Stark Law (by Naira Matevosyan)

STARK LAWCases, Scenarios, Discussions

Naira R. Matevosyan, MD, PhD, MSJMedical Doctor, Jurist, Scientist, Musician, Mother

09.18.2016

STARK LAW IS NOT A SHARK-LAWAn “anti-shark” law, it secures welfare-justice by prohibiting physician self-referrals of Medicare patients for the designated health services

(DHS), including when the physician (or an immediate family member) has a financial relationship with the entities providing DHS.

The ”who, why, whom, how, what, when, and where” questions are addressed in the next slides.

SOME FACTS BEFORE WE STARTSOME FACTS BEFORE WE START

FIGHTING FRAUD IS A WISE INVESTMENTThe return-on-investment (ROI) for Health Care Fraud and

Abuse Control (HCFAC) program:

- Since 1997, $4.9 returned for every $1.0 expended.

- Three-year average (2008-2010), $6.8 returned for every $1.0 expended.

$1.0 expeded

FIGHTING FRAUD IS A TEAMWORKA joint effort by the Department of Health & Human Services

(DHHS) and the Department of Justice recovered a record $4 billion from fraudsters in FY 2010.

CONTENTSCONTENTS Singularities of the laws against Medicare Fraud: The AKS, FCA, and STARK decision trees Basic elements of Stark:

- Physician practices, Group practice

- Designated health services (DHS) - Financial relationships, ownership or investment interests, aggregate compensations, “standing-in-the-shoes,” and more Penalties Substantive v. technical violations Self-disclosure The 60-day over-payment rule Stark exceptions CMS regulatory preambles and the future of the Stark Law State Stark Laws and their overlaps with the Federal Stark:

Baby Stark (MD), Codey Law (NY), Baby Stark (NY), Mini Stark Law-21 (CO), Corporate Practice of Medicine (CA), etc.

5-19

20-41

42, 43

44, 45

46-48

49, 50

51-92

93, 94

95-103

FEDERAL LAWS AGAINST HEALTHCARE FRAUD & ABUSE FEDERAL LAWS AGAINST HEALTHCARE FRAUD & ABUSE

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Anti-Kickback Statute – 42 U.S.C. § 1320a-7b - a criminal statute that prohibits exchange (or an offer to exchange) of anything valuable in an effort to induce (or reward) the referral of federal health care program business.

Stark Law – 42 U.S.C. § 1395nn - a compound (civil and criminal) and strict liability statute that prohibits a physician from referring Medicare patients for DHS to an entity with which the physician (or immediate family member) has a financial relationship; prohibits the DHS entity from submitting reimbursement claims for unlawfully referred services.

False Claims Act or the Lincoln Law - 31 U.S.C. §§ 3729 - 3733 - imposes liability on persons and companies (typically federal contractors) who defraud governmental programs.

Civil Monetary Penalties Law (CMPL), and Exclusion Authorities - prohibit inducements to beneficiaries - 42 CFR §1003.101, 65 FR 24400 - 9 and §1128A(a)(5) of the Social Security Act; prohibit hospitals paying inducements to physicians to limit care - 42 CFR § 413.65.

WHO are the legislative & judiciary coordination?

The Department of Justice (DOJ)

The Department of Health & Human Services (DHHS) Office of Inspector General (OIG)

The Centers for Medicare & Medicaid Services (CMS)

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WHY?The necessity of Federal Compliance Programs was a round-table talk since the 70s. One

of the reasons - out of the several others - is provided below. In Edelman v. Jordan (1974), the respondent filed for declaratory and positive injunction

against the IL Department of Public Aid, alleging “improper authorization” for administering Federal Aid programs to the Aged, Blind, and Disabled (AABD) in a manner that was inconsistent with various federal regulations as well as the 14th Amendment to the U.S. Constitution.1

Under the Social Security Act, the AABD program was funded by the state and federal governments.2 The Department of Health, Education,& Welfare (DHEW), which was in charge of administering payments for the federal government, issued regulations prescribing maximum permissible time standards with which the participant states had to process the AABD applications. Since 1968, these regulations required that eligibility determinations might be made by the states within 30 days from the receipt of applications for aiding seniors and blind, and within 45 days from the applications for aiding the disabled.3 Yet, during the “checking-in” periods, Illinois officials were administering benefits pursuant to their own regulations as provided in the Categorical Assistance Manual of the IL Department of Public Aid.

THE ISSUE: whether a federal court could require a state to restore money wrongfully withheld from citizens by the state, if the order to restore the funds was in the form of an injunction requiring the state to stop its wrongful possession of those funds.1

The Supreme Court held that "private litigants could not avoid the bar of state sovereign immunity by manipulating the doctrine of ex parte," and affirmed the decision of the Court of Appeals.

(1) 415 US 651 - Supreme Court 1974; (2) 42 U. S. C. §§ 801-805 (1970 ed., Supp. II); (3) 45 CFR § 206.10 (a) (3)

7

WHAT?The 17 supreme compliance risk areas as identified by the Office of Inspector General's

(OIG) and published in the 1998's OIG primary guidance: 4

1. Billing for items or services not actually rendered2. Duplicate billing3. Providing medically unnecessary services4. “DRG creep” - upgrading, upcoding, or regrouping of patients to increase hospital

income5. Outpatient services rendered in connection with inpatient stays 6. Teaching-physician or instructor-resident requirements for academic hospitals 7. False cost reports8. Unbundling9. Billing for discharge in lieu of transfer10. Patients’ freedom of choice11. Failure to refund credit balances12. Hospital incentives that violate the AKS, FCA, Stark, and CMPL13. Joint ventures14. Financial arrangements between hospitals and hospital-based physicians15. Physician self-referrals16. Knowing failure to provide covered services or necessary care to members of a health

maintenance organization17. Patient dumping (enforced attrition). (4) Office of Inspector General , HHS (1998). Publication of the OIG Compliance Program

Guidance for Hospitals. Federal Register/Notices ; 63 (35) 8

WHAT ELSE?The following risk areas are identified under the 'Fraud and Abuse' section of

the 2005's OIG supplemental guidance: 5

18. Submission of accurate claims and information

19. Referral statutes

20. Payments to reduce or limit services

21. Emergency Medical Treatment and Labor Act (EMTALA)

22. Substandard care

23. Relationships with federal health care beneficiaries

24. HIPAA privacy and security rules

25. Billing Medicare or Medicaid substantially in excess of usual charges.

(5) Office of Inspector General , HHS (2005). OIG Supplemental Compliance Program Guidance for Hospitals. Federal Register/Notices; 70 (19).

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Very Briefly: Very Briefly: AKS, FCA, STARK Differences & Overlaps AKS, FCA, STARK Differences & Overlaps

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The Federal Law:

Anti-Kickback Statute (AKS)

False Claims Act (FCA)

Stark

Forbids whom? Anyone Health care providers Physicians only

Forbids what?

Offering, paying, soliciting or receiving

anything of value (over-utilization, overrated costs, corruption of

medical decision making, patent steering, free

vacations, unfair competition) to

induce/reward referrals or generate Federal

healthcare business.

(1) Knowingly making or inducing a false record in order to have a fraudster claim reimbursed by the

government; (2) Knowingly presenting or inducing to present to the Federal government a false/ fraudulent claim for

payment or approval.

(1) Referring of Medicare patients for a DHS entity with which physician (or

an immediate family member) has a financial

relationship; (2) The DHS entity claims

to Medicare for fraudulently referred

services.

Intent to defraud:

Mens rea in remuneration must be

proven during the settlement or by the

grand jury (in the sealed indictment).

Under the civil FCA, no specific intent to defraud is required. Criminal FCA

(18 U.S.C. § 287) considers the level of scienter in sentencing (slide 11). **

A strict liability statute: intent is unimportant for criminal charges. Intent is viewed only in respect

to the civil monetary penalties.

This table is continued to the slides 12, 13.This table is continued to the slides 12, 13.

More about the FCA Intent Requirement

* *General INTENT requirement of the False Claims Act (FCA) is that one

must knowingly engage in the prohibited activity. Yet, the word "knowingly" has different power and meaning in various contexts.

Congress vests that in order to satisfy the "knowing" requirement, the government (or Qui Tam relator) must establish that defendant:

- had "actual knowledge" of the false or fraudulent information presented to the government,

- acted in "deliberate ignorance" of the truth of falsity of the information, or

- acted in "reckless disregard" of the truth of falsity of the information. 6

(6) False Claims Act, 31 U.S.C.A. § 3729 et seq11

Differences & OverlapsDifferences & Overlaps (continued)(continued)The Law: AKS FCA Stark

Services: Any Any DHS

Qui Tam relator:

Under 42 USC § 1320a-7b(b), a private individual

(" whistleblower") with knowledge of improper

kickbacks in the healthcare sector, can bring suit on

behalf of the Federal government.

Under 31 USC § 3729 et seq, a private individual ("whistleblower") with knowledge of past or

present fraud committed against the Federal

government, can bring suit on its behalf.

42 USC §1395nn:In addition, qui tam relators

are encouraged to act through a qualified counsel to avoid their own liability for the false accusations.

Penalties:

Criminal: jail time, and prison up to 5 years.

Administrative sanctions: exclusion from participating in Federal health-care programs.

Civil (42 U.S.C. § 1320a-7a(a)(5)): penalties of up to $50,000 per kickback plus the treble amount of remuneration.

Civil: > $5,000 and < $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act (28 USC 2461), plus restitution in the treble amount of damages. In reduced inter alia, it is > of the double amount.

Criminal: not a stand-alone provision. Prison-terms depend on the defrauded amount.

Civil: Over-payment or refund

obligation. Potential $15,000 penalty

for each service. Restitution of up to the

treble amount assessed.

Criminal: If a FCA liability.

Administrative: Medicare/Medicaid exclusions.

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AKS, FCA, STARKAKS, FCA, STARK (continued)(continued)

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The Federal Law:

AKS FCA Stark

Exceptions:Voluntary Safe

Harbors - 42 CFR § 1001.952

Depend on whether the certification is actually or legally

false?** (see details in slides -14-16)

Mandatory Exceptions (see details in slides 51 -

92)

Notable Cases:

U.S. v. Greber 7

U.S. V. McClatchey 8

U.S. v. Starks 9

U.S. ex rel. Grubbs v. Kanneganti 10

U.S. v. Krizek 11

U.S. ex rel. Kosenske v. Carlisle HMA, Inc 12

U.S. v. Rogan 13

Cite:

(7) 760 F.2d 68 (3d Cir. Pa. 1985)

(8) 160 F. Supp. 2d 1254 (D. Kan. 2001)

(9) 157 F.3d 833 (11 Cir. 1998)

(10) 565 F. 3d 180 - Court of Appeals ( 5th Circ. 2009)

(11) 111 F.3d 934 (DC. Cir. 1997)

(12) 554 F. 3d 88 - (Court of Appeals, 3rd Circ. 2009)

(13) 459 F. Supp. 2d 692 - Dist. Court, ND Illinois, 2006)

FALSE CERTIFICATIONFRAUD is an intentional misrepresentation, concealment, or nondisclosure

for the purpose of inducing another in reliance upon it to part with some valuable thing, or to surrender a legal right.14 The court's determination to "false" or "fraudulent" links the government's decision to pay. A claim is false if the government wouldn't have paid, had it known about the alleged misconduct. A misrepresentation must be material to the government's decision to pay. Hence, the current FCA statute is amended to include the notion of "material."

These FALSE CERTIFICATIONS are classified in two ways. Firstly, distinction is made between the factually false and legally false conducts.

Factually false claim relates to situations, when a payment is maid for services or items that were never actually delivered, or not delivered in the way were claimed.

Legally false claim is when the claimant knowingly and falsely certifies that the services have been rendered in a manner consistent with a condition for government's payment.

(14) Biegelman MT, Bartow JT ( 2012). Executive Roadmap to Fraud Prevention and Internal Control: Wiley - Business & Economics Series 14

FALSE CERTIFICATION (continued)According to the second classification, False Certifications can be expressed

or implied.

Expressed - when the provider charges for services that were entirely unnecessary.

