Back to the Drafting Table: How Stark has Changed Contracting Risks

Robert G. Homchick, Esq. Kim Harvey Looney, Esq. Davis Wright Tremaine LLP Waller Lansden Dortch & Davis, LLP 1201 Third Avenue, Suite 2200 511 Union Street, Suite 2700 Seattle, Washington 98101 Nashville, Tennessee 37219 roberthomchick@dwt.com kim.looney@wallerlaw.com 206-757- 8063 615-850-8722

I. INTRODUCTION

The Affordable Care Act (ACA) did more than reform the health care financing system. It also changed the analysis and recalibrated the risk calculus for providers and suppliers subject to the prohibitions of the federal physician self-referral statute, commonly referred to as the Stark law. It is now abundantly clear that the financial consequences of discovering either an historical Stark law problem or a longstanding oversight of a Stark violation are potentially devastating. This paper and the accompanying presentation outline possible means of structuring arrangements and/or drafting agreements involving physicians and entities furnishing designated health services in ways that reduce or limit their Stark law risks. The first section is an overview of the Stark Law. The second section explains how some of the recent changes in the law that require repayment of known overpayments have increased the risks triggered by the discovery of a Stark violation. Finally, the last section summarizes the increase in exposure under Stark and outlines how drafting with an eye toward how the parties are likely to implement the arrangement should enable lawyers to assist their clients in reducing their overall Stark exposure.

II. OVERVIEW OF THE STARK LAW

A. Introduction

The federal self-referral statute prohibits a physician from referring Medicare patients for designated health services (DHS) to entities with which the physician (or an immediate family member) has a financial relationship, unless an exception applies.1 The

1 Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Pub. L. No. 101-239, § 6204, 103 Stat. 2106 (1989), codified at 42 U.S.C. § 1395nn.

federal physician self-referral statute is often referred to as the “Stark Law,” so named because the statute’s primary sponsor was Congressman Fortney “Pete” Stark (D-Cal.).2

B. Historical Background

Stark I. As originally enacted in January 1992, the first Stark statute, “Stark I,” only covered financial/referral relationships between physicians and clinical laboratories.

Stark II. The Stark law was significantly expanded a year later in what is referred to as: “Stark II,” (effective January 1, 1995). With Stark II the referral prohibition was extended to eleven (11) “designated health services”, including most types of imaging and inpatient and outpatient hospital services.

Stark I Regulations. The first set of Stark regulations addressed the first Stark statute (“Stark I”). While these regulations technically related only to the referral of clinical laboratory services, CMS indicated that the Stark I regulations were to be used to interpret Stark II as it applied to other “designated health services” as well.3

Proposed Stark II Regulations. In January 1998 CMS published the Proposed Stark II regulations.4 These regulations were very controversial and were criticized by many in the industry.

Stark II Phase I Regulations.. Reacting to the public criticism of the proposed regulations, CMS implemented Stark II in three phases.5 In January 2001 CMS issued the “Stark II Phase I,” Final Regulations.6 These regulations went into effect in January 2002.

2 The first section of this paper presents an introduction or overview of the Stark Law. Reference must be made to the statute, regulations, and CMS’s interpretations to fully understand the technical details of this law. No portion of this paper should not construed as providing legal advice. Readers should consult counsel familiar with the statute when questions arise. 3 60 Fed. Reg. 41916 (Aug. 14, 1995), codified at 42 C.F.R. §§ 411 et seq. 4 63 Fed. Reg. 1659 (Jan. 9, 1998). 5 The final regulations are now codified at 42 C.F.R. part 411, subpart J (§§ 411.350–411.361). 6 66 Fed. Reg. 856 (Jan. 4, 2001)

Stark II Phase II Regulations. In March 2004, “Stark II Phase II” regulations were released as an interim final rule, effective on July 26, 2004.7

Stark II Phase III Regulations. In September 2007 CMS published the Phase III Final Rule without a comment period, thereby bringing the rulemaking cycle to an end.8

EHR Donation Final Rule. Reacting to public and Congressional pressure, CMS created two separate exceptions addressing the donation of electronic health records (EHR) technology and support. The rulemaking for these exceptions was on a separate track from the Stark II final regulations.9

Annual Rulemaking Cycle. In August 2006 CMS for the first time used the annual rulemaking cycle of the physician fee schedule to target a controversial issue related to so-called “pod labs” and the in-office ancillary services exception. CMS continued to use the fee schedules to introduce changes to the Stark regulations in the 2008 Final Medicare Physician Fee Schedule (2008 MPFS Final Rule), the 2009 Inpatient Prospective Payment System Final Rule (2009 IPPS Final Rule), the 2009 Final Medicare Physician Fee Schedule (2009 MPFS Final Rule),10 and the 2010 Final Medicare Physician Fee Schedule (2010 MPFS Final Rule).11 Practitioners should anticipate that CMS will use the annual fee schedule updates to amend the Stark regulations, because it allows the agency to avoid the cumbersome process of omnibus rulemaking.

