Client Alert

On July 31, 2008, the Centers for Medicare and Medicaid Services (“CMS”) published its comprehensive final regulations of the FY 2009 Inpatient Prospective Payment Systems and FY 2009 Rates (“Final IPPS Rule”). As foreshadowed in the proposed IPPS regulations published earlier this year and the proposed CY 2008 Physician Fee Schedule, the Final IPPS Rule contains a number of changes to the Ethics in Patient Referral Act (the “Stark Law”). Although the Stark Law II, Phase III regulations (the “Phase III Regulations”) published on September 5, 2007 purported to be the final installment of the Stark Law, CMS continues to modify, substantially at times, its regulation of the financial relationships between health care entities and physicians that make referrals for designated health services (“DHS”) to such entities. The Final IPPS Rule also discusses certain disclosure requirements that will be imposed upon selected hospitals.

Some of the key changes set forth in the Final IPPS Rule include:

• A Revision to the Physician “Stand in the Shoes” Provision: The Stark statute, as enacted by Congress, only addressed direct financial relationships between physicians and health care entities to which they make referrals for DHS. CMS has repeatedly expressed concern about indirect financial relationships where the financial relationship between a health care entity and the referring physician runs through intervening entities such as the physician’s medical practice or a joint venture. In the Stark Law II, Phase I regulations, CMS used its regulatory authority to define an “indirect compensation relationship” and to create a regulatory exception for a certain subset of permissible “indirect compensation relationships.” However, CMS indicated that further attention was needed in this area to address the continuing potential for abuse and to simplify compliance. To address this concern, in the Phase III Regulations, CMS provided that physicians “stand in the shoes” of their physician organizations; accordingly, compensation relationships between a hospital and a physician organization resulted in a direct compensation relationship between the hospital and each individual physician in that organization. The Final IPPS Rule revises the “stand in the shoes” provision to provide that only physicians who have a true ownership or investment interest in a physician organization are deemed to “stand in the shoes” of that physician organization. As a result, a non-owner physician does not necessarily have the same compensation arrangements with a DHS entity that his or her physician organization does and may not have to satisfy a direct compensation exception.
• Percentage-Based Compensation Formulas: CMS and the health care industry have had a running dialogue over whether percentage-based payments would be permissible under the Stark Law for certain compensation arrangements where, among other requirements, the compensation must be “set in advance” and “not vary based on the value or volume of referrals or other business generated between the parties.” In the commentary to the Phase III Regulations, CMS refused to give blanket approval to compensation calculated using a percentage-based formula even though it is common in many compensation arrangements in the health care industry including personal services contracts, management and billing contracts, and space and equipment leases. In the Phase III Regulations, CMS stated that percentage-based compensation will be permissible if it is “set in advance” as part of a predetermined fixed formula and if, based on the circumstances, it does not vary based on the value or volume of referrals or other business generated by the affected physician. In the Final IPPS Rule, CMS prohibits the use of percentage-based compensation formulas when determining rental charges in space and equipment leases. Parties are prohibited from calculating rent based upon a percentage of revenue raised, earned, billed, collected or otherwise attributable to the services performed or business generated through the use of the office space or equipment.
• Per Click Rental Charges in Space and Equipment Lease Agreements: CMS has previously expressed concern about leases in which a lessor comprised of physician investors leases equipment such as a MRI or CT to an entity like a hospital and receives “per click” rental payments. These arrangements are susceptible to abuse because the rental payments may be the result of referrals from the physician investors. In the Final IPPS Rule, CMS prohibits these per click rental charges, to the extent that such charges reflect services provided to patients referred by interested lessors. CMS did expressly permit parties to lease equipment and space on a “block lease” basis, but states that it is continuing to review these arrangements.
• The “Entity” Definition: The Stark Law prohibits a physician from making a referral for DHS to an “entity” with which the physician has a financial relationship, unless an exception applies. “Entity” is not defined by the Stark statute enacted by Congress, but prior Stark Law regulations have applied the term almost exclusively to an “entity” that bills Medicare for DHS. As a result of this treatment, physicians have been able to refer patients to joint ventures in which they had a financial relationship if that entity merely furnishes DHS to another provider that bills for the services. These joint ventures were commonly formed to provide DHS “under arrangements” to hospitals. CMS identified this development as an area of potential abuse. To address this concern, in the Final IPPS Rule, CMS revises the definition of “entity” to include both an entity that bills Medicare for DHS and one that furnishes DHS to another entity that bills Medicare for it. The effect of this change is to close this “loophole.”

These are just a few of the many changes set forth in the Final IPPS Rule. Womble Carlyle has prepared a thorough analysis of the Final IPPS Rule, which you may read here.

The new regulations are scheduled to be published in the Federal Register on August 18, 2008 and will go into effect on October 1, 2008 (except where otherwise noted). If you would like to discuss these matters at greater length, please contact one of the following members of Womble Carlyle’s Health Care Practice Group: Tom Stukes at 336-574-8065, Tony Brett at 336-721-3620, Dick Vincent at 404-879-2422, Kim Licata at 919-484-2313, Jill Girardeau at 404-879-2426 or Jodi Knox at 336-574-8059.