Phase I stark II regulations provide some flexibility: CMS calls the stark II final rule a commonsense approach to preventing potentially abusive referrals while recognizing many legitimate financial arrangements - Centers for Medicare and Medicaid Services regulations

Healthcare Financial Management, Oct, 2001 by Lisa Chase

The Centers for Medicare and Medicaid Services (CMS--formerly HCFA) issued Phase I regulations of Stark II in January 2001. The Stark II final rule prohibits physicians from referring Medicare patients for designated health services (DHS) to entities with which the physicians or their immediate family members have a financial relationship. A financial relationship can be either an ownership interest or a compensation arrangement, and can be direct or indirect. The law provides a variety of sanctions, including denial or refund of payment and civil penalties. The final rule generally permits physicians to make referrals to entities with which they have a compensation relationship, as long as the compensation paid to the physician is no more than would be paid to someone who provided the same services but was not in a position to generate business for the entity.

The final rule is substantiaily different from the January 1998 proposed rule. As a result, physicians who refer patients to entities for DHS need to ensure that the referrals do not trigger Stark II prohibitions. To avoid unknowingly violating the law, healthcare providers need to understand what constitutes an entity, how CMS views referrals, and what is and is not a DHS.

On January 4, 2001, the Centers for Medicare and Medicaid Services (CMS--formerly HCFA) issued Phase I of the long-awaited final regulations implementing the physician self-referral law commonly known as Stark II. (a) The regulations take effect January 4, 2002.

Stark II prohibits a physician (or a physician's immediate family member) who has an indirect or direct financial relationship with an entity from making referrals to that entity for designated health services (DHS) payable by Medicare or Medicaid, unless a statutory or regulatory exception allows the referral. Any DHS performed as a result of a prohibited referral cannot be billed to any payer, including the patient. In addition, any physician or entity that violates Stark II may be subject to significant civil penalties and exclusion from participation in all Federal healthcare programs. Stark II violations also may form the basis of an accusation of a False Claims Act violation.

Phase I addresses the ownership and compensation exceptions most frequently relied upon by physicians and their group practices to remain compliant with the statute: the physician services and in-office ancillary services exceptions. CMS made significant changes in the final rule from its January 1998 proposed rule in an attempt to create clear rules and add flexibility for physician practices. Among the more notable revisions are:

* Clarification of which indirect financial relationships are covered by the statute;

* Exclusion of DHS personally performed by the referring physician from the definition of a referral;

* Clarification of the definitions of covered DHS;

* Substantial broadening of the in-office ancillary services exception by relaxing the criteria for qualifying as a group practice and conforming the supervision requirements to CMS's coverage and payment policies for the specific service;

* Expansion of the in-office services exception to cover certain durable medical equipment provided to patients in physicians' offices to assist them in ambulating;

* Allowance for shared facilities providing DHS if provided in the same building in which physicians routinely provide services that are unrelated to Federal and private-pay DHS; and

* Interpretation of the "volume or value" standard to permit fixed fair-market-value unit-of-service- or unit-of-time-based payments.

INDIRECT FINANCIAL RELATIONSHIPS

To determine whether Stark II applies to a physician's practice, one must ask two preliminary questions: Is there a direct or indirect financial relationship between the referring physician and the entity furnishing the DHS, and is there a referral for DHS from the physician to the entity? If the answers to these questions are "yes," the physician's referrals will violate Stark II, unless an exception is met.

Any financial relationship, whether an ownership interest or compensation arrangement, between a referring physician and an entity furnishing DHS triggers Stark II's prohibition, even if a Federal healthcare program is not involved. A direct financial relationship is any arrangement between the referring physician and the DHS entity without any person or entity interposed between them. In the final rule, GMS significantly refined its definition of indirect financial relationships that fall within the scope of the statute by distinguishing between indirect ownership interests and indirect compensation arrangements.

An indirect ownership financial relationship exists for the purposes of Stark II between the referring physician and DHS entity if there is an unbroken chain of any number of individuals or entities with an ownership or investment between them, and the DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician has an ownership interest in the DHS entity. For example, a physician shareholder of a group practice that contracts with a hospital to provide pathology services has an indirect financial interest with the hospital. The hospital would be expected to know of such an ownership interest because it is not submerged in various layers of ownership. An indirect compensation arrangement triggers Stark II if the following conditions are met: