Deciphering Stark II may test your patience

Observe carefully the good, the bad, and the ugly

Deciphering and applying "Stark II" - a federal law that prohibits physicians from referring Medicare patients for certain services to entities with which the physician (or an immediate family member of the physician) has a financial relationship - would test the patience of even the most fanatical and detail-oriented compliance zealot, not to mention quality managers struggling to survive in an increasingly competitive, highly regulated environment.

In January of this year, the Health Care Financing Administration (HCFA) in Baltimore issued proposed regulations governing Stark II. Stark I was the original antireferral law and applied only to referrals for clinical laboratory services. Stark II expanded the antireferral ban to cover 10 additional designated health services, including all inpatient and outpatient hospital services. The health care industry has been struggling with the numerous ambiguities contained in the Stark II legislation since its inception. Now, many of those questions have been answered.

The proposed regulations are extensive, complex, and detailed. They cover literally dozens of issues. They also contain a handful of high-impact provisions discussed below - good, bad, and ugly - that, if they become final, will significantly alter the long-term effect of the Stark II legislation on the health care industry.

The good: 'Catch-All' compensation exception

The most important new provision in the proposed regulations addresses a glaring omission in the underlying legislation: the lack of a catch-all compensation exception. Previously, if a physician's financial relationship with an entity did not fit neatly into one of a handful of specific statutory exceptions, the physician could not refer Medicare patients there for designated health services. Numerous common, nonabusive financial relationships do not meet any statutory exception.

Now HCFA has used its authority to add an exception that protects any commercially reasonable business transaction between a physician (or the physician's family member) and an entity, which furthers legitimate business purposes, if it meets certain minimum standards. The arrangement must:

· be in writing;

· be signed by the parties;

· specify the items and services to be provided;

· specify the time frame for the arrangement (which, if less than a year, cannot be altered more often than annually);

· provide for fair market value compensation that does not take into account the volume or value of referrals or other business generated between the parties;

· not violate the anti-kickback statute.

Moreover, HCFA specifically advises health care providers to make use of this new exception if an arrangement does not meet any others. If this proposed regulation becomes final, Stark II will become much simpler to interpret and will accommodate the vast majority of nonabusive compensation arrangements between physicians and the entities to which they refer.

The bad: Physician ownership of hospitals

There is a long-standing Medicare prohibition on a physician certifying the need for home health agency services or establishing or reviewing a plan of care for such services if the physician has a "significant" ownership interest in the agency providing the services. Last year, HCFA indicated that it interpreted this long-standing prohibition as applying to any of a hospital's financial relationships with physicians, even if the relationship does not relate to the hospital's home health agency. Then, on Nov. 5, 1997, HCFA announced its intention to withdraw that interpretation pending issuance of proposed regulations on Stark II.

The proposed regulations would reconcile these two sets of laws by, in essence, having the requirements of Stark II supersede the earlier law and its requirements. However, there is a twist. An exception in Stark II permits physicians to have an ownership interest in hospitals. The exception protects only the physician's referrals for "designated health services provided by [the] hospital." If the proposed regulations become final in this form, physicians who have an ownership interest in a hospital that owns a home health agency, skilled nursing facility, or other provider will not be permitted to refer to these other hospital-owned providers. HCFA makes this narrow interpretation notwithstanding what appears to be a complete absence of any public policy justification for treating services provided directly by a hospital differently from services provided indirectly by a hospital.

The ugly: Reporting requirements

The Stark legislation requires each entity providing Medicare-covered services to provide HCFA with information concerning the entity's ownership, investment, and compensation arrangements with physicians. Because HCFA still is developing a procedure for implementing these requirements, entities are not yet required to report this information to HCFA. In the proposed regulations, HCFA would require entities to report on all their financial relationships with physicians, whether or not they comply with a Stark exception, if the entity "knows or should know" the information "in the course of prudently conducting business." (See related article on incentive plans, p. 150.) This standard is meant to be a compromise as HCFA acknowledges that requiring an entity to report all financial relationships with physicians could be "overwhelming and perhaps impossible." For example, publicly traded corporations with thousands of shareholders - and potentially hundreds of thousands of indirect owners, through mutual funds and retirement plans - could find it nearly impossible to determine all of their owners, and of those, all that are physicians or family members of physicians.

The compromise standard, designed to give HCFA more information than just requiring entities to report noncompliant financial relationships without being "overwhelming or impossible" to meet, is nevertheless extremely burdensome and difficult to interpret. Entities may be hard-pressed to determine what financial relationships with physicians they "should" know about - as opposed to the ones they do know about. Harder yet is trying to determine what "the course of prudently conducting business" is supposed to mean in the context of information an entity "should know" about financial relationships that may or may not exist between the entity and any physician or family member who has ever referred a Medicare patient to that entity for designated health services.

This article originally appeared in the 98-6 issue of Law Watch, dated January 15, 1998. Reprinted with permission. Copyright ã1998 Foley & Lardner.