The 2009 IPPS Final Rule - American Health Lawyers Association

October 2008
MEMBER BRIEFING
FRAUD AND ABUSE PRACTICE GROUP
STARK MARCHES ON: THE 2009 IPPS FINAL RULE
Jason Christ, Esq.
Epstein Becker & Green PC
Marci Handler, Esq.
Epstein Becker & Green PC
S. Craig Holden, Esq.
Ober|Kaler
William T. Mathias, Esq.
Ober|Kaler
Kathleen McDermott, Esq.
Sonnenschein Nath & Rosenthal LLP
Michael W. Paddock, Esq.
Crowell & Moring LLP
Beth Schermer, Esq.
Coppersmith Gordon Schermer & Brockelman PLC
Albert W. Shay, Esq.
Sonnenschein Nath & Rosenthal LLP
Carrie Valiant, Esq.
Epstein Becker & Green PC
Editor:
Robert G. Homchick, Esq.
Davis Wright Tremaine LLP

TABLE OF CONTENTS
I. Introduction........................................................................................................... 1
II. Physician Stand in the Shoes............................................................................... 2
A. Background: The Evolution of “Stand in the Shoes” ............................................. 2
B. The Here and Now of Physician Stand in the Shoes ............................................ 4
III. Services Provided “Under Arrangements” .......................................................... 10
A. Background: The Proposed Rule........................................................................ 10
B. The Final Rule .................................................................................................... 11
IV.
Use of Percentage-Based Compensation Formulae and Unit-of-Service
(Per Click) Payments in Space and Equipment Leases ..................................... 17
A. Percentage-Based Compensation Formulae...................................................... 18
B. Per Unit-of-Service Payments ............................................................................ 18
C. Indirect Compensation Arrangements ................................................................ 20
D. Effective Date of the Revisions........................................................................... 20
E. Implications of the Revisions .............................................................................. 20
V. Period of Disallowance ....................................................................................... 21
VI. Alternative Method of Compliance with Signature Requirement......................... 23
A. Signature Requirement....................................................................................... 23
B. CMS’ Stark Worldview........................................................................................ 24
VII. Modifying or Amending Agreements................................................................... 25
VIII. Obstetrical Malpractice Insurance Subsidies...................................................... 26
IX. Ownership of Investment Interest in Retirement Plans....................................... 27
X. Burden of Proof .................................................................................................. 27
XI. Conclusion.......................................................................................................... 28

I. Introduction
On August 19, 2008, the Centers for Medicare and Medicaid Services (CMS)
published the 2009 Hospital Inpatient Prospective Payment Systems final rule (2009
IPPS Final Rule; 73 Fed. Reg. 48343 (Aug. 19, 2008)). Continuing its use of various
Medicare fee schedule rules to propose or implement revisions to the physician selfreferral
or “Stark Law,” CMS included in the 2009 IPPS Final Rule significant
amendments to the Stark regulations (42 C.F.R. § 411.351 et seq.).
The Stark Law is a broad prohibition on physician self-referrals. More specifically,
the Stark Law prohibits a physician from referring Medicare patients for certain
“designated health services” (DHS) to entities with which the physician (or an immediate
family member of the physician) has a financial relationship, unless an exception
applies. The statute also prohibits an entity from billing for services provided pursuant to
an impermissible referral. Although the concepts sound simple, Stark has long been
notorious for its complexity. The statutory language is both broad and ambiguous and
CMS has struggled for over fifteen years with the rulemaking process. The agency’s first
attempt to craft regulations was in 1992, under the original Stark Law enacted in 1989
(Stark I). CMS next issued proposed Stark II regulations in 1998 to implement the 1993
amended law (Stark II). This was followed by the Phase I final rule in 2001 and the
Phase II final rule in 2004, both of which were issued as interim final rules with comment
periods.
In 2007, CMS published the final Stark regulations (Phase III Rule; 72 Fed. Reg.
51012 (Sept. 5, 2007)). Many hoped that the Phase III Rule would clarify and stabilize
the parameters of the law—which has not happened. Over the past year, both the pace
and practical implications of the stream of proposed and final changes to the Stark
regulations that have poured out of CMS have left the healthcare industry reeling. The
2009 IPPS Final Rule is simply the latest Stark installment. For better or worse, it
appears that the Stark opus remains unfinished.
The changes implemented by the 2009 IPPS Final Rule are significant. In this
rule, CMS narrowed the “stand in the shoes” concept, expanded the definition of “entity”
in order to restrict the ability of physician organizations to provide services under
arrangements, revised four separate Stark exceptions to limit the use of percentage and
per click compensation formulae, defined the period of disallowance attendant to a
Stark violation, and made a number of other changes. Importantly, this rulemaking
repeals or modifies several provisions CMS implemented in the Phase I Rule in 2001.
This means that arrangements structured to comply with Phase I will need to be
amended or terminated to comply with CMS’ latest interpretation of the statute.
The 2009 IPPS Final Rule goes into effect October 1, 2008. However,
recognizing the disruption to existing arrangements that will be triggered by certain of
the amendments to the Stark regulations, CMS delayed the effective date of selected
provisions until October 1, 2009.
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II.
Physician Stand in the Shoes
Change in Text of Regulation: 42 C.F.R. § 411.354(c)(1), (2), and (3) (see 73
Fed. Reg. 48434, 48691-48699).
A. Background: The Evolution of “Stand in the Shoes”
Phase III Rule. In the preamble to the Phase III Rule, CMS reiterated its concern
that certain abusive arrangements between physicians and entities providing DHS were
escaping scrutiny under the Stark Law. Specifically, CMS was concerned that the
“indirect compensation arrangement” definition and exception were either being
misinterpreted or did not adequately regulate some arrangements (72 Fed. Reg. at
51028).
Concerned about the implications of its broad definition of indirect compensation
arrangement, CMS amended the Stark regulations to provide that a physician would
“stand in the shoes” (SITS) of his or her group or physician organization with respect to
that organization’s compensation arrangements with DHS entities. The Phase III Rule
provided that a physician would stand in the shoes of the referring physician’s
professional corporation, physician practice, or group practice—whether the referring
physician was employed by, contracted with, or owned the physician organization.
Grandfathering Provision for Indirect Compensation Arrangements. The Phase III
Rule’s SITS provisions “need not apply” during the original term or current renewal term
of an arrangement that satisfied the requirements of the indirect compensation
arrangement exception (42 C.F.R. § 411.357(p)) as of September 5, 2007 (the
publication date of the Phase III Rules). However, the SITS provisions would apply to
these arrangements at the end of the one-time grandfathered initial or renewal term.
“Mission Support” Payment Concerns. In the wake of the publication of the
Phase III Rule, industry stakeholders raised substantial concerns about the application
of the stand in the shoes provisions to academic medical centers (AMCs) and integrated
healthcare delivery systems that provide mission support or similar payments to
affiliated physician groups. Before the Phase III Rule, these relationships had been
subject to the indirect compensation arrangement analysis. If the relationship created an
indirect compensation arrangement as defined by the regulations, then it was analyzed
to determine if it satisfied the indirect compensation arrangement exception. Under the
Phase III Rule SITS provisions, however, these relationships would need to satisfy a
direct compensation exception. In many cases, this was not possible because the
support payments were not tied to specific items or services provided by the affiliated
physician group but were intended to support the overall mission of the AMC or
integrated healthcare delivery system.
In order to provide time to consider these issues, CMS issued a notice delaying
for one year (until December 4, 2008) the effective date of SITS for compensation
arrangements between an AMC component and a faculty practice plan within that AMC,
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as well as between a DHS entity and an affiliated group practice within the same
501(c)(3) integrated health delivery system (72 Fed. Reg. 64161 (Nov. 15, 2007)).
2009 IPPS Proposed Rule. CMS proposed refinements to the SITS provisions in
the 2009 Proposed Inpatient Prospective Payment System Rule (2009 Proposed IPPS
Rule, 73 Fed. Reg. 23683 (Apr. 30, 2008)). CMS proposed two alternative approaches:
the first alternative looked at the nature of the relationship between the physician and
the physician organization, while the second alternative focused on mission support
payments.
The first alternative, focusing on the relationship between physicians and
physician organizations, included two options. The first option provided that a physician
would be deemed to not stand in the shoes of a physician organization if the
compensation arrangement between the physician organization and the physician
satisfied the requirements for: (a) the employment exception, (b) the personal services
arrangement exception, or (c) the fair market value compensation exception. Under this
alternative, the SITS provisions also would not apply to arrangements protected by the
AMC exception.