C. Elements of the Stark Law’s Prohibition

Under Stark:

A physician

7 69 Fed. Reg. 16,054 (Mar. 26, 2004) 8 Medicare and Medicaid Programs; Physicians’ Referrals to Health Care Entities With Which They Have Financial Relationships (Phase III), 72 Fed. Reg. 51,012 (Sept. 5, 2007), codified at 42 C.F.R. pts. 411 & 424. 9 71 Fed. Reg. 45,110 (Aug. 8, 2006). 10 72 Fed. Reg. 66,222 (Nov. 27, 2007; 73 Fed. Reg. 48,434 (Aug. 19, 2008),; and 73 Fed. Reg. 69,726, 69,794 (Nov. 19, 2008). 11 74 Fed. Reg. 61738 (Nov. 25, 2009).

may not make a referral

to an entity for the provision of a designated health service (“DHS”) for which Medicare payment may be made (and the entity may not present a claim for services provided as a result of such a referral)

if the physician or an immediate family member has a financial relationship with the entity

unless either the referral or the financial relationship is “excepted” from the statute’s coverage.12

D. Designated Health Services

The following services are considered “designated health services” under Stark. A current list of specific CPT and HCPCS codes considered DHS is available on the CMS website.

Clinical laboratory services

Physical therapy services

Occupational therapy services

Radiology services (including diagnostic nuclear medicine services and supplies,13 magnetic resonance imaging, computerized axial tomography scans, and ultrasound, but excludes nuclear medicine and certain radiology and imaging procedures requiring the insertion of a needle, catheter, tube or probe)

Radiation therapy services and supplies (including therapeutic nuclear medicine services and supplies)14

Durable medical equipment and supplies

Parenteral and enteral nutrients, equipment, and supplies

12 42 U.S.C. § 1395nn(a)(1). 13 Reversing its own decision from several years earlier, CMS added nuclear medicine services and supplies to radiology services and radiation therapy services in November 2005. 70 FR 70116, 70283 (Nov. 21, 2005). These new DHS categories were added effective January 1, 2007. 14 Supra n.13.

Prosthetics, orthotics, and prosthetic devices and supplies

Home health services

Outpatient prescription drugs

Inpatient and outpatient hospital services

E. Key Statutory Terms

The Stark Law contains a definitions section that includes the terms “referral,” “entity,” “financial relationship,” “ownership or investment interest,” “compensation arrangement,” and “remuneration.”15 In addition, CMS introduced, by regulation, a limited “knowledge” definition.

1. Referral

The term “referral” is broadly defined. A referral can be direct or indirect, meaning that physicians would be considered to have made referrals if they caused, directed, or controlled referrals made by others.16 A referral can be in any form, including—but not limited to—any written, oral, or electronic means of communication. A referral can also be made in a plan of care and does not require that physicians send patients to particular entities or indicate in a plan of care that DHS should be performed by particular entities.17

Although the term “referral” generally includes services performed by physicians’ employees and group practice members, CMS determined that the term “referral” or “referring physician” excludes services personally performed by the referring physician, and referrals to a physician’s wholly owned professional corporation.18 Examples of personally performed services at a hospital include the professional component of cardiac catheterization and lithotripsy. For the most part, these services are physician services, although, as discussed below, the professional component of a radiology service is deemed to be a DHS. Referrals still take place when physicians refer patients to other members of their group practices or to other entities for DHS, including technical components of radiology services or hospital services themselves.

The definition of “referral” includes DHS provided in accordance with a “consultation” with another physician, including DHS performed or supervised by the 15 See generally 42 U.S.C. § 1395nn(h). 16 42 C.F.R. § 411.351. 17 Id. 18 Id.

consulting physician or any DHS ordered by the consulting physician.19 Because the DHS orders by consulting physicians are imputed to the physician requesting the consult, it is important to determine when a physician is transferring care of a patient as opposed to requesting a consult.

Radiologists, pathologists, and radiation oncologists are subject to special rules. When pathologists, radiologists, and radiation oncologists order DHS pursuant to a consultation requested by another physician, such orders are statutorily excluded from the definition of “referral.”20

2. Entity

To fall within the scope of the Stark Law, a referral must be made to an “entity” furnishing DHS to a Medicare patient. In the Phase I Final Rule, CMS defined an “entity” as the party to which Medicare makes payment for the DHS, either directly, upon assignment on the patient’s behalf, or upon reassignment pursuant to CMS’s reassignment rules. In short, in Phase I, CMS defined “entity” as the organization that bills the Medicare Program.21

a. Revised Definition of “Entity”

