Miller Health Law Bulletin on The Stark Regulations – Phase II

On March 26, 2004, the Centers for Medicare & Medicaid Services (“CMS”) issued the long-awaited Phase II Stark regulations (the “Phase II Regulations”). The Phase II Regulations, which become effective on July 26, 2004, address important issues not covered in the Phase I Regulations (which were issued in January 2001). They also respond to the many industry comments on the Phase I Regulations. In CMS’ view, the Phase II Regulations reduce the compliance burden by broadening the available exceptions to the Stark law. This edition of the Health Law Bulletin highlights key provisions of these complex new rules.

By way of background, the Stark law (42 U.S.C. Section 1395nn) prohibits physicians and their immediate family members who have a financial relationship with an entity (such as a group practice or hospital) from making referrals to the entity for the provision of “designated health services” (“DHS”) paid for by Medicare unless an exception is available. Entities cannot bill for prohibited referrals and are subject to penalties of $15,000 for each prohibited claim and exclusion from the Medicare program. The Stark law is a “strict liability” statute; the parties’ intent is irrelevant.

“Set in Advance.” A number of the Stark law exceptions require that compensation paid by an entity to a referring physician be “set in advance.” The Phase I Regulations indicated that many common percentage-based compensation arrangements (e.g., percentage of gross collections) would not comply with this requirement. The Phase II Regulations now permit fluctuating compensation based on a specific formula that is agreed upon before the furnishing of the items or services for which the compensation is paid, provided the formula is not changed during the course of the agreement to reflect referrals. Fair Market Value. Most of the exceptions for physician compensation arrangements also require that the compensation not exceed fair market value. In an unusual twist, CMS has revised the definition of fair market value to provide two “safe harbor” methodologies for hourly payments for a physician’s personal services. The first method permits an hourly rate that is equal to or less than the average hourly rate for emergency room physician services in the relevant market. The second method allows for an hourly rate determined by averaging the 50th percentile national compensation level for physicians with the same specialty in at least four of six specified physician compensation surveys and dividing by 2,000 hours.