The second option under the first alternative provided that only physician owners
of a physician organization would be deemed to stand in the shoes of the physician
organization. CMS solicited comments on whether the inclusion of all physician owners
was overly broad, particularly with respect to physician owners of captive physician
organizations where the physician owners would have no right to the distribution of
profits or where the physician’s ownership interest is nominal.
The second alternative focused on mission support payments. CMS proposed to
promulgate a separate exception for non-abusive “support payment” arrangements and
solicited comments on whether any new exception should be limited to “mission
support” or whether other types of payments should be included. As part of this second
alternative, CMS also solicited comments on how it could define a “fully integrated
healthcare delivery system” and the types of relationships that should be protected.
Entity Stand in the Shoes. In addition to physician SITS, CMS has been exploring
whether and under what circumstances an entity should be deemed to stand in the
shoes of another entity. In the 2008 Medicare Physician Fee Schedule Proposed Rule
(2008 MPFS Proposed Rule, 72 Fed.Reg. 38122 (July 12, 2007)), CMS proposed that a
DHS entity that owns or controls an entity to which a physician refers a Medicare patient
for DHS would stand in the shoes of the entity that it owns or controls—and would be
deemed to have the same compensation arrangements with the same parties and on
the same terms as the entity that it owns or controls. In other words, a DHS entity would
stand in the shoes of any downstream DHS entity that it owns or controls. This proposal
was not finalized in the 2008 MPFS Final Rule (72 Fed.Reg. 66222 (Nov. 27, 2007)).
In the 2009 IPPS Proposed Rule, CMS introduced a revised proposal for entity
SITS. This time, CMS suggested that an entity that furnishes DHS would be deemed to
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stand in the shoes of an organization in which it has a 100% ownership interest and
would be deemed to have the same compensation arrangements with the same parties
and on the same terms as the organization that it owns. CMS also proposed a set of
conventions in the 2009 IPPS Proposed Rule that would dictate how physician SITS
and entity SITS would be applied in a chain of relationships.
B. The Here and Now of Physician Stand in the Shoes
1. Basic Rule for Physician SITS
In the 2009 IPPS Final Rule, CMS finalized revisions to the physician SITS. CMS
adopted the simpler of its proposed alternatives, amending the Stark compensation
arrangement provisions to provide that effective October 1, 2008, a physician is deemed
to stand in the shoes of his or her physician organization and have a direct
compensation arrangement with an entity furnishing DHS when:
• the only intervening entity between the physician and the DHS entity is his
or her physician organization, and
• the physician has an ownership or investment interest in the physician
organization.
42 C.F.R. § 411.354(c)(1)(ii)(A) & (B).
Similarly, CMS amended the definition of an indirect compensation arrangement
to provide that, for the purpose of analyzing an unbroken chain of financial relationships,
a physician is deemed to stand in the shoes of his or her physician organization if the
physician has an ownership interest in the physician organization (42 C.F.R.
§ 411.354(c)(2)(iv)(A)). Thus, the only operational difference between the Phase III Rule
and the 2009 IPPS Final Rule is as follows: between December 4, 2007, and
September 30, 2008, all physicians stood in the shoes of their physician organizations,
whereas on and after October 1, 2008, only certain physicians (i.e., owners) stand in the
shoes of their physician organizations.
2. Exceptions
The new SITS rules incorporate the following exceptions:
• AMCs. The physician SITS rule does not apply to an arrangement that
satisfies the AMC exception requirements under § 411.355(e). This
exception applies even if a faculty practice plan within an AMC includes
physician owners or investors whose interests are not titular. As a result,
mission support payments between an AMC component and the AMC’s
faculty practice plan do not trigger the SITS provisions as long as the
arrangement meets the requirements of the AMC exception. However, if
an AMC does not meet the requirements of § 411.355(e), the physician
SITS requirements would apply to a physician-owned faculty practice plan.
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If no physician owns or invests in an AMC’s faculty practice plan, then no
physician would stand in the shoes of that faculty practice plan.
• Titular Ownership. Physicians with only a titular interest—that is,
physicians who do not have the right to receive the financial benefits of
ownership, such as the distribution of profits, dividends, proceeds of sale,
or similar returns on investment—are not required to stand in the shoes of
their physician organizations. CMS sought to establish a relatively bright
line in defining a titular interest and rejected a definition based on whether
a physician had a material right to receive profits from a physician
organization. The new rule instead focuses on whether the physician has
any right to the financial benefits of ownership or investment in the
physician organization.
This titular interest exception to the SITS rule addresses captive
professional corporations formed in states with corporate practice of
medicine prohibitions. Such organizations may have nominal physician
ownership for purposes of control and decision-making, but do not provide
profits or economic distributions based upon ownership. CMS’ treatment
of titular ownership interests is consistent with Advisory Opinion CMS-AO-
2005-8-01, where the agency determined that stock held by physicians in
a nonprofit, tax-exempt multi-specialty group practice did not constitute an
ownership or investment interest for purposes of application of the Stark
Law where the stock did not convey any ownership rights or the financial
risk or benefits normally associated with stock ownership.
3. Permissive Physician SITS
The new rules permit (but do not require) non-owner (and titular owner)
physicians to stand in the shoes of their physician organizations (42 C.F.R.
§ 411.354(c)(1)(iii) and 42 C.F.R. § 411.354(c)(2)(iv)(B)). In other words, non-owner
physicians (such as employees and contractors) and titular owner physicians may stand
in the shoes of their physician organizations. If parties to an arrangement elect to treat a
non-owner (or titular owner) physician as standing in the shoes of the physician
organization, the arrangement would have to satisfy all of the requirements of a direct
compensation arrangement exception—or, if the arrangement creates an indirect
compensation arrangement, the exception for indirect compensation arrangements.
The option to allow parties to elect to treat non-owner physicians as standing in
the shoes of a physician organization is intended to address situations where a DHS
entity is unable to confirm downstream financial relationships between a physician
organization and its physicians, and the DHS entity does not want to rely on
representations or assurances of a physician organization over which it has no control.
The option of applying the stand in the shoes rule to such arrangements may also
simplify the analysis of situations that involve both owner and non-owner physicians.
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Moreover, there appears to be no downside to electing to have non-owner
physicians optionally stand in the shoes of the physician organization. CMS has
indicated previously that parties may rely on any available exception that an
arrangement satisfies. Therefore, if the exception for indirect compensation
arrangements would be available absent the optional standing in the shoes, the parties
may rely on that exception. Of course, under a basic physician self-referral analysis, the
compensation arrangement (as ultimately structured) between the DHS entity and the
non-owner physicians may not constitute a direct or an indirect compensation
arrangement. In such a case, the referrals of the non-owner physicians would not be
tainted, even though for purposes of structuring the arrangement, the parties opted to
treat the non-owner physicians as standing in the shoes of the physician organization.
Accordingly, whether under the Phase III Rule or the 2009 IPPS Final Rule, the
practical result is that an arrangement between a DHS entity and a physician-owned
physician organization must be structured to satisfy a direct compensation arrangement
exception, because the physician owners will stand in the shoes of the physician
organization. However, the ramifications from a failure to satisfy a direct compensation
exception differ under the Phase III Rule and the 2009 IPPS Final Rule. Under the
Phase III Rule, an arrangement’s failure to satisfy a direct compensation arrangement
exception meant that all of the physicians’ referrals were tainted. Under the 2009 IPPS
Final Rule, an arrangement’s failure to satisfy a direct compensation arrangement
means that only certain physicians’ referrals are tainted, i.e., only those of the
physicians who hold an ownership or investment interest in the physician organization.
As a corollary, fewer tainted referrals lead to fewer tainted claims.
4. Revised Definitions: “Physician” and “Physician Organization”
Under the 2009 IPPS Final Rule, CMS clarified (without making substantive
changes from the March 26, 2004 Phase II Final Rule) that under the definition of
“physician,” a physician and the professional corporation in which he or she is the sole
owner are the same for purposes of application of the Phase III Rules. As a result,
arrangements between a professional corporation wholly owned by a physician and a
DHS entity will need to meet the requirements of a direct compensation arrangement
exception under the Stark Law.
Similarly, CMS deleted from the definition of “physician organization” the
reference to a professional corporation of which a physician is the sole owner. CMS
intended this change to clarify that a physician who stands in the shoes of his or her
wholly owned professional corporation also stands in the shoes of his or her physician
organization.
Except for these clarifications, the definition of “physician organizations” remains
the same as set forth under the Phase III Rules.
