August 2004 Bulletin

Questions & answers on Stark II, Phase II

A look at the physician self-referral prohibition

By Patrice Drew

The Centers for Medicare and Medicaid Services (CMS) recently published Phase II of the final Stark II regulations (the Phase II rules). The 2001 Phase I rules addressed the majority of the implementation issues in Stark and Phase II responds to public comment on Phase I and tackles new regulatory issues.

Although CMS has attempted to reduce the regulatory burdens and has added slightly more flexibility, the rule is still unduly complex. Substantial gray areas remain as a result of certain interpretations and standards adopted in this rule.

To date, Stark has not been aggressively enforced, but representatives of both CMS and the Department of Health and Human Services’ Office of Inspector General (OIG) have indicated that enforcement efforts are likely to intensify. The Phase II rules went into effect on July 26, 2004.


Q: Is providing crutches to my in-office patients considered a referral under Stark?

A: According to CMS, there is no referral if a physician personally provides durable medical equipment (DME), such as crutches, to a patient. A medical practice can furnish any medically necessary DME to its patients, provided that the referring physician personally hands the DME to the patient and instructs the patient on its use.

Q: Are requests for services by my nurse practitioners and other licensed professional considered referrals under Stark?

A: Yes. Requests for services by nurse practitioners and other licensed professionals are considered referrals of a physician. Although other professionals may be licensed to provide care and are able to make independent referral decisions, the legal authority to make a referral is not the determinating factors. If the physician exercised control or influence over the referral, then the referral will be attributed to the physician.

Financial relationships

Q: When is there a financial relationship between the referring physician and a DHS entity?

A: The existence of a financial relationship, which includes an ownership or investment interest or a compensation agreement, between a referring physician and the entity furnishing the DHS triggers the Stark Law. Financial relationships include both direct and indirect ownership and investment interests, and direct and indirect compensation arrangements between referring physicians and DHS entities.

A direct financial relationship is an arrangement between the entity furnishing DHS and a referring physician with no person between them. An indirect financial relationship exists where one or more persons or entities are between the referring physician and the DHS entity. There is a three-part test to determine whether an indirect compensation agreement exists: an unbroken chain of financial relationships links the referring physician with the DHS entity; the aggregate compensation is tied to the volume or value of the referrals; and the DHS entity knows that the physician receives compensation that takes into account the volume or value of the referrals. If any of these elements is missing, the arrangement need not qualify for any exception.

Q: I own an interest in a company that furnishes physical therapy services to a hospital for an hourly rate. I also refer patients to the same hospital for physical therapy. Would this be considered an “indirect compensation arrangement” under Stark?

A: Yes. A time-based or per unit-based compensation arrangement can, for purposes of the indirect compensation definition, result in aggregate compensation that varies with or reflects the volume of value of referrals. In this case, the hospital’s aggregate payments to the physical therapy company will vary or reflect the volume of the physician’s referrals to the hospital, even if the hourly rate is fair market value. Thus, the arrangement meets the definition of an indirect compensation arrangement, and must be further examined to determine whether an exception that relates to such an arrangement applies.

Q: If I have an indirect compensation arrangement under Stark, is there an exception under which I could continue to maintain ownership interest in my physical therapy services company and to refer patients to hospital that uses my company’s services?

A: Yes. The “indirect compensation arrangement exception” provides physicians a fairly easy out if an indirect compensation arrangement exists. As long as the compensation paid to the referring physician is “fair market value” for the items or services provided and the arrangement between the parties is: set out in writing, signed by the parties, specifies the services covered, and does not violate the anti-kickback statute, the indirect compensation arrangement will qualifies for the exception.


Q: If the “group” of physicians includes one direct owner and one independent contractor, does it meet the “group practice” definition?

A: No. In order for a group of physicians to qualify for the group practice definition, the group practice must have at least two physicians who are members of the group. Members of the group are defined as direct or indirect owners, employees, locum tenens physicians, or, in certain circumstances, on-call physicians. CMS makes clear that even part-time employed physicians can be counted for the “two or more physicians” test. Unfortunately, independent contractors cannot be considered members of the group under this test.

