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Avoiding Illegal Service Referrals: The Stark Statute Explained

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Editor's note: The anti-referral law discussed below was issued as a three-phase amendment to the physician self-referral prohibition in section 1877 of the Social Security Act. Visit the CMS website for more information.

At its core, the Stark statute is this basic: If you, as a physician, or a member of your immediate family has a financial relationship with an entity, then you may not refer a Medicare or Medicaid patient to that entity and that entity may not submit a bill for any item or service defined as a designated health service (DHS), unless you qualify under one of the Stark exceptions. Unlike other regulations physicians usually deal with, the Stark law is a "strict liability" law, meaning that if you bill or the entity you referred to bills for a DHS and you are not protected by an exception, you are in violation of Stark (i.e. no intent is required).

In contrast to the Stark law, the anti-kickback law (AKS) generally makes it an offense to offer, give payment, solicit or receive any remuneration in exchange for a patient referral. There are exceptions to this law (commonly referred to as "safe harbors"), which have been written into the statute itself, developed under the regulatory authority of the Office of Inspector General (OIG) or both.

Unlike Stark, AKS is not a strict liability statute; meaning first, that this is an intent-based law. For a violation to have occurred, it was your intent to induce referrals. The Stark law is a strict-liability law, so that unless you have met an exception to the applicability law, you will be deemed to have violated the statute. Similarly, where the AKS has "safe harbors," even if you are not protected by a safe harbor, your arrangement may not be in violation.

So, where is the typical ophthalmology practitioner likely to encounter the Stark statute?

1. Compensation Plans
As mentioned previously, the threshold question of whether you may be in violation of the Stark statute is: Have you referred a Medicare patient for a DHS to an entity in which you (or a family member) have a financial interest? Of the vast number of such services listed by statute, relatively few pertain directly to ophthalmology. Below is a listing of the CPT codes for DHS, specifically for ophthalmology, that was effective through Jan. 1, 2007, and corrected through April 16, 2007. This list is updated periodically, so you should check back over time to see if there are any deletions or additions to this list:

70190  X-ray exam of the eye sockets
70200  X-ray exam of the eye sockets
76510  Ophth, B-scan & quantitative A-scan
76511  Ophth, quantitative A-scan only
76512  Ophth, B-scan w/non-quantitative A-scan
76513  Anterior segment, water bath, B-scan
76514  Corneal pachymetry
76516  Ophthalmic biometry, A-scan
76519  Ophthalmic biometry with IOL power calculation

To furnish these services in compliance with Stark, if you divide income based on your productivity, your practice compensation arrangements should address and typically exclude any compensation received from the income earned from the DHS services. The theory is that if you cannot be compensated based on the referral of DHS, then you should exclude it from your formula.

Alternatively, you may legally choose to exclude only the Medicare and Medicaid technical components of the DHS, since the professional components of the DHS were either rendered by you or incident to your services — but this can be very administratively cumbersome. This, of course, leads to the question, what happens to the revenues from the DHS? As often occurs, these revenues are pooled together and divided equally among the shareholders/partners of the ophthalmology practice or among all physicians of the practice, whichever the case may be per practice.

If you plan to take the approach that you personally rendered the DHS and, therefore, should be able to "earn" the full productivity share (the global reimbursement) from each code, even if the service was rendered by someone else, ancillary to your professional services, and under your supervision, you may want to consult your attorney.

2. Consulting Arrangements
Occasionally specialists (such as retina or glaucoma surgeons) enter into independent contractor agreements or "personal service arrangements" with general ophthalmology practices to service their subspecialty patient needs. In the course of these arrangements, there could be referrals for DHS, whether intentional or not (recall that this is a no-intent statute). Therefore, with concern to billing Medicare, the "personal service arrangement" exception is used to protect an ophthalmologist from a potential violation.

Those exception elements require that: the arrangement be set out in writing, signed by the parties (presumably it will be signed upon agreement); it specifies the covered services; the aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement; the term of the agreement is for at least one year and provides for non-renewal within the initial year period if the agreement is terminated within the first year from the effective date; and the compensation is set in advance, does not exceed fair market value and is not determined in a manner that takes into account the volume of referrals or other business generated between the parties.

Prior to September 2007, a practice might have entered into a personal services arrangement with another entity and then "lease" the specialty physician, with the specialty physician completing an assignment of benefits form to the contracting practice. The benefit of a direct contract between the two entities is that the entity supplying the doctor can control the use of the "leased" physician and receive a form 1099 from the contracting practice. The direct payment avoids the need for a W-2 based salary to the "leased" physician and needless complication to the contracting entities' internal income division formula. However, the Stark Phase III regulations (announced in September 2007 and made effective Dec. 4, 2007) changed this standard. Now a direct contract is required between the contracting entity (e.g., a general ophthalmology practice) and the servicing physician (e.g., a specialty surgeon). Under these new regulations, two options are presented for compliance. In the example above, one option is to have the leased physician personally execute the personal services arrangement, assigning his benefits to the general ophthalmology practice and receiving a fee on a form 1099 basis (independent contractor status).