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5. Effective Date and Timing
The new physician SITS rules are effective October 1, 2008. CMS recognized
that, following publication of the Phase III Rules, organizations may have restructured
arrangements to meet direct compensation arrangement exceptions—but that these
arrangements (such as those involving the employees of a physician organization)
could now be qualified as indirect compensation arrangements under the new 2009
IPPS SITS provisions. In order to provide flexibility for these organizations, the new
rules provide that arrangements structured to comply with a compensation arrangement
exception under 42 C.F.R. § 411.357 as of August 19, 2008, other than the indirect
compensation arrangement exception (42 C.F.R. § 411.357(p)), need not be
restructured to meet the indirect compensation arrangement exception until the
expiration of the original term or current renewal term of the arrangement. In addition,
the original grandfathering provision from the Phase III Rule continues to apply: the
SITS provisions still need not apply during the original term or current renewal term
of an arrangement that satisfied the requirements of the indirect compensation
arrangement exception (42 C.F.R. § 411.357(p)) as of September 5, 2007.
In November 2007, CMS delayed the application of physician SITS to certain
compensation arrangements involving AMCs and 501(c)(3) integrated healthcare
delivery systems until December 4, 2008. The publication of the 2009 IPPS SITS rules
does not affect this delay of the application of the SITS rule to certain compensation
arrangements within these organizations. However, to the extent no physician maintains
an ownership or investment interest in an AMC-affiliated faculty practice plan or a
practice group affiliated with a 501(c)(3) integrated health delivery system, the SITS
rules are no longer applicable in the first instance. In other words, for such nonphysician
owned organizations, the December 4, 2008 grandfathering deadline has
become superfluous.
6. Who Are the Parties When SITS Applies?
42 C.F.R. § 411.354(c)(3)(i) provides:
a physician who stands in the shoes of his or her physician
organization “is deemed to have the same compensation
arrangements (with the same parties and on the same
terms) as the physician organization.” For purposes of
applying the exceptions in § 411.355 [general exceptions to
ownership and compensation relationships] and § 411.357
[exceptions to compensation relationships] to [arrangements
subject to physician SITS], the “parties” to the arrangements
are considered to be the entity furnishing DHS and the
physician organization (including all members, employees,
or independent contractor physicians).
This language is subject to interpretation and raises questions as to the reach
and application of the stand in the shoes provisions.
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• Parties to the Agreement. The “parties” language in 42 C.F.R.
§ 411.354(c)(3)(i) means that the physician organization, any physician
who stands in the shoes of the physician organization, and the DHS entity
are the parties to the arrangement. If the physician practice contracts with
a hospital to provide the services of a physician owner as a medical
director, the arrangement will need to meet a direct compensation
arrangement exception, such as the exception for personal services or
the fair market value exception. The parties to the arrangement, for the
purposes of applying the elements of the applicable exception, will be the
practice, the physician owner (and any other physician owners regardless
of whether they provided services under the medical director
arrangement), and the DHS entity.
• Parties Subject to Tainted Referrals. If an agreement between a physician
organization and a DHS entity fails to meet the requirements for an
applicable exception (e.g., if the agreement provides for payment that is
not fair market value, or if payment continues beyond the term of the
agreement in the absence of permitted correction), any referrals by a
physician owner standing in the shoes of the physician organization,
regardless of whether that owner actually provides services under
that agreement, will be tainted.
The second sentence of 42 C.F.R. § 411.354(c)(3)(i) expressly extends
“for the purposes of” analyzing applicable direct exceptions under
42 C.F.R. § 411.355 and § 411.357. It does not, however, relate back
to the prohibition on referrals under 42 C.F.R. § 411.355(e). As a result,
the parenthetical reference to employee physicians and independent
contractors applies only to the requirements for complying with a specific
direct exception. If an arrangement does not comply with a direct
exception, only the referrals of physicians who stand in the shoes of
the organization for purposes of the arrangement would be tainted. The
disallowance provisions of 42 C.F.R § 411.353(c)(1) will apply to the
physician organization and physician owners who stand in the shoes of
the physician organization, as well as the DHS entity. The referrals of
physicians who are employed or contracting with the physician
organization would not be tainted—unless the entities or physicians
elected to include those physicians under the permissive stand in the
shoes provision and that relationship does not meet an applicable
exception.
Because of concerns that a non-compliant arrangement would taint all
referrals by all physician owners, physician organizations and DHS entities
may decide to establish service contracts directly between the DHS entity
and the physician responsible for providing the services, rather than the
physician organization, when SITS applies. These direct compensation
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arrangements, however, may trigger other concerns under the Stark Law
group practice provisions, as well as other applicable laws, such tax and
independent contractor or employee considerations.
• Parties for Purposes of Determining Direct Compensation Arrangements
Exception Requirements. The “parties” language in 42 C.F.R.
§ 411.354(c)(3)(i) applies to the application of relevant direct exceptions.
As a result, in arrangements involving physician SITS, the parties must
look at all members, employees, and independent contractors of a
practice to determine whether applicable requirements are met, such as a
prohibition against compensation based on the volume or value of
referrals or other business generated between the parties. As a result, if a
DHS entity contracts with a physician organization for clinical services, the
parties must take into consideration not only services rendered by
physician owners who will stand in the shoes of the physician
organization, but any services rendered and referrals made by employees
and independent contractors in order to determine compliance with the
elements of a specific direct exception.
The language of 42 C.F.R. § 411.354(c)(3)(i) suggests that each physician
owner who stands in the shoes of a physician organization, as a party to
an agreement with a DHS must execute such an agreement to satisfy a
“signed by the parties” direct compensation arrangement exception
requirement. However, CMS has indicated in its frequently asked
questions (FAQ) that it considers a physician who stands in the shoes of
his or physician organization to have signed the written agreement when
the authorized signatory of the physician organization has signed the
agreement (see FAQ 8885, http://questions.cms.hhs.gov/).
7. What Is Left of Indirect Compensation Arrangements?
Arrangements between a DHS entity and a physician organization that include
physician employees or independent contractors may still be analyzed as potential
indirect compensation relationships. In addition, arrangements that involve bona fide
subsidiaries owned by or affiliated with a DHS entity or a group practice, such as
leasing entities or entities that provide billing or management services, may be analyzed
as potential indirect compensation arrangements. If the arrangement meets the
definition of an indirect compensation arrangement, then it would need to meet the
indirect compensation arrangement exception under 42 C.F.R. § 411.357(p). If the
arrangement does not meet the definition of an indirect compensation arrangement,
then it would not be subject to regulation under the Stark Law (unless a circumvention
scheme).
Arrangements between DHS entities and physician organizations that include
both physician owners and employees may be subject to dual analyses under both the
indirect compensation arrangement provisions (for employed and contracting
physicians) and the physician SITS provisions (for owner physicians). In these cases,
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organizations will need to consider whether an election of permissive SITS for nonowner
physicians provides benefit in avoiding the headaches of dual analyses, and
whether the risk of tainted referrals for all parties to the arrangement outweighs this
benefit.
8. Entity Stand in the Shoes
CMS did not adopt any of the entity stand in the shoes proposals it considered in
earlier regulations. However, in the preamble to the 2009 IPPS Final Rule, CMS takes a
shot across the bow of those who might exploit the absence of such a rule. CMS noted
that, while many arrangements between physicians and DHS entities will require
analysis under the indirect compensation arrangement provisions, the use of shell
organizations interposed between the DHS entity and referring physicians are:
highly suspect under the fraud and abuse laws and will be
subject to close scrutiny. Depending on the circumstances,
such arrangements could violate the physician self-referral
law, constitute unlawful circumvention schemes or violate
the anti-kickback statute (73 Fed. Reg. at 48699).
III.
Services Provided “Under Arrangements”
Change in text of regulation: 42 C.F.R. § 411.351 (definition of “Entity”; see 73
Fed. Reg. 48721-48733).
A. Background: The Proposed Rule
In the 2008 MPFS Proposed Rule, CMS expressed its concerns that under
arrangement relationships between hospitals and physicians (a) facilitate “a method to
share hospital revenues with referring physicians,” leading to overutilization and
program abuse, and (b) result in higher program costs, as the services are performed in
less medically intensive settings and are billed at traditionally higher hospital outpatient
rates (see 72 Fed. Reg. 38122, 38186 (July 12, 2007)). CMS also noted its heightened
sensitivity to under arrangement relationships that result in per-service Medicare
payments, such as under arrangement relationships for clinical laboratory tests, therapy
services, and “the vast majority” of radiology and other imaging services. CMS went so
far as to say “[t]here appears to be no legitimate reason for these arranged for services
other than to allow referring physicians an opportunity to make money on referrals for
separately payable services” (72 Fed. Reg. at 38186).
