HCFA takes a narrow view of incentive plans

No free parking privileges?

The "personal service arrangements" exception in the Stark II law generally prohibits compensating a physician in a manner that takes into account the volume or value of referrals or other business generated between the parties. There is an exception to this specific requirement to permit physician incentive plans, which are defined as compensation arrangements that "may directly or indirectly have the effect of reducing or limiting services provided with respect to individuals enrolled with the entity."

Physician incentive plans are permitted in recognition that the basic purpose of the Stark legislation, which is to prevent overutilization due to a physician's financial incentive, does not apply to compensation under physician incentive plans, which are used in the managed care arena to create a financial incentive for physicians to control utilization. The Health Care Financing Administration (HCFA) in Baltimore has taken the position in the proposed regulations that the physician incentive plan element of the personal services arrangement exception is available only to "the kind of entity that enrolls its patients, such as a health maintenance organization."

HCFA offers no justification for this narrow interpretation. In fact, HCFA notes in the proposed regulations that because there already is a broad exception in the Stark legislation covering almost all designated health services provided to enrollees of prepaid plans, the physician incentive plan exception, under this narrow interpretation, will have very limited application. Even worse, numerous compensation arrangements within and between IPAs, physician groups, PHOs, and other integrated delivery systems that have substantial risk-sharing arrangements may now have to be re-evaluated. These arrangements have been widely viewed as complying with the personal service arrangement exception, notwithstanding the fact that risk pool or other payments might be tied to utilization goals (and hence to the "volume or value of referrals"), because of the physician incentive plan qualification.

It is particularly surprising that HCFA takes this narrow view, given the general trend in health care toward increasing provider participation in managed care and the proliferation of risk-sharing arrangements at the provider level. Congress seems to recognize the potential benefits in this trend, and has demonstrated its support by passing legislation permitting provider-sponsored organizations to contract with the Medicare program and by adding a "shared risk exception" to the anti-kickback statute. If the proposed Stark II regulations become final in this form, the benefits of these recent legislative developments could be imperiled by HCFA's narrow application of the physician incentive plan qualification, which may hinder or prevent otherwise favorable provider contracting arrangements in the managed care arena.

Stark meant to prevent overutilization

A frustrating aspect of the Stark II legislation has been its failure to provide any exception for de minimus compensation arrangements, thus raising questions about everything from providing physicians with free coffee and doughnuts to providing them with free malpractice insurance. In an effort to draw a "bright line" between compensation that is so minimal that it would have no impact on a physician's referrals and compensation that could impact a physician's judgment, HCFA created the de minimus compensation arrangement exception.

The exception would protect compensation from an entity to a physician in the form of items or services (not including cash or cash equivalents) not exceeding $50 per item and $300 per year, if the compensation is provided to all similarly situated individuals, regardless of referrals, and the compensation does not take into account the volume or value of referrals.

Although this exception will prove useful in many situations, it may also create unintended difficulty for entities that have what they consider to be de minimus compensation arrangements, but which have a value of more than $300 per year.

For example, discussion in the proposed regulations mentions free parking for physicians as potentially constituting de minimus compensation. Unfortunately, the fair market value of a year's worth of free parking in many locations will greatly exceed $300, thus bringing into question whether facilities must begin charging physicians for parking, or whether they can justify free parking as being predominately for the facilities' benefit, and thus not constituting compensation to the physicians at all (de minimus or otherwise). On a helpful note, HCFA has indicated that it views free parking "while a physician is making [hospital] rounds" as being for the hospital's benefit and thus not constituting remuneration to the physician. However, HCFA cautions that free parking at other times "could" constitute remuneration.