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What's New In Stark II?

Health care professionals around the country have been patiently waiting for almost three years for the newest refinements to the Stark law. Stark is a federal law that prohibits doctors from referring patients for certain services covered by Medicare or other federally supported health programs to an entity with which the referring doctor has a financial interest, unless the arrangement meets certain exceptions.
The waiting ended on March 26, 2004, when the Centers for Medicare and Medicaid Services (CMS) released the Stark II, Phase II interim regulations, which regulations went into effect on July 26, 2004. CMS not only published the regulations, but CMS also published 70-plus pages of comments regarding the Phase II regulations. Although this material covers many situations, there are six areas of the new regulations and comments that are especially interesting.
1. Employee Compensation
The comments to the new regulations clarify the application of the Stark law to certain methods of employee compensation.
First, the comments make it clear that independent contractors may work under a fair market value percentage compensation arrangement "if the methodology for calculating the compensation is set in advance and does not change over the course of the arrangement in any manner that reflects the volume or value of referrals."
Second, the new regulations indicate that productivity bonuses may be paid to employees, independent contractors or academic medical center physicians. However, such bonuses must be based on work the individual personally performs.
2. Equipment Leases
Previous comments to the Stark law had indicated that per-use or "per-click" payments may be made under a lease for equipment or space.
The new comments expand this approach, stating that in some situations such payments may actually decrease as volume increases, provided that such an arrangement actually reflects fair market value and does not take into account the volume or value of other services referred between the parties. The comments note that the situations where such an arrangement would be acceptable are likely to be situations involving equipment leases.
3. Covenants Not To Compete
The new comments indicate that "a covenant not to compete is not necessarily equivalent to an obligation to make referrals."
4. Physician Recruitment
One of the areas most affected by the new Stark revisions is the area of physician recruitment by hospitals.
The Stark law exempts payments made by a hospital to a physician to induce the physician to relocate to a new geographic area. Previously, this exception was interpreted to require the physician to move his or her residence. The new regulations make clear, however, that the critical factor is the relocation of a physician's medical practice. Thus, the exception will apply to a physician who moves his or her medical practice at least 25 miles, even if the physician does not move his or her residence.
Additionally, the new regulations state that physicians who have been in medical practice for less than one year are not considered to have an established practice. Thus, those physicians can be freely recruited, regardless of whether or not they move their medical practice.
The new regulations also discuss a hospital's recruitment of a new physician by subsidizing an existing medical group to hire the new physician. Most importantly, except for actual costs incurred by the physician group in recruiting the new physician, remuneration from the hospital must be paid directly to the recruited physician. Moreover, the recruiting medical group may not impose additional restrictions on the recruited physician, such as a non-compete agreement.
Furthermore, a new exception has been created for retention payments made to a physician with a practice located in a Health Professional Shortage Area (HPSA), regardless of whether the HPSA is specifically designated for the physician's particular specialty. Such payments may be made if the physician has a firm written recruitment offer from an unrelated hospital located outside of the HPSA.
5. Installment Sales
The Stark law contains an exception for isolated financial transactions, such as the one-time sale of a practice. Previously, these transactions generally had to involve a single lump- sum payment. Recognizing that this unduly inhibits the financial flexibility of physicians, CMS states in the new regulations that installment sales may be protected under the isolated transaction exception to Stark. However, payments under such installment sales must not vary based on future performance, and must either be evidenced by a negotiable promissory note or be otherwise secured.
6. Fair Market Definition
The new regulations state that an hourly payment for a physician's personal services will not be considered to be more than fair market value if one of two methodologies are used.
Under the first methodology, the hourly rate must be less than or equal to the average hourly rate for emergency room physician services in the relevant market. This methodology may only be used if there are at least three hospitals providing emergency room services in the relevant market.
Under the second methodology, the hourly rate must be calculated by averaging the 50th percentile national compensation level for physicians within the same specialty, as such 50th percentile is reported by at least four out of six designated sources.


September 22, 2004




Rosen, Barry F.


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