To address these concerns, CMS proposed in the 2008 MPFS Proposed Rule to
revise the definition of “entity.” In Phase I of the Final Stark II Regulations, CMS defined
entity as “the person or entity to which CMS makes payment for the DHS” (42 C.F.R.
§ 411.351 (2007)). In the 2008 MPFS Proposed Rule, CMS floated the idea that the
definition of “entity” be expanded to include the person or entity that “has performed” the
DHS, as well as the person or entity that “presented a claim or caused a claim to be
presented” to Medicare for the DHS (72 Fed. Reg. at 38224).
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B. The Final Rule
1. Changes to the Definition of “Entity”
In the 2009 IPPS Final Rule, CMS adopted some (but not all) of its proposed
changes to the definition of “entity.” CMS abandoned its controversial proposal that
“entity” be defined to include the person or entity that “caused a claim to be presented”
to Medicare, acknowledging that administrative rulemaking is not the proper forum to
implement such a change. CMS finalized a revised 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 “has performed” the DHS (notwithstanding that another person or
entity actually billed the services as DHS; see 73 Fed. Reg. 48434, 48751). These
changes will be effective October 1, 2009.
2. The Effect of the Definitional Change
By changing the definition of “entity” to include persons and entities that
“perform” DHS, CMS has effectively converted to “DHS entity” status any physician
group practice or other organization that provides inpatient and/or outpatient services
“under arrangement” with a hospital. Consequently, any physician who maintains a
financial relationship with that “under arrangement” organization/DHS entity only can
make DHS referrals to the organization if that financial relationship meets a Stark
exception. While it may be possible to structure a physician’s compensation
arrangement with an “under arrangement” organization to satisfy a compensation
arrangement exception, only under limited circumstance will a physician be able to hold
ownership or investment interests in an “under arrangement” organization. According to
CMS, this is precisely the intended effect of the definitional change:
we note that some of the protections contained in the
compensation exceptions, such as the requirement that the
compensation be at fair market value and not determined on
the basis of the volume or value of referrals, would not
provide protection against overutilization or anti-competitive
behavior that exists where a physician refers patients for
DHS to an entity in which he or she has an
ownership/investment interest and which performs DHS
under contract for a hospital or other provider because of the
returns on investment such physician stands to earn,
regardless of whether the physician also has a
compensation arrangement with the hospital that is at fair
market value (73 Fed. Reg. at 48731).
CMS clarified that even if the service would not be a DHS if provided by the
under arrangements entity (e.g., cardiac catheterization performed by a physician
group) if the service is billed by the hospital as a DHS, then the financial relationship of
11

the referring physician to the entity performing the service must fit within a Stark
exception to avoid triggering the referral prohibition (73 Fed. Reg. at 48730).
Given these changes, most physicians involved in “under arrangements”
relationships with hospitals will be confronted with the choice of either (a) divesting their
ownership or investment interests in the “under arrangement” organization or (b)
restructuring the “under arrangement” relationship. Assuming physicians choose to
restructure their “under arrangement” relationships with hospitals, they must do so by
October 1, 2009. The issue of how “under arrangement” relationships may be
permissibly restructured is discussed below.
3. Authority for the Definitional Changes
CMS’ Position. Responding to comments in opposition to this proposal, CMS
explained the revised definition of entity is consistent with congressional intent, as
revealed by both the text and purpose of the statute. CMS first noted the statutory
prohibition’s textual reference to entity is not form-specific, but rather is functional
(i.e., it refers not only to organizations that present claims to Medicare, but also to
organizations that furnish DHS and cause claims to be presented to Medicare;
73 Fed. Reg. at 48723). Focusing on the “furnish” and “cause to be presented”
verbiage, CMS minimized its prior reliance on the billing aspect of its regulatory
definition of “entity”: “[w]e believe that furnishing DHS includes performing services that
are billed as DHS to the Medicare program, irrespective of whether the entity performing
the services submits the claim or whether some other entity . . . submits the claim”
(73 Fed. Reg. at 48723).
CMS also justified its revised definition of entity by relying on the underlying
purpose of the statute:
Congress has made a policy decision to disallow selfreferrals
involving an ownership or investment interest,
except in a few specified instances. We fail to see why the
Congress would have intended to prohibit a physician from
referring patients to a freestanding laboratory or imaging
facility that he or she owns, but would have wanted to permit
the physician to make such a referral simply because
laboratory or imaging service is sold to another entity that
does the billing for it (73 Fed. Reg. at 48723, 48724).
Finally, CMS found solace in certain commenters’ support for its proposal—
highlighting stories of the anticompetitive effects of under arrangement relationships, as
well as assertions that such arrangements fail to improve the quality of care furnished to
patients yet increase program costs. Indeed, in some instances, commenters asserted
that under arrangement relationships facilitate the overuse and misuse of services (73
Fed. Reg. at 48722, 48723). The persuasion of CMS was clear: “[w]e believe that, in
some instances, hospitals would prefer to furnish services directly but have been
12

concerned about losing referral streams if they compete with physician service
providers” (73 Fed. Reg. at 48729).
Critics’ Position. Not everyone agrees with CMS’ analysis. In fact, CMS’
amendment to the definition of entity has created significant controversy. Critics point
out that the agency specifically addressed the entity definition and under arrangements
contracts in the Phase I Rule in 2001. In the Phase I Rule, CMS interpreted the same
law with the same legislative history and same purpose but reached an entirely different
conclusion as to how the term entity should be defined and how under arrangements
contracts should be analyzed.
A lawsuit seeking to invalidate the new definition of entity as applied to under
arrangements service agreements was filed in late September 2008 (Colorado Heart
Institute LLC v. Leavitt, Civil Action No.:1:08-cv-01626 (D.D.C. Sept. 23, 2008)). The
complaint alleges that the new definition is contrary to statutory authority, arbitrary and
capricious, and, as issued by CMS, invalid.
4. Who “Performs” DHS?
Given the severe consequences that can result from physicians’ unprotected
referrals to DHS entities, it is crucial that (a) physicians know whether or not the
organizations to which they refer Medicare patients are “DHS entities” and (b)
organizations know whether or not they constitute “DHS entities.” The answer to these
questions will (as of October 1, 2009) turn on whether the organization “performs DHS.”
However, notwithstanding the importance of knowing when an organization “performs
DHS,” CMS declined to provide a specific definition of the term “perform,” noting that “it
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” (73 Fed. Reg. at 48726). By way of illustrative example, though,
CMS indicated that a physician has performed DHS if he or she does the medical work
for the service, begging the question: what is “medical work?”
CMS indirectly provided some guidance on what it means to perform by outlining
actions that do not constitute the performance of DHS. Surprisingly, CMS stated that
“[w]e 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” (73 Fed.
Reg. at 48726). By indicating that the provision of such space, items and services do
not constitute the performance of medical work or DHS, CMS appears to have retreated
from the stance it took in the 2008 MPFS Proposed Rule. In that rule, CMS stated:
We agree . . . that arrangements structured so that referring
physicians own leasing, staffing, and similar entities that
furnish items and services to entities furnishing DHS but do
not submit claims, raise significant concerns under the fraud
and abuse laws. We believe such arrangements to be
13

contrary to the plain intent of the physician self-referral law.
Arrangements so structured are particularly problematic
because referrals by physician-owners of leasing, staffing,
and similar entities to a contracting DHS entity can
significantly increase the physician-owned entity’s profits and
investor returns, creating incentives for overutilization and
corrupting medical decision-making (72 Fed. Reg. at 38187).
CMS also explained its opposition to a broader proposal put forth by the
Medicare Payment Advisory Commission (MedPAC) (i.e., to prohibit physicians from
referring patients for DHS to any entity that “derives a substantial portion” of its revenue
from a provider of DHS). In response to that proposal, CMS stated that:
we are concerned that entities that do not directly perform a
service . . . but rather have only tangential connection to the
service by providing another entity with supplies or
equipment could be included within the test. We question
whether such a result is appropriate policy, as well as
whether we would have the authority to adopt such a test (73
Fed. Reg. at 48724).
