• Life After Stark II Phase II: Pros and Cons of Competing Stark II Compliance Strategies for AMCs
  • June 23, 2004 | Author: Marci Handler
  • Law Firm: Epstein Becker & Green, P.C. - Washington Office
  • With the issuance of Phase II Stark II rules in March 26, 2004, most Academic Medical Centers ("AMCs") now are in the midst of assessing their compliance with the new rules. Theoretically, there are two paths available to AMCs in this regard. This article summarizes the key advantages and disadvantages of each of these compliance alternatives. In short, although the AMC exception provides the beneficial possibility for addressing Stark Law compliance on a "global" basis across the AMC components, the physician compensation provisions of the AMC exception may not afford sufficient flexibility for some AMCs. In contrast, the indirect compensation arrangement provisions of the Stark II regulations seem to offer greater flexibility for faculty physician compensation; however, compliance with the indirect compensation rules may come at a higher price in terms of ability to demonstrate compliance, should the arrangements ever called into question.

    A. General Requirements

    The most obvious choice for Stark II compliance for an AMC would be to comply with the AMC exception. Essentially, this would require the components of the AMC to work to together to ensure the existence of appropriate documentation of their relationship, including measures to ensure that funds flowing between the components are used to support the "core" AMC functions of teaching, indigent care, research and community service (including patient care).

    Only certain organizations engaged in academic endeavors can qualify for this exception; namely, organizations that include at least one accredited medical school or accredited academic hospital, faculty practice plan and an affiliated hospital where a majority of medical staff are faculty who refer a majority of the hospital's admissions.

    Faculty must be employed within the AMC. "Total amounts" paid to each faculty member must be set in advance, reflect fair market value in the aggregate, not be determined in a manner that takes into account referrals or other business generated by the physician for the AMC, and not otherwise violate the anti-kickback statute or rule governing billing or submission of claims. Faculty compensation can not violate the anti-kickback statute or law governing billing or claims submission. Personally performed services are always allowed, because they are not considered "referrals" in the first place. Finally, any amounts paid among the AMC for research must support bona fide research in accordance with the grant requirements.

    B. Pros and Cons

    The advantages of compliance with the AMC exception appears largely as follows: the exception appears designed to protect on a "blanket" basis all of the funds and arrangements flowing among the AMC components, regardless of whether specific amounts are paid by the hospital directly to a faculty member or paid among the corporate components of the AMC. In essence, as long as the money is spent on appropriate purposes (as defined in the regulations), the faculty physicians are employed within the AMC, faculty compensation is structured appropriately, and appropriate documentation exists, then generally all of the individual faculty members and entities that comprise the AMC should be protected for all of their financial arrangements.

    The key point here is that there should be no need for separate Stark compliance analyses for each and every payment made under such an excepted (protected) "global" arrangement. Thus, every payment, e.g., new research projects, leases, recruitment arrangements, medical directorships, teaching services, administrative services, GME payments, etc. -- all of these should be presumed compliant as long as the global arrangement remained protected. Further, the exception should apply to all of the AMC components that compensate faculty physicians, whether as employees or under contractual arrangements. In fact, the preamble to the Phase II regulations reflects this "blanket" approach in its discussion of physician recruitment arrangements, where CMS states that no separate physician recruitment exception is necessary for AMCs in light of the AMC exception (see preamble at p. 16097).

    This possibility of such "one-stop shopping" for AMC compliance, given how complex the financial arrangements within AMCs can be, is a tremendous opportunity available only to AMCs (and not other hospitals).

    On the other hand, under the current version of the Stark II Phase II AMC regulation, there are constraints on the flexibility afforded to AMCs in terms of faculty physician compensation. This regulatory constraint, unfortunately, makes it more difficult for a faculty practice plan ("FPP") to incentivize its physician members to be as productive and efficient as a group practice (relying on the in-office ancillary services exception) that is unaffiliated with an AMC.

    The group practice rules on compensation effectively allow a group practice physician to receive compensation from the group based on personally performed services, services furnished as an "incident to" such personally performed services, and even certain revenues derived from designated health services ("DHS") ordered by the physician within the group practice, provided that such DHS productivity or profitability bonuses comply with applicable requirements. The AMC exception, in contrast, provides only for faculty compensation payments based on methods that measure personally performed services. The government actually reflects this difference in its preamble to the Stark II Phase II rules, where it includes a chart showing the rules for physician compensation under several different exceptions (see 65 Fed. Reg 16054 at p. 16067).

    However, nowhere in the Stark II Phase II rules does the government square this regulatory limitation for FPP compensation within an AMC with the Stark statute's enabling provision that expressly envisions a FPP as a group practice. In the statute's "special rules" on group practices, there is an express statutory provision that blesses the ability of FPPs to qualify as group practices (see 42 U.S.C. § 1395nn(h)(4)(ii)). In fact, the statute's "special rules" give FPPs additional advantages over non-academic group practices in terms of the requirements for counting how much time a physician spends providing services within his/her group setting.