Implied - involves situations when a condition of payment is not actually printed on claim form, but is nonetheless an implicit condition of payment the absence of which would result in the government's nonpayment of the claim. This type generates the majority of litigation.

The majority of courts have limited the scope of Implied Certification claims. For example, in the United Health Group decision, 15

, the 3rd Circuit ruled that “defendant's alleged violation of Medicare marketing regulations did not provide basis for Implied FCA liability, because the compliance with marketing requirements was not a condition for payment.” 15 Nonetheless, the Court disagreed. Thus, the FCA under the violation of the AKS provides with a basis for the implied false certification.

(15) United States ex rel. Wilkins v. United Health Group, Inc; Civ. No. 08-3425, 201015

CIRCUIT SPLIT OVER THE RULE 9(b)Intensified by the Congress in Deficit Reduction Act of 2005, thirty-two states

have enacted their own False Claim Acts (FCA). Concurrently, a few states have established their own Offices of Inspector General (OIG). For example, NJ has its own Stark Law as well as a Medical Fraud Control Unit to fight against corruption in healthcare, pharmaceutical and medical device industries.

Under Rule 9(b) of the  Federal Rules of Civil Procedure, allegations of fraud or mistake must be pleaded with particularity. The application of the Rule 9(b) has, however, generated a split amid the federal appeal courts surrounding the specificity of the factual matter. While the 1st Circuit 16 has ruled that the FCA whistleblowers are not required to allege specific false claims to satisfy Rule 9(b), the 5th , 6th, 7th, 8th , 10th and 11th Circuits have all found that plaintiffs must allege specific false claims.17-22

(16) U. S. ex rel. Duxbury v. Ortho Biotech Products, L.P., 579 F.3d 13 (1st Cir. 2009)

(17) U.S.ex rel. John Spicer; 12-10858 (5th Circ. 2014);

(18) PH Sanderson v. The Health Care Company et al; 01-00580 (6th Circ. 2006)

(19) U.S. Lusby v. Rolls Roys Co; 08-3593 (7th Circ. 2009)

(20) U.S. ex rel. Rudy Vigil v. Nelnet, Inc. et al; 10-1784 (8th Circ. 2011)

(21) U.S. Sikkenga v. Regence BlueCross BlueShield of Utah; 05-4088 (10th Circ. 2006)

(22) J. Hopper et al. v. Solvey Pharmaceuticals et al; 08-15810 (11th Circ. 2009) 16

Corporate “Whistleblower” ProtectionBetween 1987 and 2013, the federal government has recovered $38.9

billion solely under the FCA. Of this amount, $27.2 billion (70%) has been from qui tam cases brought by the relators.

Since the passage of the U.S. Department of Labor's Occupational Safety & Health Administration Act (OSHA) in 1970, Congress has expanded the whistleblower authority to protect workers from discrimination under twenty-one federal laws. The retaliated or discriminated employees have the right to file a complaint with OSHA within 30 days of the alleged adverse action. Protection from discrimination means that an employer cannot retaliate by taking "adverse action" against workers, including:

Firing or laying off ; Blacklisting; Demoting; Denying overtime or promotion; Disciplining; Denying benefits; Failure to hire or rehire; Intimidation; Making threats; Reassignment affecting prospects for promotion; and Reducing pay or hours. 23 -25

(23) The U.S. Department of Labor. Occupational Safety & Health Administration Act http://www.whistleblowers.gov/

(24) Fleming v. Correctional Healthcare Solutions Inc., 164 N.J. 90 (2000) (25) Employee Protection Act (EPA) or Whistleblower Act, N.J.S.A. 34:19-1 to -8

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AKS & FCA Disposition AlgorithmAKS & FCA Disposition Algorithm1) Is there an economic benefit? If No →

If Yes ↓

2) Is there a referral? If Yes →

If Yes ↓

3) Is there a statutory exception? If Yes →

If No ↓

4) Is there a safe harbor? If Yes →

If No ↓

5) Is there a risk of abuse in discretion? If Yes, there is a problem !

If No ↓

6) Go to Stark analysis.18

Stark Disposition AlgorithmStark Disposition Algorithm

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1) Is there a physician or immediate family member?If No →

If Yes ↓

2) Is there a direct or indirect financial relationship?If No →

If Yes ↓

3) Is there a self-referral?If No →

If Yes ↓

4) Is that referral for designated health services?If No →

If Yes ↓

5) Is there a statutory exception? If Yes →

If No ↓

6) Is there a regulatory exception?A problem !

If Yes ↓

7) There is no case.

BASIC ELEMENTS OF STARKThe Stark law 26 prohibits: - physician(s) or immediate family member(s), with financial relationship with

an entity, from making a referral to that entity for furnishing of a designated health service (DHS) payable by Medicare;

- an entity from presenting or causing to present a claim for DHS furnished due to an outlawed referral.

Therefore, basic four elements of the Stark are:(1) A physician practice (MD, OT, DDS, DMD, chiropractor, podiatrist, except

psychologist) 27 and family member (spouse, biological or adoptive parent, child, or sibling; stepparent, stepchild, stepbrother, or stepsister; two generation in-laws; grandparent, grandchild and their spouses).

(2) Financial relationship - a direct or indirect compensation or ownership relationship with the entity that provides with DHS.

(3) Referral - a request or order by a physician, or certifying/re-certifying of the need for any DHS for which payment may be made under Medicare Part-B, including a request for a consultation with another physician and any test or procedure ordered by or to be performed by or supervised by the other physician. Referral is also the establishment of a plan of care which includes provision of DSH, as well as certifying or re-certifying of a plan of care.

(4) DHS (see the next slide). (26) 42 U.S.C. § 1395nn5n; (27) 42 C.F.R. §§411.351, 411.352 20

DESIGNATED HEALTH SERVICES(1) Clinical lab services(2) Physical therapy(3) Occupational therapy and outpatient speech-language pathology

services(4) Radiology an other imaging services, including nuclear medicine(5) Radiation therapy services and supplies(6) Durable medical equipment services and supplies(7) Parental and enteral nutrient equipment and supplies(8) Prosthetics and orthotics(9) Home health services(10) Outpatient/inpatient hospitalization services and prescription of drugs.

DHS include two components: professional (PC), and technical (TC).Personally performed services do not constitute referrals. Those are just

extended attendances of the patient. If the fourth component of the Stark is not proven by the claimant, there is no violation.

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PHYSICIAN-PRACTICEA “physician practice” 28 is a medical practice by two or more physicians organized

to provide patient care services (regardless of its legal form: LLC, LLP, Corp, etc). A group of physicians may practice together, even so not meeting all requirements for the “group practice” 29 standard to satisfy the physician services and in-office ancillary services exceptions.

The “physician organizations” or “physician practices” are not mandated to have a physician owner. As for the group practice (i.e. “physician organization”), the single legal entity may be organized by any party or parties, including - but not limited to - physicians, health care facilities, or other persons or entities.

A hospital (or other Part-A provider) is not considered to be a “physician organization” because it has employment or contractual arrangements with physicians for provision of patient care services. Exclusions are:

Hospitals and other Part-A providers of services Federally qualified health centers A single legal entity (that does not satisfy the requirements of a group practice

for purposes of §411.352) that encompasses (operates) a faculty practice plan AND either a medical school or hospital, or both

A medical school that does not operate a faculty practice plan but employs physicians to provide clinical and academic services.

(28) 42 CFR §411.351; (29) 42 CFR §411.352 22

GROUP PRACTICEWhy is Stark's physician practice exception so important?Because the DHS also include inter-specialty (cardiologist-to-cardiologist), or large

multi-specialty (internist- orthopedist) referrals. This referrals are legitimate if they fall under the Stark exceptions.

Group-practice is defined under §411. 352,29 and is explained in eight paragraphs.

(1) Single Legal Entity:

- Operates primarily for the purpose of a group practice. Examples: partnership, LLC, foundation, non-profit, faculty practice plan, singular association;

- May be owned and operated by any party/parties, including physicians or healthcare facilities;

- A practicing physician under the state's license is a single entity separate from the hospital; physicians directly employed by a hospital will not be a single entity.

(2) At least two physicians ("members of the group") are required:

-"Members" include owners, employees, locum tenets, on-call physicians.

(3) Each physician must furnish full range of patient care services through joint use of shared office space, facilities, equipment and personnel:

- The group members must act coherently in a unit, avoiding loose associations. 23

GROUP PRACTICE (continued)(4) "Substantial all" test: - Substantially all (at least 75%) of the patient care services provided by the group

members must be furnished through the group and billed under one group billing number assigned to that group.

(5) Allocation and distribution of expenses and income must be set in advance: - The group practice should not take in account the volume and value of referrals

for the DHS services.(6) Unified Business Test: - The group practice is a centralized decision-making body in terms of provision of

care and solidarity in billing. - Location and specialty-based compensation are permitted with respect to revenues

derived from services that are not DHS. - There is a safe harbor for the revenues derived from DHS under the special rule for

the profit shares and productivity bonuses (see slide-25).(7) No compensation based on the volume or value of referrals: - obviously enough.(8) At least 75% of patient encounters must be conducted by the group members: - Share of profits may not be determined in any manner that's directly relates to the

volume or value of referrals for DHS. - Bonus may be based on personally performed services or services "incident to" such

services but not directly related to the volume or value of referrals for DHS. 24

GROUP PRACTICE SAFE HARBORSThe group-practice definition strikes a balance between the

improper referrals and bona fide referrals. The following harbor methodologies are provided to ensure that physicians are functioning in a coherent unit by pulling out their expertise and resources in compliance with the unity:

(1) profits are divided per capita;

(2) Revenues from the DHS are distributed in the same way as in other revenue scenarios;

(3) The DHS revenues are less than 5% of the group total revenue and 5% or less of each physician's compensation from the group.

Exceptions exist:(see slides 51- 92).

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CMS Opinion A0-2011-01The non-compete provision restricts the physician from establishing, operating,

or providing professional medical services at any medical office, clinic, or other health care facility at any location within a 25-mile radius of the hospital for a period of one year following the earlier termination or expiration of the arrangement. Such a provision does not impose practice restrictions in a certain geographic area.

In reaching such a conclusions, the CMS evaluates several factors :

(1) Time period: restriction of one-year is reasonable.

(2) Distance: the 25-mile radius is reasonable based on the geographic area served by the hospital.

(3) Fairness: even with the time period and distance restrictions, the physician would still be permitted to practice at certain hospitals both within and outside of the hospital's geographic service area within the one-year time period.

(4) The requestor's certification: the non-compete provision must comply with the applicable state laws.30

(30) CMS Advisory Opinion AO-2011-01 26

FINANCIAL RELATIONSHIPFinancial relationships include either (i) direct or indirect ownership investment

interest in any entity that furnishes DHS;31 or (ii) direct or indirect compensation arrangement with an entity that furnishes DHS.32

A direct financial relationship exists if remuneration passes between the referring physician (or immediate family member) and the entity furnishing DHS without any intervening persons or entities between the DHS setting and the referring physician (or immediate family member).

Example: A physician prescribes a lab test in his own laboratory or a laboratory that is owned by his mother-in-law.

An indirect financial relationship exists between the referring physician (or immediate family member) and the entity furnishing DHS where there is an unbroken chain of any number of persons or entities having ownership or investment interests; and the DHS setting has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact of that relationship (referral, ownership, debt, investment).

Example: A GP refers the patient to a specialist (endocrinologist) who then prescribes pancreatic MRI and the technician performing the MRI is the referring physician's (GP) wife and is employed (or paid) by the referred specialist (endocrinologist).

(31) 42 CFR 411.354(b)(5); (32) 42 CFR 411.354(c)(2)27

REMUNERATIONRemuneration33 is any payment, discount, forgiveness of debt or

other benefits made directly or indirectly, overtly, in cash or in kind.

Example 1: Sharing profits with a group's physician owners constitutes remuneration, even though those payments are not compensations but ownership distributions.

Example 2: Distribution of revenue to all physicians in the group, regardless of ownership status, is also remuneration under the Stark.

Example 3: A physician invests a imaging center, the products of which he might order or to which he might refer his patients, and he has an investment interest for a nominal capital contribution. He also believes he will be likely referring more patients for the imaging services provided by the venture through that investment.