By responding to MedPAC’s proposal in such fashion—and by explicitly carving
out the provision of space, equipment, supplies, management, billing, and personnel
services from the performance of DHS—CMS has preserved physicians’ ability to
maintain ownership or investment interests in organizations that provide such items and
services via contract to other organizations, including organizations that maintain “under
arrangement” relationships with hospitals. Some caution is warranted, however, given
CMS’ historical concerns in this area and the agency’s willingness to posit one
interpretation of Stark, only to reverse that interpretation at a later date.
Notably, CMS did not adopt the position that physician-owned implant or other
medical device companies “necessarily ‘perform the DHS’ and are therefore an ‘entity’
on that basis” (73 Fed. Reg. at 48728). Instead, CMS expressly left open for future
rulemaking the issue of whether such physician-owned companies could perform DHS
and therefore constitute DHS entities, regardless of their billing practices (73 Fed. Reg.
at 48727). Should such companies be deemed DHS entities, any physician’s ownership
or investment interest in such companies would be threatened.
5. What of Organizations That “Cause a Claim to Be Submitted”?
As set forth in the 2008 MPFS Proposed Rule, the revised definition of “entity”
would include persons or entities that have “caused a claim to be presented” to
Medicare. In response to comments in opposition to this revision, CMS abandoned the
proposal, stating that “[w]e do not believe it is practical to attempt to define, through
general rulemaking, what does or does not constitute causing a claim to be submitted.
Rather, such a determination must be made, through adjudication, on a case-by-case
basis” (73 Fed. Reg. at 48727).
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6. Can Hospital Services Still Be Provided “Under
Arrangements”?
CMS correctly stated that the definitional change to entity does not “prohibit[]
services to be furnished ‘under arrangements’” (73 Fed. Reg. at 48728). However, if a
physician has a financial relationship with an organization that provides DHS under
arrangement, and makes DHS referrals to that organization, that financial relationship
must—as of October 1, 2009—meet either an exception for ownership or investment
interests (e.g., the rural provider exception) or an exception for compensation
arrangements (e.g., the personal services arrangement exception or the indirect
compensation arrangement exception). In the alternative, the referrals may be permitted
if they each meet an exception to the definition of “referral” (e.g., for services personally
performed by the referring physician). 1 Finally, and as a matter of course, the Stark Law
does not prohibit the under arrangement provision of non-DHS. Although hospital
inpatient and outpatient services are DHS, CMS specifically cited the under
arrangement provision of certain hospital inpatient dialysis services as not covered by
the Stark Law (73 Fed. Reg. at 48733).
Thus, while the definitional change to “entity” does not eliminate “under
arrangement” relationships with physician-owned entities, it does sharply limit their
viability. In the vast majority of instances a physician’s ownership or investment interest
in an “under arrangements” organization will not satisfy an ownership or investment
interest exception. After October 1, 2009, the circumstances under which a physician or
physician-owned entity may be able to provide services under arrangement to a hospital
appear to be limited to:
a. Rural Providers. If the physician entity qualifies under the
Stark Law rural provider exception, then physician ownership
in the entity performing the service pursuant to an under
arrangements contract with a hospital should be permissible
if structured appropriately.
b. Radiologists, Radiation Oncologists, and Pathologists.
As noted above, the definition of “referral” under the Stark
Law specifically excludes requests for services by
radiologists, radiation oncologists, and pathologists made
pursuant to request for consultation by another physician.
Thus, radiologists, radiation oncologists, and pathologists
may be able to own an entity that performs services under
arrangements if they in fact do not make referrals as that
1 For instance, if the referring physicians personally perform the under arrangement DHS, no referrals
will have occurred. Similarly, pathologists’ requests for clinical diagnostic laboratory tests, radiologists’
requests for diagnostic radiology services, and radiation oncologists’ requests for radiation therapy,
may remain outside the scope of “referral” definition and therefore outside the scope of the Stark Law.
Therefore, in certain circumstances it may remain possible for a radiology group practice to provide
hospital inpatient or outpatient diagnostic radiology services under arrangement.
15

term is defined under Stark. Given the nature of the services
most typically provided under arrangements, radiologists and
radiation oncologists are likely to benefit greatly from the
expanded definition of entity.
c. Non-owner physicians. If a physician is employed by or has
an independent contractor relationship with an entity that
performs services provided under arrangements, the
relationship of the physician to the under arrangements
entity could be structured to fit within a compensation
exception and the physician’s relationship with the hospital
billing for the services would be analyzed as an indirect
compensation arrangement. Caution should be exercised
when relying upon this analysis if the entity includes
physician owners in addition to physician employees or
contractors. The referrals of the non-owner physicians may
well be imputed to the physician owners if the owners direct
or control such referrals.
d. Lithotripsy. In the 2009 IPPS Final Rule, CMS indicates that
at least for now it will not challenge the conclusion of the
U.S. District Court for the District of Columbia ruling that
lithotripsy is not a DHS (Lithotripsy Society v. Thompson,
215 F. Supp. 2d 23 (D.D.C. 2002)). Thus, physician
ownership of an entity performing lithotripsy under
arrangements will continue to be permissible because even
when a hospital bills for lithotripsy as an outpatient hospital
service it is not considered a DHS (73 Fed. Reg. at 48730).
It should be noted, however, that the changes to per click
and percentage compensation rules will force the
restructuring of a number of lithotripsy lease arrangements
between now and October 1, 2009 (See 73 Fed. Reg. at
48719).
It should also be possible for hospitals to maintain under arrangement
relationships with organizations that are not owned by physicians. Those organizations
could, in turn, contract with referring physicians for the medical work of the under
arrangement services (and possibly include performance improvement and/or utilization
management incentive compensation structures)—as long as those compensation
arrangements meet compensation arrangement exceptions. Those under arrangements
organizations could also contract with physicians (and physician-owned organizations)
for space, equipment, supplies, management, billing, and/or personnel services—again,
as long as the financial relationships meet compensation arrangement exceptions.
Again, as stated above and given CMS’ apparent skepticism of physician ventures,
providers should restructure any under arrangement relationships with caution.
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IV.
Use of Percentage-Based Compensation Formulae and Unit-of-Service
(Per Click) Payments in Space and Equipment Leases
Change in text of regulation: Space and Equipment Lease exceptions, 42 C.F.R.
§ 411.357(a) and (b), respectively; the fair market value exception, 42 C.F.R.
§ 411.357(l); and the indirect compensation arrangements exception, 42 C.F.R.
§ 411.357(p) (see 73 Fed. Reg. 48752).
In the 2008 Proposed MPFS Rule, CMS proposed changes related to
percentage-based compensation formulae and unit-of-service payments (per click
payments). With regard to percentage-based compensation, CMS specifically proposed
revising the definition of “set in advance" to limit the use of percentage-based
compensation arrangements to those that directly result from a physician’s personally
performed services. Under CMS’ proposal, no other percentage-based compensation
arrangements would meet the proposed definition of “set in advance.” CMS explains in
its commentary to the 2008 Proposed MPFS Rule that it had learned of situations where
percentage compensation arrangements were being used for the provision of services
and items, such as equipment and office space, leased on the basis of a percentage of
the revenues generated by the equipment or in the medical office space being leased.
With regard to unit-of-service (per click) payments, CMS proposed in the 2008
Proposed MPFS Rule to revise the office space and equipment lease exceptions to
prohibit such payments to a physician when (a) the physician leases space or
equipment to a DHS entity (e.g., a hospital) and (b) the DHS entity utilizes the leased
space or equipment to furnish services to patients referred by the physician lessor.
CMS did not finalize either of these proposals in the Final 2008 MPFS Rule. As
part of the 2009 Final IPPS Rule, however, CMS revisited percentage and per click
compensation. CMS revised the office space and equipment lease exceptions, as well
as the fair market value and indirect compensation arrangements exceptions (four
exceptions) to address the use of both percentage-based compensation formulae and
per-click payments to calculate the rental charges under office space and equipment
leasing arrangements. CMS added the following prohibitions to the office space and
equipment lease exceptions:
(ii) Using a formula based on—
(A) A percentage of the revenue raised, earned, billed,
collected, or otherwise attributable to the services
performed or business generated in the office space
[or by the use of the equipment]; or
(B) Per-unit of services rental charges, to the extent that
such charges reflect services provided to patients
referred between the parties.
Similar language was added to the fair market value exception and the indirect
compensation arrangements exception. These revisions are effective for payments
17

made on or after October 1, 2009. The final rules do not provide for grandfathering of
existing arrangements after that time.
