PHILIP C. OLSSON ATTORNEYS AT LAW TISH E. PAHL RICHARD L. FRANK SUITE 400 ROBERT A. HAHN DAVID F. WEEDA (1948-2001) 1400 SIXTEENTH STREET, N.W. NAOMI J. L. HALPERN DENNIS R. JOHNSON WASHINGTON, D.C. 20036-2220 STEPHEN L. LACEY ARTHUR Y. TSIEN (202) 789-1212 RYAN W. STROSCHEIN JOHN W. BODE* FACSIMILE (202) 234-3550 EVAN P. PHELPS STEPHEN D. TERMAN VALERIE B. SOLOMON MARSHALL L. MATZ MICHAEL J. O'FLAHERTY OF COUNSEL DAVID L. DURKIN NEIL F. O'FLAHERTY JUR T. STROBOS PAMELA J. FURMAN JACQUELINE H. EAGLE BRETT T. SCHWEMER KENNETH D. ACKERMAN MARK L. ITZKOFF *PRACTICE WITHIN THE DISTRICT OF COLUMBIA IS LIMITED TO MATTERS AND PROCEEDINGS BEFORE FEDERAL COURTS AND AGENCIES MEMORANDUM BY ELECTRONIC MAIL TO: FROM: Board of Directors Robert A. Hahn RE: CMS Interim Final Rule -- Medicare Program; Physicians Referrals To Health Care Entities With Which They Have Financial Relationships (Phase II) The Centers for Medicare & Medicaid Services (CMS) has issued Phase II of its regulations implementing 1877 of the Social Security Act (often referred to as the Stark Law ). 69 Fed. Reg. 16054 (March 26, 2004). This new interim final rule amends the CMS regulations implementing the Stark Law that were promulgated in 2001. 66 Fed. Reg. 856 (Jan. 4, 2001) (see our memorandum dated February 5, 2001). The interim final rule will become effective on July 26, 2004. CMS will accept comments regarding the interim final rule until June 24, 2004. Generally, the Stark Law prohibits a physician from making a referral to an entity for the furnishing of designated health services for which Medicare would otherwise pay if the physician (or an immediate family member of the physician) has a financial relationship with that entity, unless a specific exception applies. The Stark Law also prohibits the entity receiving a prohibited referral from billing for those designated health services. The purpose of the law is to remove the financial incentive for over-utilization of services covered by the Medicare and Medicaid programs. This memorandum briefly summarizes the Stark Law and CMS implementing regulations, as amended by the interim final rule, and explains their relevance to audiologists.
Page 2 SUMMARY The Stark Law has minimal impact on audiologists. The Stark Law only applies to referrals for designated health services (DHS). As this interim final rule makes clear, very few audiology services fall within the definition of DHS. Only the following audiology services are DHS: (1) hospital inpatient and outpatient services All hospital inpatient and outpatient services are DHS. However, the Stark Law provides that the entity furnishing DHS is the entity to which CMS makes payment for those services. In the case of inpatient and outpatient hospital services, CMS makes payment to the hospital, not the audiologist. Therefore, it is the hospital, not the audiologist, that must comply with the Stark Law. (2) CPT codes 92507 and 92508 (treatment of speech, language, voice, communication and/or auditory processing disorders) CPT codes 92507 and 92508 are DHS. However, the Stark regulations provide that DHS are services payable by Medicare. CPT codes 92507 and 92508, when performed by an audiologist, are payable by Medicare only if performed as incident to services. When CPT codes 92507 and 92508 are performed as incident to services, it seems such services generally would fall under the in-office ancillary services exception to the Stark Law. DISCUSSION I. General Prohibition With certain exceptions, a physician who has a direct or indirect financial relationship with an entity (or who has an immediate family member who has a direct or indirect financial relationship with the entity) may not make a referral to that entity for the furnishing of designated health services for which payment may otherwise be made under Medicare. The entity that receives a prohibited referral and furnishes DHS pursuant to the referral may not present, or cause to be presented, a claim or bill for those services to Medicare or to any individual, third party payer, or other entity.
