Recent developments suggest that in the years to come, health care lawyers will continue to grapple with the difficulties of the broad and complex federal physician self-referral law, commonly called the Stark Law. Although originally enacted in 1989 to create a "bright line" to demark improper physician self-referred laboratory services, and expanded in 1993 to cover a wide range of "designated health services" reimbursable under Medicare, even now the contours of the Stark Law continue to evolve and new uncertainties emerge.

The significant damages that can result from a Stark Law violation - most particularly the prospect under the False Claims Act for recovery of three times the Medicare reimbursement paid as a result of a prohibited referral - has caused the Stark Law to attract increasing attention from U.S. Attorneys offices and the private qui tam relator bar. For these reasons, despite the many years since enactment, counseling health care clients on the Stark Law will become increasingly difficult.

Lawyers advising health care clients will be challenged not only on the substance of the application of the Stark Law to particular facts, but also in deciding how to deal with Stark Law violations that have been uncovered. Developments in just this past year demonstrate some struggles in counseling in both these circumstances.

Entity Definition

The Stark Law prohibits a physician from making a referral for Medicare-reimbursable designated health services to an entity with which the physician (or an immediate family member) has a direct or indirect financial relationship, unless an exception applies. Historically, the Stark Law regulations, which are issued by the Centers for Medicare & Medicaid Services (CMS), defined an "entity" as the party to which Medicare makes payment for the designated health services. Thus, identifying the relevant parties for a Stark Law analysis was fairly easy.

Beginning Oct. 1, 2009, the Stark Law regulations utilize a broader definition of "entity." The term "entity" now means both the party that "presented a claim" to Medicare for the designated health service; and the party that "performed" the designated health service (even if another party bills for the service). The regulations do not define the term "perform."

In the preamble discussion accompanying the publication of the regulatory change, CMS simply indicated that the term "should have its common meaning," although it did allow that an entity is not performing a designated health service if the entity is merely leasing space or equipment, furnishing supplies or providing management, billing services or personnel in connection with the performance of a designated health service. It is not clear whether contracting to provide a combination of those elements would cause a business to meet the "entity" definition.

As a result of the expansion of the definition of "entity," health care lawyers will need to assess whether a business owned by physicians, for example, could be regarded as "performing" a designated health service because of a contract between the business and a health care provider. In addition, since now a physician can be regarded as referring to multiple "entities," it will be necessary to evaluate whether the physician has a financial relationship with each of them, and if so whether a Stark Law exception applies in connection with each.

IOAS Exception

A commonly used exception to the Stark Law's referral prohibition is the In-Office Ancillary Services (IOAS) exception, which permits physician referrals for certain services if furnished as part of the referring physician's medical practice, as demonstrated by specific criteria. The government has become increasingly concerned in recent years with the growth of the provision of certain self-referred ancillary services - diagnostic imaging, radiation therapy, and physical therapy, for example - furnished in medical offices under this exception.

The recently-passed health reform legislation took some steps to address this concern. Specifically, physicians self-referring for MRI, CT or PET in reliance on the IOAS exception will be required to notify the patient in writing that the services can be obtained elsewhere and must provide a list of alternate suppliers in the area. CMS has proposed regulations, to be effective Jan. 1, 2011, implementing this requirement.

The Medicare Payment Advisory Commission (MedPAC), which advises Congress on Medicare policy, issued a report in June 2010 setting forth various options to address further the growth of services covered by the IOAS exception. One option involved limiting the ability of physician practices to self-refer for ancillary services. While MedPAC made no recommendations and Congress has not yet acted in response, health care lawyers should be mindful of the possibility of further limitations of the availability of the IOAS exception.

Hospital Ownership

The Stark Law had contained an exception, referred to as the "whole hospital exception," that allows physicians to have ownership interests in a hospital as long as the interests are in the entire hospital, not merely a division or component. The federal health reform legislation included provisions to eliminate that exception, while "grandfathering" existing physician ownership of hospitals. The grandfathering provisions limit the extent of physician ownership and any expansion in beds, operating rooms and procedure rooms of existing physician-owned hospitals.

Further, physician-owned hospitals are required to notify the Department of Health and Human Services (HHS) of their physician ownership, are required to ensure that physician-owners disclose their ownership interest to referred patients, and are required to disclose the fact that their owners include physicians in any public website or advertizing.

Certain Stark Law provisions in the health reform legislation focus on physician-owned hospitals that furnish limited services, akin to ambulatory surgical centers, by requiring that the hospital disclose to each patient, and obtain a signed acknowledgement from the patient, if a physician is not present in the hospital at all times that the hospital is providing services to the patient. CMS has proposed regulations implementing these health reform requirements. Health care lawyers representing physician owned hospitals or physicians that have invested in these hospitals should be aware of the new limitations and requirements.

