Neil Caesar, J.D.

Neil Caesar, J.D.

The Stark II regulations hang over physician practice activity like the proverbial Sword of Damocles, ready to drop onto ignorant or careless physicians who work with, or refer services to, certain providers. These days, a doctor who chooses to ignore the Stark II rules is, almost by definition, a careless doctor. Physicians who do not ensure that their activities and referrals fall within one of the exceptions to the Stark law are subject to substantial fines and penalties and risk violation of numerous other fraud statutes, such as the False Claims Act.

Some of the most important Stark law compliance issues concern physician compensation provisions. Let's explore HCFA's interpretation of several key Stark II concepts and definitions in the context of physician compensation arrangements.

What is remuneration?

To understand the Stark rules, physicians should first understand what remuneration means under the law. According to the regulations, "remuneration means any payment, discount, forgiveness of debt or other benefits made directly or indirectly, overtly, in cash or in kind." In this respect, the regulatory explanation of remuneration more or less tracks the statutory definition.

The Health Care Financing Administration says that remuneration involves any payment of cash, property or services, regardless of whether either party received a net benefit." What does this mean for physician income-division arrangements? Medicare and Medicaid carriers' payments to a medical group probably would not count as remuneration to the group's individual physicians, but payments made by the group to its physicians would — even if the payment is not compensation for a physician's work.

For instance, sharing profits with a group's physician owners constitutes remuneration, even though those payments are not compensation but ownership distributions. Similarly, distribution of revenue to all physicians in the group, regardless of ownership status, is also remuneration under the Stark law.

'Other business between the parties'

The regulations prohibit physicians from dividing income or practice expenses in a way that reflects the volume or value of business generated. (If the physician is employed by a hospital, practice management company, or some other provider, this prohibition applies to any business generated between the physician and the employer.) According to HCFA, "If a party's compensation contains payment for other business generated between the parties, [HCFA] would expect the parties to determine if this extra payment falls within one of the exceptions." This means that compensation for as-needed consulting or occasional services must be structured carefully to justify payment.

Essentially, HCFA's interpretation appears to impose a fair-market-value gloss on compensation arrangements. For example, if a physician is paid for as-needed consulting as part of a compensation package tied to acquisition of his practice, this would be outside of the bounds of the Stark law. However, if the amount of that compensation is based on the physician's continued loyalty to the purchaser, the arrangement would violate the law, because the physician's referrals would generate that "other business" between the parties. Along those lines, if, after acquisition, that physician is still employed by the purchaser, Stark regulations would prohibit the employer from basing nonsalary payments (e.g., for consulting) on the volume or value of that physician's referrals.

About designated health services

One of the most confusing things about the new regulations is HCFA's contention that the revenue division rule relates — somehow -- only to the Stark law's list of prohibited "designated health services." According to HCFA, the Stark rules about income division apply only to referrals for those services — and only for Medicare and Medicaid patients. Does that mean that the regulations allow groups to track use of ancillary or nondesignated health services by commercial patients and reward referring physicians accordingly?

Not quite. First, the new rules require that rewards for utilization be tracked separately for each physician in the group. As a practical matter, most group practices have neither the time nor the tolerance for separate tracking.

Second, if compensation is based on non- Medicare or Medicaid referrals to designated health services and is (in HCFA's opinion) "inordinately high or otherwise inconsistent with the fair market value of those referrals," the agency has said it will investigate whether those payments include disguised compensation for Medicare and Medicaid referrals. It is risky for physicians to make any such distinctions in their compensation formulas. This possibility of heightened scrutiny may make distinctions between Medicare or Medicaid and commercial utilization impractical.

Getting right down to it

Third, despite the murkiness of the new regulations, the essence of the Stark law is that inappropriate referrals for ancillary services are bad. Any physician who acknowledges the importance of cost containment can embrace this message, particularly in light of the realities of health reform, managed care and managed competition. Any medical group that insists on boosting utilization by carving distinctions between Stark-designated services and other services is behaving dangerously.

Finally, on this point, you might have noticed that HCFA's narrow statement (that Stark only applies to Medicare- or Medicaid-designated services) appears to conflict with HCFA's stance that an income-division formula cannot reflect the volume or value of other business generated between the parties. How can these two positions be reconciled? I'm not sure.

Better safe than ...

But the bottom line for physicians is this: Be sure that your internal methods for division of productivity income tracks physicians' actual clinical activity only. A productivity formula should not reward physicians for referrals within the group or for referrals of ancillary services. While the Stark rules only forbid tracking referrals of certain services, physicians should err on the side of caution and strongly consider applying this rule to all ancillary services.

Despite all of this, don't worry! Physicians still have many options for making productivity formulas work — while still passing muster under Stark. We'll take a look at those next month.

Neil Caesar is president of The Health Law Center (Neil B. Caesar Law Associates), a national health law consulting practice in Greenville, S.C.

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