A. Percentage-Based Compensation Formulae
In the 2009 Final IPPS Rule, CMS reiterated its concerns about the use of
percentage-based formulae to determine rent payments for office space and equipment
and chose to address these concerns not by changing the definition of “set in advance”
but by revising the four exceptions noted above. CMS characterized its amendments in
the 2009 IPPS Final Rule as a “targeted approach for addressing [its] primary concerns
regarding percentage-based compensation formulae that are used to determine
compensation outside the context of personally performed physician services”
(73 Fed. Reg. at. 48709).
CMS cautions not to view its decision to limit the use of percentage-based
compensation formulae to office space and equipment leasing arrangements as an
endorsement of such compensation methodologies in other contexts. To the contrary,
CMS stressed its intention to continue monitoring the use of percentage-based
compensation formulae to determine payments for non-professional services, such as
management and billing services. CMS also warns that it may further restrict the use
of percentage-based compensation formulae in future rulemaking. Despite these
warnings, the 2009 Final IPPS Rule does not prohibit the use of percentage-based
compensation formulae outside the context of determining the rental charges for the
lease of office space and equipment (73 Fed. Reg. at 48712).
In response to comments submitted to the 2008 Proposed MPFS Rule, CMS
clarifies in the 2009 Final IPPS Rule that this change to the office space lease exception
would not prohibit a landlord from charging tenants a pro rata share of expenses related
to the leased office space. CMS also states that it is not finalizing any limitation or
prohibition on the use of percentage-based compensation formulae to pay physicians
for their personal services.
B. Per Unit-of-Service Payments
In the 2009 Final IPPS Rule, CMS also prohibits the use of per unit-of-service (or
per click) payments under the office space and equipment lease, FMV and indirect
compensation arrangement exceptions if the services are furnished to patients referred
by the physician lessor or lessee. This change was prompted by many of the same
concerns that prompted CMS to prohibit the use of percentage-based compensation
formulae to determine the rental charges for the office space and equipment leasing
arrangements. This prohibition applies regardless of whether the physician is (a) the
lessor and refers patients to the entity that leases space or equipment from the
physician or (b) the lessee and pays the entity lessor a per click payment each time the
physician uses the space or equipment to provide services to one of the physician’s
patients.
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CMS was not persuaded by the many comments it received in opposition to this
change. Some commenters claimed that hospitals would be less likely to purchase
expensive medical equipment without the ability to limit the financial risks of doing so
through per use payment arrangements. Other commenters claimed that per use
payment arrangements are the best way to determine the fair market rental charges for
equipment. Still other commenters urged CMS to draw a distinction between the
provision of diagnostic versus therapeutic procedures, arguing that the provision of
therapeutic procedures is much less susceptible to a risk of overutilization. In each
case, CMS responded that per use lease arrangements create an incentive for
overutilization—because the more referrals made by the physician lessor, the more
revenues the physician earns through the lease arrangement. CMS also noted that such
arrangements may foster anticompetitive behavior “because entities may enter into
such agreements due to fears of losing the physician lessor’s referrals” (73. Fed. Reg.
at 48715).
CMS noted that it was not attempting to prohibit per use payment arrangements
involving lessors that are not physician-owned, to the extent that such lessors do not
refer patients to the lessee. In addition, CMS noted that physicians are not prohibited
from leasing office space or equipment to entities on a per use basis for the provision of
services furnished to patients referred by others. Thus, if a physician wishes to lease
equipment or space to an entity and refer patients for DHS to that entity, it may be
possible for the parties to structure the arrangement so that the physician would receive
per use fees for services rendered to patients referred by others, but would receive
compensation calculated on some other basis for services that were rendered to
patients who were referred by the physician (73. Reg. Reg. at 48717).
With respect to such arrangements, CMS cautions that the lease payments must
be consistent with fair market value and the arrangement must be commercially
reasonable even if no referrals were made between the parties. In fact, CMS claims it
would have a serious question about an arrangement where the lessee hospital is
performing a sufficiently high volume of procedures (and making per use lease
payments) such that it would be economically feasible for the hospital to purchase the
equipment outright, rather than continuing to lease the equipment from a physician or
physician entity that generates referrals for the hospital.
CMS also addressed the effect of this regulatory change on the continued use of
block leases—which are lease arrangements where the physician leases space and/or
equipment for designated periods of time. Specifically, CMS states that time-based
rental arrangements, if structured properly, may meet the requirements of the office
space and equipment lease exceptions (i.e., the arrangement meets the fair market
value and commercially reasonableness requirements of the exceptions). According to
CMS, on demand rental agreements are problematic (and presumably prohibited),
because such agreements are essentially the same as per use arrangements. CMS
expressed the same concern about time-based lease arrangements where the lessee is
leasing the space or equipment for small blocks of time (“for example, once a week for
19

4 hours”) or for extended blocks of time (“which may indicate the lessee is leasing
space or equipment that it does not need or cannot use in order to compensate the
lessor for referrals”; 73 Fed. Reg. at 48720). CMS said it intends to continue studying
the ramifications of time-based leasing arrangements and warns that it may propose
changes affecting these types of lease arrangements in a future rulemaking.
C. Indirect Compensation Arrangements
It is noteworthy that the 2009 IPPS Final Rule includes an amendment to the
indirect compensation arrangement exception. As amended, under the indirect
exception “compensation for the rental of office space or equipment may not be
determined using a formula based on” a percentage of revenues generated in the office
space or through use of the equipment, or a per unit-of-service rental charge for
services furnished to patients referred between the parties (42 C.F.R. § 411.357(p)).
Note, however, that the first sentence of § 411.357(p)(1)(i) requires the “compensation
received by the referring physician” to be consistent with fair market value for services
and items actually provided and not determined in any manner that takes into account
the volume or value of referrals or other business generated by the referring physician
for the DHS entity. CMS’ new language of § 411.357(p)(1)(i) does not appear to focus
on the compensation received by the referring physician, but rather on the
compensation arrangement described in § 411.354(c)(2)(ii)—that is, the compensation
arrangement between the DHS entity and the physician entity. Thus, a joint venture
entity owned by physicians (but not a physician organization) that leases equipment to a
hospital may not receive a per use rental payment if the physicians refer patients to the
hospital prompting the use of the leased equipment.
D. Effective Date of the Revisions
Anticipating that many existing lease arrangements will not comply with these
new requirements, CMS specifically extended the effective date until October 1, 2009.
Nonetheless, CMS reminds those who are currently parties to per use leasing
arrangements that the current office space and equipment lease exceptions contain fair
market value and commercial reasonableness requirements. Specifically, CMS states
that it “would not consider an agreement to be at fair market value if the lessee is paying
a physician substantially more for a lithotripter or other equipment and a technologist
than it would have to pay a non-physician-owned company for the same or similar
equipment and service” (73 Fed. Reg. at 48714).
E. Implications of the Revisions
The revisions to the office space and equipment lease exceptions, the fair market
value exception, and the indirect compensation arrangements exception will force the
restructuring of many per use leasing arrangements between hospitals and physicians.
Such leases must be restructured regardless of whether the arrangement involves a
physician organization (such that the stand in the shoes provisions would apply) or a
physician-owned entity that does not fall within the definition of a physician organization.
20

While some parties may agree on alternative methodologies to determine the rent
payments for office space or equipment being leased, others may have to unwind the
arrangements altogether.
For example, consider what will happen to a group of physicians who have made
a substantial investment in gamma knife technology, which the group is leasing to the
local hospital on a per use basis. Will the parties be able to agree on an alternative rent
payment for the equipment that does not take into account the laser’s use on patients
referred by the physicians? If so, how will the hospital’s restructured rent payments
compare to the rent payments the hospital would have made on a per-use basis?
Alternatively, will the physicians suggest that the hospital purchase the equipment from
the physicians at a fair market value price? Regardless of how the arrangement is
restructured, there is a high likelihood that the hospital will bear the risk of underutilization
of the equipment in the event that revenues generated from the use of the
equipment do not exceed either the rental or acquisition costs attendant to the
equipment.
V. Period of Disallowance
Change to text of regulation: 42 C.F.R. § 411.353 (c) (see 73 Fed. Reg. at 48700-
48705; 48751).
Prompted by public comments, CMS uses the 2009 IPPS Final Rule to address
the question of how to define the period of time that referrals from a physician are
“tainted” by a financial relationship that does not meet the requirements of a Stark
exception. CMS reiterates its long-standing general interpretation that the period of
disallowance “begins on the date that a financial relationship fails to comply with a
statute and regulations and ends on the date the relationship came into compliance or
ended” (73 Fed. Reg. at 48700).
