Steptoe & Johnson

In the last year and a half, the Centers for Medicare and Medicaid Services (CMS) issued final rules with substantive revisions to the federal Stark self-referral law under Stark II, Phase III (Phase III), which had a general effective date of December 4, 2007, and issued the 2009 Hospital Inpatient Prospective Payment Systems Final Rule (2009 IPPS) which also has provisions relating to Stark. In this Alert, the first of two parts, we discuss changes under the 2009 IPPS that took effect on October 1, 2008; in the second part, to be posted later, we will discuss changes under those rules that will take effect on October 1, 2009. The 2009 IPPS was published on August 18, 2008.

In the 2009 IPPS, CMS revised the "stand in the shoes" (SITS) provisions of Phase III in determining whether a chain of financial relationships creates a direct or indirect compensation arrangement governed by Stark. Under the 2009 IPPS, a physician is deemed to stand in the shoes of his or her "physician organization" only if the physician has an ownership or investment interest in the physician organization and there are no other intervening entities in the chain, whereas all physician members, employees and contractors were treated as standing in the shoes of their physician organization under Phase III. A physician who does not own or only has a "titular ownership or investment"1 in the physician organization is not required to stand in the shoes of the physician organization, but has the option to avail himself or herself of the SITS provision. As a result of these changes, a direct financial relationship will be created with each physician owner or investor in a physician organization, but not necessarily all physicians associated with the physician organization, when a designated health service provider, like a hospital, contracts with a physician organization, like a group practice.The exception for indirect relationships is less cumbersome than most of the exceptions for direct financial relationships. A physician organization is defined to mean a physician, a physician practice or a group practice, and a physician and his or her wholly-owned professional corporation are treated as one and the same for purposes of the SITS provisions.

The 2009 IPPS also finalized provisions related to periods of disallowance resulting from noncompliance. CMS's position is basically that referrals made during a period when parties are not in compliance with the Stark regulations are "tainted" and that all claims submitted to Medicare as a result of such referrals are subject to overpayment refund. The new regulations establish timeframes in which the periods of disallowance will be imposed. In instances when the period of noncompliance is not related to compensation, the period of disallowance ends on the date when the arrangement satisfies the requirements of an applicable exception. In cases where noncompliance is related to insufficient or excess compensation, the period of disallowance ends on the date on which all insufficient or excess compensation is either paid or returned, and the arrangement satisfies the requirements of an applicable exception. CMS does, however, make clear that these prescribed periods of disallowance represent the outside boundaries, and parties are not prevented from arguing that the period of disallowance ended sooner than the prescribed outside period on the theory the relationship ended earlier.

Aside from a limited provision related to signature requirements (as discussed below), a period of disallowance cannot be corrected through retroactive action according to CMS. In CMS's commentary, it posited that all requirements of an exception must be met at the time the referral is made so, for example, parties may not execute agreements with a retroactive effective date, return compensation or otherwise attempt to bring arrangements into compliance after the fact. The Stark law is a very harsh, strict liability statute, and CMS refuses to distinguish between technical and substantive violations or between inadvertent and knowing violations. Given CMS's inflexible approach, entities must be extremely diligent in ensuring that all requirements of an exception are met prior to the outset of an arrangement in order to avoid a period of disallowance, wherein the refund amounts and penalties could quickly become catastrophic.

Many Stark exceptions for compensation arrangements require a written agreement signed by the parties. In what can be viewed as a minor concession, CMS addressed instances involving the failure to obtain a signature but the arrangement otherwise fully complied with an exception. Where the failure was inadvertent, the 2009 IPPS allows the signature to be obtained within ninety (90) days after the arrangement became noncompliant, or, in instances when the failure to sign was not inadvertent, within thirty (30) days of noncompliance. This provision may be a valuable tool for those parties who, at the outset of the arrangement, are or quickly become aware that a signature is missing; however, it is limited in nature, and does not address situations where the failure to obtain a signature is uncovered beyond the corrective timeframes or when the noncompliance is based on a technicality other than the signature requirement. The special rules concerning signatures are also limited to use only once every three years with respect to the same physician.

As a reminder, many of the exceptions also have a fair market value component and many have an express requirement that the arrangement be commercially reasonable apart from referrals. Based on CMS commentary (and as a wise compliance undertaking generally), parties should evaluate and document fair market value by using objective, independently published surveys (multiple according to CMS although CMS makes clear that parties are free to choose their own methodologies),2 and should also document the commercial justification of an arrangement apart from referrals. In the 2009 IPPS, CMS takes the aggressive position that the burden of proof and persuasion on appeal rests on the entity submitting the claim in the event a claim is denied due to a Stark violation, i.e., the provider must demonstrate that the claim does not arise out of a prohibited referral. Therefore, providers of designated health services will want to make certain that they can show, with appropriate documentation, all elements of an exception are met when applicable.
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1 According to CMS, titular owners or investors do not have the ability or right to receive the financial benefits of ownership or investment, such as distribution of profits, dividends, proceeds of sale or other investment returns.
2 Also remember that, while the Stark exception for space leases has a fair market value component, common areas payments are limited in that a "lessee may [only] make payments for the use of space consisting of common areas if the payments do not exceed the lessee's pro rata share of expenses for the space based upon the ratio of the space used exclusively by the lessee to the total amount of space (other than common areas) occupied by all persons using the common areas." As noted above, accurate documentation confirming these elements, too, is very important. By "common areas," CMS means foyers, central waiting rooms, break rooms, vending areas, etc., to the extent that such rooms are actually used by the lessee. Common areas do not include, for example, exam rooms, which are subject to the exclusive lessee use limitations.


This alert is a periodic publication of Steptoe & Johnson PLLC and should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The content is intended for general information purposes only, and you are urged to consult your own lawyer concerning your own situation and any specific legal questions that you may have. For further information about these contents, please contact Steptoe & Johnson PLLC. Charles Sinsel & Walter Williams of Steptoe & Johnson are the lawyers responsible for the content of this alert.