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Court Lifting of Stark Law Ban on Per Click Fees May Lead to "Sub-under Arrangements" between Physicians and Hospitals?

The Stark Law prohibits a physician who has a "financial relationship" with a provider of designated health services[i] ("DHS Entity") from referring Medicare patients to that DHS Entity. It also bars DHS Entities from receiving Medicare payments based on these prohibited referrals. Under Stark, a physician has a "financial relationship" with a DHS Entity if he or she owns or invests in it, or if he or she has a compensation agreement with the DHS Entity covering services, equipment, and the like.

Despite the general prohibition on potentially self-interested referrals, the Stark Law permits referrals by physicians to entities in which they have a financial interest in certain limited circumstances. It does so by creatingn exceptions for some forms of compensation agreements and ownership interests from the definition of "financial relationship," thus allowing both the relationships and the referrals.

One such exception is the equipment rental exception, under which physicians may both lease equipment to a hospital and refer their Medicare patients to that hospital for procedures using the equipment so long as the leasing agreement meets certain conditions. The lease must (1) be in writing; (2) assign use of the equipment exclusively to the hospital; (3) last for a term of at least one year; (4) set rental charges in advance that are consistent with fair market value and "not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties"; (5) satisfy the standard of commercial reasonableness even absent any referrals; and (6) meet "such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse."

In 2009, CMS prohibited the use of "per-click" fees for arrangements seeking to comply with the Stark exceptions for rental of office space, rental of equipment, fair market value, and indirect compensation arrangements. Likewise, this rule prohibited compensation arrangements based on percentage of revenues in the Stark Law exceptions for office and equipment leases, and in the exceptions for fair market value compensation and indirect compensation arrangements. Thus, under this rule, a physician owned group that contracted to lease equipment to a hospital could not do so on a per-click basis while referring patients to that hospital for procedures using the equipment.

Earlier this year, in COUNCIL FOR UROLOGICAL INTERESTS, v BURWELL 790 F.3d 212, 223 (D.C. Cir. 2015). ("Urological") the DC Court of Appeals held that the CMS ban on per click fees was not a "permissible" and "reasonable" view of Congressional intent and thus could not be upheld. The Court then remanded the case back to CMS, with instructions that CMS consider, "with more care than it previously exercised", whether a per client ban on equipment leases is consistent with Congressional intent. As a direct result of this Court ruling, CMS announced, in the 2016 Medicare Physician Fee Schedule and Part B Revisions, that it is considering options for how to comply with this court decision.
In my view, CMS will have an uphill battle finding Congressional intent in support of its position, since the Stark Law's legislative history strongly suggests that per click fees are okay as long the "units of service rates " cannot "fluctuate during the contract period".

The Urological case was not a total defeat for CMS though. The Court rejected a challenge to CMS's ban on "under arrangements". Under an "under arrangement" an entity (often a physician hospital joint venture) provides equipment and technicians for a procedure while the hospital provides space and support services, pays for the lease of the equipment and techs and bills Medicare under the hospital's provider number. If lawfully structured, these arrangements are attractive because Medicare reimburses outpatient procedures that take place in hospitals at higher rates than if they were performed elsewhere.

Prior to October 1, 2009, the Stark Law did not expressly prohibit "under arrangements" between referring physicians and hospitals, because the Stark law's definition of "entity" only covered the person or entity to which CMS made payment for the DHS, or to which the right to payment was reassigned. Effective October 1, 2009, however, this definition of "entity" was expanded to cover both the entity which has "performed the services" that are billed as DHS (e.g. the physician, physician group, or joint-venture entity), as well as the entity billing for DHS. This change gave "DHS entity" status to joint venture entities that provide in-patient and out-patient services "under arrangements" with hospitals, meaning that any physician who has an ownership interest in an entity which has entered into an "under arrangement" contract with a hospital can no longer make referrals of DHS to such hospital. Thus, there is now a prohibited referral associated with many "under arrangement" joint ventures where previously CMS merely monitored such relationships for abuse.

