Physician Referral Law — Are You Affected?

On January 4, the Health Care Financing Administration published the Physician Referral Law (Stark II) to prevent abuse in the Medicare program from over-utilization of services by physician-owned facilities. Effective January 4, 2002, pending a 60-day stay imposed by the new Bush Administration on Jan. 20, the recently published Phase I of the final regulation gives physicians the first reliable guidance on how to structure their business relationships in light of this law.

This article offers some highlights of the regulations. It should not be relied on to ensure compliance.

Does this law apply to me?
If you refer a patient for designated health services (DHS) to an entity in which you or a family member has either a direct or indirect ownership interest or compensation arrangement, the law applies to you.

Designated health services include clinical laboratory services; physical, occupational and speech-language pathology services; radiology and certain imaging services; radiation therapy services and supplies; DME and supplies; parental and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services.

Even your practice is "an entity" for the purposes of Stark. Fortunately, a DHS personally provided or supervised by you in your own practice is not a referral under Stark. However, if you practice with other physicians and refer patients to other physicians in the group, the referral may be prohibited unless the practice is a true "group practice" and the referral meets an exception.

What is a "group practice" and why is qualification as a group practice important?
Qualification as a group practice is essential if you practice with other physicians, make referrals to each other, and share practice revenues. A group practice must have two or more physician "members" — at least one of whom is an owner and the other(s) an employee — organized as a single legal entity formed primarily for the purpose of practicing medicine. A group practice may operate more than one site, but it must have centralized decision-making, utilization review, and consolidated billing.

Locum tenens and on-call physicians will be deemed employees of a practice (and therefore members) if they meet certain requirements. Independent contractors and leased employees are not considered members of the group.

So beware — if you are the sole owner/employee of a professional corporation and you compensate a physician as an independent contractor for services provided to your patients, you will fail the group practice test and referrals will be prohibited. If you satisfy the group practice test, an independent contractor will be considered a physician in the group, making such referrals permissible if they have executed a contract and reassigned their right to Medicare payment to the group.

Compensation for DHS
While generally prohibited, referrals to entities with which you have a compensation arrangement may be permissible if the compensation methodology is set in advance, unrelated to volume or value of referrals, and fair market value.

The final rule allows per-service, per-use, or per-time period formulas as long as the amounts are fair market value at the time of inception and do not vary based on volume or value of DHS referrals. Percentage-based compensation arrangements, such as percent of gross revenue, collections or practice expenses, are not considered to be fixed in advance and therefore are not permitted.

Productivity bonuses may take into account a physician's productivity for the services he or she provided — including DHSs.

Penalties for Violating the Statute
You may not submit claims to Medicare for services rendered pursuant to a prohibited referral. Medicare will deny these claims. If Medicare pays these claims, the amounts reimbursed must be returned to Medicare.

– Diane Bissonnette Moes, Esq.

The MMS will offer educational sessions on Stark II regulations to various Massachusetts hospital Medical Education Departments.