Page 3 No Medicare payment may be made for DHS furnished pursuant to a prohibited referral, and any entity that receives reimbursement for DHS furnished pursuant to a prohibited referral must refund such reimbursement on a timely basis. 1 Because the Stark Law is a civil, not a criminal, statute, no wrongful intent is required for a violation to be found. Violations of the Stark Law are subject to additional sanctions, including civil money penalties. Money penalties are levied by the Department of Health and Human Services (HHS) Office of Inspector General (OIG) under OIG regulations (42 C.F.R. Part 1003). II. Definitions of Key Terms A. Referral A referral means a physician s request for, ordering of, or certifying or re-certifying of the need for, a DHS for which payment may be made under Medicare. It may be in any form (e.g., written, oral, or electronic). There is no referral, and therefore no Stark Law violation, if a physician personally performs DHS. However, there is a referral if the DHS are performed by any other person, including the physician s colleagues, employees, or independent contractors. Thus, when a physician refers a patient to an audiologist employee or independent contractor and the audiologist furnishes incident to services, there is a referral for purposes of the Stark Law. 2 B. Entity An entity is any person (including an individual, sole proprietorship, partnership, or corporation) that furnishes designated health services. A person is considered to be furnishing designated health services if it: (1) is the person to which CMS makes payment for the services; or (2) is the person to which the right of payment for the services has been reassigned pursuant to 42 C.F.R. 424.80(b)(1) (employer), (b)(2) (facility), or (b)(3) (health care delivery system). 1 42 C.F.R. 411.353. 2 69 Fed. Reg. at 16063.
Page 4 C. Designated Health Services The Stark Law only applies to prohibited referrals for the furnishing of designated health services. If a referral is not for the furnishing of DHS, the Stark Law is not implicated. The Stark regulations define designated health services as the following services: 3 (1) clinical laboratory services; (2) physical therapy, occupational therapy, and speech-language pathology services; (3) radiology and certain other imaging services; (4) radiation therapy services and supplies; (5) durable medical equipment and supplies; (6) parenteral and enteral nutrients, equipment, and supplies; (7) prosthetics, orthotics, and prosthetic devices and supplies; (8) home health services; (9) outpatient prescription drugs; and (10) inpatient and outpatient hospital services. For the services listed in (1) through (4) above, the interim final rule includes, as an attachment, a list of CPT/HCPCS codes that define the entire scope of these services. Because this list may be amended from time to time, the list is published annually in an addendum to the Medicare Physician Fee Schedule final rule and is posted on the CMS website (see http://www.cms.hhs.gov/medlearn/refphys.asp). To be DHS, an item or service must be included in the list above and it must be payable by Medicare. DHS means only DHS payable, in whole or in part, by Medicare. 4 In addition, DHS does not include services reimbursed by Medicare as part of a composite rate (e.g., skilled nursing facility services payable under Medicare Part A), except to the extent the services are themselves payable through a composite rate (e.g., inpatient and outpatient hospital services). The only audiology services that fall within the definition of DHS are the following: Audiology services furnished as inpatient or outpatient hospital services that are covered by Medicare. However, since CMS generally reimburses the hospital, not the audiologist, for 3 42 C.F.R. 411.351. 4 Id.
Page 5 these services, the hospital is the entity that must ensure it is in compliance with the Stark Law. CPT codes 92507 and 92508 (treatment of speech, language, voice, communication and/or auditory processing disorders), which CMS lists as speech-language pathology services. When audiologists perform these services as incident to services, they are subject to the Stark Law. 5 This interim final rule clarifies that the following audiology services are not DHS: Cochlear implant mapping and reprogramming CMS had previously stated that cochlear implant rehabilitation was a speech-language pathology service and, therefore, within the definition of DHS. In this interim final rule, CMS states that cochlear implant mapping and reprogramming (CPT codes 92601 through 92604) are audiology diagnostic services and, therefore, outside the definition of DHS. According to CMS: One commenter [the Academy] asserted that the Phase I preamble incorrectly stated that device mapping (the fine tuning of cochlear implants) is performed by speech-language pathologists. We did not intend to include audiology services within the scope of our description of speech-language pathology services. Accordingly, we are removing the following four codes, which were erroneously added to the DHS code list in the CY 2003 physician fee schedule update. CPT 92601 (cochlear implant f/up exam <7); 92602 (reprogram cochlear implant <7); 92603 (cochlear implant f/up exam 7>); and 92604 (reprogram cochlear implant 7>). All of these codes represent diagnostic audiology services. 6 5 When performed by an audiologist, CPT codes 92507 and 92508 are payable by Medicare only if furnished as incident to services. 6 69 Fed. Reg. at 16102.