In the 2009 IPPS Final Rule, CMS made a fundamental change by revising the definition of “entity” to include both (a) the person or entity that “presented a claim” to Medicare for the DHS and (b) the person or entity that “performed” the DHS (notwithstanding that another person or entity actually bills for the services as DHS).22 This revised definition directly affected “under arrangements” services agreements. As defined by CMS in the 2009 IPPS Final Rule, an “entity” includes persons and entities that “perform” DHS, which effectively converts to “DHS entity” status any organization that provides services “under arrangement” to a hospital. A physician who has a financial relationship with an organization can make DHS referrals to that organization only if the financial relationship fits within a Stark exception. CMS takes the position that when a physician group is providing services under arrangement to a hospital, the physician owners of the practice cannot rely on the in-office ancillary services exception to protect their referrals to the practice for the under arrangement services because these services will be billed by the hospital, not the group. While it is possible to structure a physician’s compensation arrangement with an under-arrangement organization to satisfy a compensation-arrangement exception, only under limited circumstances will a

19 Id. 2042 C.F.R. § 411.351. 21 42 C.F.R. § 411.351. 22 See 73 Fed. Reg. 48,434, 48,751.

physician be able to hold ownership or investment interests in an under-arrangement provider.

b. Performing a DHS

When the definition of entity was amended to include those persons or organizations that perform a DHS, CMS declined to define the term “perform.” In the preamble, the agency stated that perform “should have its common meaning” and that “[p]hysicians and other suppliers and providers generally know when they have performed a service and when they are entitled to bill for it.”23 CMS notes, however, that a physician has “performed” DHS if he or she “does the medical work” for the service, but similarly fails to define what constitutes “medical work.”

CMS provided some guidance on what actions do not constitute the performance of DHS. “We do not consider an entity that leases or sells space or equipment used for the performance of the service, or furnishes supplies that are not separately billable but used in the performance of the medical service, or that provides management, billing services, or personnel to the entity performing the service, to perform DHS.”24

3. Financial Relationship

A “financial relationship” can occur through either a direct or indirect ownership or investment interest, or a direct or indirect compensation arrangement.25

4. Ownership or Investment Interest

a. Direct Ownership or Investment Interest

An ownership or investment interest may be through equity, debt, or “other means,” and includes an interest in an entity that holds an ownership or investment interest in any entity that furnishes DHS.26 However, an ownership or investment interest in a subsidiary is neither ownership nor investment in the parent company or in any other subsidiary, unless the subsidiary company itself holds an interest in the parent or such other subsidiary. An ownership or investment interest also includes stock, partnership shares, and limited liability company memberships as well as loans, bonds, or other financial instruments that are secured by an entity’s property or revenue.

23 Id. at 48,726. 24 Id. 25 42 C.F.R. § 411.354(a). 26 Id. § 411.354(b).

Ownership or investment interests do not include interests in retirement plans, stock options, and convertible securities received as compensation until the options are exercised or the securities converted to equity, unsecured loans, or “under arrangements” contracts between a hospital and an entity owned by a physician or physician group.27 Many of these forms of remuneration fit within the compensation arrangements definition.

Common ownership does not establish an ownership or investment interest by one common investor in another common investor.28

b. Indirect Ownership or Investment Interest

In the Phase I and Phase II Final Rules, CMS substantially revised its approach to indirect financial relationships. The agency established tests for when an indirect relationship will trigger the Stark Law prohibition and a limited knowledge requirement to avoid application of the statute’s sanctions when an entity has no reason to know that a DHS referral is tainted. Under the Stark regulations:

(i) An indirect ownership or investment interest exists if—

(A) Between the referring physician (or immediate family member) and the entity furnishing DHS there exists an unbroken chain of any number (but no fewer than 1) of persons or entities having ownership or investment interests; and

(B) The entity furnishing DHS has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician (or immediate family member) has some ownership or investment interest (through any number of intermediary ownership or investment interests) in the entity furnishing the DHS.

(ii) An indirect ownership or investment interest exists even though the entity furnishing DHS did not know, or act in reckless disregard or deliberate ignorance of, the precise composition of the unbroken chain or the specific terms of the ownership or investment interests that form the links in the chain.

27 Id. § 411.354(b)(3). 28 69 Fed. Reg. at 16,061.

(iii) Notwithstanding anything in this paragraph (b)(5), common ownership or investment in an entity does not, in and of itself, establish an indirect ownership or investment interest by one common owner or investor in another common owner or investor.

