• CMS Cracks Down on "Under Arrangements" Relationships
  • July 30, 2007 | Author: Edgar C. Morrison
  • Law Firm: Jackson Walker L.L.P. - San Antonio Office
  • On July 2, 2007, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule updating the Physician Fee Schedule (PFS) for calendar year 2008.  In addition to updating fee schedule amounts, the rule makes numerous and comprehensive changes in many aspects of the Physician Fee Schedule.  Many of those changes are aimed at limiting the ability of physicians to profit from ancillary services ordered by that physician.  If the rule becomes final, it will be effective January 1, 2008.

    Under Arrangements


    Perhaps the most dramatic change in the PFS proposed rule is an amendment to the Stark regulations aimed at limiting the spread of “under arrangements” contracts. Historically, hospitals could purchase certain services that they did not currently provide, or did not wish to directly provide for their patients, by outsourcing such services “under arrangements” with a third party supplier. In such arrangements, which may involve inpatient or outpatient services, the third party actually provides the care and is paid by the hospital. The hospital remains responsible for the quality and overall scope of the service and bills the appropriate payer for the care under the hospital’s provider number.  The hospital must accept the patient in accordance with its usual admission policies; maintain a complete and timely clinical record on the patient, which includes diagnosis, medical history, physician's orders, and progress notes relating to all services received; and maintain liaison with the attending physician with regard to the progress of the patient and the need for revised orders.  The hospital must apply the same quality controls as it applies to services furnished by its salaried employees.

    CMS notes that it is very concerned with the proliferation of these agreements, particularly between hospitals and joint ventures owned by physicians, as it gives the physicians an opportunity to profit from referring patients for the services. Because a referring physician who owns the under arrangement supplier is referring the patient to the hospital for treatment, rather than to the under arrangement supplier, the Stark statute exceptions for compensation arrangements, rather than ownership interests apply, making compliance with Stark more feasible.  In an effort to limit such arrangements, CMS proposes to amend the definition of “entity” under the Stark regulations to include the entity that bills the Medicare or Medicaid program as well as the entity that actually “performs the DHS.”  With a single stroke, CMS has expanded the coverage of the Stark statute to apply to entities that do not even bill the Medicare or Medicaid programs. When one reviews the precise language of the Stark statute, it is questionable whether CMS has such authority or whether such a dramatic change is more properly the role of Congress.


    There are several unanswered questions. In addition to whether CMS has authority to expand Stark coverage to entities that do not even bill Medicare, a practical consideration is what does it mean to “perform the DHS?” If a contractor furnishes equipment only, and hospital employees perform the DHS services, is that contractor considered an “entity?”  What if the contractor furnishes equipment and medical direction of the DHS services? What if the contractor also leases employees to the hospital?  At what point will CMS conclude that the contractor “performs the DHS,” and is thus an “entity” under the law?

    Assuming the CMS proposal becomes final and survives challenge, it will eliminate many, if not most, "under arrangement" relationships between hospitals and suppliers owned by referring physicians.