Page 6 Hearing aids Prior to this interim final rule, there had been some confusion as to whether hearing aids were durable medical equipment (DME) and, therefore, within the definition of DHS. The confusion arose from the fact that, while hearing aids are not DME under the Medicare program, they may be listed as DME under some State Medicaid plans. Several years ago, CMS had proposed that, where a State Medicaid plan s definition of DME differs from the Medicare definition, CMS would defer to the State s definition of DME. The interim final rule clarifies that hearing aids are not DME for purposes of the Stark Law. CMS makes clear that it is the Medicare definition of DME that controls. According to CMS, the simplest way to determine the proper classification of [an item] is to consult the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) fee schedule, which identifies such items by HCPCS code and is available at http://cms.hms.gov/providers/pufdownload/default.asp#dme. 7 The DMEPOS fee schedule does not list hearing aids. 8 In a conversation on May 3, 2004, Karen Raschke in CMS Center for Medicare Management confirmed that hearing aids are not DHS. D. Financial Relationship A financial relationship is a direct or indirect ownership or investment interest in, or a direct or indirect compensation arrangement with, the entity that furnishes DHS. A compensation arrangement is any arrangement involving remuneration between a physician (or a physician s immediate family member) and an entity. This includes an under arrangements contract between a hospital and an entity furnishing DHS. The relationship between the referring physician and the entity furnishing DHS need not be related to the DHS. For an indirect ownership or investment interest to exist, (i) there must be an unbroken chain of entities having ownership or investment interests between them; and (ii) the entity 7 69 Fed. Reg. at 16100. 8 It should also be noted that the definition of DME in the Stark regulations specifically refers to the Medicare definition of DME, and Medicare defines DME as equipment that generally is not useful to an individual in the absence of an illness or injury. 42 C.F.R. 414.202. Hearing aids are useful in the absence of illness or injury. Moreover, the Stark regulations provide that DHS includes only items and services payable, in whole or in part, by Medicare. 42 C.F.R. 411.351. Hearing aids are not payable by Medicare.
Page 7 furnishing DHS must have actual knowledge of, or act in reckless disregard or deliberate ignorance of, the fact that the referring physician (or an immediate family member) has an ownership or investment interest in the entity furnishing DHS. The entity furnishing DHS has no duty to inquire about the existence of an ownership or investment interest, unless facts or circumstances exist such that failure to inquire would constitute deliberate ignorance. For an indirect compensation arrangement to exist, (i) there must be an unbroken chain of entities having financial relationships between them; (ii) the referring physician must receive aggregate compensation that varies with, or otherwise reflects, the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS ; and (iii) the entity furnishing DHS must have actual knowledge of, or act in reckless disregard or deliberate ignorance of, the fact that the referring physician receives compensation that varies with, or otherwise reflects, the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS. The entity furnishing DHS has no duty to inquire whether the referring physician receives compensation that varies with referrals, unless facts or circumstances exist such that failure to inquire would constitute deliberate ignorance. 9 III. Exceptions The Stark Law and CMS implementing regulations contain a number of exceptions. The Stark Law itself contains 17 statutory exceptions and authorizes CMS to create additional regulatory exceptions for arrangements that pose no risk of program or patient abuse; CMS has created more than a dozen such regulatory exceptions. If an exception applies, there can be no violation of the Stark Law. A referral that falls under an exception to the Stark Law may, nevertheless, violate other federal or state laws. There are three types of exceptions: ownership or investment interests that do not constitute a financial relationship for purposes of the Stark Law; compensation arrangements that do not constitute a financial relationship for purposes of the Stark Law; and services that are not subject to the Stark Law. The following discussion highlights a few of these exceptions. It is not intended to be comprehensive. 9 69 Fed. Reg. at 16062.
