space and equipment. CMS also clarified that a personal services contract can be amended in the same manner as an office space or equipment lease. Stand in the Shoes As discussed above, CMS now considers a physician to stand in the shoes of his/her group practice or physician organization for purposes of determining Stark compliance. As a result the indirect compensation arrangement exception will not be available in the future for certain arrangements between DHS entities (such as hospitals) and group practices.

10 Physician Incentive Plans CMS modified the text of the personal services exception as it relates to physician incentive plans to refer consistently to contractors and subcontractors as downstream contractors. Additionally, CMS refused to expand this exception to allow DHS entities to provide physician incentives in connection with fee-forservice patients, even where the incentive fits the basic structure of the personal services exception. Physician Recruitment CMS made a number of changes and clarifications to the physician recruitment exception, including the entities that may qualify for the exception, the definition of geographic service area, expansion of the expenses that may be included in the recruitment agreement in certain situations, the ability of group practices to include reasonable non-compete provisions, exceptions to the relocation requirement for physicians relocating following certain employment situations with governmental agencies, and the availability of advisory opinions to deem compliance with certain requirements of the exception. Due to the number and the nuances of the changes and clarifications, we highly recommended that any entity with existing physician recruitment agreements closely review its arrangements in light of the Phase III rule to ensure compliance. Some of the key changes and clarifications include the following: The definition of geographic area served by the hospital was modified to include the area composed of the lowest number of contiguous zip codes from which a rural hospital draws at least 90 percent of its inpatients (remains 75 percent for non-rural hospitals). If the hospital draws fewer than 90 percent/75 percent of its inpatients from all of the contiguous zip codes of its inpatients, the hospital may include certain noncontiguous zip codes as specified in the rule When a physician with an income guarantee is employed by a group practice, the expenses attributable to the recruited physician may be based on a per capita allocation of the practice s aggregate overhead and other expenses, not to exceed 20 percent of the practice s aggregate costs, if the recruiting physician is replacing a deceased, retired or relocating physician within such group practice. Group practices may impose limited, reasonable non-compete provisions, provided that the restrictions do not unreasonably restrict the recruited physician s ability to practice medicine in the geographic area served by the hospital. Remuneration Unrelated to Designated Health Services The Phase III rule made no changes to this exception, although commenters strongly objected to the regulation, arguing that the regulation is inconsistent with statutory language and Congress intent to permit hospitals to provide any amount of remuneration to physicians so long as the remuneration is not directly related to the provision of a DHS. CMS refused to make any changes to the exception, stating, Bona fide compensation relationships related in any way to the furnishing of DHS should be structured to fit in another exception. CMS did clarify, however, that in situations where a hospital does not or could not reasonably be expected to know whether a particular item, service, or cost could be 10

11 allocated under cost reporting principles, CMS would not consider the item, service, or cost to relate to the furnishing of a DHS. However, CMS noted all other elements must still be met. Payments by a Physician In Phase III, CMS expanded the exception for fair market value compensation to explicitly include compensation from a physician to a DHS entity, as long as the arrangement meets all of the other requirements for the exception. In addition, CMS amended the fair market value compensation exception to state that it does not include office space lease arrangements that are protected only by the rental of office space exception. However, CMS indicated that the fair market value exception could be used, for example, to protect payments by physicians to DHS entities for equipment leases extending for less than one year. Charitable Donations by a Physician In Phase III, CMS amended this exception to clarify that donations can be neither solicited nor offered in a manner reflecting the volume or value of referrals. With respect to medical staff fundraising efforts, CMS clarified that nonprofit DHS entities may solicit and medical staff may offer contributions as long as the solicitation and offer do not take into account the volume or value of referrals. CMS refused to exclude charitable donations from physicians from the definition of remuneration, stating the Stark Regulation applies to all financial relationships and remuneration includes charitable donations from physicians to tax-exempt DHS entities (or supporting organizations). Nonmonetary Compensation CMS expanded the nonmonetary compensation exception to: (i) permit physicians to repay certain excess nonmonetary compensation within the same calendar year or within 180 days of receiving such excess to preserve compliance with the exception; (ii) allow entities to hold one appreciation event per year for the entire medical staff (noting that door prizes or gifts in connection with the event will count toward the aggregate limit); and (iii) calculate the aggregate limit on a calendar year basis (instead of for the 12-month period ending September 30 each year). It is worth noting that the excess compensation repayment provision may only be used by a DHS entity once every 3 years for the same physician. CMS also advised DHS entities that become aware of excess nonmonetary compensation to delay any claims submission for those physicians referrals until after the physicians return the excess compensation. CMS also noted that it will only protect excess nonmonetary compensation that exceeds the aggregate limit by no more than 50 percent during the calendar year as long as the physician repays the excess compensation in accordance with time limits stated in the exception. Finally, CMS clarified, in response to a commenter, that the value of nonmonetary compensation is based upon the fair market value of the item to the physician rather than the cost of the item to the hospital. 11