The leased employee then turns over his payment to his employer practice according to the terms of the employment agreement. Another option is to retain the direct entity-to-entity contract (described above as permitted prior to September 2007), and have the leased physician "sign on" to the contract between the two entities. Under this second option, the leased physician "joins" the entity-to-entity agreement and agrees to act in accordance within the agreed contracted terms.

3. In-Office Ancillary Activity
The Stark "in-office ancillary" exception permits a physician or group practice to order and provide DHS in the office, provided that the DHS is ancillary to the professional medical services provided by the practice. At the advent of the Stark regulations, the federal law placed the referral of prosthetics (as defined by state Medicaid laws) as a DHS. Therefore, the referral of a cataract patient to an optical shop could have been a Stark violation, depending on the state.

Presently, post-cataract eyeglasses are specified in a special exception and not considered a referral of DHS, therefore there is no Stark violation in making referrals to your optical shop. On the other hand, this is an area where you need to remain cognizant of your state law restrictions (if any). The referral of a patient to a separately incorporated optical shop in which you are wholly the owner or an investor may be a violation of your state law under some circumstances. You should check with your attorney for state-specific fee-splitting and anti-referral regulations that could impact your practice and any such referrals.

4. Leasing Arrangements and Fair Market Value
An ophthalmology practice may enter into leasing arrangement with a hospital or an optical or optometric office for space, even though any of these potential landlords could also be a referral source for patients, if the arrangements are set up correctly. This is an area regulated by the Stark regulations because the potential exists for disguised remuneration, such as an ophthalmology practice leasing office space for less than fair market value in exchange for referrals from that practice to the hospital. Additionally, where there is equipment involved that might include leased telemedicine images and optometric and ophthalmology providers, there has been a specific opinion on this relationship.

To meet the rental of office space or equipment exception to Stark, the following rules must be followed: the lease must be set out in writing, detailing the premises and/or equipment to be used; the space or equipment may not exceed the reasonable and necessary requirements for their intended use; the lease must be for at least one year (if terminated within that year, neither party may enter into another lease with each other for the remainder of that year); the rental amounts must be set in advance and may not reflect or take into account the volume or value of referrals, and must be consistent with the fair market value; and the lease would otherwise be commercially reasonable if no referrals were made between the parties. The lease must also be current to qualify for the exception. There are specific ways of dealing with changed circumstances (taking more space, upgrading or downgrading the space, etc.), and all of the requirements must be met at all times for this exception to apply.

5. Ambulatory Surgical Centers
Ophthalmologists often have the opportunity to invest in the ASC where they may be performing their surgical cases. The Stark statutes do not, per se, include ASC services in the list of DHS. Therefore, statutes do not limit or prohibit an ophthalmologist from investing in an ASC by an ophthalmologist.

On the other hand, there are very specific fraud and abuse safe harbors that outline the permissible investment structures for ASCs and who may invest in the same. Additionally, as recently as October 2007, the OIG issued one advisory opinion on an ophthalmic ASC proposing to admit optometric owners. So, since, the anti-kickback statutes do regulate the ownership of ASCs, you should consult your attorney prior to entering into or changing any ASC ownership arrangement.

6. Physician Recruitment
Ophthalmologists also occasionally find themselves either being recruited to join a hospital or seeking the assistance of their area hospital to help them bring another physician to the area. Due to the likelihood of the referral of Medicare and Medicaid patients to the hospital (inpatient and outpatient services are DHS), the recruited physician and recruiting practice should seek to comply with an exception to the Stark statute. Such an exception is found for physician recruitment. This exception allows a guaranteed income level (based on the fair market value of the recruited specialist) to be paid by a hospital as an advance against collections to the recruited physician and, in turn, to the practice that the physician is joining (as long as it flows through directly to the physician).

There are restrictions on what may be included in the marginal costs of employing the associate and what business expenses/fringe benefits are included in determining the fair market value compensation. The "loan" is then forgiven over a course of years in exchange for the recruited physician remaining in the hospital's service area.

Since these types of arrangements are predicated on community need for the physician's specialty services, the contract between the physician and practice previously precluded any form of restrictive covenant on the associate. However, the Stark Phase III regulations lightened these restrictions. Now a practice may impose a reasonable restrictive covenant upon a recruited physician, as long as the restriction is not so far reaching that it completely disallows compliance with the recruitment arrangement (service area is defined by zip code listing).

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About the authors: Sandra E. D. McGraw, Esq., MBA, and Michael J. Sileski, Esq., MHA, are consultants of The Health Care Group, Inc., and attorneys with Health Care Law Associates, PC, in Plymouth Meeting, Penn. For more information, call 610.828.0360 or e-mail smcgraw@healthcaregroup.com or msileski@healthcaregroup.com.