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HCFA issues final Stark I rules.

On August 14, 1995, the Health Care Financing Administration (HCFA) published in the Federal Register a final rule with comment period regarding the federal physician self-referral proscription, applicable to entities providing Medicare-covered services. This statute has commonly been referred to as Stark 1. The final regulations became effective September 13, 1995, with a comment period that extended until October 13, 1995.

These final regulations specifically address clinical laboratory services. They do not expressly address the 10 additional "designated health services" subject to the self-referral ban as a result of subsequent amendments to Stark I. The amendments to Stark I are commonly referred to as Stark II. Nevertheless, according to HCFA, "Even though we will cover the designated health services under a separate proposed rule, this final rule with comment will affect how we review referrals involving any of the designated health services."

Thus, the final rule will affect a broad spectrum of the health care industry, involving not only clinical laboratory services but also the other designated health services that are now included within the self-referral ban. Consequently, the final regulations have a substantial impact on many issues affecting health care industry, including how to structure acquisitions of physician-owned designated health services and group practices. Prior to issuance of these regulations, permissible structures were largely an issue of unresolved statutory interpretation.


In 1989, Congress adopted Stark 1, which became effective January 1, 1992. The statute prohibits physicians having a financial relationship with an entity from referring patients to that entity for clinical laboratory services, without a specific exception. Proposed regulations implementing Stark I were published on March 11, 1992.

In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) changed the self-referral prohibition in several ways, which resulted in Stark II. The changes included, but were not limited to, extending the prohibition to Medicaid services effective December 31, 1994, and increasing the scope of the prohibition from clinical laboratory services to 10 additional "designated health services" effective January 1, 1995. Moreover, additional modifications to Stark H were made in the Social Security Act Amendments of 1994 (SSA 1994).

Although the recently published final regulations had an effective date of September 13, 1995, HCFA takes the position that Stark I was, "for the most part, self-implementing." However, to the extent that the final rule clarifies or interprets certain provisions, and exercises the Secretary's authority to promulgate additional exceptions through regulations,...any sanctions that can be applied as a result of the clarification or interpretation of die statute specified in this rule will, of course, be applied prospectively, beginning with the effective date of this rule."

Significant issues Addressed in the Stark I Final Rule

The Stark I final regulations encompass more than 70 pages in the Federal Register and include responses to public comments on a variety of legal issues. Highlights of the final regulations follow.

Isolated Financial Transactions

A significant "gray" area under the Stark Law has been whether transactions, such as practice purchases, may include installment payments consistent with the requirements of the isolated transactions exception. Unfortunately, HCFA has taken the position that an "isolated transaction" includes only a single payment. According to the preamble, "If a financial relationship involves long-term or installment payments (such as a mortgage), each payment would constitute a separate transaction, and would result in an ongoing financial relationship." This interpretation may have a significant effect on many existing financial relationships, including hospital and other health care entity purchases of physician practices with continuing installment payments that do not otherwise qualify for a separate Stark Law exception.

HCFA also has mandated that there can be no additional transactions between the parties for six months following the transaction unless the transactions fall within another Stark Law exception. For example, following an isolated transaction, a physician can be employed by the other party as long as the employment arrangement meets the requirements of the employment exception.

Group Practices

Another significant issue under the Stark Law has been whether a group practice may have nonphysician owners (eg., hospital owners) and still constitute a "group practice" under the Stark Law. The law requires that "two or more physicians" be legally organized as a partnership, professional corporation, foundation, not-for profit corporation, etc. Fortunately, HCFA has recognized that group practices may be legal entities that include not only physicians but also other individuals and entities: "Because the statute is silent about who must actually legally organize the association or operate or control it, we believe that any individuals or entities can assume these tasks, as long as the group practice meets all of the other specific requirements [in the statute]." This is good news for hospital-affiliated groups, which now may be structured (subject to state corporate practice of medicine prohibitions) as physician-hospital joint ventures. Another requirement for group practices is that "substantially all" of the patient care services of the physicians who are members of the group are furnished through the group and are billed in the name of the group. Under these final regulations, HCFA has modified the threshold for being "substantially all" by lowering the requirement from 85 percent to 75 percent and by providing a precise formula involving patient care service time for determining whether the 75 percent threshold is met.

These regulations also clarify who HCFA considers to be members of a group practice, in that HCFA has defined a group practice as including partners, full- and part-time employees, and contract physicians who should "be considered in determining whether the group practice as a whole meets the requirement that substantially all of the services of physician members be finished through the group." This expansive definition of the term "member" means that even a contracting physician may supervise an in-office clinical laboratory, but the services of the contracting physician must be counted in determining whether the group practice meets the 75-percent "substantially all" rule.

