Mid-Atlantic Health Law TOPICS

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What's New in Stark II

January 4, 2001, "Phase I" of the long-awaited and continually postponed Stark II regulations were released. The regulations interpret the so-called Stark law, and for the most part are effective on January 4, 2002. Simply put, under Stark, if a physician, or a member of a physician's immediate family, has a financial relationship with a health care entity, the physician may not make referrals to that entity for the furnishing of certain designated health services under the Medicare or Medicaid programs, unless an exception applies. In addition, Stark prohibits the entity that furnishes the services from billing Medicare or Medicaid for such services. Penalties for violating Stark are harsh and include the denial of payment, civil monetary penalties and exclusion from the Medicare and Medicaid programs.

A. Background 
Congress initially enacted the Stark law in 1989, and at that time, the prohibition was limited to referrals for clinical laboratory services. In 1993, Congress expanded the scope of Stark to include ten additional designated health services and supplies, namely: physical therapy services; occupational therapy services; radiology services; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. (The 1993 expansion of Stark is often referred to as Stark II.) Phase I of the Stark II regulations addresses Stark's general prohibition, Stark's exceptions, as well as relevant definitions. Phase II of the regulations are yet to be published, but are to address exceptions relating to ambulatory surgical centers, end-state renal dialysis facilities and hospices, as well as certain Medicaid issues. Phase II of the regulations are also expected to elaborate on certain Phase I concepts, and to respond to public comments made in regard to the Phase I regulations.
B. What is New? 
The Phase I regulations are approximately 110 pages long and differ substantially from proposed regulations that were previously published in January of 1998, in several major respects, including the following:
1. Designated Health Services. An Attachment to the Phase I regulations lists CPT and HCPCS codes that are "designated health services," and are, therefore, covered by the law. For example, the new regulations make it clear whether certain tests are or are not "radiology services," and, therefore, are or are not covered by Stark. (CMS also added 15 new CPT/HCPCS codes as designated services since the publication of the Phase I regulations.)
2. Indirect Relationships. The Phase I regulations clarify the concept of "indirect financial relationship," and create a new exception for indirect compensation arrangements. On the one hand, the regulations widen the law's reach to include indirect relationships, such as a doctor owning a hospital that owns a lab. On the other hand, the regulations protect certain reasonable indirect relationships. For example, if an independent contractor relationship would be legal if it were direct, it will still be legal even if it is indirect.
3. Group Practice Definition. The in-office ancillary services exception has been substantially broadened by easing the criteria for qualifying as a group practice, and by conforming Stark's supervision requirements to Medicare and Medicaid coverage and payment policies for specific services. Generally, this means that referrals of designated health care services performed or supervised by a physician within a group practice are exempt from Stark.
4. In-Office Ancillaries. The in-office ancillary exception has also been expanded to cover blood glucose monitors, and certain durable medical equipment (DME) provided in physicians' offices to patients to assist them in ambulating. The Phase I regulations also make it clear that: (a) outpatient prescription drugs may be furnished in the office, even if they are used by patients at home; (b) external ambulatory infusion pumps may be provided; and (c) chemotherapy infusion drugs may be provided if administered or dispensed to patients in the physician's office.
5. Shared Facilities. The new regulations allow physicians who are not in the same group practice to share facilities in the same building, and to refer patients to such shared facilities under certain circumstances.
6. Personal Performance. The Phase I regulations exempt services personally performed by the referring physician from the ambit of Stark.
7. Academic Faculties. A new exception for compensation of faculty members in academic medical centers has been created, provided that, among other things, the referring physician is an employee of a component of the academic center, and that physician's compensation is fair and set in advance.
8. Risk Sharing. A new "risk sharing" exception for commercial and employer-sponsored managed care plans has also been added.
9. Volume or Value. The regulations interpret the Stark law as permitting unit of service or unit of time-based payments, so long as the unit of service or unit of time-based payment, among other things, is equal to fair market value and does not vary over time. In other words, a referring doctor may pay an independent contractor a fair set fee per procedure without worrying that such fee is violative of Stark. Previously, such per unit of service or per time fees were suspect because the contractor's total compensation varied with the number of referrals, that is, the more referrals the greater the total payment to the contractor.
10. Ignorance. The Phase I regulations also create an exception where designated health services are furnished by entities that did not know, or have reason to suspect, the identity of the referring physician.

C. Conclusion

Though an arrangement may fall within a Stark exception, health care providers need to remember that the arrangement may still violate the federal anti-kickback statute, or a particular state's anti-referral prohibitions, and, therefore, the arrangement may still be illegal. Nevertheless, the good news for health care providers is that overall, the Phase I regulations are a liberalization of the rules that govern referrals. For more information, please contact:


December 21, 2001




Rosen, Barry F.


Health Care