ACS Views on Legislative, Regulatory, and Other Issues

Physician Self Referral Law—

staff contact: Barbara Peck, bpeck@facs.org

• Letter to Mark McClellan, 6/15/04

June 15, 2004 

The Honorable Mark McClellan, MD, PhD
Centers for Medicare and Medicaid Services
Department of Health and Human Services
Room 445-G
Hubert H. Humphrey Building
200 Independence Avenue, SW
Washington, DC 2-20201

Re: Medicare Program; Physicians' Referrals to Health Care Entities With Which They Have Financial Relationships (Phase II) [CMS-1810-IFC]

Dear Administrator McClellan:

On behalf of the 66,000 Fellows of the American College of Surgeons, I am pleased to submit the following comments relating to the rule on Physician's Referrals to Health Care Entities With Which They Have Financial Relationships (Phase II), which was published in the March 26, 2004 Federal Register.

The interim final regulation covers statutory exceptions that were not addressed in Stark I and creates several new regulatory exceptions for legitimate financial relationships. The new regulations address general exceptions relating to ownership or investment and compensation, exceptions related only to ownership or investment interests and exceptions related to only compensation arrangements. For the most part, the regulation is a welcome addition to the existing Stark rule because it will generally permit greater flexibility in relationships between physicians and other entities and provide many more "bright line" rules than the existing regulation. The changes appear to be practical, clarify some common questions about the earlier regulation, and demonstrate a commitment on the Centers for Medicare & Medicaid Services' (CMS) part toward greater flexibility.

Phase II of the new regulation provides the following useful guidance and creates several new exceptions which we address in our comments and that the College believes will have positive implications for surgeons and other physicians:

• Change in the definition of "group practice" that makes it less likely that physicians will fall out of compliance
• The limit for the non-monetary compensation exception has been indexed for inflation
• Providing a professional courtesy exception that allows doctors to provide free or discounted care to other physicians or their families
• Permitting intra-family referral in rural areas
• Creation of a new temporary non-compliance policy
• Community-wide health information system exception
• Exception for physician ownership or investment in providers that furnish designated health services (DHS) in rural areas
• Exception for physician investment in publicly traded securities and mutual funds
• Changes to exception for lease agreements that allow early termination of leases and month-to-month leases
• Changes to the physician recruitment provisions
• Relaxation of reporting requirements

The College also addresses the following aspects of the interim final rule that we believe are misguided or that need additional clarification or refinement:

• CMS has maintained its proposed definition of "referral" to include "Incident to" services.
• No "incident to" productivity bonus for physicians outside a group practice 

Definition of Referral

In the final regulation of Phase I, CMS asked for comment on the question of whether, and under what conditions, services performed by a physician's employees could be treated as the physician's personally performed services. The College commented that CMS should consider two different situations: services by a licensed employee which are separately billable; and services "incident to" the physician' services, performed by a licensed or non-licensed employee, which cannot be billed separately. "Incident to" services must be integral to the physician's own services and they must be performed under the physician's direct supervision. The physician, is, in effect, asking for help in carrying out his or her own services rather than asking for services that are performed independently. In short, they are "incident to" services. In the view of the College, the nature of these services are such that they should be treated as though the physician personally performed them and not as a "referral."

In the Phase II interim final rule, CMS has decided to adhere to the original determination that "incident to" services performed by others, as well as services performed by a physician's employees, are referrals within the meaning of the statute.

We agree that situations in which an employee who is licensed to perform procedures without physician supervision and may be too far away from the physician to receive the physician's direct personal supervision should not be exempt from a "referral." These situations would create a larger exemption through the rule than Congress created statutorily. However, we remain concerned that "incident to" services are categorized as "referrals." This is one main area in which the College urges CMS to provide more protection. At a minimum, we hope that CMS would provide further education to physicians on how some of these "incident to" services would fit into the in-office ancillary services or another exception.

Group Practice Definition (16076)

The Stark law provides an exception for referral for physician services provided personally by, or under the supervision of another physician in the same "group practice" as the referring physician. The interim final rule alters the definition of group practice for purposes of referral within a physician group in several ways that make it easier for physicians within group practices to comply with the law. Most notably, we support CMS' modification of the group practice definition to address problems faced by group practices that fall out of compliance with elements of the definition when they add new members to the group. The new rule provides 12 months to reach the 75% billing level conditioned upon the group meeting the standard when the new physician is excluded from the calculation and the new physician's employment in the practice is documented in writing.

