1. INTRODUCTION

On January 9, 1998, the Health Care Financing Administration ("HCFA") issued an interim final rule with comment period setting forth the procedures by which HCFA will issue advisory opinions to requesting parties regarding the application of "Stark II." 63 Fed. Reg. 1646. Stark II prohibits physician referrals for certain designated health services to entities with which the physician, or the physician’s family member, has a financial relationship, unless certain exceptions apply. (FN1) Section 4314 of the Balanced Budget Act of 1997 (the "BBA"), which was enacted on August 15, 1997, amended Stark II to require HCFA: (1) to issue such advisory opinions under Stark II; (2) in so doing, to the extent practicable, to apply certain requirements of the advisory opinion process applicable to the anti-kickback statute and to take into account the regulations of the Office of Inspector General (the "OIG") of the Department of Health and Human Services for advisory opinions under the anti-kickback statute; (FN2) and (3) to promulgate regulations to implement a Stark II advisory opinion process.

The new interim final rule broadly describes the subject matter to be addressed in physician referral advisory opinions, and specifies the technical requirements for the request, review, and issuance of the opinions. Although HCFA anticipates that it will receive up to two hundred requests for advisory opinions in 1998, several factors suggest that the number of requests will be much fewer. The broad disclosure requirements, potential legal exposure associated with the submission of a request, and failure of a favorable advisory opinion to ensure a party’s freedom from prosecution, may be among the disincentives to a request an advisory opinion. Thus, like the OIG’s advisory opinion process, the actual demand for Stark II opinions may fall short of the government’s expectations.

2. EFFECTIVE DATE AND COMMENTS

Published in "interim final" form, the rule became effective on January 9, 1998. HCFA implemented the rule on an expedited basis since Section 4314 of the BBA required the agency to respond to requests submitted on or after November 4, 1997. HCFA has requested comments in a number of specific areas, and will accept comments until March 10, 1998. HCFA will publish a final rule with any necessary revisions based on comments that it receives.

3. PROPER SUBJECTS OF AND REQUESTORS FOR ADVISORY OPINIONS

Under the new Stark II advisory opinion rule, subject to certain limitations described below, any individual or entity may request a written advisory opinion from HCFA concerning whether a physician’s referral "relating to designated health services (other than clinical laboratory services) is prohibited under" Stark II. 42 C.F.R. § 411.370(b); 63 Fed. Reg. 1655. HCFA will then determine whether the business arrangement described by the parties "appears to constitute a ‘financial relationship’" as defined in Stark II, and "whether the arrangement or the designated health services at issue appear to qualify for any of the exceptions to the referral prohibition described in" Stark II. Id. HCFA’s findings will be articulated in an advisory opinion which will be disseminated to the public.

HCFA has limited the scope of its advisory opinions to actual or proposed arrangements submitted by a party to the existing or proposed arrangement. Thus, HCFA will not accept an anonymous request for an opinion, a general question of interpretation, or a request concerning a hypothetical situation or the activities of third parties, such as competitors. Where the arrangement is merely proposed, a requestor must certify that it has a good faith intention to enter the arrangement in the near future. A requestor may state that its intention to enter into the arrangement is conditioned upon the receipt of a favorable opinion from HCFA or, if the requestor has also sought an opinion from the OIG, the receipt of a favorable determination from both agencies.

Advisory opinions will not address whether fair market value was paid or received for any goods, services, or property, or whether any individual is a bona fide employee within the requirements of Section 3121(d)(2) of the Internal Revenue Code of 1986. In addition, advisory opinions will not address the subjective intent of the parties. HCFA reasoned that intent is not relevant under Stark II, since the law essentially provides that a financial relationship entered by a physician that is not specifically excepted by the statute and the regulations will be prohibited, regardless of intent. Further, even through intent may be relevant for determining what sanctions may be appropriate, HCFA indicated that it considers it impractical to ascertain a party’s intent from the written materials of the requestor submitted in the advisory opinion process. Id. at 1648-9.