Q: I am in the process of establishing a new group practice. If the practice is unable to satisfy the “substantially all” test immediately, will we lose our ability to qualify as a group practice under Stark?

A: No. Phase II establishes a 12-month grace period for start-up groups to come into compliance with the group practice definition.

Q: What if my existing group practice decides to add new members or reorganize? Does the 12-month grace period still apply?

A: It depends. Phase II adds a new provision to allow a group practice 12 months to come back into full compliance with the requirements of the “substantially all” test only if its non-compliance stems from the addition of a new member who has relocated his or her medical practice. The exception does not apply to groups that add new members through mergers with other groups or by other reorganization practices.

In order to qualify for this exception, the group practice must prove that it would be fully compliant with the “substantially all” test if the new member was not counted as a member of the group and the new physician’s employment/ownership or investment interest in the group practice is documented in writing before commencement of the new employment or ownership.

Q: May a physician in a group practice share profits and productivity bonuses derived from DHS?

A: Yes. Stark provides that a group practice may pay any employee or independent contractor of the group practice profit shares and productivity bonuses. The productivity bonus may be based upon services that the physician personally performs and, unlike other practice settings, services that are “incident to” personally performed services.

A physician in a group practice may also be paid a share of the overall profits of the group, as long as the allocation of shares is made in a “reasonable and verifiable manner” and not in a manner that is directly related to the volume or value of the physician’s referrals of DHS.

Q: May a group elect to establish subgroups for allocation of profits?

A: If a group elects to establish subgroups for allocation of profits, as opposed to dividing all profits among members of the entire group, the subgroup must consist of at least five physicians.

Office services

Q: May I still provide X-rays or physical therapy in my office?

A: Unless prohibited by state law, the in-office ancillary services exception under Stark allows services such as X-rays and physical therapy, as long as the physician meets three elements: (1) direct supervision requirement, (2) building requirements, and (3) billing requirements.

Under the direct supervision requirement, DHS must be personally provided by the referring physician or a physician member of the same group practice, or personally provided by individuals who are directly supervised by the referring physician or by another physician in the group practice. Phase I interprets “directly supervised” to mean that the supervision meets the requirements under applicable Medicare payment or coverage rules.

In addition, the Stark Law provides that to qualify for the in-office ancillary services exception, the DHS must be furnished in the same building where the referring physician or another physician member of the referring physician’s group practice furnishes physician services unrelated to DHS. Alternatively, where the referring physician is a member of a group practice, the Stark Law provides that the services may be furnished in another building used by the group practice for the provision of some or all of the group’s clinical laboratory services or for the centralized provision of the group’s other DHS.

The billing requirement mandates that the DHS must be billed by one of the following:

  1. the physician performing or supervising the service;

  2. the group practice that the physician belongs to, under the group’s billing number; or

  3. an entity that is wholly owned by the referring or supervising physician’s group practice. In addition, the group practice may bill if the physician is in the group practice.

Q: How should a group practice or a solo practitioner seeking to furnish in-office ancillary services, such as physical therapy and X-rays, in the same building as its primary medical office ensure that its office structure is compliant with Stark?

A: Under the in-office ancillary services exception, DHS must be furnished to patients in the same building where the referring physicians provide their medical services, or in the case of a group, a central building. These requirements are designed to guarantee that the DHS qualifying for the exception are truly ancillary to the physician’s core medical office practice and are not provided as a separate enterprise.

A group practice can use as many facilities as it likes, so long as they are owned or leased full-time for the group practice and its exclusive use. A solo practitioner or other group practices that do not own or lease space full-time for its exclusive use may use one of three alternative tests to meet the “same building” requirement of the in-office ancillary services exception.

Under the first test, the building must be one where:

  1. the referring physician or his or her group practice has an office that is normally open to their patients at least 35 hours a week; and

  2. the referring physician or one or more members of the group regularly practices medicine and furnishes physician services to patients in that office at least 30 hours a week.