Finally, HCFA takes the position that the referrals of any one member of a group practice are imputed to the entire group. Specifically, HCFA stated that because members who are owner physicians ... may not be able to refer, then neither can the employees, unless an exception applies." Further clarity in this imputing doctrine will be necessary, including its application to physician contractors and whether employee arrangements also are imputed to owners.

Joint Ventures Unrelated to the Provision of Clinical

Laboratory Services

It has always been our position that joint ventures between physicians and hospitals that are unrelated to the provision of clinical laboratory services (or designated health services under Stark II, such as a physician-hospital organization (PHO) or a management services organization (MSO), should not invoke the Stark Law, and, therefore, should not prohibit physicians from referring patients to hospitals. HCFA has confirmed this interpretation by stating that, "in the case of a joint venture held with a hospital, if the physician has no ownership or investment interest in the hospital, a prohibition based on ownership would not apply at all. That is, even though a physician may own a venture with a hospital, as separate partners, that does not mean that the physician actually owns any pan of the hospital."

Corporate Affiliates

Another important issue under Stark I and 11 is whether a physician who has a financial relationship with one entity in a corporate family that does not furnish clinical laboratory or other designated health services would be precluded from referring patients to that entity's sister/brother subsidiary that furnishes designated health services. HCFA has confirmed in the final regulations that the physician's financial relationship would not, in itself, trigger a violation of the Stark Law. "Subsidiary entities that are related via a common parent may or may not have any ownership interest in each other. If a physician has an ownership interest in a subsidiary that has an ownership interest in a brother laboratory, the physician could be regarded as having an indirect ownership interest in the laboratory. However, this would not be the case if the brother/sister corporations have no ownership relationship."

Shared Laboratories

There has been substantial debate, from both a regulatory and legislative perspective, regarding the issue of shared laboratories, which applies to physicians who practice in the same building (but not in the same group practice) and who operate a "shared laboratory." However, HCFA has not created an additional exception for shared laboratories. The preamble to the regulations specifically states, "Unfortunately, notwithstanding the arguments for establishing such an exception, there is not sufficient basis in the rule-making record to support an exception...." Nevertheless, HCFA notes in the preamble that physicians will still be permitted to refer patients to a laboratory as long as the referrals fall within the in office ancillary services exception. This would require each physician-owner's direct personal supervision of the laboratory test or of the technician performing the test.

Definition of "Plan of Care" and its implication for End-Stage

Renal Disease (ESRD) Facilities, Ambulatory Surgical Centers,

and Hospices

Under the Stark Law, "referral" includes a physician's "plan of care." HCFA's definition of plan of care is "any time a physician orders any item, service, or treatment for a patient, that order is pursuant to a plan of care." Nevertheless, HCFA notes that this definition may be overly restrictive when laboratory tests are included in the physician's plan of care. Consequently, HCFA has promulgated a new, general exception applicable to both ownership and compensation arrangements for services furnished in an ambulatory surgical facility, end-stage renal disease facility, or a hospice if payment for those services is included in the ASC rate, the ESRD composite rate, or the per diem hospice charge. According to HCFA, these inclusive rates are a sufficient barrier to either Medicare program or patient abuse: "The Medicare program will pay only a set amount to the facilities irrespective of the number and frequency of laboratory tests that are ordered." However, these exceptions do not apply where such facilities furnish laboratory or other designated health services that are separately billable to the Medicare program.

Attestations and Reporting Requirements

The regulations now require that each group practice submit to its carrier an initial attestation that states that the group has met the "substantially all" criterion. A newly formed group practice must submit not only an attestation that it expects to meet the "substantially all" criterion during the next 12-month period but another attestation at the end of the 12-month period that it actually met these requirements. According to the final regulations, failure to meet the "substantially all" criterion at the end of this period will result in an overpayment for clinical laboratory services furnished during that time. Clearly, this is an onerous result when the new group is acting in good faith.

These final regulations also set forth the reporting requirements under Stark I and 111. Specifically, entities furnishing items or services for which payment may be made under Medicare must submit information to HCFA concerning their financial relationships (i.e., investment interests and compensation arrangements) with physicians. However, the regulations set forth an exception for entities that provide 20 or fewer Part A and Part B items and services during a calendar year. Failure to submit this information can result in a civil penalty of up to $10,000 for each day a person or entity fails to submit such information. However, the preamble states that these reporting requirements are only effective upon HCFA's issuance of the relevant reporting forms and accompanying instruction booklets.


Physician self-referral has been, and promises to continue to be, a focus of health care fraud enforcement efforts. With HCFA's promulgation of final regulations for Stark I and with the anticipation of its promulgating regulations for Stark 11, the health care industry should reexamine financial relationships involving physicians in order to ensure that these arrangements comply with HCFA's recent interpretation of the various provisions in the Stark Law.
COPYRIGHT 1995 American College of Physician Executives
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Title Annotation:Health Care Financing Administration
Author:Matyas, David
Publication:Physician Executive
Date:Nov 1, 1995
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