(iv) An indirect ownership or investment interest requires an unbroken chain of ownership interests between the referring physician and the entity furnishing DHS such that the referring physician has an indirect ownership or investment interest in the entity furnishing the DHS.29

5. Compensation Arrangement

A “compensation arrangement” is any arrangement involving remuneration, direct or indirect, between a physician (or an immediate family member) and an entity.30

6. Indirect Compensation Arrangement, Indirect Compensation Arrangement Exception and Stand in the Shoes

The definition of “indirect compensation arrangement” contains a three-part test: (1) an unbroken chain of financial arrangements (either ownership or compensation) linking the referring physician to the entity furnishing DHS; (2) focusing on the compensation arrangement in the chain closest to the physician, does the aggregate compensation vary with, or otherwise take into account, the volume or value of the physician’s referrals to, or business generated for, the DHS entity; and (3) the DHS entity has knowledge that the aggregate compensation varies in this manner.31

If an arrangement constitutes an indirect compensation arrangement, to avoid triggering the referral prohibition it must fit within the indirect compensation exception. This exception generally requires that (1) the compensation must be set at fair market value not taking into account the volume or value of referrals or business generated, (2) the arrangement must be memorialized in a signed written agreement specifying the services covered, and (3) the compensation must not violate the anti-kickback statute.32

Since CMS created a definition and parallel exception for indirect compensation arrangements, commenters have raised various questions and concerns about the meaning and application of these concepts. The agency has been attempting to narrow the 29 42 C.F.R. § 411.354 (b)(5). 30 Id. § 411.354(c). 31 42 C.F.R. § 411.354(c)(2). 32 42 C.F.R. § 411.355(d)(4).

application of its indirect analysis. Its most visible step has been the adoption of the “stand in the shoes” concept. In short, to avoid triggering the indirect analysis a physician will be deemed to stand in the shoes of his or her physician group, thereby transforming the relationships of the physician group into direct rather than indirect financial relationships with the physician. After a period of significant confusion cause by the agency’s rulemaking on this subject, the rule now is that a physician “stands in the shoes” of his or her physician organization when: (1) the only intervening entity between the physician and the DHS entity is his or her physician organization and (2) the physician has an ownership or investment interest in the physician organization.33

7. Remuneration

Remuneration is broadly defined as “any payment or other benefit made directly or indirectly, overtly or covertly, in cash or in kind.”34 The following, however, are excepted from this definition: the forgiveness of amounts owed for inaccurate or mistakenly performed tests or procedures or the correction of minor billing errors; the furnishing of items, devices, or supplies used solely to collect, transport, process, or store specimens for the entity furnishing the items, or to order or communicate the results of tests or procedures for the entity; and certain payments made by insurers or self-insured plans, or subcontractors of the insurers or plans, to physicians.35

The definition of remuneration, however, is not as broad as these limited exceptions might suggest. In the commentary to the electronic health records (EHR) exception, CMS responded to a question of whether electronic information that is transmitted through an EHR is considered remuneration for purposes of the Stark law as follows:

Typically, information about a particular patient’s health status, medical condition, or treatment exchanged between or among the patient’s health care providers and suppliers for the purpose of diagnosing or treating the patient would not constitute remuneration to the recipient of the information. In this regard, the electronic exchange of patient health care information is comparable to the exchange of such information by mail, courier, or phone conversation. Thus, when related to the care of individual patients, information such as test results, diagnosis codes, descriptions of symptoms, medical history, and prescription information

33 42 C.F.R. § 411.354(c)(1)(ii)(A) & (B). 34 Id. § 411.351 (definition of “remuneration”). 35 Id.

are part of the delivery of the health care services and would not have independent value to the recipient.36

Along similar lines, CMS states in the preamble to the Phase II Final Rule that a “hospital’s provision of a computer or other technology that is wholly dedicated to use in connection with hospital services provided to the hospital’s patients would be for the hospital’s benefit and convenience and would not constitute remuneration to a physician” (i.e., would not create a financial relationship) triggering the Stark law.37 There are numerous other examples of items or services that historically have not been considered “remuneration,” such as medical staff privileges, access to hospital facilities, or providing operating room “block time.” Thus, while the definition of remuneration is quite broad, even CMS has acknowledged that common sense and historical practices may play a role in determining whether a particular item or service is “remuneration” under the Stark law.

8. Knowledge Standard

In response to complaints about the disproportional liability that may result from an innocent Stark violation, CMS adopted a scienter or knowledge requirement, but it is only applicable in limited situations. Payment may be made for a service provided pursuant to an otherwise prohibited referral if the entity did not have actual knowledge or act in reckless disregard or deliberate ignorance of the identity of the referring physician, and the claim otherwise complies with all applicable laws.38 Similar knowledge standards are imposed elsewhere in the regulations to prevent the application of the statute unless the person or entity submitting the claim knew or should have known of the identity of the referring physician.39

F. Stark Global Exceptions

The Stark Law and regulations include several exceptions that apply to both ownership interests and compensation arrangements between a physician and a DHS entity. These so-called “global” exceptions include:

“Physician services” exception – referrals for physician services provided personally by (or under the supervision of) another physician in the same “group practice” (see below) as the referring physician are not prohibited by the Stark statute.

36 71 Fed. Reg. 45,140, 45,143 (Aug. 8, 2006). 37 69 Fed. Reg. at 16,113. 38 42 C.F.R. § 411.353(e)(1). 39 Id. §§ 411.354(b)(5) & (c)(2).