The new language in the regulations defines the outer bounds of the period of
disallowance in situations where a problematic financial relationship is brought into
compliance. More specifically:
• Where non-compliance is unrelated to compensation, the date the
relationship satisfies all requirements of an applicable exception;
• Where non-compliance is due to the payment of excess compensation,
the date on which all excess compensation is returned, and the
relationship satisfies all other requirements of an applicable exception; or
• Where non-compliance results from the payment of insufficient
compensation, the date on which all additional required compensation is
paid, and the financial relationship satisfies all of the other requirements of
an applicable exception (42 C.F.R. § 411.353 (c); 73 Fed. Reg. at 48751).
21

In the preamble, CMS takes great pains to note that this regulation sets only the
outside boundary of the period of disallowance:
We emphasize that, consistent with our proposals, this final
rule only prescribes the outside period of disallowance for
certain situations, that is, a date by which parties can be
assured that that referrals for DHS are not prohibited
(73 Fed. Reg. at 48700).
CMS goes on to note that the regulation “does not prevent parties from arguing
that the period of disallowance ended earlier than the prescribed outside period, on the
theory that the financial relationship ended at an earlier time” (73 Fed. Reg. at 48700).
The determination of when a particular relationship ended will vary based upon the facts
and circumstances of the relationship. For example, CMS understands that, in some
cases, arrangements may never be brought into compliance due to the inability to
obtain a missing signature. In those circumstances, CMS seems to suggest that it would
recognize arguments, based upon the particular facts, that the relationship ended at an
earlier date—thereby ending the period of disallowance.
Unfortunately, CMS provides little guidance on what criteria it would use in
making a determination as to when a particular relationship ended for the purposes of
arguing that a relationship ended before the outside limit provided under the
disallowance provisions. CMS posits a hypothetical situation in which a physician is paid
excess compensation under a personal services agreement for months one through six,
with the error being discovered near the end of month six. At that point, the physician
repays the excess compensation for those months. CMS rejects a commenter’s
suggestion that, in such a situation, the period of disallowance should end at the end of
month six, regardless of whether the excess compensation is repaid because the
arrangement has been brought into compliance with an exception going forward. In its
response, CMS also notes that the “beginning and end dates of an agreement do not
necessarily correspond with the beginning and end dates of a financial relationship”
(73 Fed. Reg. at 48700). CMS notes that, under the example, the payment of excess
compensation for the first six months may have been intended as a reward for referrals
prior to, during, or after the period specified in the agreement.
It is unclear where CMS’ reasoning leads in this example. It seems to be taking
the view that this is an intent-based inquiry. For example, if the facts of the case
supported a finding that the excess compensation for the first six months was intended
as a reward for referrals for the remainder of the year, then CMS seems to be
suggesting that the period of disallowance would extend through the end of the year—
unless the excess compensation is repaid. The more interesting scenario would be if
the payment of excess compensation during the first six months of the year was
intended as a reward for referrals in the prior year. The intent-based analysis suggested
by CMS seems to lead to the conclusion that the period of disallowance would end once
the excess payments ended, even if they were not repaid.
22

Notwithstanding this lack of clarity, the clear implication of the preamble
language is that CMS would be receptive to reasonable arguments to limit further the
period of disallowance on a case-by-case basis.
VI.
Alternative Method of Compliance with Signature Requirement
Change to text of regulation: 42 C.F.R. § 411.353(g) (73 Fed. Reg. at 48705-
48709).
A. Signature Requirement
In the 2009 IPPS Final Rule, CMS revisits the subject of defining alternative
methods for compliance with the Stark Law. As opposed to the broad discussion of this
topic set forth in the 2008 MPFS Proposed Rule, in the 2009 IPPS Final Rule, CMS
focuses solely on signature requirements. After having received a litany of complaints
about technical Stark violations based upon a missing signature, CMS adopts a new
provision that allows an entity under certain circumstances to submit a claim for a
designated health service if the compensation arrangement between the entity and a
referring physician fully complied with an applicable exception except with regard to the
signature requirement.
More specifically, if the failure to comply with the signature requirement was
inadvertent and the parties obtain the required signature(s) within ninety consecutive
calendar days immediately following the date on which the compensation arrangement
became non-compliant, the arrangement qualifies for the exception, without regard to
whether any referrals occur or compensation is paid within the ninety-day period. If the
failure to comply was “not inadvertent,” the parties must obtain the required signature(s)
within thirty consecutive calendar days following the date on which the compensation
arrangement became non-compliant to enjoy the protection of the exception. In both
circumstances, the compensation arrangement otherwise must have complied with all
criteria of the applicable exception. In the preamble, CMS gives as an example an
arrangement where the exception requires that the arrangement not violate the federal
anti-kickback statute. In that example, the alternative method for compliance with the
signature requirement of the Stark exception would not be available to the parties
unless this requirement for anti-kickback compliance was satisfied (73 Fed. Reg. at
48706).
The industry will undoubtedly struggle with defining what constitutes an
inadvertent lapse. The preamble to the 2009 IPPS Final Rule CMS states that failure to
comply with the signature requirement is “not inadvertent” if it is “knowing” (73 Fed.
Reg. at 48707). The agency specifically notes that, on occasion, a hospital or other
entity may need to retain a physician on very short notice—such as obtaining
emergency on-call coverage from a physician who is substituting for another
physician—and that the entity had been faced with choosing to begin a financial
relationship without the physician’s signature on the agreement or forego using the
physician’s services, possibly adversely affecting patient care (73 Fed. Reg. at 48707).
23

CMS, however, wants to “incent” parties to exercise diligence. CMS states that it
believes that ninety days is sufficient time for parties to discover whether a signature is
missing, and thirty days is sufficient time for parties to procure signatures that they know
are missing when they enter into relationships (73 Fed. Reg. at 48707).
An entity may use the provision for alternative method for compliance with
signature requirements only once every three years with respect to the same referring
physician. CMS specifically declines to extend relief to failures to satisfy other
procedural or form criteria of an exception such as the amount of compensation or the
description of the services.
B. CMS’ Stark Worldview
During its preamble discussion, CMS responds to a number of comments
seeking guidance as to when the Stark Law referral prohibition would be triggered. The
agency’s responses reflect a rigid application of the statute. CMS flatly rejects a number
of ways to interpret Stark so as to reduce the frequency of technical violations. Instead,
the agency reiterates a strict analysis that many consider to be at odds with practical
realities. The agency also fails to address the complexities created by the intersection of
state law and Stark.
CMS takes the position that all elements of an exception must be satisfied at the
onset of the financial relationship between a physician and a DHS entity in order to
avoid triggering the referral prohibition. The alternative method of compliance with
signature requirements is the only practical concession to the healthcare industry
offered by the agency. CMS specifically rejects the notion that the parties can
retroactively correct deficiencies: “[A]ll of the requirements of the exception must be met
at the time the referral is made. Further, we believe that the statute does not
contemplate that parties have the right to back-date arrangements, return
compensation, or otherwise attempt to turn back the clock so as to bring arrangements
into compliance retroactively” (73 Fed. Reg. at 48703). CMS also emphasizes that Stark
is a strict liability statute and flatly refuses to explore when inadvertent or unknowing
violations should be subject to special consideration or more lenient treatment (73 Fed.
Reg. at 48704).
In explaining its analysis of the Stark Law, CMS fails to address the effect of
state law. More specifically, CMS does not address whether an enforceable written
agreement under state law would satisfy the written agreement requirement under a
Stark exception. Likewise, the agency does not analyze the implications under the Stark
Law when state law permits parties to make an agreement effective and enforceable as
of a past date. Many healthcare lawyers rely upon state law contract principles to
determine what configuration of writings, payments, and signatures constitute a written
agreement. Although CMS may disagree, looking to state contract law to define a
written agreement is a practical approach and an approach that many would contend is
consistent with congressional intent.
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Some in the industry question whether Congress really intended that the host of
technical Stark violations to which all DHS entities are susceptible should trigger the
referral prohibition and leave these entities potentially liable for astronomical
recoupment claims. The interpretation urged by CMS could well lead to an entity’s
financial ruin based solely on a technical, unintended omission. Industry pundits have
observed that CMS’ position that it lacks discretion with respect to the enforcement of
the Stark Law provides additional support for the argument that Congress did not intend
the statute to be interpreted and applied in the manner the agency advocates.
VII.
Modifying or Amending Agreements
No Change to text of regulations: see 73 Fed. Reg. at 48696-48697.