Under the second test, the patient receiving the DHS service typically receives physician services in the same building; the referring physician/group owns or rents an office that is normally open to patients for medical services at least 8 hours a week; and the referring physician regularly practices medicine and furnishes physician services at least 6 hours a week. The 6 hours must include some physician services that are unrelated to the furnishing of DHS, even if the unrelated physician services may lead to the ordering of DHS.

Under the third test, the referring physician or group practice member is present and orders DHS during a patient visit on the premises; the referring physician/group owns or rents an office that is normally open to patients for medical services at least 8 hours a week; and the referring physician regularly practices medicine and furnishes physician services at least 6 hours a week. The 6 hours must include some physician services that are unrelated to the furnishing of DHS, even if the unrelated physician services may lead to the ordering of DHS.

Although most of the reporting requirements have been eliminated, physician practices should continue to maintain documentation of compliance in case they are asked to prove compliance. In some cases, documentation must be provided within 30 days with penalties of up to $10,000 for each day the deadline is missed.

Solo practitioner

Q: I am a solo practitioner who shares a facility with other practices. Do I qualify for the in-office ancillary services exception?

A: Phase II clarifies that Stark permits a solo practitioner to provide DHS under this exception through a shared facility, as long as the arrangement meets the supervision, location and billing requirements.

Surgical centers

Q: Is there an exception under Stark for implants furnished by an Ambulatory Surgical Center (ASC)?

A: Yes. Phase I actually established an exception for implants furnished by an ASC. The exception, however, only covers those implants that are not included in the ASC’s composite rate. Phase II clarifies that this exception only applies when the implant is billed by the ASC and not when a physician or other entity bills the implant. When a physician bills for the implant, another exception must be satisfied in order to be allowable under Stark.

Professional courtesies

Q: May I provide insurance-only billing for my colleagues and/or their families?

A: Physician practices, commonly referred to as “professional courtesies,” often include waiving the entire fee for services provided to office staff, other physicians, and/or family members. Furthermore, physicians will sometimes waive coinsurance or other out-of-pocket expenses for other physicians or their families, which is also known as “insurance-only” billing.

Phase II creates a professional courtesy exception that defines such actions as the provision of free or discounted health care items or services to a physician, immediate family members or office staff. To qualify for the exception, the arrangement must meet all of the following conditions:

  1. The professional courtesy is offered to all physicians on the entity’s bona fide medical staff or in the entity’s local community without regard to volume or value of referral or other business generated between the parties.

  2. The health care items and services provided are of a type routinely provided by the entity.

  3. The professional courtesy policy is set out in writing and approved in advance by the entity’s governing body.

  4. The professional courtesy is not offered to a physician (or immediate family member) who is a federal health care program beneficiary, unless there is a good faith showing of financial need.

  5. If the professional courtesy involves any whole or partial reduction of any co-insurance obligation (a waiver of co-pays), the reduction or waiver is disclosed to the insurer in writing.

  6. The arrangement does not violate the Anti-kickback Statute or any federal or state laws and regulations covering billing or claims submission.

Although Stark clearly states that professional courtesy is acceptable, the OIG recently indicated that physicians and hospitals should be wary of providing such services. An OIG guidance issued in June 2004 (FR Vol. 69, No. 110 p. 32027) referred to the new Stark exception covering professional courtesy and provided direction to hospitals as to how they could avoid running afoul of anti-kickback laws. In general, the OIG advised that whether a professional courtesy program involves the anti-kickback law depends on whether the recipients of the professional courtesy are selected in a manner that takes into account, directly or indirectly, their ability to refer to, or otherwise generate business for, the hospital. Also relevant is whether the physicians have solicited the professional courtesy in return for the referrals.

The OIG encourages hospitals to evaluate the method by which the courtesy is granted. For example, “insurance only” billing offered to a Federal program beneficiary potentially implicates the anti-kickback statute, according to the OIG. This dovetails with Stark, which does not prohibit “insurance only” billing, but simply requires that Medicare be notified if the professional courtesy includes “insurance only” billing. In other words, if a physician or hospital complies with Stark and properly reports “insurance only” billing, the physician or hospital might run afoul of the anti-kickback law.

Patrice Drew is manager, regulatory affairs, in the AAOS Washington, D.C., office.

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