Stark II Analysis and Summary

Introduction, continued

• Overview

• Statutory and Regulatory History

• Effective Dates

• Comment Period on "Phase II Rule"

• Major Changes in Final Phase I Rule

C. Effective Dates

The Phase I regulations become effective one year after promulgation, or on January 4, 2002. Stark I regulations already codified, and not revised in Phase I, remain in effect, but technically only as applied to clinical laboratory services. Phase II rules, when they are promulgated, will presumably also have a prospective effective date.

With respect to those aspects of the law that HCFA has deferred to Phase II, the compliance status of particular arrangements or transactions will be governed by the statute itself. HCFA makes clear that the delay in promulgation of implementing regulations does not defer the statutory effective dates (January 1, 1992 for Stark I and January 1, 1995 for Stark II).

To date, there has been virtually no Federal enforcement of any aspect of the Stark law. Presumably, HCFA is signaling in this new Phase I rule its willingness to begin enforcement when this new guidance becomes effective, or sooner for clear violations of the statute. At the same time, a growing number of whistle-blower suits filed under the Federal Civil False Claims Act have raised Stark issues, asserting that a claim submitted in violation of Stark is a false claim for purposes of that other law. Thus, at the current time, enforcement by whistle-blowers and U.S. attorneys taking over whistle-blower initiated actions remains a greater practical risk than does any national enforcement initiative emanating from HCFA.

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D. Comment Period on "Phase II Rule"

Despite the fact that many provisions of the January 2001 rule were noticed for public comment in the January 1998 proposal, HCFA is accepting public comments on everything in Phase I for 90 days (due April 4, 2001). HCFA indicates that these comments will be addressed and changes made, if any, at the same time the Phase II rule is promulgated.

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E. Major Changes in Final Phase I Rule

The Phase I rule is different from the January 1998 proposal in many respects. In part, the changes respond to public comments submitted by the industry, and undoubtedly, in part, they respond to the threat of Congressional intervention. Many of the most controversial aspects of the January 1998 proposal have been significantly improved in the final product. While this memorandum does not attempt to cover each and every change between the proposed and final rules, some of the more significant changes would appear to be the following:

1. Personally Performed Services. HCFA previously proposed extending the law's referral prohibition and certain compensation restrictions to designated services, even if they were personally performed by the same physician who ordered them for his or her patient. The final rule effectively exempts personally performed services, even if on the designated list, from the reach of the law. This permits physicians to be paid on a productivity basis for designated services that they perform personally, even though they may have ordered them.

2. Indirect Compensation Relationships. It is clear from the statute that a financial relationship, for purposes of the Stark law, can be indirect, but it was not clear from the January 1998 proposal exactly how many of these indirect relationships would be treated. The final Phase I rule has a new definition of indirect financial relationships which provides protection to entities providing designated services if they did not know or have reason to suspect that a referring physician had an indirect relationship, and also provides a new exception for indirect compensation arrangements. While not easy to follow structurally, the final treatment of indirect financial relationships is certainly more generous than the January 1998 proposal.

3. "Volume or Value Test". A major uncertainty in 1998 was how services paid on a unit-of-service basis would be handled. The final rule, bowing to legislative history that accompanied the Stark II enactment, permits many fee-for-time or fee-for-service arrangements not clearly permitted under the January 1998 proposal.

4. The "Unified Business" Test. The proposal had a "unified business" test as part of the proposed definition of a bona fide group practice. The final retains certain aspects of the unified business test, but eliminates the most controversial feature, now permitting group practices to allocate income and expenses by site or specialty, and in some cases, even use separate ancillary compensation approaches by specialty and site.

5. The "Direct Supervision" Requirement. The proposed rule limited the availability of the in-office ancillary services exception by requiring direct (i.e., in the suite) supervision for services provided by non-physician personnel. The final rule falls back to a more general supervision requirement, deferring to the particular supervision rules applicable for coverage and payment purposes. At some point in the future, this may create an even higher supervision standard for some services, if HCFA requires a higher standard for fee schedule payment purposes, but at the current time, it generally provides a more relaxed standard for most services.

6. Productivity Bonuses and Profit Sharing in Group Practices. The final rule establishes several permissible compensation techniques, akin to "safe harbors," for group distributions of revenues derived from Medicare designated services. While groups would much prefer repeal of the compensation test within the definition of group practice, the new rules provide substantial flexibility not found in the January 1998 proposal.

7. Designated Service Definitions. The final rule is certainly more precise, if not always more favorable, in defining the various categories of DHS services. The absurdly broad proposed definition of "physical therapy" services has come back to earth, and now covers services expressly listed by CPT code. Similarly, both the clinical laboratory and radiology definitions are handled by the listing of specific CPT codes. This resolves, generally favorably, uncertainty over the status of technical services which utilize imaging or ultrasound technologies, but which have not traditionally been thought of as radiology.

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