(33) 42 U.S. Code § 1395nn28

PRACTICE MODELS ACCEPTABLE BY THE STARKThe Patient Protection and Affordable Care Act (ACA): (1) promotes the coordination of

care; (2) compensates providers based on quality rather than quantity of the services provided. For that, it offers the following models:

I. Entire Practice Acquisition Model: - the hospital buys the tangible assets for the entire practice - the hospital assumes all of the practice's space and equipment leases - directly employs all of the practice's physicians and non-physician personnel.Three exceptions apply:1) Purchase of assets - isolated transaction exception2) Physician employment - employment exception3) Physician compensation - fair market value or personally performed services

exceptions.II. Employment & Practice Lease Model: - the hospital employs the physicians - the hospital leases the other resources (practice's space, equipment, non-physician

personnel).Three exceptions apply:1) Exception for Rental of Office Space and Equipment.2) Personal Services Arrangement Exception or Fair Market Value Exception3) Bona fide Services Exception.

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PRACTICE MODELS (continued)

III. Leasing Entire Practice Agreement:

Hospital leases everything and the physicians serve as contractors.

Same exceptions as in (I) Employment & Practice Lease Model - except that there is a personal services arrangement between the hospital and the practice, instead of the employment relationships.

Key benefit from this model is that physicians can share profits and earn bonuses based indirectly on the referrals. This is possible under the group-practice arrangement and not available if a physician is employed by the hospital.

IV. Electronic Health Records:

Exceptions of this model are provided in the “Exceptions” section, slides 51-92.

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OWNERSHIP OR INVESTMENT INTEREST Inclusions: Equity, debt, interest, ownership, or incentives in a

DHS furnishing entity.34

(1) An ownership or investment interest includes stock, as well as options not described in § 411.354(b)(3)(ii), partnership shares, limited liability company memberships, loans, bonds, or other financial instruments that are secured with an entity's property or revenue or a portion of it.

(2) An ownership or investment interest in a subsidiary company is neither an ownership or investment interest in the parent company, nor in any other subsidiary, unless the subsidiary itself has an ownership or investment interest in the parent. It may, however, be part of an indirect financial relationship.

(34) § 411.354(b)(3)(ii)

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OWNERSHIP OR INVESTMENT INTERESTExclusions of this provision include: 35

(i) An interest in an entity that arises from a retirement plan offered by that entity to the physician (or immediate family member) through physician's (or immediate family member's) employment with that entity;

(ii) Stock options and convertible securities received as compensation until the stock options are exercised, or the convertible securities are converted, to equity;

(iii) An unsecured loan subordinated to a credit facility which is a compensation arrangement as defined in paragraph (c) of this section;

(iv) An “under arrangement” contract between hospitals and entities owned by one or more physicians providing DHS “under arrangements” with the hospital;

(v) A security interest held by a physician in equipment sold by the physician to a hospital and financed through a loan from the physician to the hospital;

The ownership or investment interest that meets an exception set forth in §411.355 or § 411.356 do not need to meet an exception for compensation arrangements set forth in § 411.357 with respect to profit distributions, dividends, or interest payments on secured obligations.

(35) 42 CFR § 411.355, § 411.356 32

INDIRECT OWNERSHIP OR INVESTMENT INTERESTPhysician referrals are governed by both § 1877 of Social Security

Act and the Stark Law §§ 411.354 – 357.Indirect ownership or investment interest exists when:- between the referring physician (or immediate family member)

and the DHS entity there is an unbroken chain of more than one person or entity having ownership or investment interests; and

- the entity furnishing DHS has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician (or immediate family member) has some ownership or investment interest in the entity furnishing the DHS.

Common ownership or investment in an entity does not establish an indirect ownership or investment interest by one common owner or investor in another common owner or investor.36

(36) 42 CFR § 411.355, § 411.356 33

COMPENSATION ARRANGEMENT- is any arrangement involving remuneration - direct or indirect - between a

physician (or an immediate family member) and any entity. 37, 38

An “under arrangements” contract between a hospital and a DHS entity creates a compensation arrangement.

A compensation arrangement does not include the portion of any business arrangement that consists solely of the remuneration under the Stark Law.33 However, any other portion of the arrangement may still constitute a compensation arrangement.

Special Rules:(1) Compensation is considered “set in advance” if the aggregate compensation, a

time-based or per-unit of service-based amount, or a specific formula for calculating the compensation is set out in writing before the furnishing of the items or services for which the compensation is to be paid.

(2) Unit-based compensation (including time-based) excludes “the volume or value of referrals,” or “private pay” healthcare business, if the compensation is fair market value for services or items actually provided and does not vary during the course of the compensation arrangement in any manner that takes into account referrals to DHS.

(37) 42CFR § 411.351 ; (38) 42 CFR § 1877(h)(1)(C) 34

DIRECT COMPENSATION ARRANGEMENT: “STANDING-IN-THE-SHOES”

A direct compensation arrangement exists if remuneration passes between the referring physician (or an immediate family member) and the DHS entity without any intervening persons or entities.

Exception:

A physician is deemed to “stand in the shoes” of his physician organization and have a direct compensation arrangement with a DHS entity if -

(A) The only intervening entity between the physician and the DHS entity is his physician organization; and

(B) The physician has an ownership or investment interest in the physician organization.39

(39) 42 CFR § 411.351(c)(3)(ii)(C) 35

INDIRECT COMPENSATION ARRANGEMENT

The referring physician (or immediate family member) receives aggregate compensation from the person or entity in the chain with which the physician (or immediate family member) has a direct financial relationship that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the DHS entity, regardless of whether the individual unit of compensation satisfies the special rules.40

If a direct financial relationship is an ownership or investment interest, the determination whether an aggregate compensation varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the DHS entity, will be measured by the non-ownership or non-investment interest closest to the referring physician (or immediate family member). Put simply, if a referring physician has an ownership interest in company A, which owns company B, which has a compensation arrangement with company C, which has a compensation arrangement with the entity D that furnishes DHS, the compensation between company B and company C would be seen as aggregate.41

(40) 42 CFR § 411.351 (d)(2) or (d)(3); (41) 42 CFR §411.351, (c)(2)(ii).

36

An “Aggregate” CompensationThe word “aggregate” is used to describe the indirect financial

relationships, when:1) there is an unbroken chain of financial relationships between the

physician, physician's family member, and the designated health services (DHS);

2) the referring physician receives aggregate compensation that varies with or takes into account volume or value of referrals;

3) the entity furnishing DHS knows about it, otherwise acts with reckless disregard or deliberate ignorance of physician's compensation (including stand-in-shoes chaining situations).

In the context of STARK, aggregate means an arrangement where the physician is compensated by:

- formula based on revenue from services performed, or - receives a per-unit based compensation.Such types of arrangements are aggregate compensations as they are

sensitive to, and accounted from, the values or volumes of the referrals.37

How does the Volume-or-Value Standard in definition of indirect compensation arrangement differ from the Volume-or-Value Standard in

exception of indirect compensation arrangement ? In the definition of indirect compensation arrangement (ICA), the core inquiry focuses

on compensation in its entirely.In the ICA exceptions, the inquiry focuses on the individual units of compensation and

compensation formula. Can a “flat” compensation amount ( a fixed annual amount or a set annual

rate) ever be considered to “take into account the volume or value of referrals”?

Yes: There is a a deviation between the ICA definition and ICA exceptions for the volume and value standard of referrals in terms of the per-total or per-unit catch.42

Takeovers from Tuomey 43 and Bradford, 44 is that compensation can implicate the “volume or value standard” even if it is not explicitly tied to variations in volume or revenue. Further, if compensation is above the fair market value or is designed to compensate physicians for actual/anticipated referrals, it implicates this standard. Lastly, the compensation (even a flat one) must not violate the Anti-Kickback statute and the False Claim Act (FSA) as such coupling violations will intensify the charges.

(42) Phase I Preambles at 66 Fed. Reg,876-879(43) U.S .ex. rel. Drakeford v. Tuomey Healthcare System, 5 F. 3d 394 -Court of Appeals, 4th

Circuit, 2012 (44) U.S. ex. rel Singh v. Bradford Regional Medical Center, 752 F. Supp. 2d 602 -Dist. Court,

WD Pennsylvania, 2010 38

INDIRECT COMPENSATION ARRANGEMENT:“STANDING-IN-THE-SHOES”

In an indirect compensation arrangement as described in slide-36, a physician is deemed to “stand in the shoes” of his physician organization if he has an ownership or investment interest in that physician organization.45 Exception to this rule is provided by paragraph(C).46

A physician (other than a physician described in paragraph- (A) is permitted to “stand in the shoes” of his physician organization.47

Paragraph- (A) provisions apply during the original term or the ongoing renewal term of an arrangement that has satisfied the requirements of §411.357(p) as of September 2007,46 but do not apply to an arrangement that satisfies the requirements of § 411.355(e).48, 49

As of August 2008, an arrangement structured to comply with an exception in §411.357 (other than § 411.357(p)), but which would otherwise qualify as an indirect compensation arrangement under this paragraph, need not be restructured to satisfy the requirements of § 411.357(p) until the expiration of the original term or current renewal term of the arrangement. 48, 49

Stay-in-the shoe rule may apply to physicians employed by a group practice. Stay-in-the shoe rule always applies (a must) to physician-owners.

(45) 42 CFR § 411.351 (c)(2)(i); (46) 42 CFR § 411.351 (c)(3)(ii)(C); (47) 42 CFR § 411.351 (c)(2)(iv)(A); (48) 42 CFR § 411. 357 (p); (49) 42 CFR § 411. 357 (e) 39

SUMMARY OF FINANCIAL RELATIONSHIPSUnder the Stark, “financial relationships” exist when the physician (or an

immediate family member) has a: direct ownership or investment interest in a DHS entity indirect ownership or investment interest in a DHS entity direct compensation arrangement with a DHS entity indirect compensation arrangement with a DHS entity.

Under the Stark, an “ownership or investment interest” : Includes interests through equity, debt, or “other means” and interest in an

entity that holds an ownership or investment interest in any entity that furnishes DHS

Does not include interest in a retirement plan; stock options earned as compensation until exercised; unsecured loans; “under arrangements” contracts; security interest held by a physician in equipment sold by the physician to a hospital (when financed through a loan to the hospital).

40

STARK DIAGRAMSDirect ownership/interest: Indirect ownership/interest - between B and C:

Direct compensation arrangement:

Deemed direct compensation arrangement (“stand-in-the-shoes”:

Physician

DHS entity

Owner

B C

A

Physician

DHS entity

DHS entityRemuneration

41

Physician

DHS entity

Physician organization

Owner

Remuneration DHS entity

PENALTIESPenalties under the Stark include: government's denial of payment or refund imposition of $15,000 per service civil monetary penalty imposition of a $100,000 civil monetary penalty for each arrangement

considered to be a circumvention scheme.The Bradford case 44 was around a nuclear camera sublease arrangement. Bradford

RMC paid the physicians $6,545 per month for leasing a camera (reflecting the lease with General Electric) and $23,655 per month for the non-compete code under the sublease.

The Court held that payments under the sublease (which included substantial amounts attributable to a non-to-compete agreement) took into account the volume and value of referrals and were not in fair market value because the amount of such payments exceeded the physicians' personal collection arrived at by taking into account anticipated referrals. Hence, the sublease created an indirect compensation arrangement (ICA).

The lawsuit caused BRMC more than $20 million plus several millions in FCA mandatory penalties. In 2015, however, the CMS announced a 1% reduction of reimbursement penalties for 758 hospitals from 10/2015 to 10/2016. Earning a score of 4.12 under the program, the BRMC is currently forgiven $70,000.50

(44) U.S. ex. rel Singh v. Bradford Regional Medical Center, 752 F. Supp. 2d 602 -Dist. Court, WD Pennsylvania, 2010 ;

(50 https://www.brmc.com/news-events/articles/quality-efforts-showing-results-at-brmc-and-ogh 42

Assuming that the “incentive pool” in Halifax47 only included revenues with respect to the professional component of the oncology services. Would the Court have reached a different conclusion?

Halifax was paying each physician a portion of an incentive pool equal to 15 % of the"operating margin" for the hospital's medical oncology program. The pool included not only the physicians' billings for their professional services, but also fees earned by the hospital for the physicians' referrals to the hospital.

In hearing the qui tam action,51 the Court targeted the technical component revenue derived from the oncologists' own referrals —and the flaw was not remedied by the subsequent division of the pool among the physicians in proportion to each physician's personal share of the group's total professional service billings. It held that the physicians' individual bonuses varied on the basis of referrals because bonuses were based on operating margin of the entire oncology program —including fees for hospital services —and that margin would be improved by the physicians' referrals in addition to the services that they personally performed.

It is likely, that the Court would reach the same conclusion in terms of the professional component, as reasoned that “... the Stark regulations seek to ensure that hospitals and other healthcare providers compensate physicians only for the work or services they actually perform, not for their ability to generate other revenues for the provider through referrals." 51 Taking the technical component off, there would still remain FMV questions, fee-variation per service-unit question, as well as productivity bonus question as it was about a group-practice. Those questions are leading to the Court's mentioned “other revenues” cluster.

The settlement costed Halifax 85 million dollars.(51) U.S. v. Halifax Hospital & Medical Center, Relator v. Case No: 6:09-cv-1002-Orl-31TBS 43

SUBSTANTIVE v. TECHNICAL VIOLATIONSThe Stark does not distinguish between “substantive” and “technical” breaches, since all violations are subject to the same penalties. Technical violations commonly are inadvertent and tricky for discovery. They surface during the: 1) internal compliance reviews; 2) diligence pursuant to a merger or acquisition; 3) routine governmental audit. Case 1 (internal compliance reviews) – technical violations are often reported to the government pursuant to the Medicare self-referral disclosure protocol. In 2013, Intermountain Healthcare settled with the DOJ alleged Stark violations involving payments to more than 200 doctors for $25,500,000.00 52

Case 2 (merger acquisitions) - In 2010, the Detroit Medical Center (DMC) agreed to pay the DOJ $30,000,000.00 to settle alleged “engagement in improper financial relationships with referring physicians, as well as improper perks, special entertainment, unreasonable lease deals” in connection to the DMC's sale to Vanguard Health Systems, Inc.53

Case 3 (governmental investigation) - Westerly Hospital in Rhode Island settled $500,000.00 to allegations of improper payment arrangements with physicians following a different audit for failing to maintain accurate records of compensation arrangements, poor lease documentation, and “sloppy Paperwork.”54

(52) Carlson J (2013). Intermountain to Pay $25.5 Million to Settle Stark Case. Modern Healthcare(53) Burda D (2011). Detroit Medical Center to Pay $30 Million Settlement. Modern Healthcare(54) Faulkner DP (2013). Settlement Outlines Investigation. The Westerly Sun 44

How to Avoid “Technical” Violations of the Stark?(1) Financial Relationship Sign-Off: The Stark's broad definition of “financial

relationship” covering both direct and indirect bonds 55 may mislead the parties to improper financial relationships. Additionally, arrangements with physicians whose family members are also physicians practicing in the community, or whose family members otherwise have financial relationships with the DHS entity, may lead to violations. Thus, the DHS entity should require annual provision of a conflict-of-interest statement to timely tackle problematic arrangements.

(2) Drafting Checklist – to determine whether the agreement: (A) contains an evergreen clause to prevent termination while the parties continue to perform under it; (B) satisfies each element of an applicable Stark exception; (C) was cross-referenced against and added to the DHS entity’s master list of agreements.

(3) Drafting Techniques: An evergreen clause allows an agreement to automatically renew unless otherwise terminated. Yet, such clauses should not be used where fair market value is reviewed periodically. Often, a DHS entity may desire to include certain provisions that proactively anticipate a potential holdover of the contract. If a holdover rental premium is included in the contract, for example, the premium must still be consistent with fair market value at the time the agreement is entered.

(4) Contract Management: The DHS entities should consider adopting contract management software to: (A) closely assess and alert agreement expiration dates; (B) aggregate all contracts in a comprehensive repository; (C) customize workflows and verify mandatory elements of the contract.

(5) Seek Advice of a Legal Counsel – especially prior the self-disclosure. (55) 42 CFR § 411.354(a)

45

SELF-DISCLOSUREWHY? In 2010, the ACA § 6409 (a) established a Medicare self-referral disclosure

protocol (SRDP) enabling providers of services and suppliers to self-disclose to the CMS actual or potential violations of the Stark federal statute. It gives the DHHS Secretary the authority to reduce the penalty amount for the violations of §1877 of the Act. It also gives the disclosing party the opportunity to (1) avoid exclusions as part of a settlement; (2) be protected from a potential or viable qui tam whistleblower action and expenses.

The CMS timely submits reports of the disclosure outcomes to Congress. It also provides special instructions for the SRDP involving solely noncompliance with 42 CFR § 411.362(b)(3)(ii)(C) (requiring physician-owned hospitals and rural providers to disclose on any public website for the hospital and in any public advertisement that the hospital is owned or invested in by physicians).

HOW? The complete disclosure must be submitted electronically to [email protected], with a copy to [email protected], and with a subject line: “Website and advertisement disclosures.”

Disclosure must include a signed certification. A hard copy of the signed certification only should be mailed to: Division of Technical Payment Policy, ATTN: Provider and Supplier Self-Disclosure, Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Mailstop C4-25-02, Baltimore, MD 21244-1850.

(56) Patient Protection and Affordable Care Act, Section 6409 (2010, 2011)46

DISCLOSING WHAT? Pursuant to the OMB Control No: 0938-1106, parties disclosing solely

noncompliance with 42 CFR § 411.362(b)(3)(ii)(C) need only to report the following: Hospital's name, address, CNN, NPI, TIN, name of the contact person; Period(s) of noncompliance - the months during which the hospital had at least one instance of noncompliance, excluding months during which the hospital was in compliance;46, 51

Certify that, during each of the months in the reported period(s) of noncompliance, at least one physician owner/investor made referrals to the hospital for DHS, and the hospital billed Medicare for these services; Certify that the hospital met other requirements of 42 C.F.R. § 411.362 and the remaining requirements of 42 C.F.R. § 411.356(c)(1) or (c)(3), if applicable; Certify that no other exception to the physician self-referral law was available during the reported period(s) of noncompliance to except referrals from physicians with ownership or investment interests in the hospital; Certify that no other exception to the physician self-referral law was available during the period(s) of the reported noncompliance to except referrals from physicians with ownership or investment interests in the hospital. 47

SAMPLE EXCERPTS FROM CMS's REPORT TO CONGRESS

48

THE 60-DAY OVERPAYMENT RULESince the inception of section 6402(a) of the Affordable Care Act (ACA), there has been

confusion among providers, lawyers, regulators, and courts regarding the requirements, scope, and impact of Social Security Act section 1128J(d), which mandates a person in receipt of an overpayment to report and return the overpaid amount within 60 days of identification or the date any corresponding cost report is due.

Six years after enacting the authorizing statute, the CMS has published the awaited Final Rule about the requirements of reporting and returning Medicare Part A and B overpayment.57 Failure to report and return the overpayment is an obligation for the purpose of the False Claims Act. 58

Look-Back Period:

The Proposed Rule of 2012 offered a 10-year look-back period, based on the outer limit of the FCA’s statute of limitations. The Final Rule settles on a 6-year look-back period effective March 2016, which is not retroactive.59

Reopening:

Under the Stark 60 the reopening is extended to 6 years and must be requested only by the provider 61 or supplier.62

(57) 81 Fed. Reg. 7654-7684 (Feb. 12, 2016) ; (58) 31 USC § 3729(a)(1)(G)(59) 81 Fed. Reg. At 7671; (60) 42 CFR § 405.980(c)(4); (61) 42 CFR. § 401.305(62) 81 Fed. Reg. At 7673

49

THE 60-DAY OVERPAYMENT (continued)

The 60-day clock does not start running until after the reasonable diligence period has concluded, which may take “at most 6 months from receipt of credible information, absent extraordinary circumstances.” 63 The Final Rule acknowledges that complex investigations, like a Stark Law violation, that are referred to the CMS Voluntary Self-Referral Disclosure Protocol, fall within this “extraordinary circumstances” category.

Failing to conduct diligence with all deliberate speed after obtaining the information, may result in the “provider or supplier knowingly retaining an overpayment because it acted in reckless disregard or deliberate ignorance of whether it received such an overpayment.” 64 The overpayment liability can, in turn, result in False Claims Act liability as in “reverse” false claims.65

Lastly an overpayment is not “identified” until the amount of the refund has been “quantified.” 66 That means an 8-month period, of which 6 months for timely investigation, plus 60 days for reporting and returning of the overpayment.

(63) 81 Fed. Reg. At 7662; (64) id. At 7659;

(65) 31 USC § 3729(a)(1)(G); (66) id. At 7661;50

STARK EXCEPTIONSIn its nutshell, there are three main types of STARK exceptions: - For the ownership/investment interests (§411.356) - For compensation arrangements (§411.357) - For certain “services” (§§ 411.352, 355).In particular, STARK exceptions relate to the: - Fair market value (§ 1877nn(h)(3))

- Rental office space (§411.357(a)) - Bona fide employment (§411.357(c)) - Personal service arrangements (§411.357(d)) - Physician recruitment (§411.357(e)) - Isolated transactions (§411.357(f)) - Non-monetary compensation (§411.357(k)) - Medical staff incidental benefits (§411.357(m)) - In-office ancillary services (§411.352) - Temporary non-compliance (§411.353(f)) - Grace period for signature (§411.353(g)). 51

FAIR MARKET VALUE Value in arms-length transactions consistent with the general market value:67

- The price that is the result of bona fide bargaining between well - informed parties. Fair market value (FMV) is the key element in the Stark exceptions and is measured through the:

- Market metric, extrapolation, comparisons, Revenue Ruling 5-60 - National benchmark sources (AHRQ, MGMA, CAMP, Sullivan Cotter) - Valuation experts ( real estate appraisers, clinical performance evaluators).

An entity cannot bill Medicare for DHS referred by physicians with whom the entity has a financial relationship unless the relationship falls within a Stark's exception.

• Most compensation exceptions require FMV • Space and Equipment Leases • PSA’s • Employment • Payments by Physicians • FMV Exception.

Remuneration must be FMV and not determined - directly or indirectly - in a way that takes into account the volume or value of referrals (or other business) to the DHS entity.

(67) 42 U.S.C. 1877nn(h)(3); (64) Goodstein v. McLaren, 202 F. Supp. 2d 671 (E.D. Mich 2002)52

What's included in FMV?All of the cash flows associated with the operating assets of the

entity:

• Tangible assets - like equipment

• Working capital – accounts receivable

• Enterprise goodwill

• Personal goodwill

• Double counting results in a payment that exceeds fair market value

• Common problem with physician practice valuation and post-purchase physician compensation.

What Do We Need for Measuring FMV?The FMV is not necessarily established through:

Earnest negotiations

An amount that is requested

Opportunity cost.

The FMV can be measured through three approaches:

Income approach

Market approach

Cost approach.

Documentation used to evaluate the FMV include: 1) data on market comparable; 2) a valuation from an outside expert; 3) national salary comparisons; 4) a lease or real estate appraisal.

Parameters for measuring FMV include: (1) volume of services (working hours); (2) the specialty; (3) provider's credentials and qualifications; (4) specific services contemplated by the arrangement.

54

U.S. ex rel Goodstein v. McLaren Regional Medical CenterDid Goodstein's court 68 find that the parties engaged in an arms’ length

transaction? What factors supported the court’s conclusion? Here, defendants (Family Orthopedic Associates Family Orthopedic Realty,

McLaren Regional Medical Center) were accused of paying above-market rents in exchange for referrals, which constituted a violation under the Stark and AKS. The parties agreed to conduct a bifurcated bench-trial, so the Court would first consider whether the lease agreement - the crux of the FCA allegations - was negotiated at arm's length and whether it met the fair market value (FMV) standard?

After hearing the testimonies of three defense experts and one expert witness for the government, and after considering their credibility, the Court dismissed the case in its entirely. By doing so, the Court reasoned that the material evidence and testimonies supported defendant's argument that the rents were in FMV. The government's expert failed to present a number of measurable and comparable parameters (except a Tax Tribunal from 1996) and with that he imposed undue restriction on the market being analyzed. The Court concluded that the parties were engaged in protracted negotiations which have resulted in a balanced agreement that did not overtly favor either party.

(68) United States ex rel Goodstein v. McLaren Regional Medical Center, 202 F.Supp.2d 671 (2002)

55

COMMERCIAL REASONABLENESSConsidering the aggregate terms of the overall arrangement, it asks the question, “Does

this deal make sense?” The fundamentals ensuring that sense are: (1) a prudent business agreement; (2) commercial sense, (4) parties contracting out of the referrals, and (4) for reasonably necessary services. The commercial reasonableness analysis assembles its key measures from the:

I. Regulatory Guidance II. Courts III. Application of Guidance to Assess Commercial Reasonableness.(I): Regulatory DefinitionsCMS: An arrangement is commercially reasonable if it's “a sensible, prudent business

agreement, from the perspective of particular parties involved, even in the absence of any potential referrals.” (see Stark II, Phase II regulations at 69 F.R. 16093, 2004)69

STARK: An arrangement is “commercially reasonable in the absence of referrals if the arrangement makes commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential DHS referrals.” (see 42 CFR §411.351).70

OIG: In order to meet the threshold of commercial reasonableness, compensation arrangements with physicians should be “reasonable and necessary.”(see OIG Supp, 70 F.R. 4866, 2005). 71

(II): Courts – see U.S. ex. rel., Kaczmarczyk v. SCCI Hospital Ventures (2004); U.S. v. Campbell (2011) 72, 73

(III): Applications – (1) Business purpose analysis; (2) Service provider analysis; (3) Provider/demand index analysis; (4) Faculty analysis; (5) Resource analysis; (6) Independent audit or oversight analysis.

56

GENERAL MARKET VALUEPrice that an asset would bring, as the result of bona fide bargaining

and agreement between well-informed parties who are not otherwise in a position to generate business for the other party, on the date of acquisition of an asset or at the time of the service agreement: 70

• Price of bona fide sales for assets of like type, quality and quantity in particular market;

• Compensation includes bona fide service agreement with comparable terms at the time;

• Not determined in any manner that it takes into account the volume or value of anticipated or actual referrals.

** The inclusion of "general market value" in regulatory definitions is to draw important distinctions between the regulatory and statutory definitions, to establish the government's view of the FMV.

(70) 42 CFR § 411.351 57

VALUATION MODEL: Noncompetes and Referrals- considers the business lost by the holder of the noncompete if it were

violated. The value of a noncompete is part of the enterprise level operating cashflows of a business. For compensation arrangements, local law needs to be evaluated to see if continued employment is adequate compensation for the noncompete.

58

VALUATION MODEL: Income ApproachValuation is about future cashflow (not historical cashflow), and its

multiple based upon the risk of that future cashflow. Simple formula: Cashflow x Valuation Multiple = Value

• Risk is based upon empirical evidence and judgment and a risk assessment targets: regulatory risk, investment risk, size risk, specific market risk, reimbursement risk.

Underestimating risk overstates value.Overestimating risk understates value.

The greatest risk of overestimating value in implications of Stark or AKS is in improper or unrealistic assumptions as to the future profits.

• For Part-B Medicare, history of Medicare Conversion Factor and Producer Price Index must be robustly revisited.

• For Part-A Medicare, there is usually a market basket update (similar to inflation).

• Profit margins often erode as costs rise faster than per unit revenues leading to increased utilization to maintain profits –which then leads to regulatory or legislative action.

59

VALUATION MODEL: Income Growth Approach

VALUATION MODEL: Market Approach - is premised on finding and applying comparable data to the subject of valuation.• Generic Valuation - Comparable transactions (the FMV is the price at which

bona fide sales have been consummated for assets such as profile, quality, and quantity in a particular market at the time of acquisition)

• Business Valuation - via two methods: (1) Guideline Publicly Traded Company Method; (2) Merged and Acquired Company Method or Direct Market Method

• Direct Market Method – The Stark regents create special rules – what is relevance of a transaction in Ohio to a proposed transaction in Texas? 74

(74) Caracci, 98 AFTR 2nd 2006-5264 (CA -5, 2006) – the tax court appeals

RENTAL OFFICE SPACE EXCEPTIONSpecifies the premises it covers. 75

Term of agreement is at least 1 year. If the agreement is pre-terminated with or without cause, parties may not enter a new agreement during first year of original term of agreement.Space does not exceed what is reasonable and necessary for the legitimate business purposes of lease or rental.Space is used exclusively by the lessee, except that lessee may make pro rata payments for use of space consisting of common areas. Shared space must be block leased because of the “exclusive use” requirement.Rental charges over term of the agreement are:

- Set in advance - Consistent with fair market value - Not determined in manner that takes into account volume or value of any referrals

or other business generated between the parties - Not determined using a formula based on “ percentage of revenue raised, earned,

billed, collected, or otherwise attributable to services performed in the office space”; or “per-unit of service rental charges to the extent that such charges reflect services provided to patients referred by the lessor to the lessee.”

Commercially reasonable even if no referrals were made between the lessee and the lessor. Holdover month-to-month rental for up to 6 months immediately following expiration of an agreement of at least 1 year that meets the other requirements of the exception may also satisfy the exception, provided that holdover rental is on same terms and conditions as the immediately preceding agreement.

(75) 42 CFR §411.357(a) 60

EXAMPLE 1:Hypothetically, the “Strong Bones, LLC” owns a portable x-ray machine. The

“Trauma Watch, Inc.” agrees to lease the equipment from “Strong Bones” for what it pays the “Strong Bones” 100 for each x-ray performed. In this scenario, the compensation is a per-unit or "per-click" arrangement, which is not covered by the “rental-unit” harbor.

EXAMPLE 2:Let's assume the “Strong Bones, LLC” asks a payment amounting the 15%

of all revenues the the “Trauma Watch” gets for services it provides using the leased X-ray machine. Does this case fall under the Stark's rental-agreement exception?

NO. The compensation is still barred because it is based on the percentage of the revenue related to the referrals.

However, a compensation based on the percentage of square footage of sub-leased space is permitted under this exception.

61

BONA FIDE EMPLOYMENT EXCEPTIONThe employment is for identifiable services.The amount of remuneration under the employment is:

- Consistent with the fair market value of services; and - Is not determined in a manner that takes into account (directly or

indirectly) the volume or value of the referral(s), except for certain productivity bonuses (see below).76

The remuneration is provided under an agreement that would be commercially reasonable even if no referrals were made to the employer. Payment of remuneration in the form of productivity bonus based on services performed personally by the physician (or immediate family member of the physician) is permissible.

The bona fide exception seems straight forward; however, two things need to be considered:

- the employment agreement has not to be in writing - this exception allows the physician to be paid. (76) 42 C.F.R. §411.357(c) 62

EXAMPLE:Hypothetically, Dr. Osborn works as an attending OB/GYN in the

maternity ward of “Queen Beatrice” Hospital. The hospital pays her a $200,000/year wage. She also gets $100 for each baby she delivers. This is a general bona fide arrangement.

What if the bonus is from the 20% of all revenue generated from delivering babies? In such a scenario, the arrangement would NOT be covered by this exception. However, Dr. Osborn will get the bonus and the 20% of the professional component of her deliveries.

63

PERSONAL SERVICES ARRANGEMENT EXCEPTION Specifies the services covered by the arrangement. 77

Covers all services to be furnished by physician (or immediate family members) to the DHS entity. Can have separate arrangements between entity and physician (or any family member) if agreements incorporate each other by reference or cross-reference master list of contracts maintained and updated centrally. Physician or family member can “furnish” services through employees through a wholly-owned entity, or through locum tenens physicians; Aggregate services do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement(s). Term of arrangement is at least 1 year. If arrangement is pre-terminated with or without cause, parties may not enter into same or substantially the same arrangement during first year of original term of the arrangement. Services to be furnished under each arrangement do not involve counseling or promotion of a business arrangement or other activity that violates any federal or state law. Compensation is:

- set in advance - does not exceed fair market value - except in the case of “physician incentive plan,” is not determined in manner that

takes into account the volume or value of any referrals or other business generated between the parties. Holdover personal service arrangement for up to 6 months following the expiration of an agreement of at least 1 year, that meets other requirements of this exception, may also satisfy this exception, as holdover personal service arrangement is on the same terms and conditions as in preceding agreement.

(77) 42 C.F.R. §411.357(d)64

U.S. ex. rel Kosenske v. Carlisle HMA Kosenkse was a qui tam relator who brought a False Claim Act (FCA) action against

HMA and its parent company,78 upon the discovery that the Blue Mountain Anesthesiology Associates (BMAA) was paying no rent to the hospital (HMA) and receiving physician support services at no cost. In addition, the hospital wasn't receiving facility fees for a portion of BMAA’s pain management services, and was therefore uncompensated for BMAA’s use of the pain clinic, which was a newly-formed physicians practice group. But the hospital did not have a written agreement with the anesthesiology group for pain management services.

ISSUE: Whether a financial relationship existed between the hospital and the anesthesia group to provide outpatient pain management services at the HMA clinic; and if so, did that relationship trigger restrictions placed by the Stark and Anti-Kickback (AKS) laws?79

The Court held that the Stark and AKS were implicated. Unlike the Stark (strict liability law), the AKS looks for scienter. Therefore, Kesenske carried the burden to show that defendants: (1) caused claims to be submitted to the government, (2) remunerated physicians with an intent to induce referrals, and (3) knew that their actions violated the AKS. (continued to the next slide)

(78) US ex. rel Kosenske v. Carlisle HMA, 31 U.S.C. §§ 3729-3733 (MDPA, 2006)

(79) 42 U.S.C. § 1320a-7b 65

Kosenske 78 (continued)Unlike the Stark's professional service arrangement (PSA) exception, the AKS 79 is

violated if one purpose of payment - tendered from the hospital to a physician - is to induce future referrals, even if the payments were also intended to compensate for professional services.

The Court held that the pain management arrangement did not meet the PSA exception under the Stark.

HOLDING: The District Court held than the arrangement satisfied the Stark law personal services exception, and thus granted summary judgment to the HMA.

The Circuit Court reversed and remanded on the grounds that the arrangement did not satisfy the personal services and fair market value(FMV) exceptions.

The last inquiry was whether this remuneration was meant to induce referrals? The final Court established that the HMA did provide BMAA with remuneration and these benefits constitute remuneration in-kind. In rejecting the District Court's FMV analysis, it reasoned that:

▪ in-kind remuneration, including free office space and equipment, can serve as the basis for finding a Stark violation;

▪ the anesthesiologists who provide pain management services are viewed as referral sources;

▪ what may have constituted fair market value consideration at the signing of an agreement must be able to withstand a current fair market value analysis in light of changed circumstances.79

66

The “Master List” of PSA Exception. Under the § 411.351, the PSA covers all services to be furnished by the physician (or

immediate family member) to the entity. This requirement is met if all separate arrangements between the entity, physician, and immediate family members, cross-refer in a master list of contracts that is maintained and updated centrally and is available for review by the Secretary. The master list must be maintained in a manner that preserves the historical record of contracts.

Under the Stark II, Phase III Regulations the use of master list is permissive but not required, but if a DHS entity chooses to comply in such a manner, the list must contain all PSA with any physician or group practices, and must cover all performed services.

The purpose of the master list (as a safe-harbor) is to reduce the burden and prescriptive (evolutionary) nature of the rule while applying the statute and maintaining the integrity of the regulatory framework. Put somewhat differently, the master list intends to provide some flexibility to providers so that all arrangements between the parties are set forth in a centralized location, which reduces the risk for "hidden" compensation being paid for improper referrals.

For example, arrangements between an entity and a physician (or immediate family member) may change from time to time as a result of new protocols, terminations, renewals. The CMS finds that the PSA exception should only require a reference to a master list of contracts that could be updated periodically and would be transparent to the DHS.

