Neil Caesar, J.D.

Neil Caesar, J.D.

One of the most promising changes created in the new Stark regulations, published by HCFA last year, is the proposed "fair market value" exception to the Stark law's general prohibition of referrals of certain health services between physicians and other providers with whom they have financial relationships.

The proposed exception would allow financial arrangements that technically violate Stark, if the payments stay within commercially reasonable parameters. This could apply, for example, to incentive contracts between hospitals and physicians already in the community — a situation currently prohibited under Stark.

Although this regulation is not yet law and may be modified by HCFA before enactment, careful study rewards us with insight into HCFA's current and proposed approach to the Stark law. To satisfy the fair market value exception, six conditions must be satisfied, including these two:

  • The transaction must be commercially reasonable and must further legitimate purposes of the parties.
  • It must meet one of the safe harbors under the antikickback statute or otherwise comply with that statute.

Let us examine these two requirements in detail, for they offer much guidance for present financial relationships.

The transaction must be commercially reasonable, and must further legitimate purposes of the parties. I find no useful elaboration or clarification of this requirement in the new regulations or in HCFA's notes on them, and presume that providers would need to apply the same analysis that must be applied to any arrangements of concern under the antikickback laws. So, as examples:

  • The documents that discuss the relationship and its implementation will need to demonstrate that the arrangement is truly needed by at least one of the parties, and is not merely a smoke screen to hide payments or referrals.
  • Payments will need to be justified in value. It would not make much sense for a DME supplier, for instance, to pay a physician $50 for use of his or her nurses in providing DME set-up services for the supplier's customers, when the supplier could have used its own employees to provide the same services for a fraction of the cost.
  • The relationship must be operated in a manner that is consistent with the ostensible reasons for its creation. So if the same DME supplier were to pay a physician to provide services to DME customers far from the supplier's warehouse but close to the physician's office, that relationship should apply to all such distant customers, not just to those referred to the DME supplier by that physician.

Get a lawyer

This is one reason why these sorts of arrangements must be carefully crafted, with assistance from health lawyers.

Finally, the transaction must meet one of the safe harbors under the antikickback statute. The number of safe harbors under the antikickback laws is growing. They set up conditions for transactions where, if the physician practice or other health care provider complies with each condition, the government will probably allow the transaction to proceed even if it technically violates the antikickback law. Safe harbors are acceptable to HCFA because they set up circumstances where overutilization or other inappropriate behavior is extremely unlikely. Among antikickback safe harbors are special rules addressing space leases, equipment leases, use of personnel, physician recruitment incentives, managed care discounts and referrals, other discounts, joint ventures, and practice sales.

Try to conform

A provider who fails to conform completely to an antikickback safe harbor's definition may not necessarily be found to have violated the antikickback laws, but as a practical matter, it is prudent to try to conform to a safe harbor as much as is possible.

The antikickback laws coexist with the Stark law; neither is more important. The new fair market value exception to the Stark law thus requires that the physician's arrangement also satisfy the conditions of an antikickback safe harbor whenever possible, in order to ensure that the relationship will not encourage overutilization or other inappropriate behavior.

However, this is not an ironclad rule. Physicians can comply with the antikickback statute even when their arrangements do not satisfy one of the safe harbors. After all, the antikickback law has to do with the parties' motivations for paying something of value. Therefore, if the transaction does not satisfy a safe harbor under the antikickback law, HCFA will still allow it to satisfy the fair market value exception if it complies with the general requirements of the antikickback law. Basically, this means that nothing about the transaction should suggest that one of its motives is to induce referrals or other business between the parties.

HCFA hopes the new fair market value exception will allow providers to move forward with appropriate transactions that fail to meet other exceptions because of some technicality.

On the other hand, the new exception does not mean that any otherwise noncompliant arrangement is acceptable as long as it tracks fair market value for the activities between the parties. For example, suppose an equipment lease arrangement failed to satisfy the Stark law's lease exception because the payment was per use, and the lessor was in a position to refer business that would utilize the leased equipment. In this case, the lease could not qualify for the new fair market value exception because it would still compensate the lessor in relation to the volume of the lessor's referrals.

Nonetheless, I believe HCFA will maintain enthusiasm for the new fair market value exception, as the proposed regulations wind their way to finality. It is a useful and welcome addition to the Stark law arsenal. Further, it suggests that HCFA may be less likely to pursue violations when they relate solely to technical failures under the existing exceptions, and do not suggest payment for referrals.

Don't be aggressive

But be careful before you apply my comments aggressively. I believe that HCFA's creation and explanation of the fair market value exception demonstrates the agency's reluctance to pursue violations that relate solely to technical failures under the existing law but that do not suggest payments for referrals.

But HCFA has not actually stated any such reluctance, and even if we correctly infer it, Stark law violations may also be pursued by the Health and Human Services Department's Office of Inspector General and by the Justice Department, which are not bound by anything we read into HCFA's discussion of the new regulations.

Finally, even if you agree with my belief as to the present meaning of the fair market value exception, it will only give you comfort against arrangements that violate Stark solely on technical grounds. If the government investigates you for other violations, it will certainly throw technical Stark violations into the mix.

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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