    Further, although the preamble suggests that CMS intended to give AMCs the benefit of its new thinking on unit and time based compensation, the AMC exception itself is not clear on this point. Under the regulations, compensation is deemed "set in advance" if it is structured using fixed salaries, time-based or unit-based methodologies (such as per-use or per-service), or specific formulas (e.g., percentage based compensation), provided the methodology or formula is stated up-front at the start of the agreement in detail and no modifications are made that are based on referrals or other business. Unit-based compensation methodologies are allowed as long as they reflect fair market value for actual services provided and do not reflect referrals for designated health services or private pay health care business.

    However, unlike other Stark exceptions, the AMC exception requires that "total compensation" paid to a faculty member be "set in advance." The regulations do not address the effect of the "total" requirement on the ability to compensate faculty members using otherwise allowable methodologies that include variable components. This is particularly interesting in light of CMS's prior statements on percentage compensation arrangements. In its prior statement, CMS delayed the effective date of its proposed rule against percentage-based compensation arrangements, in part, it stated, because it understood that certain providers, including AMCs, would have to restructure or renegotiate thousands of physician contracts to comply with the prohibition as it was originally drafted (see, e.g., 66 Fed. Reg. 60154 at 60155). The preamble to the Phase II regulations would suggest that percentage-based compensation is allowed in an AMC. Yet, the AMC exception itself raises the important issue of whether a percentage-based compensation formula for faculty physicians reflects "total" compensation set in advance.

    These aspects of AMC compliance deserves further consideration, and industry comments (the comment period extends through June 24, 2004. Although FPP salary models have not been historically as sophisticated as some group practice models, the pressure on FPPs to operate more cost-efficiently, and with higher measurable quality, may increase, as AMCs experience declining financial performance and declining payor reimbursement, at least in certain markets.

    II. Indirect Compensation Arrangements Exception

    A. General Requirements

    Another alternative possibility for AMC compliance with Stark is the rule for indirect compensation arrangements. The rules for "indirect" compensation arrangements remain a tricky area to understand. In general, an indirect compensation arrangement exists where there is a chain of financial arrangements between an entity that provides DHS and a physician, and the physician's compensation reflects referrals to, or other business generated for, the entity. In an AMC setting, funds flowing among the hospital and FPP that employs physicians could be a chain of arrangements potentially giving rise to an indirect compensation arrangement. The remaining question is whether the FPP physicians are compensated based in any way on referrals or business generated for the hospital. If not, then there could be at least a technical argument that no Stark Law financial arrangement exists between the parties.

    However, in light of the broad scope of the definition of indirect compensation arrangements, many AMCs are likely to take the position that compliance with the exception for indirect compensation arrangements is prudent. Further, while it might be unusual for a AMC compensation system to pay physicians directly based on the volume or value of referrals to the hospital, there could be other financial arrangements between the parties that requires compliance with this exception -- for example, if funds paid by the FPP to a physician reflect the hospital's per unit lease of equipment from the FPP/faculty physician where the physician is in a position to order such equipment use for hospital patients.

    The exception for indirect compensation arrangements protect arrangements where the compensation, though variable, reflects fair market value for actual items and services provided, is not determined in a manner that takes into account referrals or other business between the parties, is reflected in writing (except for employment) and does not violate the anti-kickback statute.

    Although the definition and exception for indirect arrangements are somewhat circular, according to the preamble, the regulations are designed to include time and unit based compensation, and aggregate compensation arrangements, that take into account referrals or other business generated between the parties. However, the preamble further explains that the rules are intended to exclude that subset of indirect arrangements where the compensation is fair market value and does not reflect the volume or value of referrals or other business generated. This would mean that per unit or per click arrangements that qualify under the "special rules" for compensation (i.e., where unit compensation reflects fair market value without regard to referrals) should be protected (see preamble at p. 16059). The previously proposed rule banning percentage-based compensation has been removed.

    B. Pros and Cons

    The advantage of the indirect compensation arrangements provisions is the flexibility it seems to afford for faculty physician compensation. This flexibility allows variable unit or percentage based payments for faculty physicians, if certain requirements are met. It, therefore, may be technically possible to comply with the indirect compensation rules and also allow the FPP to operate as a group practice (within the in-office ancillary services exception), in order to take advantage of the additional flexibility available to group practice compensation systems.

    On the other hand, the indirect compensation arrangement is not clear as to whether it can be applied on a "global" basis, like the AMC exception (discussed above), or whether every payment between AMC components must separately qualify. For example, it is not clear whether a hospital's payment to an FPP for physician recruitment would qualify under the indirect compensation exception, or whether such arrangement would need to separately meet the exception for physician recruitment (which includes additional specific criteria for recruitment of a physician placed at an existing group).

    Further, this approach seems to require the hospital and FPP each to separately structure initiatives to ensure their respective compliance with applicable regulations. Finally, because the exception protects only indirect arrangements, it would not apply to any direct compensation paid by a hospital to a faculty member within an AMC.

    In addition, there is the practical concern that government enforcement agencies may be reluctant to accept an AMC's argument that it has no Stark law financial arrangements with faculty physicians, where the AMC arrangements fall outside of the indirect compensation definition. This issue over whether there is a "hierarchy" of exceptions, which suggests that parties need to comply with the most specific exception available, has not been definitively addressed by CMS. This is another key issue that would be ripe for industry comment with the goal of getting clear direction from CMS in its next issuance of the Stark regulations.