4. LIMITATIONS ON SCOPE AND EFFECT OF ADVISORY OPINIONS

HCFA will not accept a request for an advisory opinion if it is aware that "the same, or substantially the same, course of action is under investigation, or it is or has been under investigation, or is or has been the subject of a proceeding involving the Department of Health and Human Services or another governmental agency." Additionally, an advisory opinion need not be issued if "HCFA believes that it cannot make an informed opinion or could only make an informed opinion after extensive investigation, clinical study, testing, or collateral inquiry." 42 C.F.R. § 411.370(e).

Advisory opinions will be legally binding only on HCFA and the requestor, and only with respect to the specific conduct of the requestor. HCFA has emphasized that a third party may not legally rely upon an advisory opinion, even if the third party implements an arrangement that appears similar to the arrangement described in the advisory opinion. In the preamble to the rule, HCFA cautions that:

[A]dvisory opinions are capable of being misused by persons not a party to the transaction in question in order to inappropriately escape liability. Advisory opinions are intended only to address the facts of a particular arrangement. A third party may implement an arrangement that appears similar to an arrangement described in the advisory opinion, but the third party may introduce additional factors that may make a difference in the outcome of an advisory opinion.

63 Fed. Reg. 1648 (emphasis in original).

The regulations specifically preserve the investigatory and prosecutorial authority of the OIG, the Department of Justice and other agencies of the government. In the preamble, HCFA suggests that, for example, the failure of a requestor to disclose a material fact in the advisory opinion process could lead to prosecution under various fraud and abuse laws, including the False Claims Act and the anti-kickback statute. Id. at 1653.

5. PROCESS FOR OBTAINING AN OPINION

The rule describes in detail the process to be followed by a requestor and HCFA that may lead to an advisory opinion. The process-related issues include (1) the submission of required information, (2) the use by HCFA of outside experts, (3) the timing for issuance of an advisory opinion, (4) the fees charged to a requesting party for an advisory opinion, (5) withdrawing a request for an advisory opinion, (6) the dissemination of an advisory opinion, and (7) the rescission of an advisory opinion.

A. Information Required To Be Submitted

The rule generally describes the documentation an individual or entity must submit in order to receive a physician referral advisory opinion. HCFA has requested comments on the type of information requestors should include in their requests, and has stated that this issue will be addressed in the revised rule. In the interim, HCFA strongly advises parties to call Joanne Sinsheimer at HCFA’s national office in Baltimore to inquire about the information required to process a request. HCFA may then informally provide the requestor with "preliminary questions to help them structure their requests." Id. at 1650.

To initiate the advisory opinion process, under 42 C.F.R. § 411.372(b), a request must contain:

A complete description of the arrangement that the requestor is undertaking, or plans to undertake, including: the purpose of the arrangement; the nature of each party’s (including each entity’s) contribution to the arrangement; the direct or indirect relationships between the parties, with an emphasis on the relationships between physicians involved in the arrangement (or their immediate family members who are involved) and any entities that provide designated health services; the types of services for which a physician wishes to refer; and whether the referrals will involve Medicare or Medicaid patients.

Requestors are also asked to "include any information they believe demonstrates that the arrangement meets one of the exceptions to the referral prohibition." Id. at 1649.

According to the rule, a request for an advisory opinion must include copies of all relevant documents -- such as contracts, leases, employment agreements, and court documents -- as well as a narrative description of the arrangement in question and detailed statements of all collateral or oral understandings, if any. The request must also include the names and addresses of the requestor and all other actual and potential parties, as well as any Medicare and Medicaid provider numbers used by all parties to the arrangement, and must identify a designated contact person. The requestor must include its taxpayer identification number so that HCFA may collect and report any delinquent fees. Id. at 1649. The parties must also indicate whether they have asked, or are planning to ask, for an advisory opinion on the arrangement in question from the OIG under the anti-kickback statute, and whether the arrangement, to the best of the requestor’s knowledge, is the subject of an investigation.