“In-office ancillary services” exception – referrals for the provision of most DHS satisfying the following conditions are not prohibited by Stark:

The service is furnished within the same “group practice” (see below) as the referring physician by either (a) the referring physician, (b) a physician in the group, or (c) persons supervised by such a physician;

The service is furnished in (a) the “same building” where the group provides physician services unrelated to the designated health service, (b) in a “centralized building” dedicated solely to the provision of designated health services and wholly controlled by the group practice, or (c) a centralized building that is used by the group practice for the provision of some or all of the group practice’s clinical laboratory services;

The service is billed by (a) the physician performing or supervising the service, (b) the group practice, (c) an entity wholly-owned by the performing or supervising physician or by that physician’s group practice, or (d) by third-party billing agents for any of the above.

Note: The use of these two exceptions requires the establishment of a bona fide “group practice” as defined by the Stark law. In order to qualify as a “group practice,” the entity must meet a series of requirements relating to how it is organized, how expenses and revenues are shared, etc. A key criterion for qualifying as a “group practice” is that no physician member may be paid based directly upon his or her “volume or value of referrals” of DHS within the group. Both the definition of group practice and the limitations on how a group may compensate its members have evolved with each set of regulations CMS has issued.

“Pre-paid plan” exception – exception for services furnished by certain prepaid plan organizations (e.g., Medicare risk contractors, federally-qualified HMOs, etc.). Treatment of Medicaid managed care plans was deferred until Phase II of the Stark II regulation.

“Risk sharing arrangements” exception – exception covering compensation paid pursuant to a risk-sharing arrangement (i.e., withholds, bonuses, and risk pools) between a managed care plan and a physician or IPA for services provided to the plan’s enrollees (both Medicare/Medicaid enrollees and commercial enrollees).

Academic Medical Center (AMC) exception – protects payments to bona fide employed medical faculty from the various components of a

qualifying AMC, including an affiliated hospital (or teaching hospital) that meets certain requirements.

Implants furnished in ASCs – to facilitate ambulatory surgery center (ASC) operations, CMS created an exception that permits referring physicians or members of the referring physician’s group practice to implant certain prosthetic devices in Medicare-certified ASCs.

EPO and other dialysis-related outpatient prescription drugs exception applies only when these drugs are furnished in an end-stage renal disease (ESRD) facility.

Certain preventive screening and immunization services may qualify for an exception if they are subject to CMS-imposed frequency limits.

Eyeglasses and contact lenses that are prescribed after cataract surgery are eligible for a specific exception.

Intra-Family referrals in rural areas exception permits a physician to refer a patient living in a rural area to an entity in which the physician’s immediate family member has either an ownership or compensation interest.40 This exception is similar to the ownership exception for rural providers (described below), but also protects compensation arrangements.

G. Stark Ownership Exceptions

Stark includes certain exceptions that apply to physician “ownership/ investment interests” in entities that furnish DHS, including:

Ownership in publicly traded securities (and mutual funds);

Ownership in hospitals in Puerto Rico

Ownership of certain rural providers;

Ownership in hospitals generally, if the ownership interest is in the hospital as a whole and the referring physician is authorized to provide services therein;

The Medicare Modernization Act (MMA) imposed a moratorium on the application of the whole hospital and rural provider exceptions to physician ownership of

40 42 C.F.R. § 411.355(j).

certain specialty hospitals. Specialty hospitals were defined as hospitals primarily or exclusively engaged in the care and treatment of (1) patients with cardiac conditions, (2) patients with orthopedic conditions, (3) patients undergoing surgical procedures, or (4) any other specialized category of services designated by the Secretary. The MMA statutory moratorium on specialty hospitals expired in June of 2005.

In 2010 Congress enacted ACA which severely restricted the ability of physicians to hold equity interests in hospitals by narrowing both the whole hospital and rural provider exceptions. ACA grandfathers existing physician owned hospitals but places significant restrictions on their ability to increase aggregate physician ownership or expand operations.

H. Stark Compensation Exceptions

The statutory exceptions for compensation arrangements between physicians and DHS entities include exceptions for:

Leases of space and equipment;

Bona fide employment relationships;

Personal service relationships, including those involving “physician incentive plans,” between physicians and certain insurer organizations;

Remuneration unrelated to the provision of designated health services;

Physician recruitment agreements;

Certain isolated, one-time transactions (e.g., practice acquisitions);

Certain group practice relationships with hospitals existing prior to December, 1989; and

Payments made by a physician to a designated health service provider for items or services at fair market value.

