Physician referral practices under attack.

Closer scrutiny is being given to referrals by physicians to entities in which they have an investment interest. "Health Law" is a regular feature Of Physician Executive contributed by the law firm of Epstein Becker & Green, P.C. Douglas A. Hastings, Esq.,a partner in the firm's Washington, D.C. offices, serves as column editor. Physician referrals to facilities in which they have financial interests have come under attack both by the Office of the Inspector General (OIG) of the Department of Health and Human Services (HHS) and by members of the U.S. House of Representatives. In regulations first published on January 23, 1989, the OIG proposed safe harbors from the Medicare/Medicaid fraud and abuse prohibition for only a very limited class of investment interests. Physicians who refer to affiliated entities that do not fall within a safe harbor may be subject to prosecution by the OIG. On February 9, 1989, Rep. Fortney (Pete) Stark D-Calif.) re-introduced the "Ethics in Patient Referral Act" (EPRA), H.R. 939, which would impose civil monetary penalties on persons who claim Medicare reimbursement for services provided pursuant to a referral from a physician to a facility in which the physician (or a member of the physician's immediate family) has a financial interest. Taken together, these two provisions will significantly change the structure of investment in health care enterprises. Much support has been generated for both these initiatives. The health care community has been seeking specific guidance with regard to statutory fraud and abuse prohibitions in recent years, and several consumer groups have lined up in support of the Stark proposal. Some groups of physicians have also supported the initiatives in an effort to remove business considerations from competition for referral sources. The proposed fraud and abuse safe harbor regulations stem from the requirement of the Medicare and Medicaid Antifraud and Abuse Act that the Secretary develop "safe harbors" for legitimate business practices that might technically violate the prohbibition against payments for referrals. Violation of the fraud and abuse prohibitions could subject a practitioner to civil penalties of up to 2,000 for each item or service, disqualification from participation in the Medicare and Medicaid programs, and criminal penalties of up to 5 years imprisonment and 25,000 per violation. EPRA also would prohibit referrals made by physicians to entities in which they have financial interests. However, rather than addressing referral practices within the context of the existing fraud and abuse legislation, Representative Stark proposed absolute prohibitions on health care practitioners and providers from furnishing services for which payement maybe made by Medicare if the referring physician (or the physician's family) has an ownership or other financial interest in the provider of care. If EPRA is enacted, violations could subject a physician to a civil monetary penalty of $15,000 per violaton, and participation in a scheme to circumvent EPRA, such as cross-referrals, could result in a $100,000 penalty. Significantly, EPRA provides a grace period until July 1, 1990, for physicians to disentangle themselves from relationships that would result in prohibited referrals. Both the proposed fraud and abuse safe harbor regulations and EPRA deem certain business practices to be legitimate. Although the types of interests deemed legitimate are similar, the requirements for the exemptions do not entirely overlap. Below is a discussion of the proposed relationships under which referrals would be permitted by EPRA and the fraud and abuse safe harbor regulations, as currently proposed. Investment Interests Payments that represent returns on investments obtained for fair market value in large corporations would be exempt from the antifraud and abuse prohibition under the proposed safe harbor regulations. In order to qualify for the safe harbor, the corporation in which the investment securities are held must have total assets exceeding $5 million and a class of equity securities held of record by at least 500 persons. Investment interests in partnerships, limited partnerships, trusts, and other types of ventures are outside safe harbors. The exemption for investment interests under EPRA is similar, but not identical, to the investment exception in the proposed safe harbor regulations. Investment interests in securities of a corporation with assets in excess of $100 million would be exempt from the EPRA prohibition if the securities are traded over a publicly regulated exchange and are purchased on terms generally available to the public. The EPRA exemption is more difficult to meet than the fraud and abuse safe harbor, insofar as the particular investment interest, and not just the corporation, must be traded publicly. Under the proposed regulation, return on a class of investment that is available only to persons who have the ability to refer business to the corporation would meet the requirements for the safe harbor as long as the corporation meets the 500-person, $5 million total assets requirements and the investment is obtained for fair market value. Investment in such a security would not, however, meet the requirements for the EPRA exemption. In addition to investment in large publicly traded corporations, EPRA, unlike the safe harbor regulations, provides specific exemptions for certain referrals by physicians to entities in which they have financial interests. For example, under EPRA a hospital would be permitted to provide Medicare-covered services upon referral from a physician who has an ownership interest in the hospital if the ownership interest was established prior to March 1, 1989. Ambulatory surgical centers would be permitted to provide Medicare-covered services in conjunction with a surgical procedure performed by the referring physician, regardless of whether the physician has an ownership interest in the facility. Services rendered by sole rural providers would also be exempt from the EPRA prohibition. Employees Services rendered by employees of the referring physician would generally not raise concerns under EPRA or the fraud and abuse prohibition. The proposed safe harbor regulation defines employee, for fraud and abuse purposes, to include all persons who are considered to be employees for purposes of federal employment taxes. Under this definition, payments to a director who does not serve as an officer in another capacity would not fall within the safe harbor. Moreover, despite the broad language of the statutory fraud and abuse exemption, the preamble to the proposed safe harbor regulations indicates that the OIG views the purchase of an allied practitioner's practice followed by employment of the practitioner as an abusive practice that would be subject to prosecution. The EPRA provision is somewhat broader than the safe harbor with respect to physician employees, insofar as it exempts all referrals among physicians in the same group practice. The term "group practice" is defined to include fully integrated medical groups, but would not include loosely organized individual practice associations or similar groups. The fraud and abuse safe harbors do not include a specific exemption for referrals among physicians who are members of a group practice, but groups are typically viewed as single entities for purposes of the fraud and abuse prohibitions. The EPRA exemption with respect to referrals to allied health practitioner employees is, however, more narrowly defined than the comparable fraud and abuse safe harbor. Although the exemption from the fraud and abuse prohibition would by its terms apply to any bona fide employee, the EPRA exemption for allied health practitioner employees would only apply to services rendered by physicians assistants, nurse midwives, psychologists, and certified nurse anesthetists. Services rendered by other allied health practitioners would be outide of the EPRA exemption. Ancillary Services The provision of Medicare-covered ancillary services other than durable medical equipment, ambulance services, and parenteral and enteral services by a referring physician (or another member of a group practice) may be exempt from the EPRA prohibition. In order to fall within this exemption, the services must be furnished by the referring physician, by a member of the group, or by an employee who is personally supervised by the referring physician. The services must also be rendered in the same building in which the referring physician practices and must be billed by the referring physician or the group. Specialty Consultations EPRA would also provide an exception for services integral to certain specialty consultations. A radiologist, for example, who requests diagnostic imaging services pursuant to a consultation requested by another physician would not be making a referral prohibited by EPRA. A prescription also would not constitute a prohibited referral, unless it directed the patient to a specific entity for dispensing the drug. Relationships with Hospitals and Other institutions Referrals by a physician to the hospital that employs the physician are exempt from the EPRA prohibition, as are referrals by physicians who have arrangements to provide certain administrative services to other entuities. Under EPRA, a hospital would be permitted to provide Medicare-covered services upon referral of a physician whom it employs if the physician dan's payment is consistent with fair market value and is not related to the volume of referrals. With respect to entities other than hospitals, EPRA provides an exception for referrals by physicians who have entered into an arrangement to be the facility's medical director. A hospital's physician recruitment activities would also be exempt under EPRA, as long as the physician is not required to refer patients to the hospital and any financial inducement to relocate is not related to the volume of referrals. A similar exemption was provided in an early draft of the proposed fraud and abuse safe harbor regulations but was deleted in the version that was ultimately proposed. Leasing Both the proposed safe harbor regulations and EPRA provide an exemption for leasing office space. The principal requirements for both exemptions are that:

The lease be writing and signed by the parties. The lease specify the property covered by the lease. The least be for a term of at least one year. The rental charge be consistent with the fair market value and not take into

account the volume of any referral

between the parties reimbursed under

Medicare. The safe harbor regulations require that, if the lease is not for full-time occupancy of the premises during the entire lease term, it specify exactly the schedule of use or occupancy, the duration of use or occupancy, and the exact rent for such intervals. Under EPRA, the exemption would require that, if the lessor is a physician (or immediate family memeber), the office space be located in the same building in which the physician or the physician group engage in practice. The proposed safe harbor regulations provide a similar exemption for equipment leasing. EPRA, however, does not provide an exemption for this practice. Prepaid Plans EPRA defines an exemption for referrals to certain prepaid plans, which principally include health maintenance organizations HMOS) and competitive medical plans that contracted with HHS to provide services to Medicare enrollees. The proposed safe harbor regulations do not contain such an exemption, although the OIG seems to believe that relationships between physicians and HMOs do not run afoul of the fraud and abuse prohibitions. No exception was provided for preferred provider organizations in either EPRA or the proposed safe harbor regulation. Conclusions The outcome of the deliberations on both EPRA and the safe harbor regulations will have a significant impact on the health care community. The proposed safe harbors could become applicable under EPRA, as well as under the existing antifraud and abuse legislation. EPRA provides in several instances that the Secretary may adopt regulations to create additional exceptions or implement additional requirements to meet the exemptions described in EPRA., Presumably, the Secretary will view the same business practices as legitimate under either the existing fraud and abuse legislation or EPRA. Developments on these initiatives maybe followed through the hearing on EPRA, which was scheduled for March 2, 1989, and the comments on the proposed regulations, which are being accepted through March 24, 1989.