Good news: Referral restrictions looser under Stark II

Providers could get a break if HCFA’s proposed regulations stand

Just when you think things can’t get any worse for hospital-based home health providers, something good comes along. And who would have thought it would be named Stark?

What appears promising is the recently published proposed rule governing physicians’ referrals to health care entities with which physicians have financial relationships. If the rule becomes final, doctors with financial relationships with hospitals, for example, would be allowed to refer Medicare patients to the hospital’s home health agency under certain exceptions and conditions.

"The proposed rule is indeed good news for hospital-based providers because it makes things fairly workable for doctors to fall within one of the exceptions," explains health care attorney John C. Gilliland II of Crestview Hills, KY.

The Health Care Financing Administration (HCFA) published in the Federal Register1 on Jan. 9, 1998, the long-awaited proposed regulations to interpret and implement provisions of Section 1877 of the Social Security Act, the Physician Self-Referral Law, popularly (or not so popularly) known as Stark II for its originator, U.S. Rep. Pete Stark (D-CA).

Under the law, a physician may not make referrals for designated health services under the Medicare program to any health care entity in which the physician or a member of the physician’s immediate family has a financial relationship, unless certain exceptions apply. Home health, of course, is a designated health service.

Under the proposed regulations for Stark II, the gate widens somewhat to allow bona fide hospital employees (physicians) to refer to a hospital’s home health agency provided certain conditions are met. The conditions are listed in the proposed regulation.

HCFA has also proposed revising the "Certification Regulation" (42 CFR 424.22) to provide consistency between that regulation and the Stark II regulations. That move was announced in November 1997. The Certification Regulation prohibits a physician who has an ownership interest in a home health agency of 5% or more from certifying a plan of care for that agency. The same prohibition applies if the doctor is paid more than $25,000 a year by the agency. (See excerpt from Federal Register, p. 34.)

The Certification Regulation does not recognize an employment exception to its prohibition. As proposed, the Stark II deletes the old prohibitions, exceptions, and exemptions of the Certification Regulation to make one set of rules.

The proposed Stark II regulations would revise the Certification Regulation to provide that physicians involved in arrangements with home health agencies that satisfy the Stark II exceptions may certify the patient’s home health plan of care, regardless of the amount of the ownership interest or the amount of the financial relationship. Thus, hospital-employed physicians will be able to refer patients to the hospital-owned home health agency without regard to the $25,000 limitation that presently applies.

Exceptions to referral prohibition

The key exceptions for home care under Stark II to the referral prohibition related to compensation arrangements concerns "bona fide employment relationships" and "personal service arrangements." Personal service arrangements cover doctors who work as independent contractors for a provider and are defined as "remuneration from an entity under an arrangement or multiple arrangements to a physician, an immediate family member of the physician, or to a group practice."

HCFA defines bona fide employment relationships as "any amount paid by an employer to a physician [or immediate family member] who has a bona fide employment relationship with the employer for the provision of services if the following conditions are met:

(1) The employment is for identifiable services.

(2) The amount of the remuneration under the employment is:

(i) consistent with the fair market value of the services;

(ii) except as provided in paragraph (c)(4) of this section, is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician or other business generated between the parties.

(3) The remuneration is provided under an agreement that would be commercially reasonable even if no referrals were made to the employer.

(4) Paragraph (c)(2)(ii) of this section does not prohibit payment of remuneration in the form of a productivity bonus based on services performed personally by the physician (or immediate family member of the physician) if the bonus is not directly related to the volume or value of a physician’s own referrals."

"There is a lot of flexibility now," says Gilliland. "With the Stark II changes to the 5%/$25,000 regulation, doctors will be able to certify plans of care if they fall into one of the exceptions."

Written comments to the proposed regulations will be considered if received by the Department of Health and Human Services as stated in the comments to the rule no later than 5 p.m. on March 10, 1998.


1. 63Federal Register1,659-1,728 (Jan. 9, 1998).

Excerpted from 63 Federal Register 1,659-1,728 (Jan. 9, 1998).

How We Propose to Reconcile Section 1877 and the Physician Certification Requirements for Home Health Services Under 42 CFR 424.22(d)

(Editor’s note: In this excerpt, the term "Section 1877" refers to the Stark II law, and the term "42 CFR 424.22" refers to the "Certification Regulation.")

Section 903 of the Omnibus Reconciliation Act of 1980 amended sections 1814(a) and 1835(a) of the Act to prohibit the certification of need for home health services and the establishment and review of a home health plan of care for those services, by a physician who has a significant ownership interest in, or a significant contractual or financial relationship with the home health agency (HHA) that provides those services. These amendments were incorporated into the regulations at 42 CFR 405.1633(d) [which was redesignated as section 424.22(d)], by an interim final rule with a comment period that we published in the Federal Register on Oct. 26, 1982, at 42 CFR 47388, and that became effective on Nov. 26, 1982.