A request for an advisory opinion must be accompanied by a certification signed by an individual requestor or a specified agent of a requestor that is an entity. The responsible individual must sign the following statement in connection with a request for an advisory opinion:

With knowledge of the penalties for false statements provided by 18 U.S.C. 1001 and with knowledge that this request for an advisory opinion is being submitted to the Department of Health and Human Services, I certify that all of the information provided is true and correct, and constitutes a complete description of the facts regarding which an advisory opinion is sought, to the best of my knowledge and belief.

For proposed arrangements, the requestor must also provide the following certification: "The arrangement described in this request for an advisory opinion is one into which [the requestor], in good faith, plans to enter." 42 C.F.R. § 411.373.

B. Use By HCFA Of Outside Experts

If HCFA believes that expert advice is necessary to respond to a request, HCFA may engage a qualified outside expert to assist it. HCFA cites as examples the use of accountants or business experts to assess the structure of complex business transactions or to ascertain a physician’s financial relationship with an entity. If HCFA determines that it needs to obtain expert advice, it will notify the requestor of that fact, identify the expert, and provide an estimate of the costs of the expert advice. The costs of the expert advice will be borne by the requestor.

C. Timing For Issuance Of Advisory Opinions

Within 15 working days after receiving the request, HCFA will either accept the request, decline the request, or solicit additional information. An application that is declined or with respect to which additional information is requested is not considered to have been formally accepted. HCFA will notify a requestor of its acceptance of a request.

HCFA states that it will issue an advisory opinion within 90 days after such formal acceptance. The 90-day timeframe can be extended, however, to a "reasonable time period" if HCFA determines in its discretion that the request involves complex legal issues or highly complicated fact patterns. Thus, HCFA elected not to follow the OIG’s statutorily mandated 60-day timeframe applicable to advisory opinions under the anti-kickback statute.

After acceptance of the request, the 90-day response period is suspended during any period during which HCFA is awaiting (1) additional information that it solicits after it has accepted a request, (2) payment of amounts that it has notified the requestor are due, (3) the receipt of expert advice after having notified the requestor of the need for expert advice, or (4) authorization to continue processing the request after having notified the requestor that HCFA’s costs have reached or are likely to exceed a threshold amount established by the requestor. HCFA will issue the advisory opinion only after it receives full payment of the amount owed to it. Under these rules, the timeframe for obtaining an opinion is likely to exceed the 90-day period specified in many cases.

D. Fees Charged To Requesting Parties

The requestor is responsible for paying a fee equal to the costs incurred by HCFA in responding to the request for an advisory opinion. Requests must be accompanied by a non-refundable payment of $250 (which may be increased by HCFA for requests received after December 31, 1998). While not establishing the specific fee amounts that it will charge requestors, HCFA offers same general guidance on likely fee amounts:

We estimate that currently, the actual cost of processing a request, including salaries, benefits and overhead, would be approximately $75 an hour. We must include in our estimate the time of technical staff, attorneys, supervisors, and support staff, as well as others with whom we may consult on various issues. The time it will take us to process a request will depend on the complexity of the request and the quality of the submission. Simple requests might only take a few hours. For example, a request concerning whether a physician can refer patients to his wife, who works for a physical therapy facility, may take approximately 3 hours to analyze and produce a written opinion. On the other hand, a request involving application of the physician referral rules to a large, multi-party, intricate business arrangement may take us in excess of 40 hours to fully analyze and produce a written opinion.

Id. at 1651.

A requestor may specify a "triggering dollar amount" in its submission. If HCFA calculates that the cost of processing the request has reached or is likely to exceed that triggering amount, HCFA will stop processing the request, and will promptly notify the requestor. At that point, the requestor may withdraw the request, or direct HCFA to continue processing the request. Similarly, a requestor may withdraw its request after HCFA notifies it of HCFA’s need for expert advice and the estimated cost of that advice.