CMS had long questioned whether these "under arrangements" were designed simply to allow referring physicians to share in the revenue generated by their referrals of DHS, thus creating a "loophole" in the self-referral prohibition. CMS had also expressed concern that such abusive financial relationships between hospitals and physicians significantly increase the physician-owned entity's profits and investor returns, creating incentives for overutilization and corrupting medical decision-making with respect to DHS.

In Urological, the Court's rejection to this CMS ban on "under arrangements" was based on its finding that the regulation was rationally related to the goals of the Stark Law because it closed a perceived loophole, otherwise available to physician-owned entities, that allowed circumvention of the purpose of the Stark Law merely by having the hospital bill Medicare for the services. It is important to note, however, that an entity will not be considered by CMS to have performed DHS if the entity only: (1) leases equipment or space; (2) provides management, billing services or personnel; or (3) furnishes supplies that are not separately billed. As such, whether an entity is deemed to have "performed DHS" will depend on the specific nature of the resources provided by the entity to the hospital. Based on the Stark law's expanded definition of "entity," if a physician and a hospital own an interest in an entity which provides space, equipment, personnel or other resources, and the physician intends to make referrals of DHS to such entity, then the resources provided by the entity to the hospital must be narrow enough to avoid classification of the contract as an "under arrangement." For example, the joint venture entity could provide some combination, but less than all, of the following resources to the hospital: (1) management and/or billing services; (2) equipment; (3); space; (4) clinical or technical personnel. In other words, in order to avoid being classified as an "entity" under the amended Stark regulations, the joint venture entity cannot provide all of the resources associated with the performance of DHS.
CMS has not provided any bright line tests as to whether an entity will be deemed to have "performed DHS." Instead, CMS has indicated that it will rely on the "common" meaning of the word "perform."

The D.C. Court's rejection of the CMS ban on per click fees may lead physicians and hospitals to consider entering into what might be coined as "Sub-under arrangements", with compensation based on per click fees, where the joint venture entity is providing some combination of, but not all, the resources which historically were provided by a joint venture entity to a hospital under a traditional "under arrangement". For example, the Sub-under arrangement provider might provide equipment to a hospital on a per click fee basis, but not provide the hospital with technical personnel. Such a structure could arguably keep the arrangement from being deemed to be an "under arrangement" joint venture and thereby allow the physician owners of the equipment providers to make referrals to the hospital providing the designated health services. There is regulatory risk posed by these arrangements, because it remains unclear when, by providing a package of services, an entity will cross the line into performing the DHS service. Further, it is important to keep in mind that, even if a joint venture entity is not deemed to be performing DHS, any contracts between such entity and a hospital must structured to fit within an applicable Stark exception, such as space or equipment rental, personal services arrangement exception and/or bona fide employment relationship exception.

Any such Sub-under arrangement must also pass muster under the federal anti-kickback statute (see OIG Advisory Opinions 10-14, 10-23 and 10-24). Regulatory concerns will be exacerbated if an arrangement is structured on a per click fee basis and includes marketing services. The OIG has also consistently declined to provide safe harbor protection to per-use fee arrangements. See, 56 Fed. Reg. 35952 (July 29, 1991) and 64 Fed. Reg. 63504, 63526 (November 19, 1999). Such arrangements are disfavored, because of concerns of promoting overutilization. See, for example, OIG Advisory Opinion 03-8 (April 3, 2003); A key issue is whether the total amount paid under the per-use fee arrangement will vary based on referrals generated by the recipient of the fee. If so, the fee may provide an inappropriate incentive for referrals. In States such as New York, fee splitting statutes may also pose regulatory hurdles, although there are exceptions for certain fee splitting arrangements between physicians and inpatient hospitals .

[i] Designated Health Services:

  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.
  10. Inpatient and outpatient hospital services.

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