Page 8 A. General Exceptions Related to Both Ownership/Investment and Compensation The Stark prohibition against self-referrals does not apply to certain kinds of services. These include the following services: In-Office Ancillary Services The Stark Law s prohibition does not apply to referrals for in-office ancillary services. The purpose of this exception is to allow physicians to furnish DHS that are ancillary to their core medical practice (i.e., their non-dhs services) in the location where their core medical services are normally provided. According to CMS, the in-office ancillary services exception will cover most referral DHS provided by nonphysician practitioners in a group practice setting... 10 However, this exception does not apply to referrals for most DME. To qualify for this exception, the DHS must meet the following three conditions: 1. Supervision Requirement The DHS must be furnished personally by the referring physician, a physician who is a member of the same group practice, or an individual (e.g., an audiologist) supervised by the referring physician or another physician in the same group practice, provided the level of supervision complies with all applicable Medicare payment and coverage rules. 2. Building Requirement The services must be furnished in either: (a) the same building in which (i) the referring physician or his/her group practice is normally open to patients for at least 35 hours per week, and the referring physician or one or more members of his/her group practice regularly practices medicine and furnishes physician services to patient (including some physician services unrelated to the furnishing of DHS) at least 30 hours per week; (ii) the referring physician or his/her group practice has an office that is normally open at least 8 hours per week, and the referring physician regularly practices medicine and furnishes physician services to patients (including some physician services unrelated to the furnishing of DHS) at least 6 hours per week; or (iii) the referring physician or his/her group practice is normally open to patients at least 8 hours 10 66 Fed. Reg. at 880.
Page 9 per week, and the referring physician or a member of his/her group practice (if any) regularly practices medicine and furnishes physician services (including some physician services unrelated to the furnishing of DHS) to patients at least 6 hours per week; (b) (c) a centralized building (as defined in 42 C.F.R. 411.351) used by the group practice to provide some or all of the practice s clinical lab services; or a centralized building used by the group practice to provide some or all of the group practice s DHS. This condition is intended to ensure that in-office ancillary services are truly in-office (i.e., part of a medical office s routine practice) and not provided as part of a separate business enterprise. 11 A building is defined as a structure or combination of structures having a single street address as assigned by the U.S. Postal Service. A centralized building must be used exclusively by the physician or group practice in question to qualify for the exception. 3. Billing Requirement The services must be billed by one of the following: the physician performing or supervising the service, the group practice of which the performing or supervising physician is a member (using the group practice s billing number), the group practice of which the supervising physician is a physician in the group practice (as defined at 42 C.F.R. 411.351) (using the group practice s billing number), an entity wholly owned by the performing or supervising physician or by that physician s group practice (using the entity s, physician s or group practice s billing number), or an independent third party billing company acting as an agent of the physician, group practice, or entity wholly owned by the physician or group practice. Thus, if a physician refers a Medicare beneficiary to an audiologist who is an employee or independent contractor of the physician or the physician s group practice and the audiologist performs CPT code 92507 and/or 92508 as an incident to service, this exception would apply, provided all of the above conditions have been met. Note that the supervision requirement for the in-office ancillary services exception is the same as the supervision requirement for incident to services (i.e., direct supervision, which means that the physician is present in the office suite and 11 69 Red. Reg. at 16072.
