CMS puts one-year freeze on key provisions of Stark II

The Centers for Medicare & Medicaid Services (CMS) has issued a new interim final rule that puts a one-year freeze on the so-called "set in advance" provision included in the first phase of the Stark II final regulation, which is scheduled to take effect next month.

"I think this is very significant," says Sandy Teplitzky, chair of the health care practice at Ober Kaler in Baltimore. Absent the freeze, he says, the "set in advance" provision could have required many group practices and virtually every faculty practice plan in teaching hospitals
to restructure their physician compensation systems.

The interim regulation temporarily allows for arrangements involving all types of percentage compensation to qualify for protection under the Stark exceptions, assuming the other requirements of the exception are satisfied.

According to health care attorney Robert Homchick of Davis Wright, the "set in advance" requirement originally stated that percentage contracts based on an indeterminate sum would not meet the standard that is included in a number of exceptions, such as the personal service arrangement exception, the exception for rentals, and the academic medical center exception.

Homchick says that would have meant that a percentage of charges, percentage of collections, and percentage of a bonus pool set up by a faculty practice plan would be prohibited if providers wanted to fit within those specific exceptions.

"It was interesting that was the one thing they chose to fix at the present time," says Linda Baumann, a health care attorney with Reed Smith in Washington, DC. She adds that while additional changes in the regulation are likely at a later point, this provision in particular would have caused major disruptions.

According to Baumann, while the first phase of the Stark II regulations allowed certain limited types of percentage compensation arrangements to qualify for the Stark exceptions, few providers have those types of agreements. "The ones they were going to disallow were the arrangement everybody had," she explains. "Now those are OK for another year."

Not everybody is entirely optimistic about the change, however. "I really think this is being blown a bit out of proportion," argues attorney Alice Gosfield, president of Gosfield and Associates in Philadelphia. While she says CMS’s latest action represents "a useful, positive, and more practical development," she also warns that it is applicable only to Stark and not to the anti-kickback statute.

"The anti-kickback statute has safe harbors, and if you don’t conform to a safe harbor, it does not mean that you are violating the statute; it means that you are in a prosecutorial discretion frame of reference," she asserts. "It is not relevant to everything you have to worry about under Stark. It is not relevant to all contracts under Stark. It is not even relevant to all use contracts under Stark."

According to the regulation, the delay is intended to prevent hospitals, academic medical centers, and others from having to renegotiate thousands of physician contracts and give CMS time to reconsider the matter. But how many providers can benefit from the change is unclear.

Because the regulation has been implemented in phases, Homchick says some providers were somewhat on hold. "I think that is a false sense of security because Phase I is going to be effective, and it will be a basis upon which enforcement actions could occur," he says.

Gosfield says that contracts are quite variable, and a lot depends on whether providers have a "change of law" provision in their contracts. Many contracts have those clauses, she adds, noting that they usually are written to accommodate a change in law that would make a certain practice illegal. "This is the obverse of that," she explains.

Whether CMS will make the temporary freeze permanent is uncertain. "My guess is that, in Phase II, they will back off this requirement and make some further clarifications," says Homchick. But he doesn’t rule out the possibility that CMS could decide to stand by the requirement and give providers a set period to become compliant.

The final regulation for the remaining portion of the Stark II regulation will cover considerable ground, Baumann says. "You still have many exceptions for compensation or ownership arrangements, not to mention the whole Medicaid issue that has not been addressed yet in final regulations," she says.