By William H. Maruca, Esq.

Published March 1998

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So-called "clinics without walls" that operate divisions as separate financial entities are particularly at risk. Productivity formulas that credit a physician with the professional component of certain diagnostic tests performed by that physician may need to be modified. Relationships with part-time physicians will need to be examined to evaluate whether such physicians’ status as employees or independent contractors affects a group’s compliance.

The Stark Law generally prohibits a physician from referring a Medicare or Medicaid recipient for any Designated Health Service (DHS) if the physician has a financial relationship (ownership or compensation) with the provider of the DHS, unless one or more of the highly technical exceptions applies. The DHS’s are clinical laboratory services; physical therapy services; occupational therapy services; radiology, including MRI, CT, ultrasound, and many other imaging modalities; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services (including lithotripsy).

Often overlooked is the fact that a group only needs to meet the Stark definition if physicians in that group want to continue to refer patients for any of the DHS’s which are provided through the group. Stark permits a qualifying group practice to self-refer under the "in-office ancillary service exception." A practice that does not have any laboratory, imaging or other designated health services or any financial relationship with any provider of such services is not affected by the definition. Keep in mind that the concept of "referral" is interpreted very broadly. For instance, every time a doctor orders an X-ray on his or her own patient, that doctor has made a "referral" even if the X-ray is performed in the next room by the doctor’s own staff.

HCFA concedes that the Stark law was written when group practices were in their infancy and encourages input from the public during the comment period to assist them in adapting the final regulations to the real world.

The proposed regulations define "group practice" as two or more physicians legally organized as a single partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan or similar association, with the exception that a group can consist of physicians who are also individually incorporated as professional corporations. It appears that only individual physicians or "one-shareholder" professional corporations will be permitted to be the owners of the stock or equity interests in the group practice entity.

The "clinic without walls" concept may be finished, even for group practices which were organized as single corporations in reliance on the Stark I regulations. To qualify as a group practice, compensation and expense allocation formulas must be performed on an aggregate basis and in advance of the earning of income or the incurring of expenses. The formula must reflect centralized decision making, a pooling of expenses and revenues and a distribution system that is not based on each satellite office operating as if it were a separate enterprise. Individual site-based profit center accounting methods will not qualify. It remains unclear to what extent a group will need to pool its overhead and other expenses in order to qualify. For instance, a multiple-location practice may want to create incentives among its divisions to control expenses by allocating a portion of those expenses to each site. Allocation of all expenses on a site-specific basis will not comply, but what about pooling a defined percentage of expenses or certain categories of expenses and allocating the rest by division? The regulation fails to address this issue.

Another matter is specialty-by-specialty allocation in a multi-specialty practice. There is no mention of this common practice in the text of the regulation, but the preamble calls such formulas into question, particularly where there are few members in each specialty-based division. HCFA believes that the narrower the pooling of income or profits, the more likely it will be that a physician will receive compensation for his or her own referrals.

This approach is also reflected in HCFA’s prohibition of productivity formulas which directly allocate payments for designated services when they are performed by the physician that ordered the procedure. Productivity formulas may use percentages of overall profits, or be based on services personally performed by physicians so long as they did not order, i.e., refer, the DHS. The basic rule is that compensation may not be based on the volume or value of referrals for DHS’s.

The regulations expand the definition of "radiology" to include the professional component of various diagnostic imaging procedures. Previously, it was assumed that the professional component, i.e., the reading fee, was purely a physician service and not subject to any of the Stark restrictions.

One controversial change is HCFA’s decision to exclude independent contractors from the definition of "members" of a group. This change may make it easier to meet the requirement that members must perform and bill substantially all (i.e., 75 percent) of their patient care services within a group practice. HCFA cites lobbying from physician organizations as the reason this change was made. Other physician advocates are reacting unfavorably because independent contractors would no longer be able to act as supervising physicians.

Here’s how the "substantially all" test works: A group’s "members" must spend, in the aggregate, 75 percent of their patient care time working for the group and billing through the group. Each member’s patient care time within the group is divided by that physician’s total patient care time, and the resulting percentages are added and divided by the number of members. The result must be at least 75 percent.

The Stark I regulations included independent contractors as members, which limited small groups and any groups that used a lot of part-time doctors who also treated patients elsewhere. Independent contractors, who are often part-time, can now be pulled out of that calculation altogether. The trade-off is that independent contractors cannot supervise DHS’s. Part-time medical directors of laboratories, for instance, would need to be employees, or other employed physicians would need to be on site at the lab. And making them employees may cause a group to fail the substantially all test.

Each member’s services are to be measured by time (as opposed to number of patient encounters, RBRVS values, etc.), but no elaborate time sheets will be required. Appointment schedules will suffice. HCFA considered several alternatives but rejected them as impractical or too difficult to enforce.

The "other" 75 percent test, which had been largely ignored, has new relevance: 75 percent of all patient encounters must be conducted by "members." That rule did not change, but since independent contractors are no longer "members," groups will now need to monitor numbers of patient encounters by employees and contractors.

If a group meets the Stark standards, it may provide some, but not all, of the DHS’s under the "in-office ancillary services" exception. Those services must be furnished personally by the referring physician, a member of the same group practice or individuals directly supervised by a member of the group. Direct supervision means the supervising doctor must be in the same suite of offices during the test. The services must occur in an office where one or more of the members provides physician services unrelated to the designated services, i.e., where they examine and treat patients, or in a "centralized" group site. The services must be billed by the group or a wholly-owned subsidiary (not a joint venture with outsiders). This exception does not apply to parenteral and enteral nutrients, equipment and supplies or to durable medical equipment other than crutches and infusion pumps. Crutches can be sold at cost. Since the services must be performed in the group’s office, the exception would also not cover home health services. A group may have multiple "centralized" sites for in-office ancillary services, so long as each one services more than one group location.

The proposed regulations are subject to a 60-day comment period beginning on January 9, 1998. Some history may be relevant: HCFA published the proposed Stark I regulations in March 1992 but did not issue final regulations until August 1995.

Groups will be required to submit "attestations" to their Medicare carriers certifying that they meet the Stark requirements. This requirement has been on hold awaiting the release of the regulations, but HCFA can be expected to implement it later this year. That may mean that groups could face False Claims Act liability if they improperly certify their group status.

For now, physician groups should carefully review their organizational structures, compensation formulas, physician agreements and supervision arrangements with an advisor who is familiar with the new regulations.

William H. Maruca, Esq., is a director of the Pittsburgh law firm of Kabala & Geeseman. He is vice-chair of the National Health Lawyers Association/American Academy of Healthcare Attorneys section on Fraud and Abuse, Self-Referral and False Claims.