Page 10 immediately available to provide assistance and direction during the performance of the procedure). 12 Services Furnished to Enrollees of Certain Prepaid Health Plans Services furnished by an organization (or its contractors or subcontractors) to enrollees of certain kinds of prepaid health plans (including some Medicare and Medicaid managed care plans) are accepted from the Stark Law. B. Exceptions Related to Ownership or Investment Interests Certain ownership or investment interests do not constitute a financial relationship for purposes of the Stark Law. These include ownership or investment interests in the following: Publicly-traded securities Mutual fund shares Specific types of providers (e.g., hospitals in Puerto Rico, rural providers). CMS regulations set requirements for these exceptions. C. Exceptions Related to Compensation Arrangements Certain compensation arrangements do not constitute a financial relationship for purposes of the Stark Law. These include the following: Rental of Office Space or Equipment Rental payments for the use of office space or equipment do not constitute a financial relationship, provided the following requirements are met: 12 42 C.F.R. 410.26(a)(2). 1. The agreement is in writing, signed by the parties, and specifies the premises or equipment covered; 2. The lease term is at least one year;
Page 11 3. The space rented or equipment leased does not exceed what is reasonable and necessary for legitimate business purposes; 4. The rental charges are set in advance, consistent with fair market value, and do not take into account the volume or value of any referrals or business generated between the parties; 5. The agreement would be commercially reasonable even if no referrals were made between the parties; and 6. A holdover month-to-month rental for up to 6 months immediately following the end of the lease term is permissible, provided the holdover rental is on the same terms and conditions as the original agreement. Bona Fide Employment Relationships Any amount paid by an employer to a physician (or an immediate family member of a physician) who has a bone fide employment relationship with the employer for the provision of services, provided the following conditions are met: 1. The employment is for identifiable services; 2. The amount of the payment is fair market value for the services and does not take into account the volume or value of referrals by the referring physician (but may include a productivity bonus based on personally performed services); 3. The employment agreement would be commercially reasonable even if no referrals were made to the employer; and 4. The employment meets such other requirements as CMS may impose to protect against program or patient abuse. Payments by a Physician Payments by a physician (or his/her immediate family member) to an entity as compensation for items or services that are furnished at a price consistent with fair market value and that are not specifically listed under another exception. Isolated Transactions An isolated transaction, such as a one-time sale of property or of a practice, is not considered to be a compensation arrangement for purposes of the Stark Law, provided the following conditions are met:
Page 12 1. The amount of remuneration is consistent with fair market value and does not take into account the volume or value of referrals; 2. The remuneration is provided in accordance with an agreement that would be commercially reasonable even if no referrals were made to the entity; and 3. There are no additional transactions between the parties for 6 months after the isolated transaction, except for commercially reasonable post-closing adjustments that do not take into account the volume or value of referrals or other business generated by the referring physician. An isolated transaction is defined as a transaction involving a single payment between two or more persons. The interim final rule modifies this definition to permit installment payments and post-closing adjustments, provided certain conditions are met. Fair Market Value Compensation Compensation resulting from an arrangement between an entity and a physician (or an immediate family member of a physician) or any group of physicians for the provision of items or services by the physician (or immediate family member) or group of physicians to the entity, provided the following conditions are met: 1. The arrangement is in writing, signed by the parties, and covers only identifiable items or services; 2. The writing specifies the timeframe for the arrangement; 3. The writing specifies the compensation that will be provided, which must be fair market value and may not take into account the volume or value of referrals or other business generated by the referring physician; 4. The arrangement is commercially reasonable and furthers legitimate business purposes of the parties; 5. The arrangement does not violate the Anti-Kickback Statute or any other federal or state law or regulation governing billing or claims submission; and 6. The services to be performed do not involve counseling or promotion of a business arrangement or activity that violates any federal or state law. Non-monetary Compensation up to $300 Compensation from an entity in the form of items or services (not including cash or cash equivalents) not exceeding an aggregate of $300 per year, provided all of the following conditions are met:
Page 13 1. The compensation is not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician; 2. The compensation is not solicited by the physician or the physician s practice; and 3. The compensation arrangement does not violate the Anti-Kickback Statute or any billing or claims submission law or regulation. The interim final rule provides that the $300 amount will be adjusted annually for inflation, effective January 1 of each year. The new amount will be posted at http://cms.hhs.gov/medlearn/refphys.asp. Professional Courtesy The provision of free or discounted health care items or services to a physician (or his/her immediate family members or office staff), provided all of the following conditions are met: 1. The professional courtesy is offered to all physicians on the entity s bona fide medical staff or in the entity s local community or service area without regard to volume or value of referrals or other business generated between the parties; 2. The items and services provided are of a type routinely provided by the entity; 3. The entity s professional courtesy policy is set out in writing and approved in advance by its governing body; 4. The professional courtesy is not offered to any physician (or immediate family member) who is a federal health care program beneficiary, unless there has been a good faith showing of financial need; 5. The professional courtesy involves a whole or partial waiver of coinsurance, the insurer is informed in writing of that reduction; and 6. The professional courtesy arrangement does not violate the Anti-Kickback Statute or any billing or claims submission laws or regulation. IV. Application to Medicaid When DHS are provided to a Medicaid patient pursuant to a prohibited referral, no federal payment will be made to the State for such services. 42 U.S.C. 1396b(s). The State Medicaid program may pay the provider for such services, but it may not receive payment from the federal government for the services. CMS has indicated that it intends to clarify how the Stark Law applies to Medicaid services, but that clarification will have to wait. In this interim final rule, CMS states
Page 14 that it is reserving the Medicaid issue for a future rulemaking. 13 Thus, it appears there will be a phase III Stark rule. V. Reporting Requirements All entities furnishing DHS for which payment may be made under Medicare must submit to CMS or to OIG, upon request, certain information concerning their reportable financial relationships. A reportable financial relationship is any ownership or investment interest or any compensation arrangement, as defined in the interim final rule, except for ownership or investment interests in publicly-traded securities or mutual funds. Entities are required to submit such information only upon request by CMS or OIG and shall be given at least 30 days from the date of the request to provide the information. The information requested by CMS or OIG can include the following: o The name and unique physician identification number (UPIN) of each physician that has a reportable financial relationship with the entity; o The name and UPIN of each physician who has an immediate family member who has a reportable financial relationship with the entity; o The covered services furnished by the entity; and o With respect to each physician identified above, the nature of the financial relationship. VI. Impact on Audiologists Because audiologists are not considered physicians, 14 the Stark Law generally does not apply to referrals by audiologists to other providers. As CMS has previously stated, referrals made by nonphysician practitioners generally do not implicate section 1877 of the Act... However, if a 13 69 Fed. Reg. at 16055. 14 A physician is defined as a doctor of medicine or osteopathy, doctor of dental surgery or dental medicine, doctor of podiatry, doctor of optometry, or chiropractor. 42 C.F.R. 411.351. The definition does not include audiologists.
Page 15 referral made by a [nonphysician] is directed or controlled by a physician, we are treating the referral as an indirect referral made by the directing or controlling physician. 15 On the other hand, because audiologists and audiology practices are entities, they may run afoul of the Stark Law if they submit, or cause to be submitted, a claim for DHS furnished pursuant to a prohibited referral. A person or entity is considered to be furnishing DHS if it is the person or entity to which CMS makes payment for the DHS. For the Stark Law to be implicated, the prohibited referral must be for the furnishing of DHS. The only audiology services that are DHS are inpatient or outpatient hospital services and CPT codes 92507 and 92508. Therefore, when a physician refers a patient to an audiologist for furnishing of diagnostic tests or fitting of a hearing aid, the Stark Law does not apply to the referral, because diagnostic tests and hearing aids are not DHS. Even in the case of the few audiology services that are DHS, it appears that audiologists face little or no risk of liability under the Stark Law. In the case of inpatient and outpatient hospital services, CMS makes payment to the hospital for the audiologist s services, and the hospital reimburses the audiologist under arrangements. Because CMS makes payment to the hospital, the hospital is considered to be the "entity" furnishing the DHS. Therefore, it is the hospital that must comply with the Stark Law. CPT 92507 and 92508, when performed by audiologists as incident to services, are DHS covered by the Stark Law. However, such services would generally fall under the in-office ancillary services exception to the Stark Law. The final rule generally does not prohibit physicians from self-referring patients for fitting of hearing aids. Hearing aids are not DHS. Even if they were DHS, a true self-referral in which the referring physician is also the entity furnishing the DHS would not be a referral under the CMS regulations. The definition of referral excludes situations in which the DHS are personally performed or provided by the referring physician. 16 Although the Stark Law has very limited impact on audiologists, audiologists should be aware that most States have their own Stark laws, some of which may be broader than the federal 15 66 Fed. Reg. at 880. 16 42 C.F.R. 411.351.
Page 16 law. In addition, other federal anti-fraud laws, including the Anti-Kickback Statute, do apply to audiologists. CONCLUSION It appears that the Stark Law, as implemented by CMS, has little application to audiologists. The Stark Law only applies to referrals for the furnishing of DHS. Very few audiology services fall within the definition of DHS. This interim final rule confirms that hearing aids are not DHS. * * * * * If you have any questions, would like a copy of the interim final rule, or would like us to assist you in preparing comments to CMS on the interim final rule, please contact us. RAH:jdm Attachment cc: Coding and Practice Management Committee Government Relations Committee Laura Fleming Doyle, Executive Director Jodi Chappell, Director of Health Care Policy Marshall Matz, Esq.