LegalEase: New Phase II Stark rules affect provider payments

By Elizabeth Hogue, Esq.
Burtonsville, MD

As many providers already know, the Stark law prohibits physicians from making referrals to providers who render "designated health services" (DHS) if the referring physicians have an ownership or investment interest in, or compensation arrangement with, the provider.

DHS generally include home health, home medical equipment, and infusion services. Likewise, providers of DHS generally cannot bill for services provided to patients referred by physicians who have ownership or investment interests in their operations, or compensations arrangements that violate the Stark law.

Exceptions to these general rules were published in the form of final regulations on Jan. 4, 2001, and are known as Phase I Stark rules. On March 26, 2004, Phase II Stark regulations were published as interim final rules in the Federal Register. These Phase II regulations further clarify exceptions to the statute described above.

Here are some of the provisions of the Phase II regulations:

1. Many providers utilize the services of referring physicians as consulting physicians to their organizations.

These consulting physicians perform a wide variety of appropriate services to providers. There is an exception for personal service arrangements that may include payments to referring physicians for consulting services. To meet the requirements of this exception, providers must ensure:

  • They have a written agreement with physicians signed by providers and physicians that specifies the services covered by the arrangement.
  • The arrangement covers all services to be furnished by referring physicians to providers.

    This requirement is met if all separate arrangements between providers and physicians and between providers and any family members of physicians incorporate each other by reference. If they cross-reference a master list of contracts that is maintained and updated centrally, it must be available for review by the secretary of the Department of Health and Human Services upon request.

  • Aggregate services provided do not exceed those that are reasonable and necessary for the legitimate business purposes of providers.
  • The term of each arrangement is for at least one year.

    To meet this requirement, if an arrangement is terminated during the term, with or without cause, the parties may not enter into the same or substantially the same arrangement during the remainder of the first year of the original term of the agreement.

  • Compensation paid over the term of the agreement is set in advance, does not exceed fair market value, and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.
  • The services to be furnished under each arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal laws.

2. Compensation paid to referring physicians who have compensation arrangements with providers must be set in advance, based upon a unit of time, such as per-hour or unit-of-service rates.

The formula providers choose must be included in the written agreement described above, and providers must be able to verify that services actually were rendered. In addition, the formula may not be changed or modified during the term of the agreement in any manner that reflects the volume or value of referrals or other business generated by referring physicians.

Use of a formula for payment that is based upon units of service allows providers to pay a flat fee for actual participation in each of a variety of meetings, such as professional advisory board meetings, team meetings, case conferences, interdisciplinary team meetings, and ethics committee meetings.

3. Providers must pay for services from consulting physicians at fair market value.

Many providers have asked how they should go about determining fair market value. The new Phase II Stark rules make it clear that fees paid to referring physicians for their services will be considered to be at fair market value if an hourly payment is established using either of the following two methodologies:

  • The hourly rate is less than, or equal to, the average hourly rate for emergency department physician services in the relevant physician market, provided there are at least three hospitals providing emergency department services in the market.

    As a practical matter, that means providers must obtain the rates that at least three local hospitals pay physicians who staff their EDs. This information must be documented in writing and maintained by providers to demonstrate compliance. Providers should update this information periodically, and these updates also should be documented in writing.

  • Providers also may choose the following method, especially if there are fewer than three hospitals providing ED services in their geographic area. They may pay physicians at an hourly rate determined by averaging the 50th percentile national compensation level for physicians with the same physician specialty or, if the specialty is not identified in the survey, for general practice in at least four of the following surveys divided by 2,000 hours:

    • Sullivan, Cotter and Associates Inc. —Physician Compensation and Productivity Survey
    • Hay Group — Physicians Compensation Survey
    • Hospital and Healthcare Compensation Services — Physician Salary Survey Report
    • Medical Group Management Association — Physician Compensation and Productivity Survey
    • ECS Watson Wyatt — Hospital and Health Care Management Compensation Report
    • William M. Mercer — Integrated Health Networks Compensation Survey

4. The Phase II Stark rules include an exception for compliance training, which allows organizations to provide a variety of training and education from providers from whom they receive referrals.

Under the exception, providers may offer such training to physicians, their immediate family members, and office staff who practice in the provider’s local community or service area if the training is held in that area. This exception does not, however, include medical education.

"Compliance training" means

  • Training regarding the basic elements of a compliance program, such as establishing policies and procedures, training of staff, internal monitoring, or reporting.
  • Specific training regarding the requirements of federal and state health care programs, such as billing, coding, reasonable and necessary services, documentation, and unlawful referral arrangements.
  • Training regarding other federal, state, or local laws; regulations; or rules governing the conduct of the party for whom the training is provided.

5. Finally, all providers furnishing services for which payment may be made under the Medicare program will be required to submit information about financial relationships covered by the Stark law and regulations to the Centers for Medicare & Medicaid Services or to the Office of the Inspector General.

Providers should promptly review their financial arrangements with referring physicians and make any modifications needed to comply with the Stark laws and regulations.

[A complete list of Elizabeth Hogue’s publications is available by contacting Elizabeth E. Hogue, Esq., 15118 Liberty Grove, Burtonsville, MD 20866. Phone: (301) 421-0143. Fax: 301) 412-1699. E-mail:]