The Tuomey Case

In March 2010, after a month-long trial, a jury determined that Tuomey Medical Center in Sumter, S.C., violated the Stark Law by paying 18 surgeons under part-time employment agreements for providing outpatient surgical services. The jury in U.S. ex rel. Drakeford v. Tuomey Healthcare System Inc. found for the hospital on related counts alleging violation of the False Claims Act, but, citing evidentiary errors made by the court, the judge overturned that determination and ordered a new trial on the False Claims Act. As a result, the hospital was ordered to repay $45 million in Medicare reimbursement as Stark Law damages, and the government will have another opportunity to pursue $227.5 million in False Claims Act damages.

Several aspects of the Tuomey case illustrate the difficulty that health care lawyers have in counseling clients on Stark Law issues. First, unlike most past self-referral cases that have focused mainly on violations of the Anti-Kickback Statute, the government pursued the Tuomey case on the basis of Stark Law violations only. This suggests that health care lawyers need to take potential Stark Law violations as seriously as ever, even when a proposed arrangement is not thought to raise concerns under the Anti-Kickback Statute.

Second, the case shows that the Stark Law is much less of a "bright line" than has been thought. Because the Stark Law excludes from the definition of "referral" services that are personally performed by the referring physician, many health care lawyers considered it axiomatic that physician compensation could be explicitly tied to those services without fear of a violation. In Tuomey, however, the government contended that because the physicians' personally performed services were so closely tied with the hospital's services, the employment compensation improperly took into account the volume or value of the physicians' referrals to the hospital. Health care lawyers will need to take into account these uncertainties in counseling clients on Stark Law compliance.

Third, Tuomey illustrates that in advising on Stark Law compliance, health care lawyers should critically evaluate any third-party determination of fair market value with a full knowledge of all relevant facts. In Tuomey, the hospital had obtained a third-party opinion that the compensation to the physicians was consistent with fair market value. However, the compensation paid by the hospital exceeded the amount that the surgeons could collect directly from third-party payors for the services covered by the employment, thereby enabling the government to tie the compensation to the surgeons' referrals rather than the surgeons' services. Health care lawyers advising clients on Stark Law risks will need to critically review the methodologies and results of fair market value opinions.

Self-Disclosure Protocol

Generally, the Stark Law exceptions contain many technical requirements, including for example having a written agreement with a physician who is furnishing services or leasing space that specifies the services being furnished or space being leased and contains a term of at least one year. Inadvertent errors in the contracting process can lead to failure to comply with all of the requirements. Even if the error is inadvertent and is not indicative of any purpose of paying a physician for his referrals, the Stark Law prohibits all referrals from a physician with a direct or indirect financial relationship that does not comply with an applicable exception.

Since health care entities are not permitted to submit claims for services furnished pursuant to a referral prohibited by the Stark Law, and must repay all reimbursement for such claims, health care lawyers are often faced with a distressing conundrum when a client has discovered "minor" or "unintentional" Stark Law violations.

Some health care attorneys had sought to bring such violations to the attention of the government and resolve them by using the Voluntary Disclosure Protocol established by the Office of Inspector General (OIG) of HHS. However, citing the potential diversion of resources from higher priorities, in an open letter dated March 24, 2009, the OIG stated that it would no longer accept self-disclosure of violations that involve only Stark Law liability. Presumably responding to industry complaints that providers have no means to self-report Stark Law violations, Congress included provisions in the health reform legislation that require CMS to establish a self-disclosure protocol for Stark Law violations, and on Sept. 23, 2010, CMS issued that protocol.

On the one hand, the Stark self-disclosure protocol may prove to provide a pathway that health care lawyers can utilize to resolve minor Stark Law violations without the often unpalatable repayment of all Medicare reimbursement. On the other hand, the protocol itself provides no assurance that in a given case the government will respond reasonably. Until a track record is established that provides some degree of predictability on the outcome from the new process, health care lawyers will continue to be challenged in evaluating potential responses to instances of noncompliance discovered by their clients.

Conclusion

As illustrated by these recent developments, health care lawyers can expect to struggle both with the application of the Stark Law's substantive provisions and with selecting a course of action when a Stark Law violation is discovered. Health care attorneys will be best able to advise in this area by keeping abreast of future judicial, statutory and regulatory actions and real-world experiences under the new self-disclosure protocol.

Reprinted with permission from the October 26, 2010 issue of The Legal Intelligencer. © 2010 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.