(80) 42 C.F.R. §1001.952(d)67

PHYSICIAN RECRUITMENT EXCEPTION Arrangement must be set out in writing and may not be conditioned on physician’s referral of patients to the hospital.81

Except of the actual cost of service, the remuneration must be "passed directly through to" or "remain with" the recruited physician. Records must be kept for 5 years. Hospital may not determine amount of remuneration based on volume or value of the actual or anticipated referrals or other business generated between the parties. Physician must be allowed to establish staff privileges at any other hospitals and to refer business to other entities. Payments made to induce physician to relocate to “geographic area served by hospital” and join the hospital’s medical staff.

- GSA is defined as lowest number of contiguous zip codes drawing > 75% of inpatients.

- Physician must join hospital’s medical staff (that is, no prior privileges, including courtesy).

- Relocation is when the recruited physician moves his/her practice location from outside hospital’s service area into hospital’s service area if:

1) Moving at least 25 miles, or 2) Deriving >75% of revenues from new patients during preceding 3 years.(81) 42 C.F.R. §411.357(e)

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LOCATIONThe DHS must be furnished in either the same building where the group practice

commonly provides services, or in a "centralized building" used for the provision of DHS.

Centralized Building: all part of the building, including the mobile vehicle or trailer parking lot used full time and exclusively used by the group practice. It does not include a place or vehicle or trailer that is shared between more than one providers.

Location requirement is intended to prevent the proliferation of the Pub-Labs. - An example: the revenue from the DHS -inclusive pathology services is shared

between the physician and the pathologist.82

Scenario: Dr. Dynamo is a solo practitioner-internist who also owns a large amount of real estate. His full-time medical office is located at 111 Ardor Avenue, Suite A. He's now looking to open a clinical laboratory considering the following locations: (a) in the office building across the street from 111 Ardor Avenue; (b) Suite B in the 111 Ardor Avenue location, which is currently vacant; (c) in a mobile medical van owned by him; and (d) in Suite C of 111 Ardor Avenue which would be shared with the Fast-Lab,LLC, an existing tenant - clinical laboratory.

Which option is permissible under the Stark? Options(b) and (c) are acceptable because the "centralized building" requirement

allows: (1) a lab to set up in the same building as the physician's existing practice; and 2) it specifically includes mobile vans.

(82) 42 CFR §411.35769

ISOLATED TRANSACTION EXCEPTION Isolated transactions (such as one-time sale of property or practice) do not constitute financial relationships if:

The amount of remuneration under the transaction is:

- Consistent with fair market value;

- Not determined in any manner that takes into account volume and value of the referrals.

Agreement is commercially reasonable even without any referrals made.

There are no additional transactions between the parties for six months after the isolated transaction.

There is no writings or setting in advance.83

(83) 42 C.F.R. §411.357(f)70

NONMONETARY COMPENSATION EXCEPTIONInclusions: Meals, sporting tickets; Concerts, theatre; Transportation; Flowers or plants

sent to congratulate the physician on his new office, new home, marriage, or birth of a child; Rounds of golf; Birthday presents; Use of entity-owned vacation home.

Exclusions: Cash and cash equivalents (gift certificates and gift cards). Compensation from entity to physician in form of items or services (not including cash or cash equivalents) is not seen as a financial relationship if:

- Not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician.

- May not be solicited by the physician or the physician's practice (including employees and staff members).

- Arrangement does not violate the AKS (§ 1128B(b)) or any federal or state law governing billing or claims submission. Where an entity has inadvertently provided nonmonetary compensation to a physician in excess, such compensation is deemed to be within the limit if:

- The value of the excess nonmonetary compensation is no more than 50% of the limit; and

- The physician returns the excess nonmonetary compensation within 180 consecutive calendar days following the date it was received by the end of the calendar year in which it was received. The ability to pay back excess nonmonetary compensation and remain in compliance with the exception may be used by an entity only once every 3 years with respect to the same referring physician.

(84) 42 C.F.R. §411.357(k) 71

MEDICAL STAFF INCIDENTAL BENEFITS EXCEPTION Applies to the Items and services, but not cash or cash equivalents:

- Free parking - Meals while on-call - Free computer/Internet access

Applies to all members of medical staff within same specialty Is not based on volume and value of referrals Is offered only during rounds or performance of duties that benefit the hospital and patients Is provided and used only on hospital’s campus Is reasonably related to delivery of medical services at hospital Is consistent with what other hospitals in region offer Amounts less than $25-value for each occurrence (indexed) Does not violate the Anti-Kickback Statute.85

(85) 42 C.F.R. §411.357(m) 72

SERVICES EXCEPTIONS 86, 87

Physician services

In-office ancillary services

Services furnished by an organization (or its contractors or subcontractors) to the enrollees (prepaid health plans)

Academic Medical Centers (AMC)

Implants furnished by an Ambulatory Surgery Center (ASC)

Erythropoietin (EPO) and other dialysis-related medications

Preventive screening tests, immunizations, vaccines

Eyeglass and contact lens applications following cataract surgery

Intra-family rural referrals.(86) §411.352; (87) § 411.355 73

IN-OFFICE ANCILLARY SERVICES EXCEPTIONIncludes all DHS except certain durable medical equipment (DME) and

parenteral and enteral nutrients, equipment, and supplies (PEN) (see the next slides for details).

This exception has three main requirements:

WHO: The services must be furnished by referring physician or another physician in the same group practice or someone supervised by either physician (see the “group-practice” definition in the next slide);88

WHERE: location must be in a centralized building or in the same building;

HOW: services must be billed by performing or supervising physician, his/her group, an entity wholly owned by any of the above, or a 3rd party billing company as agent for any of the above.

(88) 42 CFR §411.352 74

DME & PENStark's in-office ancillary services exception implies if specific criteria are

satisfied. However, this exception excludes most DME and PEN. The only permitted items are crutches, canes, walkers, folding wheelchairs, blood glucose monitors, and infusion pumps (but not pumps used for PEN). In addition, prosthetics, orthotics and prosthetic devices and supplies may be provided under the in-office ancillary services exception.89

The OIG cautions against certain arrangements between health care practitioners and DME suppliers — arrangements designed to ensure ready access to prescribed DME and PEN. In its 2006's advisory opinion, the OIG determines two programs between a DME supplier and physicians that "could potentially generate prohibited remuneration under the Stark and AKS."

(I) Contractual Joint Venture

(II) Supplier-prime Program

(see details in the next slide).

(89) 42 CFR §411.35275

OIG: Contractual Venture Program1) The requestor would sell the DME and PEN to the physician practice using a

discounted fee schedule that fits within the discount safe harbor. The physician practice would bill the commercial insurer under its own billing number.

2) The requestor would supply Continuous Passive Motion machines at a daily rental rate on an as-needed basis. The rental amount would be consistent with fair market value but the aggregate would not be set in advance.

3) The requestor would provide a trained technician to provide any required orthotic fitting, patient instruction, or in-home DME set-up.

4) The requestor would provide coding, billing, and collection services for a fixed monthly fee that would satisfy the personal services and management safe harbor.

OIG: Suppler-prime Program-DME and PEN are furnished to both non-federal and federal patients and the requestor

remains the DME supplier responsible for billing for any products sold or rented to the physician practice's patients. The program has three components:

1) The requestor rents storage space from the practice for a fixed monthly fee and consign its DME and PEN products to the practice to be stored in the rented space. The rental fee conforms to the space rental safe harbor.

2) The physician practice receives a percentage of the DME/PEN revenue in exchange for the practice personnel providing inventory management and other administrative services related to the consignment and storage of requestor's products.

3) The physician practice pays a fixed monthly fee for services of requestor's trained technician, who provides orthotic fitting, patient instruction, or in-home DME set-up.

Problems with the OIG ProposalsThe OIG skips with visiting why the practice would pay for a service that appears to be a service the supplier was already obligated to provide?Additionally, the consignment and physical presence of the leased technician may create additional opportunities to influence on, and “reward” the referrals. Health care providers do have the option of becoming an enrolled supplier, which enables them to order inventory and have a stock of DME and PEN readily available for patients. Yet, to become and remain durable medical equipment/prosthetic/orthotics (DMEPOS) supplier under Medicare, a provider must satisfy the 21 federal suppliers standards.90 The National Supplier Clearinghouse (NSC) is the CMS contractor responsible for performing the initial and ongoing period inspections of the standards. If the NSC determines that the supplier is not in compliance with any one or more of the 21 standards and if the and CMS concurs, the NCS may - upon 15-day notice - revoke the supplier number.91 Once revoked, the burden is on the supplier to demonstrate that the standard or standards at issue are satisfied.Among the 21 standards is the requirement that the supplier conduct its business at an appropriate physical location (locum standard, see next slide).Lastly, the DMEPOS suppliers may face more stringent requirements, updated on a pretty much regular basis.

(90) 42 C.F.R. § 424.57(c); (91) 42 C.F.R. § 405.874(b) 77

MediSource Corporation v. CMS- a seminal case identifying pitfalls associated with choosing a supplier's physical location. At the time MediSource's Medicare supplier number was revoked by the NSC, MediSource

was operating its supplier business from a home-based location. The NSC determined that MediSource did not meet supplier standard (8) under §424.57(c) , because its physical location was not accessible to the public during reasonable business hours. The applicable zoning requirements also did not allow for a business to be conducted at the supplier's physical location. 92

Following the revocation, MediSource submitted a new enrollment application to the NSC indicating a new physical location. The NSC then identified that an existing supplier, Express Care Pharmacy, was operating from the same physical address and rejected MediSource's application.

The Hearing Officer in MediSource Corporation v. CMS noted that the supplier standards are silent with regard to whether two suppliers may share the same physical location. Nonetheless, several factors supported the conclusion that MediSource failed again to maintain an appropriate physical site within the Express Care Pharmacy location:

(1) The business records of MediSource were still being maintained at the applicant's home, the original supplier site location. The multi-site supplier standard allowing records to be stored at a centralized location did not allow this single-site supplier to store records in an off-site location. (2) The inventory at the Express Care Pharmacy shared space was minimal ( a “consultation room”) compared to the inventory maintained at the original home location. The “Consultation Room” signage suggested that MediSource did not have exclusive use of this room and thus, could not protect the confidentiality of its records. (3) Lastly, the telephone number listed on the MediSource signage was not the same number listed on MediSource's enrollment application.

(92) MediSource Corporation v. CMS, DAB Docket No. A-05-112 (Jan. 31, 2006) 78

ELECTRONIC HEALTH RECORDS EXCEPTIONS(1) E -prescribing Exception: - the DHS entity may provide only hardware, software, or IT and training services that

are necessary and used solely for e-prescribing information - it may not provide monetary remuneration - e -prescribing items must be provided by: [A] hospital to a physician who is a staff member; [B] group practice to a member physician; [C] Medicare Part-D sponsor or Medicare Advantage organization to a prescribing

physician; [D] items and services must be provided in connection with an e-prescription drug

program that meets applicable standards under Medicare Part-D sponsor or Medicare Advantage plan;

[E] do not restrict a physician's ability to use the items or services with other e-prescribing or e-health records for any patient;

[F] a physician cannot make the receipt, amount or nature of items or services a condition of doing business with the donor;

[G] eligibility of physician for items or services and nature or amount of items or services can't take into account volume or value of referrals or other business;

[H] arrangement must be in a signed agreement that specifies: - all items and services being provided - donor's costs of items and services including all electronic prescriptions - non monetary remuneration covering software or IT and training services needed

and is used to create, maintain, send or receive e-health records.(93) 42 CFR Sec 411.357w

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EHR EXCEPTIONS (continued)2) The EHR software must meet the inter-operability requirements, it must

communicate and exchange data accurately, securely, and consistently in various networks, keeping the data unaltered.

3) Physician is responsible for at least 15% of the donor's costs for the items and services.

4) The items and services must not include staffing of physician offices and can't be used primarily for personal or non-medical business.

5) The EHR software must contain electronic compatibility to interface with the physician's EP system.

Takeovers: These exceptions do not allow enough flexibility for healthcare providers to

help physicians' transition to EHR technology, as they are too expensive for a sole-practice

Access to and acceptance of the EHR technology would allow greater connectivity and collaboration between the providers.

