Physicians Will Be Required to Divest Ownership Interests in Most Under Arrangements by September 30, 2009

August 26, 2008

Part 1 of 5: Key CMS Amendments to Physician Self-Referral Rules Contained in the 2009 IPPS

The Centers for Medicare and Medicaid Services (“CMS”) published the 2009 Inpatient Prospective Payment Systems final rule (“Final Rule”) in the Federal Register on August 19, 2008. The Final Rule includes several important changes to the Stark Act that will likely impact many health care providers. One notable revision described in the Final Rule will require many physicians participating in provider-based joint venture “under arrangements” to restructure or unwind such arrangements by September 30, 2009.

An “under arrangements” transaction is one in which a hospital contracts with a third-party entity to provide specific inpatient or outpatient services to a hospital’s patients. Often the third-party entity provides specialized services such as cardiac catheterization, high volume CT, radiation therapy or lithotripsy. The third-party entity providing the services may either be an independent organization (e.g., an ambulatory surgery center) or an entity that is jointly owned by physicians and the hospital. The joint venture typically provides the services, owns and operates the equipment, employs most of the staff and leases space from the hospital. The hospital, in turn, pays the joint venture a fair market value fee and bills payors for the services as hospital services under the hospital’s license and Medicare billing number.

The Stark Act prohibits a physician from making referrals for designated health services (“DHS”) to an entity with which a physician (or an immediate family member) has a financial relationship. The Final Rule attempts to eliminate physician ownership or investment in most under arrangements joint ventures, thereby significantly curbing the practice of using physician-owned entities to obtain higher hospital reimbursement rates. CMS has attempted to accomplish this goal by amending the Stark Act’s definition of “entity” to clarify that a person or entity is considered to be furnishing DHS if:

it is the person or entity that has performed the DHS, (notwithstanding that another person or entity actually billed the services as DHS) [(e.g., the joint venture)] or presented a claim for Medicare benefits for the DHS [(e.g., the hospital)].

In summary, where one entity performs a service that is billed by another entity, both entities are DHS entities with respect to that service.

CMS declined to provide an explicit definition of who qualifies as “performing services” that are billed as DHS by another entity. CMS instead stated that the term’s common meaning provides adequate guidance. CMS did, however, clarify that it does not consider an entity that leases or sells space or equipment used to perform the services or furnishes supplies that are not separately billable, but used in the performance of the services, or that provides management, billing services or personnel to the entity performing the service, to perform DHS services.

CMS expressed concern in the Final Rule that the under arrangements model, which was originally used by hospitals to provide certain services to their patients that were not available at the hospital because they were required infrequently, has become a tool used by some physicians to inappropriately invest in certain hospital departments or equipment thereby circumventing the Stark Act’s whole-hospital exception (a key element of which requires physicians to invest in the whole hospital and not just a department or portion of a hospital). CMS also took note of physicians’ concerns that patients were being steered to certain types of treatments with favorable reimbursement profiles (e.g., IMRT) in lieu of other types of equally effective and less expensive treatments. The Final Rule attempts to eliminate these sorts of potentially abusive relationships resulting in waste and overutilization.

It is important to note that existing under arrangements relationships in which physicians have an ownership interest will not be grandfathered under the Final Rule. Thus, current under arrangements joint ventures will need to be reviewed in order to determine the need for them to be unwound or restructured by September 30, 2009.

(see part 2)