The former regulation made it difficult to meet the requirement of spending 75% of the physicians' time seeing patients through the group and had to bill that work under a number assigned to the group. When a new member joins a practice, it can take many months for the new doctor to get a Medicare billing number. We are aware that CMS is working to address the problem of back-logged assignment of Medicare billing numbers, but until that problem is fully resolved, the change in regulation will help those doctors who don't immediately meet the 75% requirement, despite their best efforts to do so.

Exception for Non-Monetary Compensation

The Stark rule states that items or services not exceeding an aggregate of $300, provided they are not solicited by a physician, do not take into account the volume or value of referrals or other business, and does not violate the anti-kickback statute. While we indicated to CMS our support of this exception in our comments to the final rule, the College asked that the non-monetary compensation limit be indexed for inflation.

In this Phase II rule, CMS has stated that the limit for non-monetary compensation of $300 will be updated annually for inflation based on the CPI-U and displayed on the CMS self-referral website as soon as possible after September 30th each year. We greatly appreciate CMS' action in this regard. This will preserve the intended value of the non-monetary compensation that CMS has set and avert any need for CMS to make regulatory changes to update the limit. Notifying physicians of the yearly change to the limit is important and should be announced through the press releases, the self-referral website and the Physicians' Open Door Forum, as well as any other mechanism available to CMS.

Professional Courtesy

Stark II provides a new, narrow exception for "professional courtesy" to allow for the provision of certain free or discounted health care items or services. Stark II defines "professional courtesy" as "the provision of free or discounted health care items or services to a physician or his or her immediate family members or office staff." CMS sets certain requirements for the provision of these services under the professional courtesy exception and cautions that arrangements should be examined to ensure that they do not violate the anti-kick back statute or the civil monetary penalties law against giving inducements to Medicare and Medicaid beneficiaries. The College appreciates the creation of this exception for what it believes is a long-standing tradition. This provision will rightly help protect those physicians who innocently grant a favor to their physician colleagues with whom they have a non-abusive financial relationship.

Rural Providers Exception

Existing law provides an exception for ownership or investment interests in rural providers that furnish DHS in a rural area, if substantially all (defined as at least 75 percent) of the DHS are furnished to individuals residing in a rural area. In addition, Phase II creates a new limited exception for referrals from a referring physician to a DHS entity with which the physician's immediate family member has a financial relationship if the patient being referred resides in a rural area. This exception has been created for cases where there is no other entity furnishing the DHS within 25 miles of the patient's home. According to the interim final rule, if the patient is getting care in the home, the exception occurs if there is no DHS entity available in a timely manner in light of the patient's condition.

The College welcomes the added flexibility by CMS that will protect these qualifying services in rural areas. We believe that this exception will help to ensure adequate access to DHS for residents in rural areas that might otherwise have difficulty attracting a sufficient number of providers and suppliers.

Temporary Grace Period

Phase II establishes a 90-day grace period to protect entities when they fall out of compliance with the Stark law due to events beyond their control or when they are unable to comply with the law for temporary periods of time. This exception applies when the arrangement has fully satisfied another exception (excluding the exception for non-monetary compensation up to $300 or incidental medical staff benefits) for at least 180 consecutive days, but has fallen out of compliance for reasons beyond the control of the designated health services (DHS) entity's control. During the grace period, entities must take steps to rectify their non-compliance and must be in full compliance or have ended their prohibited relationship by the end of the grace period.

In the College's comments to the final rule of Phase I regulations, we asked for the Office of Inspector General to create a temporary safe harbor in order to protect physicians who restructure their practices prior to the regulation's effective date. A temporary safe harbor based on the exceptions set forth in the regulation would protect those physicians who are attempting to comply with new rules while permitting prosecutions for true self-referral violations. We applaud CMS for granting a temporary grace period, which is similar to our original request. This grace period will accommodate situations in which parties to an arrangement fall out of compliance with aspects of an exception through events outside their control. In particular, it will be helpful for those physicians who, for example, practice in areas designated as rural or health professional shortage areas, when the status of those areas change or delays occur in obtaining signed copies of renewal agreements.