(93) 42 CFR Sec 411.357w 80

Differences & Overlaps between the E-Prescribing, and Electronic Health Records Exceptions.

E-prescribing (EP) exception and Electronic Health Records (EHR) exception mostly overlap. Yet, there are a few differences:

(1) While the EHR exception allows the provision of items and services by any DHS entity to a physician; the EP exception limits this provision to the hospitals, group practices, Medicare Part-D sponsors, and Medicare Advantage organizations.

(2) The EHR exception has an additional condition that is absent in the EP exception: the donor does not shift the costs of donation to any federal health care program.

(93) 42 USC §411. 357w

(94) Morse CM (2007). E-prescribing and EHR exceptions. Ober Kaler, Health Law Alert Newsletter

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ACADEMIC MEDICAL CENTER EXCEPTIONIn recognition of unique aspects of the Academic Medical Centers (AMC), the CMS has

refined Phase II and Phase III regulations for attending a special AMC exception.95 In physician relationship regulations, this excepts the faculty referrals to any AMC component that furnishes DHS - so long as the AMC criteria are satisfied.

Yet, the utility exception is still constrained by the limitations it placed on permissible faculty compensation. The trick is, that the faculty practice plans are “group practices” under the Stark law which creates conflicts between the PSA and AMC exceptions. Therefore, the AMC components must be analyzed in the context of Stark's indirect compensation arrangements. It is still unclear from the Phases II and III, whether common AMC practices are deemed to create indirect compensation arrangements with the faculty physicians and if so, whether their meet the indirect compensation exception?

Typically, the faculty physicians do not have ownership interests in any component of AMC. Rather, the physicians receive compensation through a faculty practice plan, which may be organized as a single, large, multi-specialty group, or as an unincorporated division of the medical school or teaching hospital. Additionally, the faculty may receive direct payments from other components of the AMC, such as financial subsidy from the faculty practice plan, or separate medical directorship, administrative, or supervisory payments , from an affiliated teaching hospital.

In order for all these services and payments satisfy the Stark's AMC exception, the referring physician's compensation must meet the “set in advance,” and ” fair market value” standards, and must not violate the AKS or FCA (see details further).

(95) 42 CFR §411.355 (e)82

AMC EXCEPTION (continued)1. Physician requirements: The referring physician is: (A) is a bona fide employee

of a component46 of the AMC on a full-time or substantial part-time basis; (B) licensed to practice medicine in the state(s) in which he practices medicine; (C) has a bona fide faculty appointment at the affiliated medical school or at one or more of the educational programs at the accredited academic hospital; and (D) provides either substantial academic services or substantial clinical teaching services (or both) for which the faculty member receives compensation as part of his or her employment relationship with the academic medical center. A physician will be deemed to meet this requirement if he spends at least 20 % of his professional time or 8 hours per week providing academic services or clinical teaching services (or both).95

2. Compensation requirements: (A) The total compensation paid by each AMC component to the referring physician must be set in advance. (B) In the aggregate, the compensation paid by all AMC components to the referring physician must not exceed fair market value for the services provided. (C) The total compensation paid by each AMC component must not be determined in a manner that takes into account the volume or value of any referrals or other business generated by the referring physician within the academic medical center.96

(95) § 411.355(e)(1)(i)(A)−(D) (2007); (96) 42 C.F.R. § 411.355(e)(1)(ii)(A)−(C) (2007) 83

AMC EXCEPTION (continued)3. Requirements concerning the relationship between the separate

component Institutions: This entry consists of two subcategories: (A) issues of accreditation, affiliation, and staffing, and (B) issues of organization and internal financial transfers between the academic institution and the hospital.

Under the category-A, the purported AMC must consist of: (a) An accredited medical school (including a university, when appropriate) or an accredited academic hospital; (b) one or more faculty practice plans affiliated with the medical school, the affiliated hospital(s), or the accredited academic hospital; and (c) one or more affiliated hospitals in which a majority of the physicians on the medical staff consists of physicians who are faculty members and a majority of all hospital admissions is made by physicians who are faculty members.97

Under the category-B: (a) All transfers of money between components of the AMC must directly or indirectly support the missions of teaching, indigent care, research, or community service. (b) The relationship of the components of the AMC must be set forth in one or more written agreements or other written documents that have been adopted by the governing body of each component. (c) All money paid to a referring physician for research must be used solely to support bona fide research or teaching and must be consistent with the terms and conditions of the grant. 98, 99

(97) § 411.355(e)(3) ; (98) § 411.355(e)(2); (99) U.S. ex rel. Villafane v. Solinger, 543 F. Supp. 2d 678, 690 (W.D. Ky. 2008)

84

AMC EXCEPTION (continued)4. General Anti-Kickback requirements:

The referring physicians must avoid the inference that they “knowingly and willfully” paid or received money to induce patient referrals. Further, compliance with the Stark does not necessarily mean that a physician is not receiving illegal kickbacks:

“Although many of the standards within the Stark exceptions are very similar to the standards in the Anti-Kickback safe harbors, compliance with a Stark exception does not guarantee compliance with an Anti-Kickback safe harbor. Indeed, Stark sets forth only the minimum standards for permitted financial relationships, not the full range of legally permissible activity.” 100

(100) Deaton, supra note 7, at 555 (in citing Phase I, supra note 22, at 863; Medicare and State Health Care Programs: Fraud and Abuse; Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute, 64 Fed. Reg. 63,518–19 (1999) (42 C.F.R. §§ 1001.951, 1001.952 (2007)). 85

Villafane v. Solinger 99

CLAIM: Plaintiff Juan Villafane, a pediatric cardiologist and a former professor at the University of Louisville Medical School (hereto, School), was suing the School’s research foundation and fund, several pediatric cardiologists employed by the School , several physicians- faculty members, Norton Hospitals, Inc., d/b/a/ Kosair Children’s Hospital, Kentucky’s only freestanding, full-service pediatric hospital, and Larry Cook - the chief of its medical staff.

FINDINGS: The lawsuit concerned to the cash flow between Kosair and the individual physician defendants. Defendant-physicians participated in the School’s faculty practice plan. Under this arrangement, faculty salaries were funded not only by grants, donations, and contributions from various sources, but also by a portion of the revenue from the physician private practices. Further, faculty salaries were also funded by contributions from hospitals, including Kosair, where all defendant- physician extensively practiced and to which they referred their patients. Therefore, it was undisputed that the faculty salaries were partly generated from the patient referrals.99

HOLDING: Relying on Greber,7 the Court concluded that although the arrangement between Kosair and defendant-physicians predated the adoption of the AMC exception, that exception 75 “still applied because it is an administrative interpretation of what Congress intended in the Stark Law.” 7, 95, 99

(99) U.S. ex rel. Villafane v. Solinger, 543 F. Supp. 2d 678, 688 (W.D. Ky. 2008)

(7) U.S. v. Greber, 760 F.2d 68, 71 (3d. Cir. 1985); (95) 42 CFR § 411.355(e)(1)(i)(A)−(D)86

Villafane v. Solinger (continued)REASONING:(1) Stark requirements imposed to the physicians. – In visiting the “substantial

academic or substantial clinical teaching services” claim, the Court found uncertainty with the term “substantial,” for it created confusion as to the reach of this requirement. Although, the eligibility for the AMC exception requires that the physicians must spend at least 20 % of professional time or 8 hours per week providing academic services or clinical teaching services (or both), Stark Phase II provides “the academic medical centers with flexibility”99 and that safe harbor “‘is not an absolute requirement.” The Court also noted that physicians are not required to keep any particular timekeeping system, and thus it did not find determinative that the only assessment of the defendants’ time was based on general estimates reported by the doctors themselves.

(2) Requirements concerning the compensation. - The court saw that the term “total compensation” referred only to the faculty salaries paid to defendant doctors. It went on to hold that such faculty salaries did not exceed fair market value because they were paid at levels consistent with their abilities and responsibilities.99 In addition, the third requirement, the value–volume correlation, was met as well, if “the faculty salary paid to the physician is initially set at fair market value and does not vary once set ” - basing this determination on HCFA’s language.

87

Villafane v. Solinger (continued)REASONING:(3) Requirements concerning accreditation, affiliation, and staffing. - The Court

held that since the defendant doctors provided evidence that the majority of the staff at Kosair were faculty members who generated the majority of the hospital’s net revenue, the arrangement was “sufficiently focused on the academic medical center’s core mission” and therefore it satisfied this requirement.83, 88 Moreover, no authority required a specific type of documentation to verify the relationship. Even though, the documents exchanged between Kosair and the Medical School included mutual agreements purporting to establish an automatically continued relationship.

(4) Anti-Kickback Statute provisions. - The Court held that the arrangement did not violate the AKS. 83 It noted that the 6th Circuit had not explicitly spoken “to the question of whether payments made partly - but not entirely - to induce referrals would satisfy the intent element,” and rejected the “one purpose” test, instead stepping-up with interpreting “the AMC exception’s incorporation of the AKS’s provisions so as not to effectively countermand the broader purpose of the AMC exception itself.” 79 It focused on defendants’ sworn assertions that “no improper intent was behind Kosair’s payments to the Research Foundation,” as well as found that the plaintiff's assertion that “the full-service children’s hospital in Kentucky would need to induce referrals through kickbacks to physicians” was almost illogical. 101

(101) 42 CFR § 1001.952 88

Post - VillafaneIn the wake of the Villafane's decision,99 several issues surfaced with the AMC

exception. Congress's passing of the Stark Law in 1989 intended to provide a bright-line in guiding physicians with respect to their financial relationships. Yet, after Villafane, such an objective was seen as “elusive.”

It became crucial to identify many troubling aspects to the Villagane's analysis highlighting the structural flaws of the AMC exception,95 and potential difficulties with achieving compliance even under considering the “flexibility” of the AMC exception.

This forced to fit into a more complex exception, because in Villafane 99 the Court did not entirely address the issue as to whether the financial relationships between the faculty - School- and a full-time hospital were indirect compensation arrangements. Plaintiffs alleged that an indirect compensation arrangement existed between the entities, which constituted in defendant physicians’ total compensation from the School in a way that varied with the volume or value of referrals. However, the Court’s determined that the arrangement satisfied the second set of AMC exception requirements, and by doing so it proceeded to a complex analysis, extensive testamentary and fact-finding.

(95) 42 CFR § 411.355(e)(1)(i)(A)−(D) (99) 543 F. Supp. 2d 678, 688 (W.D. Ky. 2008) 89

Takeovers from Villafane(1) AMC's overlaps with Stark's other exceptions: An obvious overlap exists with

the AMC exception 99 and indirect compensation arrangement exception.102 However, the latter 102 protects only compensation arrangements,103, 104 whereas the AMC exception95 protects both ownership and compensation arrangements as well as arrangements for a variety of mission purposes.105, 106 Additionally, the “built-in” limits on the use of funds for mission purposes and the fair market value limitation on referring physician compensation may be enough to make a de facto safe harbor within the AMC exception. Hence, it is wise if the applicable regulations include an exception that is specifically tailored to the elements or parameters that make the AMC unique or distinct.

(2) Retroactive application: In Villafane, the Court reiterated from the prior decisions 7, 95 in its holding on the arrangement between Kosair and the Medical School. While the arrangement in Villafane continued well past the enactment of the Stark's AMC exception,95, 107 it is fair is arrangements are required to comply with evolving stage of law. When an already existing arrangement falls under the prior regulatory exceptions and when a new law or regulation is being enacted, the arrangement should necessarily be held to the new standard to avoid 'retroactive holding' in defense of Stark allegations in the future.