In the preamble to the Phase III Rule, CMS suggested that in order to satisfy the
requirement that compensation be “set in advance,” the parties who wished to change
the compensation under a contract during the contract term must terminate that contract
and enter into a new agreement to reflect the changed compensation. CMS stated that
[c]hanges to the rental charges (including changes to the
methodology for calculating the rental charges) and changes
to certain other terms that are material to the rental charges
(for example, a change to the amount of space rented) may
jeopardize compliance . . . . Because rental charges,
including the methodology used to calculate rental charges,
must be “set in advance” . . . parties may not change the
rental charges at any time during the term of the agreement
(72 Fed. Reg. at 51044).
Accordingly, parties that wanted to change terms that affect compensation or rent
had to “terminate the agreement and enter into a new agreement with different rental
charges and/or other terms” (72 Fed. Fed. Reg. at 51044). This rigid interpretation was
widely criticized as both impractical and a trap for the unwary. In the 2009 IPPS Final
Rule, CMS reverses it position giving greater flexibility for parties to amend agreements.
More specifically, in the 2009 IPPS Final Rule, CMS reverses its hard line stance
and states that it will allow parties to amend compensation provisions during the term of
an agreement rather than requiring the parties to terminate the agreement to make such
a change. In CMS’ view, this increased flexibility is consistent with its mandate to
safeguard against program abuse in light of the more restrictive provisions it adopted
separately in the regulation regarding percentage-based and per-click compensation
formulas for rental arrangements. However, to be consistent with the requirement that
compensation be set in advance, CMS notes that the following additional criteria must
be met: (a) all of the requirements of an applicable exception must be satisfied; (b) the
amended rental charges or other compensation (or the formula for the amended rental
charges or other compensation) must be determined before the amendment is
implemented and the formula is sufficiently detailed so that it can be verified objectively;
(c) the formula for the amended rental charges must not take into account the volume or
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value of referrals or other business generated by the referring physician; and (d) the
amended rental charges or compensation (or the formula for the new rental charges or
compensation) must remain in place for at least one year from the date of the amendment
73 (Fed. Reg. at 48697).
VIII.
Obstetrical Malpractice Insurance Subsidies
Change in text of regulation: 42 C.F.R. § 411.357(r) (73 Fed. Reg. at 48733-
48737).
The 2009 IPPS Final Rule amends the exception for obstetrical malpractice
insurance subsidies by adding an alternate method for meeting the exception’s
requirements (42 C.F.R. § 411.357(r)). The original exception provides Stark Law
protection only to obstetrical malpractice insurance subsidies that comply with the
federal anti-kickback statute safe harbor for such arrangements. The amendment in the
2009 IPPS Final Rule extends protection to payments from hospitals, federally qualified
health centers, and rural health clinics for “some or all of the costs of malpractice
insurance premiums” for a physician who regularly engages in obstetrical practice as
a routine part of a medical practice—if all of the following conditions are met: (a) the
physician’s medical practice is located in a rural area, a primary care Health
Professional Shortage Area (HPSA) or an area with demonstrated need for the
physician’s obstetrical services as determined by the Secretary in an advisory opinion
issues in accordance with Social Security Act Section 1877(g)(6) or (b) at least 75% of
the physician’s obstetrical patients reside in a medically underserved area (MUA) or are
members of a medically underserved population (MUP).
Other requirements also apply, such as the arrangement must be set out in
writing and signed, the arrangement cannot be conditioned on referrals, the amount of
payment can not be determined based on the volume or value of referrals or other
business generated, and the physician is allowed to establish medical staff privileges at
other facilities. In addition, the payment must be made to the person or organization
other than the physician that is providing the malpractice insurance. The physician must
treat federal healthcare program patients in a non-discriminatory manner. The
malpractice insurance policy or program must be bona fide, and the premium based on
a bona fide assessment of the liability risk covered by the insurance. The arrangement
also must not violate the anti-kickback statute or any federal or state law or regulation
governing billing or claims submission.
The new provisions cover payments used to cover some or all of the “costs of
malpractice insurance premiums,” defined as any costs attributable to malpractice
insurance premiums for physicians who engage in obstetrical practice on a full-time
basis. For physicians who engage in obstetrical practice on a part-time or sporadic
basis, the “costs of malpractice insurance premiums” is determined based on costs
attributable exclusively to the obstetrical portion of the physician’s malpractice insurance
and related exclusively to obstetrical services provided in the rural area, primary care
HPSA or area with demonstrated need determined by the Secretary in an advisory
opinions, or any area where at least 75% of the physician’s obstetrical patients treated
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in the coverage period (not to exceed one year) resided in a rural area or MUA or were
part of an MUP.
The prior exception covered only physicians practicing in a primary care HPSA.
However, the new provisions are available only to hospitals, federally qualified health
centers, and rural health clinics and remains limited to obstetrical malpractice insurance
subsidies. In the preamble to the 2009 IPPS Final Rule, CMS specifically declines to
extend the malpractice insurance subsidy exception to other physician specialties
because it had no information to support that, without the expansion of the exception,
beneficiary access to necessary medical services would be hindered.
The new rules governing obstetrical malpractice insurance subsidies are effective
October 1, 2008.
IX.
Ownership of Investment Interest in Retirement Plans
Change to text of regulation: 42 C.F.R. § 411.354(b)(3)(i) (73 Fed. Reg. at
48737-48738).
In the IPPS Final Rule, CMS adopts its proposal to exclude from the scope of
covered “ownership and investment interests” an interest in “an entity that arises from a
retirement plan offered by that entity to a physician (or family member of a physician)
through the physician’s (or immediate family members’) employment with that entity.
CMS’ concern about retirement plans was that physicians may be using retirement
plans to purchase or invest in other entities, that is, entities other than the one that
sponsors the retirement plan, and to which they refer patients. These new rules for
retirement plans are effective October 1, 1008.
X. Burden of Proof
Change to text of regulation: 42 C.F.R. § 411.353(c)(2) (73 Fed. Reg. at 48738-
48740).
In the 2009 IPPS Final Rule, CMS formally addresses the allocation of the
burden of proof in the context of alleged Stark violations. Specifically, CMS adopts a
provision stating that when payment for a designated health service is denied because
the service was furnished pursuant to a prohibited referral, the burden of proof (burden
of persuasion) at each level of appeal is on the entity submitting the claim for payment
to establish that the service was not furnished pursuant to a prohibited referral (42
C.F.R. § 411.353(c)(2)(i)). In addition, the new regulations provide that the burden of
production on each issue at each level of appeal is initially on the claimant, but may shift
to CMS or its contractors during the course of an appellate proceeding, depending on
the evidence presented by the claimant (42 C.F.R. § 411.353(c)(2)(ii)).
CMS explains in the preamble that because government funds are at issue, it is
appropriate to place the burden on providers to show that they are entitled to payments
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from the public fisc, and not on the government to show that the provider or supplier are
not entitled to such payments (73 Fed. Reg. at 48738).
Public comments cited in the preamble asserted that it is difficult for providers to
prove that compensation arrangements are fair market value because even valuation
experts may disagree on the subject. CMS responds by recalling its prior statements
that
[n]othing precludes parties from calculating fair market value
using any commercially reasonable methodology that is
appropriate under the circumstances and otherwise fits the
definition at section 1877(h) of the [Social Security] Act and
§ 411.351. Ultimately, fair market value is determined based
on facts and circumstances. The appropriate method will
depend on the nature of the transaction, its location, and
other factors (72 Fed. Reg. 51015-51016) (73 Fed. Reg. at
48739).
XI.
Conclusion
The Stark Law amendments in the 2009 IPPS Final Rule alter the analytical
framework of the law in a number of ways: the SITS rule is revised, the definition of
entity changed, the compensation rules for space or equipment leases are tightened,
and the process for amending existing agreements clarified. These amendments will
force the restructuring of numerous under arrangements service agreements, space
and equipment leases, and certain joint ventures.
Despite the fatigue induced by the flurry of proposals, changes, and reversals
over the past year, lawyers involved in advising clients about the Stark Law will need to
carefully analyze these new amendments. Stark marches on—it is our job to try to keep
up.
Stark Marches On: The 2009 IPPS Final Rule © 2008 is published by the American Health Lawyers
Association. All rights reserved. No part of this publication may be reproduced in any form except by prior
written permission from the publisher. Printed in the United States of America.
Any views or advice offered in this publication are those of its authors and should not be construed as the
position of the American Health Lawyers Association.
“This publication is designed to provide accurate and authoritative information in regard to the subject
matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal
or other professional services. If legal advice or other expert assistance is required, the services of a
competent professional person should be sought”—from a declaration of the American Bar Association
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