Even with this grace period in place it is possible for innocent and unintentional technical violations to occur that will not meet the conditions set forth in this provision. For example, a technical violation could occur if a lease between a physician and a hospital expires and the physician does not vacate the space before a new lease is put in place. Without a lease executed, the physician's referrals to the hospital could be considered a violation of the Stark law and the hospital would be prohibited from billing or receiving Medicare payments for these referrals. The grace period is heavily conditioned and may not be applicable to the majority of the cases where a temporary reprieve is needed. However, given the significant penalties that the Stark law imposes, the temporary grace period is important and will help ease the threat of Stark violation for some physicians in certain circumstances.

 Physician to Participate in a Community-Wide Health Information System

Phase II creates an exception for a physician to participate in a community-wide information system. The health information system must be available to everyone in the community who wants to use it and it must allow the sharing of electronic records among providers and practitioners in the community who want to use it and it must allow the sharing of electronic records among providers and practitioners in the community. Not only does this provision apply to electronic medical records, it is broader and can include complementary drug information systems, general health information, medical alerts, and related information for patients in the community.

The College applauds CMS for creating this new exception. In light of President Bush's recent statement establishing a national goal of assuring that most Americans have electronic health records within 10 years, such an exception is particularly important. The additional exception will help promote the use of electronic health records and will allow opportunity for greater participation by physicians and other health care providers in establishing a national interoperable health information infrastructure for improved patient care.

Publicly-Traded Securities Exception

Section 1877(c) of the Act creates an exception for ownership in certain publicly traded securities and mutual funds. One of the qualifications is that the securities must be securities that may be purchased on terms generally available to the public. In the 1998 proposed rule, CMS interpreted this provision to mean that the securities owned by the referring physician or his or her immediate family member must have been generally available to the public at the time the physician or family member acquired their ownership interest in order to qualify for the public securities exception.

In responding to comments, CMS has reconsidered its original interpretation of the provision and now interprets the provision to mean that the ownership interest must be in securities that are generally available to the public at the time of the DHS referral. This means that securities acquired by a referring physician or his or her family member prior to a public offering will fit in the exception if they are available to the public at the time of any DHS referral. CMS has also decided that stock options received as compensation will not be considered ownership or investment interests until the time that they are exercised. The College agrees that this interpretation is consistent with the intent of the statute, which focuses on DHS referrals.

Space and Equipment Rental Exception

In the 1998 proposed rule, CMS proposed interpreting the requirement that the lease term be for one year as permitting leases to be terminated for cause within the one-year period, provided the parties did not enter into another lease until after the expiration of the original term. It also proposed that the one-year term requirement meant that a renewal of a lease must also be for at least one year, thereby precluding month-to-month leasing.
In the Phase II interim final rule, CMS has change its interpretation of this provision to allow leases or rental agreements to be terminated with or without cause as long as no further agreement is entered into within the first year of the original lease term. Any new lease must fit on its own terms in an exception. Additionally, CMS is allowing month-to month holdover leases for up to six months if they continue on the same terms and conditions as the original lease.

The exceptions for lease and personal services are among the most commonly used under Stark II. These exceptions allow contracts, at fair market value compensation, between a designated health care provider and a referring physician. The modified interpretation of these provisions will arguably make the law more forgiving by allowing these common contracts to exist with greater flexibility.

Productivity Bonuses

Phase II clarifies that all physicians, whether employees, independent contractors, or academic medical center physicians can be paid productivity bonuses based on work they "personally" perform. Group practices also may pay physicians in the group, whether independent contractors or employees, productivity bonuses based on "incident to" services, as well as indirect bonuses and profit shares that my include DHS revenues, provided the distribution meets certain criteria. This clarification will be of significant value to medical groups that want provide direct productivity bonuses for services that are properly furnished on an "incident to" basis.

