Stricter self-referral rules may end some physician contracts with hospitals

As of Oct. 1, physicians will have to restructure or unwind many hospital arrangements to avoid federal penalties. Some doctors worry patient care will suffer.

By — Posted Sept. 28, 2009

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Sweeping changes to the federal anti-self-referral rules, approved more than a year ago, will take effect Oct. 1, potentially causing many physician-hospital arrangements to fall out of compliance if doctors are not prepared. Being unaware of the Stark law revisions or the structure of a particular deal will not excuse physicians from liability, legal experts say.

"What the changes did was make it much more difficult for physicians and other entities providing designated health services, primarily hospitals, to do joint ventures around hospital services," said Boston attorney Lawrence W. Vernaglia, co-chair of Foley & Lardner LLP's national health care payments, fraud and abuse, and compliance work group. "Stark is a strict-liability statute. So even if you have the most innocent of intentions, you are still subject to the grossest of penalties, as if you meant to violate the law."

The Stark law generally prohibits physicians from referring patients to entities in which they have a financial stake, with certain exceptions. The Centers for Medicare & Medicaid Services in an August 2008 final rule instituted broad revisions to the Medicare hospital inpatient prospective payment system that will restrict:

  • So-called "under arrangements," in which hospitals contract with physician-owned entities to provide a wide range of ancillary services, such as clinical labs or imaging services.
  • Per-use or "per-click" payments for equipment and space leases.
  • Compensation deals based on a percentage of revenue generated by space or equipment use.

The regulation changes were delayed one year from the original Oct. 1, 2008, implementation date.

Attorneys representing physicians and hospitals said many of these arrangements would have to be restructured to avoid federal penalties. Some deals may have to be unwound completely.

"Medicare really took a broad cut at reforming its self-referral regulations and really wanted to tackle what it saw as potentially abusive arrangements" that could lead to improper referrals and overutilization, said Thomas Hoffman, the American College of Radiology's associate general counsel. "CMS anticipated that with the under-arrangement change, players were going to look for other buckets to fit into for exceptions. And that's where the per-click and lease-arrangement changes come into play."

Readying for restructure

Historically, CMS rules treated physician-hospital arrangements for ancillary services as an indirect compensation relationship that qualified for a variety of safe harbors under Stark, said San Francisco attorney Daniel A. Cody, who works with physicians and hospitals on such arrangements. Under the final rule, however, physician groups will be considered to have a direct ownership stake in the designated health services they provide, effectively barring referrals unless they can meet stricter ownership exceptions under Stark.

"The problem is, there are much more limited exceptions for ownership arrangements," said Cody, a partner at Reed Smith.

Doctors likely will have to restructure contracts to narrow the scope of services they perform for a hospital, he said. For example, a physician-owned entity may need to limit its clinical services but still could conduct billing and management activities. Many contracts include provisions allowing physicians to amend or dissolve a deal to comply with a change in law, he added.

Vernaglia said physicians still can lease equipment or space they own, but they may have to consider unbundling such services from other arrangements. Doctors also may have to adjust the compensation structure to a flat fee, such as a per-month payment. Any change in compensation must reflect fair market value, he noted.

Because such physician-hospital deals have been a long-accepted practice, Vernaglia recommended that doctors "first look hard at the older deals that have been around for 10 or 15 years and that you are complacent about. Those are the deals that will come back and bite you."

Vernaglia noted that doctors have little legal recourse against alleged Stark violations. He pointed to a January ruling in which the 3rd Circuit Court of Appeals found that a hospital ran afoul of the Stark law because it did not update its contract with an anesthesiology group to reflect a change in the services provided by the physicians. Because of the alleged Stark law violation, the court in Kosenske v. Carlisle HMA also allowed a false claims case to proceed against the hospital and physician group. That case is still pending.

Impact on patient care

Meanwhile, some physician organizations expressed concern that the rule changes will limit access to care.

In an Aug. 9 letter to CMS, the American College of Cardiology said the physician-hospital arrangement prohibitions "may unnecessarily eliminate some physician-owned services that enhance access to high-quality cardiovascular care." The organization -- while generally supportive of CMS efforts to prevent abuse -- is asking the agency once again to defer the Oct. 1 implementation deadline and consider whether certain deals "provide benefit to the Medicare program and should perhaps be exempted."

The American Medical Association, in various letters to CMS, also advocated against the revisions. The Association said the additional regulatory layers unnecessarily complicate physician practices, driving up health care costs and possibly eliminating long-standing, nonabusive relationships that can create more efficient care.

But the American College of Radiology's Hoffman said access limitations are unlikely, because doctors have options to restructure in a way that ensures continuity of care. The organization supported the changes but also requested the extension until Oct. 1 to give doctors time to adapt.

"Are the [restructured deals] going to be as economically attractive? Perhaps not. But doctors should not rule out looking at them," Hoffman said. "They have to structure what is best for patient care."

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Preparing for change

Revisions to the federal self-referral regulations, known as Stark laws, are set to begin Oct. 1 and are expected to affect many physician-hospital relationships. Here are some steps physicians can take to ensure compliance.

  • Consult legal counsel to find out if current hospital joint ventures or space and equipment leases will continue to be compliant.
  • Review contracts for clauses that allow parties to amend or dissolve agreements as a result of changes in the law. Include such clauses in future contracts.
  • Consider restructuring existing deals to limit the scope of services provided or to take advantage of other applicable safe harbors. In some cases, doctors may be forced to unwind the arrangements.
  • Make sure any changes to compensation reflect fair market value.
  • Review any state self-referral laws.
  • Make any changes to agreements in writing.

Source: Legal experts

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