Revisions to Physician “Stand in the Shoes” Rule will become effective October 1, 2008

August 27, 2008

Part 2 of 5: Key CMS Amendments to Physician Self-Referral Rules Contained in the 2009 IPPS

(see part 1)

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 regulations that will likely impact many health care providers. One notable revision described in the Final Rule is the revision to the physician “stand in the shoes” rule (“SITS Rule”) which will become effective October 1, 2008.

Generally, the Stark Act prohibits physicians from referring patients to an entity for certain designated health services for which Medicare or Medicaid payment may be made if the physician has a financial relationship with the entity. CMS was leery of certain relationships between physicians and entities that furnish designated health services (“DHS entities”), especially those that were structured based on an indirect compensation exception to the Stark Act, and has devised the SITS Rule to attempt to curb potentially abusive financial relationships between physicians and DHS entities. CMS finalized the SITS Rule in the Stark II, Phase III regulations, which became effective December 4, 2007. However, it delayed the implementation of the SITS Rule for compensation arrangements between (i) a faculty practice plan and other components of the same academic medical center (“AMC”), and (ii) a DHS entity and an affiliated physician practice in the same integrated Section 501(c)(3) health care system until December 4, 2008, due to concerns from industry stakeholders related to these types of entities that the new SITS Rule was unworkable in its existing form.

In this Final Rule, CMS has limited the application of the SITS Rule that it finalized under Stark II, Phase III such that only a physician who has an ownership or investment interest in a physician organization (i.e., an entity that has a primary function of providing physician services) will be deemed to stand in the shoes of that physician organization for purposes of determining whether the physician’s relationship with a DHS entity is an indirect or direct compensation arrangement. In addition, it finalized the definitions of “physician” and “physician organization” to clarify that (i) a physician and the professional corporation (“PC”) of which such physician is the sole owner are treated the same for purposes of applying the SITS Rule and (ii) if a physician stands in the shoes of his or her wholly owned PC, then he or she also stands in the shoes of his or her physician organization.

Thus, if the physician organization has a direct compensation arrangement with a DHS entity, a physician is deemed to have a direct compensation arrangement with such DHS entity as well. As a consequence, in order for a physician to refer patients to a DHS entity, the relationship between the physician organization and such DHS entity must meet a direct compensation arrangement exception to the Stark Act, such as the exception for personal services or the equipment rental exception. The requirements of these exceptions are generally more onerous than those under the indirect compensation exception. CMS has also commented that the direct compensation exceptions are less prone to abuse.

CMS clarified that a physician that has only a “titular” or nominal ownership or investment interest in a physician organization will not be required to stand in the shoes of his or her physician organization. An interest is “titular” or nominal if a physician does not have the ability to receive the financial benefits or ownership or investment, including, but not limited to, dividends, profits, or similar returns on investment. Physician non-owners or those with only “titular” or nominal interests may elect to stand in the shoes of their physician organization, but are not required to do so under the SITS Rule.

According to CMS, arrangements that were designed to comply with the SITS Rule, as finalized under Stark II, Phase III need not be amended in light of this Final Rule. Thus, health care providers must ensure that new arrangements between physician organizations and DHS entities meet the requirements of the Final Rule but do not have to amend existing arrangements to meet such requirements.

(see part 3)