However, as we previously note in our comments, this change does not alter the underlying requirements of Stark relating to "incident to" services, and only certain types of services may be furnished on an "incident to" basis. Phase II bars the consideration of "incident to" services in determining and paying compensation to physician employees or independent contractors unless they are in a group practice that complies with the in-office ancillary services exception. Despite comments seeking consistency with allowable compensation arrangements across different settings, the interim final rule does not allow the same flexibility for employed or independent contractor physicians outside of the group practice setting to receive compensation based on the supervision services that they provide. Outside of this limited context, employee and independent contractor physicians can only be compensated for services that they "personally perform." We refer to our comments under the "Definition of Referral", noting that we believe "incident to" services should be excluded from the definition of "referral." Accordingly, we also agree with comments that CMS should be consistent with exceptions for compensation arrangements across practice settings.

Physician Recruiting Provision

The interim final rule makes significant changes to the physician recruitment provision in the proposed rule and provides some beneficial guidelines to facilitate many common physician recruitment structures. Notably, Phase II clarifies that the recruit's medical practice, and not their residence, must be relocated. Under the rule, the recruited physician will be deemed to have been relocated if the physician's medical practice is moved at least 25 miles, or if at least 75% of the recruited physician's revenues are provided to "new" patients who were not seen at the previous practice site. Also, residents and physicians practicing for less than one year are not subject to this relocation requirement. This means that hospitals will not be prohibited from recruiting their own residents under the Stark law. The recruitment exception has also been modified to clearly indicate that recruited physicians generally cannot be locked into using the recruited hospital. They must be able to establish staff privileges at other hospitals and refer to other entities, including competitors, subject to employment that comply with other Stark exceptions.

Perhaps the most significant change to the recruitment provisions is the narrow exception created for recruitment arrangements into existing medical practices. Residents and physicians who have been in medical practice less than one year will not be considered to have an established practice and will therefore be eligible under the physician recruitment exception regardless of whether or not the physicians actually moves their practice locations. This provides an important exception that can be relied upon for recruitment support through established medical practices. Overall, the recruitment provisions of Phase II clarify some of the uncertainty that previously existed and remove some of the existing barriers to legitimate recruitment of physicians.

Reporting Requirements

By statute, Stark II requires that all entities furnishing services for which payment may be made under Medicare submit information to CMS concerning their financial relationships. The 1998 proposed rule would have required covered entities to report to the agency on a prescribed form and thereafter report once a year all changes to the submitted information that occurred in the previous 12 months. This burdensome requirement would have essentially involved reporting each covered service and every financial relationship that entities have with a referring physician, regardless of whether a Stark exception applied to the financial relationship.

In the Phase II, CMS has altered this provision and now requires entities to make information available only upon request and to maintain the information only for the length of time specified by the applicable regulatory requirements of the Internal Revenue Service, Medicare, Medicaid and other programs. Clearly, CMS intends the recordkeeping to be no more onerous than that which an entity would ordinarily maintain. In view of the broad definition of "financial relationship", this new approach is a welcome relief from the proposed reporting requirements for physicians and other entities.

Conclusion

Several new exceptions have been created under CMS' regulatory authority, many of which are helpful to surgeons and other physicians. Although these new exceptions and the clarifications to existing exceptions are useful, they deal with only limited circumstances and some are heavily conditioned. In addition, the law will continue to punish even unintended violations and any deviation of a physician's relationship with an entity, however minor or unintended, would yield all physicians' Medicare referrals to that entity prohibited. Applying this law to particular scenarios even with this new regulation will continue to be problematic. We hope that CMS persists in refining these regulations to further simplify compliance and reduce the risk falling out of compliance with the law when physicians are involved in non-abusive relationships.

That said, we know that CMS' task in making sense of an extraordinarily broad, complex and often inconsistent statute is monumental. Given the complexity of this law, it is essential to physicians' financial arrangements between physicians and other health care providers that CMS define clear exceptions. On balance, it appears that CMS thoroughly considered the commenters' concerns and has introduced a variety of revisions that offer greater clarity and, in several instances, increased protections for legitimate arrangements. We believe that Phase II of the new regulations will enhance means to achieve compliance.

Sincerely,

Thomas R. Russell, MD, FACS
Executive Director

ACS Views on Legislative, Regulatory, and Other Issues

Advocacy and Health Policy