By regulation CMS added the following compensation arrangement exceptions:

“Fair market value” exception covering compensation relationships between a physician and an entity;

Non-monetary compensation by DHS entities to physicians exception (up to $300 a year but this amount is adjusted annually for inflation);

Medical staff incidental benefits exception;

Professional courtesy exception;

Indirect compensation arrangement exception;

Compliance training exception;

Retention payments for physicians in underserved areas exception;

Certain arrangements in temporary noncompliance;

Community-wide health information systems exception;

Charitable donations by physicians to DHS entities exception;

Referral services exception;

Obstetrical malpractice insurance subsidy exception; and

E-prescribing and EHR donation exceptions.

I. Temporary Non-Compliance and Six Month Holdovers

The Stark Law contains exceptions applicable when an arrangement temporarily fails to comply with a Stark Law exception. This exception applies when: (1) the noncompliance is due to circumstances beyond the entity’s control; and (2) the noncompliance is due solely to the parties failure to obtain a signature that was required by a Stark Law exception.

For temporary noncompliance that is beyond an entity’s control, an entity may submit claims for DHS services to the Medicare Program pursuant to otherwise prohibited referrals if the following requirements are satisfied:

1. The financial relationship between the entity and the referring physician fully complied with the applicable exception for at least 180 consecutive calendar days immediately preceding the date on which the financial relationship became noncompliant with the exception;

2. The financial relationship has fallen out of compliance with the exception for reasons beyond the control of the entity, and the entity promptly takes steps to rectify the noncompliance.

3. The financial relationship does not violate the anti-kickback statute, and the claim or bill otherwise complies with all applicable Federal and State laws, rules, and regulations.

4. The entity must rectify the noncompliance within a period of time that cannot exceed 90 consecutive calendar days following the date on which the financial relationship became noncompliant with the exception.

Many Stark Law exceptions applicable to compensation arrangements contain a signature requirement. For temporary noncompliance with the signature requirement, an entity may submit claims for DHS services to the Medicare Program pursuant to otherwise prohibited referrals if the following requirements are satisfied:

1. If the failure to comply with the signature requires was inadvertent, the parties must obtain the required signature(s) within 90 consecutive calendar days immediately following the date on which the compensation arrangement became noncompliant (without regard to whether any referrals occur or compensation is paid during such 90-day period) and the compensation arrangement otherwise complies with all criteria of the applicable exception.

2. If the failure to comply with the signature requirement was not inadvertent, the parties must obtain the required signature(s) within 30 consecutive calendar days immediately following the date on which the compensation arrangement became noncompliant (without regard to whether any referrals occur or compensation is paid during such 30-day period) and the compensation arrangement otherwise complies with all criteria of the applicable exception.

3. The exception for noncompliance with the signature requirement can only be used by an entity once every 3 years with respect to the same referring physician.

The Stark law also provides some flexibility in other areas of temporary non-compliance. Specifically, the Stark law exceptions for the rental of space, rental of equipment and personal services arrangements shall continue to apply for up to six (6) months after the expiration of the term of the written agreement if the arrangement between the referring physician (or immediate family member) and the DHS entity is on the same terms and conditions as the expired written agreement.

This six month holdover provision provides protection in situations in which the agreement does not automatically renew, and the parties to the arrangement continue to perform under the agreement as if it were still in place after its expiration. This provision gives the parties time to negotiate the terms of a new written agreement.

J. Patient Protection and Affordable Care Act (“ACA”)

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Health Care Act (“ACA”). This Act was amended by the Health Care and

Education Affordability Act of 2010 (H.R. 4872) (“HCEAA”) signed on March 30, 2010 (collectively referred to as “ACA”). ACA directs the CMS to establish a self disclosure process for actual or potential Stark violations and gives the Secretary explicit authority to compromise the amount of the damages resulting from submission of claims prohibited by the Stark Law.

Another aspect of the ACA that is directly relevant when analyzing the practical implications of an actual or potential Stark violation is the provision requiring disclosure and repayment of overpayments within sixty (60) days of the date the overpayment is identified.41 This provision of the ACA is discussed in Section II, below.

K. Stark Self-Referral Disclosure Protocol

Under the ACA, Congress directed CMS to establish a self-referral disclosure protocol (“SRDP”).42 Under the SRDP, providers and suppliers may report existing or potential Stark violations to CMS. The ACA also gave CMS the express authority to reduce the amount that would otherwise be due as a result of submitting claims prohibited under the Stark law. The Secretary issued the Protocol September 23, 2010.

In general, the Stark Protocol should be used after a provider has determined that an actual or potential Stark Law violation has occurred. Although arguably inconsistent with the Congressional mandate, CMS has stated that the Protocol cannot be used to seek an opinion from CMS as to whether the Stark Law has been violated. “Thus, a disclosing party should make a submission to the SRDP with the intention of resolving its overpayment liability exposure for the conduct it identified.”43

The SRDP requires the disclosing party to furnish specific information, including:

The identity of the disclosing party. If the disclosing party is owned, controlled, or part of a system or network, then a description of the “pertinent relationships” and any related entities must be included.

A description of the matter being disclosed, including the type of financial relationship(s), the specific time periods the disclosing party may have been out of compliance, and the type of designated health service claims at issue.

