Client Alert

This week, the Centers for Medicare & Medicaid Services (“CMS”) released the long-awaited third round of final regulations implementing the Stark physician self-referral law.

The Stark Law prohibits a physician from making referrals for certain “designated health services” (“DHS”) to an entity in which the physician or a member of his or her immediate family has a “financial relationship” if Medicare or Medicaid is to pay for that DHS. The Stark Law includes a number of exceptions, which have required multiple proposed and final regulations to provide health care “entities” with some understanding of what they can and cannot do when referring physicians are involved.

In large part, the Phase III final regulations build upon the two preceding final regulations issued in 2001 and 2004, and include several important revisions of keen interest to many health care providers. Some of the key changes include:

• A new “stand in the shoes” provision for physicians and physician organizations. Under the Phase III regulations, a physician will stand in the shoes of his or her physician organization for Stark analysis. As a result, physicians will have many more potential direct and indirect compensation arrangements.
• Removal of the hourly compensation “safe harbor” for hourly payments for a physician’s personal services on the basis of national surveys or emergency department physician compensation.
• Recognition of amendment of compensation arrangements in certain situations where the amendment is for bona fide reasons and does not take into account the volume or value of referrals or other business of the parties.
• Percentage-based and unit-based compensation permitted. CMS did not prohibit (but did not protect by regulatory text) unit-based or percentage-based compensation, as threatened earlier this year. Compensation arrangements, regardless of the compensation methodology used, must comply with all regulatory requirements for protection.
• Expanded exceptions for physician recruitment and retention payments. Previously, the Stark Law only made an exception for certain recruitment and retention payments made by hospitals and federally qualified health centers (“FQHCs”). The Phase III regulations extend the protection to rural health clinics. In the case of recruitment payments, the Stark III regulations increase both the number of eligible physicians (to include in some cases physicians in practice for up to 2 years) and the geographic area to which the recruited physician must relocate. The Phase III regulations also lessen the restrictions on non-competes in a recruited physician’s employment agreement with an existing practice.
• Clarification that security interests held by physicians in connection with equipment sales financed through loans to hospitals are not “ownership” arrangements, but are compensation interests.

These are just a few of the many changes to the recent regulatory interpretation of the Stark law. Womble Carlyle has prepared a thorough analysis of Phase III of the Stark regulations, which you may read here.

The new regulations are scheduled to be published in the Federal Register on September 5, 2007, and to go into effect 90 days later (early December 2007). The Phase III regulations were scheduled to be the final round of Stark regulations, which began nearly a decade ago. However, many unanswered questions remain, which may be addressed in a future rule-making by CMS.

If you have any questions regarding this client alert, please contact the Womble Carlyle attorney with whom you usually work or one of our health care attorneys.