12 Fair Market Value Compensation CMS changed this exception to reflect the changes made to the payments by a physician exception. CMS clarified that office space leases are not items or services properly falling within this exception, but must be structured to fit within the rental of office space exception. CMS also noted that this exception was not available for physician recruitment arrangements. Medical Staff Incidental Benefits CMS made no substantive changes to this exception. CMS clarified that campus, as used in this exception, includes any facility operated by a hospital except those which are leased for non-hospital purposes and which the hospital does not exclusively use. CMS also noted that dedicated pagers or two-way radios used to communicate with on-campus personnel or on-campus hospital patients of physicians could fall within this exception. CMS also noted that a physician referral service operated by a hospital could be a protected medical staff incidental benefit if it meets the exception requirements. Compliance Training Despite stating in Phase II interim rule that the compliance training exception excluded any programs involving continuing medical education (CME) credit, CMS reversed itself in the Phase III rule. Specifically, CMS amended this exception to protect CME-related compliance training programs in which compliance training is the primary purpose (rather than a mere component). CMS will not permit reimbursement of expenses for outside training, but will permit internet-based training where the physician accesses the training from a location within the local community or service area. Indirect Compensation Arrangements CMS made no changes to this exception, but the addition of the new stand in the shoes provision discussed above has essentially narrowed its application. Accordingly, CMS reiterated that on a go forward basis, compensation arrangements between a physician in a group practice and a DHS entity are required to meet the requirements of a direct compensation exception as a result of the new stand in the shoes provision. CMS also clarified that the physician members of the group would only stand in the shoes of their group practice, but would not stand in the shoes of a foundation. Finally, CMS stated that the intentional restructuring of an unprotected direct compensation arrangement by a DHS entity to form a protected indirect compensation arrangement would constitute a per se prohibited circumvention scheme, but would be evaluated on a case by case basis. Obstetrical Malpractice Insurance Subsidies In Phase III, CMS made no changes to this exception. CMS noted that the fair market value compensation exception could be used if the value of additional malpractice insurance assistance for medical staff was fair market value and the other requirements for the exception were met. CMS noted that it has proposed both the removal of the safe harbor reference and inclusion of more flexible criteria for this exception in the 2008 PFS. 12

13 Professional Courtesy CMS made one change and one clarification to the professional courtesy exception. CMS deleted the requirement that an entity notify an insurer when the professional courtesy involves the whole or partial reduction of any coinsurance obligation, but noted such notification would be a prudent practice for DHS entities and insurers may require such notification. CMS also clarified that the professional courtesy exception applies only to hospitals and other providers with formal medical staffs and not to laboratories or other suppliers. CMS stated that it considers a group or other physician practice to be an entity with a formal medical staff. Under the exception, professional courtesy must be extended to the entire medical staff or community and may not be extended to only certain member of or certain specialties. Retention Payments in Underserved Areas CMS modified the retention payment exception in several respects. First, CMS expanded the exception to permit retention payments where (i) the physician s current medical practice is in a rural area, an HPSA, or an area of demonstrated need as determined by the Secretary in an advisory opinion or (ii) at least 75 percent of the physician s patients either reside in a medically underserved area or are members of a medically underserved population. Notably, CMS eliminated the requirement that a hospital be located in an HPSA to qualify for the exception. CMS also expanded the exception to permit rural health clinics to make retention payments under the same terms and conditions as hospitals and federally qualified health centers. Second, CMS eliminated the requirement of a written offer of recruitment or employment if the physician certifies in writing that he or she has a bona fide opportunity for future employment by a hospital, academic medical center or physician organization that would require relocation of his or her medical practice at least 25 miles to a location outside the geographic area served by the entity making the payment. The employment offer no longer has to be from a hospital, but may be from a hospital, academic medical center or physician organization. In the absence of a written offer, the physician certification should include: (i) steps taken by the physician to effectuate the opportunity; (ii) details of the employment opportunity, including the identity and location of the future employer and the physician s anticipated income and benefits; and (iii) that the prospective employer is not related to the entity making the retention payment. Finally, CMS noted that where the retained physician provides a written certification, the retention payment may not exceed the lesser of (i) an amount equal to 25 percent of the physician s current annual income (averaged over the previous 24 months) using a reasonable and consistent methodology that is calculated uniformly or (ii) the reasonable costs the hospital would otherwise have to expend to recruit a new physician to the geographic area served by the hospital to replace the retained physician. Where the physician has a written offer, the hospital may match the written offer. CMS also noted in the comments that those entities making a retention payment may consider experience, training and length of service in the area when calculating the reasonable costs it would have to expend to recruit a new physician; in short, both direct and indirect costs are included. CMS declined to expand the exception to payments to physicians for medical malpractice insurance, but did state that retention payments may be applied by the physician to insurance premiums. 13

14 If you have any questions or would like additional information, please contact your Alston & Bird attorney or a member of our Health Care Group. Atlanta Office Robert C. Lower bob.lower@alston.com Gina G. Greenwood gina.greenwood@alston.com Jack S. Schroder jack.schroder@alston.com Donna P. Bergeson donna.bergeson@alston.com Jeffrey K. Hester jeff.hester@alston.com Robert D. Stone robert.stone@alston.com Angela T. Burnette angie.burnette@alston.com Dawnmarie R. Matlock dawnmarie.matlock@alston.com Michelle A. Williams michelle.williams@alston.com Kevin E. Grady kevin.grady@alston.com Washington Office Peter M. Kazon peter.kazon@alston.com Stephanie A. Kennan Senior Public Policy Advisor stephanie.kennan@alston.com Thomas A. Scully thomas.scully@alston.com Jacqueline C. Baratian Counsel jacqueline.baratian@alston.com Mark Rayder Senior Public Policy Advisor mark.rayder@alston.com Julie K. Tibbets julie.tibbets@alston.com ATLANTA One Atlantic Center 1201 West Peachtree Street Atlanta, GA Jennifer E. Bell Senior Public Policy Advisor jennifer.bell@alston.com Jennifer L. Butler jennifer.butler@alston.com Tamara Rae Carty tamara.carty@alston.com Colin T. Roskey colin.roskey@alston.com Marc J. Scheineson marc.scheineson@alston.com Donald E. Segal donald.segal@alston.com Timothy P. Trysla timothy.trysla@alston.com Tiffani V. Williams tiffani.williams@alston.com Marilyn Yager Senior Public Policy Advisor marilyn.yager@alston.com CHARLOTTE Bank of America Plaza 101 South Tryon Street Suite 4000 Charlotte, NC DALLAS 2200 Ross Avenue Suite 4650W Dallas, TX NEW YORK 90 Park Avenue New York, NY If you would like to receive future Health Care Advisories electronically, please forward your contact information including address to healthcare.advisory@alston.com. Be sure to put subscribe in the subject line. Alston & Bird llp 2007 RESEARCH TRIANGLE 3201 Beechleaf Court Suite 600 Raleigh, NC WASHINGTON, DC The Atlantic Building 950 F Street, NW Washington, DC