Physician self-referral on the fast-track.

!1! BEGIN AUTH-ABST One of the most hotly debated areas of health care fraud and abuse has been the prohibition on physician self-referral. Now, this prohibition is limited to physicians referring patients to clinical laboratories in which they have an ownership interest and for which the services are reimbursed under the Medicare program. However, this law may be expanded to include other health care services to which physicians cannot refer, as well as to other federal programs and private payers. While Congress works toward this end, many state governments have already taken the lead in expanding the prohibition beyond clinical laboratories and the Medicare program. "Health Law" is a regular feature of Physician Executive contributed by Epstein, Becker, and Green. Mark Lutes of the firm's Washington, D.C., offices serves as editor of the column.

Federal Self-Referral Prohibition

While most Americans eagerly await the Clinton Administration's solution to the health care crisis, Congress has not slowed in its efforts to enact health care legislation. Much of the focus of this legislative initiative is aimed at reducing fraud and abuse throughout the health care system.

The so-called Stark Amendment, sponsored by Fortney "Pete" Stark (D-Calif.), went into effect in January 1992. This law (Social Security Act $S 1877(a)(2)), generally prohibits physicians from making Medicare referrals to entities

furnishing clinical laboratory services with which the physicians have financial relationships. A financial relationship of a physician (or immediate family member) is defined in the statute as "an ownership or investment interest in the entity" or "a compensation arrangement... between the physician (or immediate family member) and the entity." The statute covers not only any ownership or investment interest, which has been defined as an interest through equity, debt, or other means, but also any arrangement involving any direct or indirect remuneration between a physician and an entity that provides clinical laboratory services and to which that physician refers patients for clinical laboratory services, such as space and equipment, and lease agreements.

Although the Stark amendment has exceptions to its prohibition, these exemptions are narrowly drawn. For example, the law contains an exception for the lease of office space but not for the equipment needed within the office. The Stark amendment has had the effect of jeopardizing many longstanding relationships.

In January 1993, Representative Stark introduced H.R. 345, a bill that would amend the Stark Amendment to expand its prohibitions beyond the Medicare program to other federal programs and to private payers. In addition, the law would apply beyond clinical laboratory services to a list of "designated health services." Under this new proposal, physicians could not refer patients to entities with which they have a financial relationship that provide one of these designated health services.

While H.R. 345 is making its way through the legislative process, Representative Stark's Subcommittee on Health of the House Ways and Means Committee added language to the Medicare technical amendments that are a part of the current budget bill that would also expand the list of services to which physician owners could not refer. At first, this expansion was proposed to extend to all health services. However, the list was later cut back to certain designated health services, similar to H.R. 345, but with more health services included in the list. Currently, the Medicare technical amendments bill proposes to expand the list to 14 designated health services:

* Physical and occupational therapy services. * Radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services. * Radiation therapy services. * Durable medical equipment. * Parenteral and enteral nutrition equipment, supplies. * Prosthetic devices and orthotics and prosthetics. * Outpatient prescription drugs. * Home infusion therapy services, home dialysis, and home health services. * Ambulance services. * Inpatient and outpatient hospital services. * Comprehensive outpatient rehabilitation facility services. * Contact lenses and eyeglasses. * Hearing aids.

The ban would extend beyond the Medicare program to other federal health programs as well as to private payers. However, it is not clear whether all of the exceptions that exist for referral to clinical laboratories, such as the exception that now exists for physicians who provide services within their own offices, would extend to the additional health services. Although it is almost certain that the Stark Amendment will be extended to other health services, there are still many steps that Congress must take before new legislation will be enacted.

State Self-Referral Laws

At the same time that federal legislators are contemplating an expansion of the Stark Amendment to other types of health care services, many states have already taken this step and enacted comprehensive prohibitions against physician self-referral. In doing so, these states have not been uniform in their approach to prohibiting self-referral.

Some states simply adopt the federal self-referral prohibition by enacting statutes that prohibit referrals for clinical laboratory services. However, even statutes that apply only to clinical laboratory services will extend beyond the Medicare program to any third-party payers. Other states have adopted almost blanket self-referral prohibitions that provide that physician owners cannot refer patients to health care facilities in which they have ownership interest. These statutes include very few exceptions. A few states not only have enacted prohibitions for investment interests held by physicians but, as with the federal law, also prohibit certain compensation arrangements between physicians and entities that provide particular health care services.

The most common exceptions in these state laws are for services provided to patients in physicians' offices or group practice offices. In addition, some states allow referral as long as the physician who refers the patient personally performs the services for the patient at the health care facility. This is similar to the position taken by the American Medical Association on the self-referral issue and would encompass ownership of an ambulatory surgery center or a hospital. There are usually additional exceptions for a physician's investment in a publicly traded entity or where there is a demonstrated need in the community for such a health care facility and no other investors will provide the services.

The lack of uniformity among the various state laws raises the question of how they will be interpreted if the federal law is expanded to all payers and to additional health services. The federal law could be enacted to preempt all state laws addressing this issue and thus create a uniform approach to the prohibition of self-referral. However, judging from the current proposal in the Medicare technical amendments bill, the federal law will not preempt state laws that are more restrictive than the federal version. This could create an administrative nightmare for physicians who want to determine whether their investments or plans to invest in health care facilities will comply with both federal and state laws and for health care ventures that cross state lines.

President Clinton has stated that his health package will address the self-referral issue, and the Clinton budget includes a self-referral expansion. It will be interesting to see how the Clinton proposal will be adapted to fit into the current self-referral legislation on both the federal and state levels. In any case, Congress and the state legislatures have not waited for the Clinton package but have instead moved ahead with their own health care initiatives.