41 42 U.S.C. § 1320a-7k(d); H.R. 3590, Pub. L. 111-148, Section 6402; Social Security Act § 1128J(d). 42 PPACA § 6409. 43 SRDP, available online at http://www.cms.gov/PhysicianSelfReferral/65_Self_Referral_Disclosure_OIG_Self-Disclosure_Protocpl.asp.

The names of all entities and individuals believed to be implicated and an explanation of their roles in the matter.

An explanation as to why the disclosing party believes a violation of the physician self-referral law may have occurred, including a legal analysis of the application of the Stark Law to the conduct and any exception that applies to the conduct.

The circumstances under which the disclosed matter was discovered and the steps taken when the problem was discovered to address the issue and prevent future violations.

Whether the disclosing party has a history of similar conduct, or has been the subject of any prior criminal, civil, and regulatory enforcement actions.

A description of the disclosing party’s compliance program, and all efforts by the disclosing party to prevent a recurrence of the problem.

Whether the disclosing party has knowledge of a pending government agency or contractor investigation.

Certification by the provider that the information contained in the disclosure is truthful.

The government reports that it has received well over 100 voluntary disclosures under the Stark Protocol. Unfortunately, very few of the disclosures have been resolved and the government has provided little guidance as to how it intends to exercise its discretion to compromise the amount of the overpayment liability arising out of a Stark violation.

III. REPAYMENT OBLIGATIONS UNDER THE ACA

With the enactment of the Affordable Care Act (ACA) in 2010, Congress ended the prior uncertainty as to the legal obligation to report and refund Medicare and Medicaid overpayments. The law states:

In general, if a person has received an overpayment, the person shall—

report and return the overpayment to the Secretary, the State, an intermediary, a carrier, or a contractor, as appropriate, at the correct address; and

notify the Secretary, State, intermediary, carrier, or contractor to whom the overpayment was returned in writing of the reason for the overpayment.

Deadline for reporting and returning overpayments – an overpayment must be reported and returned under paragraph (1) by the later of –

the date which is 60 days after the date on which the overpayment was identified; or

the date any corresponding cost report is due, if applicable.

Enforcement – any overpayment retained by a person after the deadline for reporting and returning the overpayment under paragraph (2) is an obligation (as defined in section 3729(b)(3) of title 31, United States Code) for purposes of section 3729 of such title.44

This provision of the ACA requires identified overpayments to be returned to the government and makes the knowing failure to return an overpayment a violation of the federal False Claims Act.45

Several aspects of the above-quoted statute are noteworthy. An “overpayment” is broadly defined as “any funds that a person receives or retains under title XVIII or XIX to which the person, after applicable reconciliation, is not entitled under such title.”46 A “person” includes a “provider of services, supplier, Medicaid managed care organization,47 Medicare Advantage organization,48 or [Medicare Part D Prescription Drug Plan] PDP sponsor.”49

44 42 U.S.C. § 1320a-7k(d); H.R. 3590, Pub. L. 111-148, Section 6402; Social Security Act § 1128J(d). 45 The ACA also amended 42 U.S.C. § 1320a-7a(a) to state that a provider who “knows of an overpayment (as defined in paragraph (4) of [42 U.S.C. § 1320a-7k(d)] and does not report and return the overpayment in accordance with such section” shall be subject to a CMP of not more than $10,000 for each item or service claimed, plus an assessment of not more than three times the amount claimed for each such service in lieu of damages. In addition, the offending provider may be subject to exclusion from federal and state health care programs. 46 Id. at § 1320a-7k(d)(4)(B). 47 Social Security Act, § 1903(m)(1)(A) 48 Social Security Act, § 1859(a)(1) 4942 U.S.C. § 1320a-7k(d)(4)(C); Social Security Act, § 1860D-41(a)(13); Section 6402, H.R. 3590, Pub. L. 111-148; Social Security Act § 1128J(d).

The statute requires that the overpayment must be “reported and returned” within “60 days after the date on which the overpayment was identified.” As anyone who has been involved in the process knows, identifying and reporting an overpayment can involve a number of steps over a period of several months. It is only after a complete review of the facts and analysis of applicable laws and regulations that a provider can determine the amount of the overpayment, its source, and whether a federal health care benefit program was the primary or secondary payor. While some may argue that an overpayment is “identified” when a possible Stark violation is uncovered, that is too simplistic. When an overpayment is “identified” will likely be determined based on the facts and circumstances as opposed to any bright line test.

