New Provisions and Modifications of Existing Regulations

By Broad and Cassel

  1. Ownership or Investment Interest in Hospital The regulations narrow the scope of the Stark law's exception for an ownership or investment interest in a hospital by providing that the exception applies only "in the case of designated health services furnished by such a hospital." The preamble explains that this means that the exception does not cover services furnished by any other health care provider the hospital owns. For example, if a physician owns an interest in a hospital that itself owns a Medicare licensed home-health agency, referrals by the physician to the agency (or even under some circumstances, by the hospital to the agency of patients referred to the hospital by the physician) would be prohibited unless protected by another exception. Since many hospitals have ownership interests in entities that deliver designated health services, this certainly makes the hospital ownership exception less useful. The preamble also clarifies that the exception can apply if a physician owns an interest in a company that owns a chain of hospitals, rather than just the one hospital to which the physician makes referrals.

  2. Physician Practice Acquisitions v Isolated Transaction The Stark law provides an important "isolated transaction" exception to the referral prohibition related to compensation arrangements. This exception encompasses, among other things, a one-time sale of a physician's medical practice. The Stark I regulations define an isolated transaction as one that, among other requirements, involves only a single payment for the practice. Although it was hoped that perhaps HCFA would expand that definition to include installment payments, that has not happened. The proposed regulations maintain the single payment requirement. Further, the proposed regulations add an additional requirement that the parties conducting the isolated transaction complete on additional transactions for the next six months.

    However, even if the "isolated transaction" exception is not met, this does not necessarily mean that the Stark law is violated. Other exceptions may be available. For example, the physician whose practice is purchased may retire, so that he or she no longer engages in referrals. In addition, the compensation arrangement exception or the new personal service arrangement exception might be met. Further, if a hospital is the acquiror, the hospital ownership exception could apply. The preamble indicates that secured debt and even some types of unsecured debt can qualify as an ownership or investment interest in a hospital.

  3. Physician Recruitment The Stark law contains a provision which, if certain conditions are met, exempts remuneration paid by a hospital to recruit a physician. With the exception of one editorial change which applies to a physician recruited, the proposed Stark law regulations pertaining to physician recruitment retain the language of the final Stark I regulations. Thus, and as apparently required by the statute, for the exception to apply the physician must have relocated from another area to the geographic area served by that hospital. The term "geographic area" is not defined. If the exemption is met, any remuneration paid to the physician to induce the move is outside the prohibitions of the Stark law.

  4. Compensation Arrangements for Physicians The proposed Stark law regulations provide answers to many physician compensation questions, but leave one guessing as to others. Some examples are:

    • Productivity bonuses within a "group practice" based upon referrals for nondesignated health services are totally sanctioned, without any restrictions.

    • A physician's compensation cannot include payments based directly on the number or value of referrals the physician has made. Within the context of a group practice, the preamble specifically sanctions without limitation, an even split of the ancillary profits, or division based upon a physician's investment in the group, or the difficulty of his or her work. However, any formula which produces a bonus not directly related to the volume or value of referrals should suffice.

    • The group practice exception focuses on the division of overall profits and the proposed regulations prohibit treating a group practice as if it is composed of separate entities. Left unanswered is the issue of cost accounting on a profit center basis. A significant number of group practices formed throughout the country during the past several years have, for practical reasons, structured physician compensation using separate profit centers, or an "eat what you kill" approach to allocating expenses and revenues. Generally, the physician is compensated by allocating revenues to each profit center producing the, and then subtracting from profit center revenues direct costs and a pro rata share of the indirect costs. It is not clear whether accounting for nondesignated health services revenues by profit centers is permissible under the proposed regulations. The unrestricted productivity bonus sanctioned for nonesignated health services discussed above indicates it may be allowable, but there is a serious concern that the group would not qualify as a "group practice", because of that definition's general prohibition of satellite offices.
    • As a result of the regulations generally treating as designated health services the professional component of those services, a greater portion of the revenues earned by the personal services of physicians will be considered designated health services. Many physician employment agreements currently allocate the revenues from those services directly to physicians in determining his or her compensation. If the regulations became final in their present form, those agreements must be amended.

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