HCFA will notify the requestor of the amount owed after it has reviewed the material facts, and has prepared a written opinion presenting its analysis and providing conclusions about how the law applies to the facts presented. HCFA will not release the written opinion until the full fee associated with producing the opinion has been paid. Once the fee has been paid, HCFA will send the opinion to the requestor via United States mail.

E. Withdrawal Of Request For Advisory Opinion

The requestor of an advisory opinion may withdraw the request at any time prior to the issuance of a formal advisory opinion by HCFA. HCFA, however, specifically reserves the right to retain any request for an advisory opinion, as well as all documents and information submitted to it in connection with the request, and to use them for "any governmental purposes" -- including, presumably, investigative and enforcement actions. The requestor must still pay the costs incurred by HCFA in processing the request up to the date on which the request is withdrawn.

F. Dissemination Of Advisory Opinions

Adopting the OIG’s model for dissemination of advisory opinions to the public, after HCFA has issued an advisory opinion to a requestor, it will promptly make a copy of that opinion available for public inspection in HCFA’s offices and on its web site. Documents submitted to HCFA related to requested advisory opinions will be available to the extent authorized by the Freedom of Information Act. Although a requestor may submit information that it believes constitutes protected trade secrets or privileged and confidential commercial or financial information, that designation will not be controlling. In addition, to the extent that HCFA bases its opinion on material facts that may have been designated confidential information, HCFA reserves the right to disclose such information to the public as part of the advisory opinion.

G. Rescission Of An Advisory Opinion

As also provided in the OIG advisory opinion regulations, HCFA reserves the right rescind advisory opinions at any time if "it determines that [rescission] is in the public interest." The circumstances that may justify rescission are not explicitly stated in the rule, and the preamble to the rule is equally vague. The preamble states merely that an opinion may be rescinded if HCFA learns after issuing it that the arrangement in question may lead to "fraud and abuse." Id. at 1652. This provision affords HCFA wide discretion in rescission of opinions, long after they have been issued, even when substantial business arrangements have been commenced in reliance on HCFA’s advice in the opinion.

Notice of the rescission or revocation will be given to the requestor so that the individual or entity may "discontinue" the course of action taken in accordance with the advisory opinion. HCFA will not proceed against the requestor with respect to any action taken in good faith reliance on its advice, where all the relevant facts were fully and accurately presented to HCFA, and where the arrangement was promptly discontinued, or was discontinued after a reasonable "wind down" period if the arrangement could not be discontinued immediately.

6. HCFA FORECASTS

HCFA’s forecasts for the advisory opinion process are provided in the "Regulatory Impact Analysis" and "Collection of Information" analysis which accompany the rule. As stated earlier, HCFA anticipates that it will receive approximately 200 requests for opinions in 1998. It bases its estimate on the number of telephone inquiries regarding Stark II received in 1997 -- approximately eight per day. Unlike the OIG’s forecasts regarding costs, HCFA estimates that advice could be provided at a relatively minimal cost to requestors, compared to the cost of advice provided by private counsel. It estimates that the average opinion will take from 2 to 40 hours to prepare, with an average of 10 hours per respondent, for a total burden on HCFA’s staff time of approximately 2000 hours. These estimates are significantly lower than the OIG’s initial estimates of 500 requests per year and a total of 5000 hours of staff time for the preparation of opinions under the anti-kickback statute. For these reasons, HCFA has stated that, unlike the OIG, it has decided not to add additional staff at this time to process requests until actual demand can be more fully ascertained.

Because HCFA’s advisory opinion process draws largely from the OIG’s advisory opinion process, health care providers may be as reluctant to request advisory opinions under Stark II as they have been to request advisory opinions under the anti-kickback statute. Perhaps recognizing the dearth of requests for OIG opinions, HCFA has refrained from hiring additional staff to address the anticipated requests. We will keep clients apprised of any major new developments regarding HCFA’s advisory opinion process under Stark II. In the interim, please do not hesitate to contact any of us if you require further assistance or would like to discuss any issues in greater detail.