On June 30, 1986, we published a final rule in the Federal Register at 51 CFR 23541 that confirmed the provisions of the Oct. 26, 1982, rule and clarified that under the term, "significant ownership interest in or a significant financial or contractual relationship with" the home health agency, we intended to include salaried employment. This clarification was made effective on Aug. 29, 1986.

The only exceptions to the home health regulations were uncompensated officers or directors of an HHA, HHAs operated by federal, state, or local governmental authority, and sole community HHAs. The home health certification restrictions of sections 1814(a) and 1835(a) and Sec. 424.22(d) have not been significantly updated since 1986.

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On Nov. 5, 1997, we published a notice with a comment period in the Federal Register (62 CFR 59818) that announced our intention to reconcile the statutory prohibitions in sections 1814(a) and 1835(a) concerning physician certification for home health services with the related section 1877 prohibition. In that notice, we stated that we had decided to re-examine appropriate provisions of section 1877 and the home health regulations as they pertain to indirect compensation arrangements involving physicians who are compensated by entities that own HHAs. We announced that, pending that evaluation, we had decided to withdraw certain recent interpretations of Sec. 424.22(d), as it applies to certification and recertification or establishment and review of plans of care by physicians who are salaried employees of, or have a contractual arrangement to provide services to, an entity that also owns the HHA. In addition, we stated that we would address the issue of indirect compensation, applicable to the health services designated in section 1877, in this proposed rule. We believe that sections 1814(a), 1835(a), and 1877 address the same behaviors and are identical in purpose: They each prohibit a physician who has a significant ownership interest in, or a significant financial relationship with, a home health agency from certifying or recertifying a patient’s need for home health services. We have defined the concepts of "significant ownership interests and significant financial relationships" in the home health context in Sec. 424.22(d)(1) through (d)(3), based on a fixed percentage of ownership and, for financial or contractual relationships, based on a specific dollar amount of compensation (or, if less, a percent of the agency’s operating expenses).

Under section 1877, in contrast, any level of ownership or compensation amounts to a financial relationship unless the arrangement meets any of a number of exceptions. We believe that the provisions we are developing under section 1877 are more effective than the current provisions in Sec. 424.22(d) in accommodating Congress’ desire to discourage physicians from over-utilizing certain services. Furthermore, section 1877 relates more specifically and in greater detail to the issue of referrals for home health services by physicians who have a financial relationship with the entity providing those services and reflects Congress’ most recent thoughts on that issue.

We believe that it is confusing to have in effect two provisions that address prohibited referrals, each of which includes different criteria and can lead to different results.

We are therefore proposing to use the section 1877 definition of a "financial relationship," and our interpretations of this definition, for the concept of a "significant ownership interest in, or a significant financial or contractual relationship with, a home health agency" in sections 1814(a) and 1835(a). In order to do this, we are proposing to amend Sec. 424.22(d) to state that a physician cannot certify or recertify a patient’s need to receive home health services from an agency if the physician has a "financial relationship" with that agency, as defined in Sec. 411.351, unless the financial relationship meets one of the exceptions in Secs. 411.355 through 411.357. In addition, we will list sections 1814(a) and 1835(a) in Sec. 411.1 as part of the statutory basis for this proposed regulation.

Section 424.22, paragraphs (d)(4), (e), (f), and (g) relate to certain specific exceptions to the prohibition on certification in sections 1814(a) and 1835(a). These paragraphs accept physicians who serve as uncompensated officers or directors of an HHA; HHAs that are operated by a Federal, State, or local governmental authority; or HHAs that are classified as sole community HHAs in accordance with our regulations. Even if a physician and an HHA are involved in an arrangement that meets one of these exceptions, the arrangement simultaneously remains subject to the requirements in section 1877. That is, if an exception in Sec. 424.22 is subsumed within the exceptions in section 1877, a physician will be able to refer; if it is not, the arrangement will disqualify the physician from referring in spite of Sec. 424.22. Thus, we believe the exceptions listed in Sec. 424.22 have been superseded by section 1877 and should not be separately listed; we are therefore proposing to eliminate them. We are particularly interested in hearing from the public about these proposed changes. n

What is a surety bond?

A surety bond is a promise to be responsible for the debt, default, or failure of another individual or entity. It is a three-party instrument in which one party (called the surety) guarantees to a second party (the obligee) that the third party (the principal) will do what is promised in an agreement or contract. The surety is the financial institution providing the bond to the obligee on behalf of the principal. Should the principal fail to perform, the principal and surety agree to pay the obligee a predetermined amount of money.

What about the surety bond requirement for Medicare providers?

This is how a surety bond would work for you: You become the principal with an agreement with the Secretary of Health and Human Services (HHS), the obligee, to perform certain duties and refund overpayments. The bond issued by a surety company and held by the HHS guarantees you will fulfill your obligations or pay the amount of the bond. If you fail to fully and completely comply with the agreement, the surety company must pay and then seeks reimbursement from you. The minimum bond required is $50,000 and the maximum is $3,000,000.

Source: Franey & Parr Insurance, Capitol Heights, MD.