IV. STARK AND THE PERILS OF CONTRACT DRAFTING

As noted above, the Stark Law prohibits a physician from referring Medicare patients for “designated health services” to an entity with which the physician has a financial relationship unless an exception applies.50 When a referral has been made in violation of the Stark Law the entity is prohibited from submitting claims to Medicare for any designated health services provided pursuant to the tainted referral. CMS regulations track the statute, prohibiting both the physician referral and the submission of claims by the DHS entity for the resulting services.51

Given the complexity and ambiguities in the statute and its tortured regulatory history, determining whether financial arrangement violates the Stark Law can be a daunting task. This lack of clarity is all the more troubling because Stark Law violations can create significant overpayment liability, often substantially in excess of any damages to the Medicare program.

Historically, there has been scant enforcement of the Stark Law and providers faced with the discovery of a Stark violation were often uncertain as to how to proceed. Neither CMS nor the Medicare Contractors was forthcoming with practical guidance and the only visible way in which Stark claims were asserted was in the context of False Claims Act (FCA) litigation. This lack of guidance gave providers substantial flexibility in determining how and when to respond to the discovery of a Stark violation.

This period of uncertainty ended with the enactment of the Affordable Care Act. The Stark Law clearly prohibits billing Medicare for designated health services furnished

50 42 C.F.R. § 411.353(b)(2009). 51 42 C.F.R. § 411.353(b)-(d)(2009). This regulation states: “[a]n entity that collects payment for a designated health service that was performed under a prohibited referral must refund all collected amounts on a timely basis.” In addition, the OIG may impose a CMP if a provider “[h]as not refunded on a timely basis . . . amounts collected as a result of a billing . . . for a designated health service that was provided in accordance with a prohibited referral as described in [the Stark law regulations].” 42 C.F.R. § 1003.102(b)(9).

pursuant to a tainted referral. Thus, payments received for services rendered pursuant to a prohibited referral are most likely overpayments. The ACA provision requiring the disclosure and repayment of identified overpayments within sixty (60) days and the federal False Claims Act amendment that declared the failure to make the repayment a basis for an FCA claim substantially increased the risks associated with the discovery of a Stark violation.

These changes in the legal landscape have increased the magnitude of the potential financial implications of a Stark violation and raised significant concerns within the industry. Because of the technical nature of the Stark Law and the lack of any intent requirement, simply an expired agreement or the failure to obtain a signature can yield a potential overpayment liability of seven to eight figures. Given the changes wrought by the application of the new ACA provisions to Stark Law violations, it seems prudent to focus on how contracts could be drafted and financial relationships with physicians structured to avoid, or at least limit, the parties’ Stark Law exposure.

When drafting contracts or creating other financial arrangements, lawyers and clients face a host of choices. Stark compliance is often considered during the negotiation or documentation of an arrangement to ensure that the writing reflects an arrangement that fits squarely within a Stark Law exception. Consideration of post drafting compliance or performance failures has typically not be a focus when documenting or structuring the arrangement. Given the potential consequences of even an innocent Stark violation, taking prophylactic measures at the onset of an arrangement would appear to be the prudent course.

Therefore, when attempting to mitigate the risks of a Stark violation one should not focus solely on the creation of a compliant arrangement on paper. The structure of the arrangement, the selection of the parties, the compensation terms and a host of other provisions can increase or decrease the Stark Law risks. Lawyers should rethink the benefits and risks of contract clauses such as evergreen provisions, holdover clauses and automatic payment escalation provisions in light of their clients’ ability to manage their relationships with physicians in a manner compliant with Stark.

The checklist below is designed to assist in identifying some ways in which a contract or other arrangement could be structured to avoid or limit Stark Law risks. Obviously there are business and other legal considerations that should be taken into account in connection with each specific arrangement. The checklist should be used to identify options and prompt an assessment, not to dictate specific contract terms.

STARK: DRAFTING CHECKLIST

1. When possible, create indirect financial relationships with physicians rather than direct. For example, if an organization affiliated with the hospital but not the hospital itself is the landlord under a physician office lease the lease is analyzed as an indirect compensation arrangement.

2. Individual physicians not physician groups should be parties to the contract or other arrangement. For example, medical director agreements should be between the entity and Dr. Jones, not Dr. Jones’ group practice.

3. If you must contract with a physician owned entity, the physician entity should not be a group practice.

4. Use evergreen clauses to prevent a written contract or lease from terminating while the parties continue to perform as if it was still in effect.

5. Do not include provisions that require automatic adjustments to compensation or annual rent increases tied to the CPI or some other metric. Adjustments in compensation after the first year of the lease or agreement should be triggered by specific request.

6. Do not include contract provisions imposing late fees, or other penalties.

7. Include an “errors and omissions” clause in the writing that describes how the parties agree to address any mistakes that have been made in the course of performance of the arrangement.

8. Describe in the writing the consequences of specific types of conduct that are foreseeable but not intended.

9. Create a “catch all” writing that is automatically put in place with physicians serving in leadership positions. For example, all physician board members could sign an agreement reciting the benefits the physician will receive in exchange for his/her service on the board.

10. The simpler the terms of the arrangement, the better. Many Stark violations are the result of oversight, confusion or a failure to monitor relationships.