(7) 760 F.2d 68 (3d Cir. Pa. 1985); (95) § 411.355; (102) §411.357; (103) §411.354 ; (104) §411.356; (105) §411.352 ; (106) §411.353; (107) Hanson AMC (2010). The AMC exception to the Stark Law. Alabama Law Review; 61(2):373 90

Lessons from Villafane (continued)(3) Value–Volume Standard and Annual Correlations: Villafane's Court held that the

defendant-physicians’ salaries were fixed in advance prior to the start of the fisc, and were consistent with fair market value standard. Yet, in its dictum, the Court noted that “value–volume standard would be implicated if a correlation could be established between the inpatient revenue generated and the faculty’s salary levels.”99 The problem is that the AMC commonly provide incentives to their physicians based on personal productivity and input. Thus, the availability of these incentives may change over time based on the business's overall profitability or the total net income. Such changes may implicate a correlation for further fiscal years which under Villafane's analysis would mean the value–volume standard. “Physicians' productivity” experts suggest, that the GMENAC projections of the “surplus” are highly sensitive to inaccuracy.108, 109 Perhaps, we must focus on the totality of the AMC’s compensation system versus the relative value units (wRVUs) standard with less elasticity, in assessing the incentive that AMCs use to boost productivity among their doctors (details in the next slide).

(4) Flexible approach to the intent element: Stark is a strict liability statute and good-faith efforts are irrelevant. Regardless, the Villafane's Court focused on the AMC’s intent to comply with the law. Plus, the holding that the AKS prohibition was satisfied, was solely based on the doctors’ sworn assertions. So, which approach is better? The stiff one, or the flexible one? The neutrals suggest that the courts must “highlight the structural flaws of the AMC exception and the potential difficulties with achieving compliance.” 107

(108) Hurdle S, Pope GC (1989). Physician productivity: Trends and determinants. Inquiry; 26(1):100-115 ;

(109) Cohen F (2015). Using RVUs to measure physician performance. Physicians Practice91

Using RVUs to Measure Physician PerformanceThe relative value units (RVUs) alone do not measure productivity. We must use RUVs as a

proxy for actual expenses, since calculating exact costs at the physician's level is difficult for many reasons. If we were developing a compensation plan only, we would rely solely on RVUs. Yet, in the context of Stark exceptions, financial productivity contributes to physician's performance.

To create a functional RVU-based physician productivity model, we need two critical metrics being reported: revenue and RVUs.

Let's say we have a 10-physician group practice. All are equal in terms of grades, schools, experiences, patient loads, patient reviews, numbers of cited publications, etc. We expect that each provider reports around 10 % of practice's revenue and around 10 % of expenses (RVUs). In this scenario, each provider would have a productivity ratio of 1.0., as for each provider we take revenue as a percentage of the total revenue and divide it by their RVUs (or expenses) to get a percent of the total RVUs. If the provider-X reports $750,000 revenue out of a total $5 million in practice, and accounts 15% of the total revenue, she is responsible for 12,500 total RVUs out of 125,000 reported for the practice (the 10 %). In this case, her contribution as a percent of the total exceeds her consumption as a percent of the total. If we divide the revenue percent by the consumption percent, we get a productivity ratio of 1.5.

% provider revenue / % provider RVU = productivity ratioAssume that for the provider-Y, the ratio of practice revenue is 8.5% and his ratio of

practice RVUs is as expected at 10 %. His productivity ratio would be 0.85, or lower than the ratio of 1.0. For each tenth of productivity, the dollar value is equal to $20,000. So moving a provider from a ratio of 0.85 to 1.0 adds $30,000 to the bottom line. 92

CMS Regulatory Preambles1989: The original Stark is adopted.

1990: The Stark is expanded to cover 12 categories of "designated health services" (DHS).

1998, 2001, 2004, 2007, 2008: The Stark is interpreted in series of restatements. Notable exploratory guidelines are issued.

According to the Centers for Medicare & Medicaid Services (CMS):

1) Agency must first propose regulations and solicit public comments;

2) Agency then publishes the final regulations, a detailed summary of the public comments and its response.

Published commentary + Agency responses = Preambles

Preambles are thousands of pages of comments and responses to:

- illuminate the CMS's process, updates, and roadmap the conflicts;

- serve as a source of guidance on interpreting the Stark Law.

The Stark's preambles are dense, intricate, often contradictory, and evolutionary documents. Those are like “treasure hunt maps.” 93

94

The Future of the StarkHaving an extremely complex and evolutionary law with frequently

updated Stark phases and preambles - especially in our days of telemedicine and remote robotic screenings and surgeries - creates concerns in both ends:

healthcare providers raise concerns about the Stark's readability; policy makers and judiciary, who are losing their track with the

countless and ongoing preambles, try to find the best coherence to avoid the triggering “mistakes of law” and “mistakes of facts” doctrines in the defense of fraud.

In the result, health systems urge Congress to revamp or repeal Stark law. In July 2016, executives of large health systems complained to Congress that they do not launch initiatives to improve quality of care for patients because those moves could result in penalties under the Stark law.109 The CEOs pushed members of the Senate Finance Committee to repeal or revamp the Stark, or at least to revisit the law's strict liability standing.

(109) Dickson V (2016). Health systems urge Senate to revamp or repeal Stark law. Modern Healthcare

State Stark LawsFederal Stark law applies only to physicians' referrals to the DHS billed to Medicare. Thirty-three states have enacted broader self-referral prohibitions or some forms of

bans in the effort to discourage negative conduct that could impact on the cost and quality of their healthcare and commonwealth.

In 1993, Maryland was the first state to enact the so called "Baby Stark" law (Md. Health Occ. Code 1-301 et seq) that prohibits healthcare practitioners referring patients, or directing a contractor to refer patients, to an entity where:

The provider's immediate family owns a beneficial interest of 3% or more,and In which the practitioner, her immediate family member, or both, have a

compensation arrangement.Maryland's prohibitions overlap with the federal Stark Law, but those are stricter:

95

FEDERAL STARK BABY STARK, MARYLAND

Applies solely to physicians. Applies to health care providers, including DO, OT, PA, RN (except of psychologists)

Applies solely to DHS provision. Applies to any services provided by healthcare practitioners

Applies solely to Medicare covered services.

Applies to any health services (except psychological) regardless the coverage.

Potomac Valley Orthopaedic Associates v. Maryland State Board of Physicians This case concerned the physicians' self-referral exception in the context of MRI

referrals. BACKGROUND: Maryland Baby Stark's has the following exceptions:110 §1-302(d)(2) - “group practice exception” - the self-referral prohibition does not apply

to “a health care practitioner who refers a patient to another health care practitioner in the same group practice as the referring health care practitioner”;

§1-302(d)(3) - “direct supervision exception” - the self-referral prohibition does not apply to “a health care practitioner with a beneficial interest in a health care entity who refers a patient to that health care entity for health care services or tests, if the services or tests are personally performed by or under the direct supervision of the referring health care practitioner”;

§1-302(d)(4) - “in-office ancillary services exception” - the self-referral prohibition does not apply to a health care practitioner who refers in-office ancillary services or tests that are:

personally furnished by (a) the referring health care practitioner (HCP); (b)a HCP in the same group practice as the referring HCP; or (c) an individual who is employed and personally supervised by the qualified referring HCP or a HCP in the same group practice as the referring HCP;

provided in the same building where the referring HCP or a HCP in the same group practice as the referring HCP furnishes services; and

billed by the HCP performing or supervising the services or a group practice of which the HCP performing or supervising the services is a member.

(110) Md. Health Occ. Code 1-301 et seq 96

Potomac Valley Orthopedics v. Maryland State Board of Physicians (continued)

A group of orthopedists challenged the prohibition for making MRI referrals within their practices relaying on the Baby Stark's in-office ancillary services exception 110 that expressly excludes MRI, CT-scan and radiation therapy services except in practices solely-owned by the radiologists.

The Court111 held that the orthopedists couldn't rely on the statutory in-office ancillary services exception,110 as it was not available for the orthopedists. The orthopedists contended that the group practice exception did apply to them, as well as the personally performed test and service exception.

The Court disagreed, holding that the group-practice exception applies when the patient is transferred from one specialist to another (multi-specialty transfer). Also, the personally performed services exception did not apply in this case, as those services were not performed outside the scope of the practice.

(111) Potomac Valley Orth. v. Board of Physicians, 12 A. 3d 84 - Md: Court of Appeals 2011

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New Jersey's Codey LawEnacted in 2008 from a Senate Bill 787, signed into law by Jon S. Corzine, and

named after the Senator Richard Codey, New Jersey's Stark Law112 bars a practitioner from referring a patient to any healthcare service in which the practitioner or the practitioner's immediate family member has a significant beneficial interest.

The law defines a "significant beneficial interest" as any financial interest including certain real property ownership or lease arrangements.

Financial interest is defined as monetary interest of any amount held by a practitioner personally or through an immediate family member in a healthcare services to which the practitioner's patients are referred. It includes offer received by any practitioner or family member on anything more than the negligible value of entity to serve the patient or prescribe services and devices.

For purposes of the law, a "healthcare services" means a business entity that provides testing for, or diagnosis or treatment of human disease or dysfunction, or that dispenses drugs or medical devices for the treatment of human disease or dysfunction.??

(112) “Codey Law”, N.J.S.A. 45:9-22.4

Codey Law (continued)“Healthcare services” include: - bio-analytical laboratory - pharmacy - home healthcare agency - home infusion therapy company - rehabilitation facility - nursing home - hospital - facility that provides radiology or other diagnostic imaging services, physical therapy,

ambulatory surgery, or ophthalmic services. 112

Codey has a broader reach than like Maryland's Baby Stark, encompassing all types of healthcare services. Some critics call Codey Law “less instructive and confusing.”

The Codey Law is rarely enforced except in the context of referrals to ambulatory surgery centers (ASCs).

In New jersey, the ASCs are separate legal entities. When first enacted, the Codey Law did not initially contain a provision that expressly let physicians refer patients to ASCs in which they had an ownership interest. However, ASC owners attempted to convince (unsuccessfully) that such referrals were allowed under the "medical office exception" because ASCs were extensions of the physicians' offices (see next slide). 99

Garcia v. Health Net of New Jersey 113

In it's initial reading, the Codey Law encompassed all types of healthcare services, and unlike the federal Stark or Maryland's Baby Stark it did not include specific elements or exceptions to the self-referral bars.112

Also, when first enacted the Codey Law did not contain a provision that expressly let physicians refer patients to the ambulatory surgical centers (ASCs) in which they had an ownership interest. In 1997, in Advisory Opinion had revised this instruction, indicating that physicians who refer patients to an ASCs in which they have an ownership interest do not violate the self-referral law.

In Garcia,113 the ASCs owners claimed that such referrals were allowed under the Codey's "medical office exception" because ASCs were “extensions of the physicians' offices.” The Court disagreed and held that “the ownership in an ASCs by physicians who refer patients to the ASC violates the Codey Law,” reasoning that the ASCs is not a “medical center.” 113

Following the Garcia, in 2009 the New Jersey Legislation issued new ASC- exceptions:(1) The practitioner who provides the referral personally performs the procedure;(2) The practitioner's remuneration is directly proportional to his/her ownership interest

and not the volume of patients referred;(3) All clinically-related decisions at a facility owned in part by non-practitioners are

made by practitioners and are in the patient's best interests;(4) Disclosure of the referring practitioner's interest in the facility is made to the patient

in writing at or before the rime the referral is made.(113) Garcia v.Health Net of New Jersey, Docket No C-37-06 (N.J. Super. Ct. App. Div. Oct.

5, 2009) 100

Surgical Practice Under the revised Codey law, a surgical practice is defined with the following

characteristics: 112

(i) no more than one operating room, equipped to perform surgery and designed to accommodate invasive diagnostic and surgical procedures;

(ii) one or more post-anesthesia care units or a dedicated recovery area where a patient may be closely monitored until discharge; and

(iii) is established by a physician, physician professional association surgical practice, or other professional practice form specified by the BME solely for private medical practice.

The new amendments increase regulatory oversight of the entire ASC industry by requiring that (1) all unlicensed one-room ASCs must become “registered” with NJDHSS, and (2) all licensed ASCs must become accredited by an “accrediting body recognized by Medicare” (the Joint Commission). The amendments also prohibit physicians from referring patients to lithotripsy or radiation oncology facilities in which they hold an interest, unless the interest “was held within one year following the effective date of the bill.” Further, the amendments clarify and arguably expand the “medical office exception.”

Today, the Codey law is rarely enforced except in the context of referrals to the ASCs.

(112). N.J.S.A. 45:9-22.5 et seq 101

State New York's Baby Stark LawNew York's Baby Stark 114 bars practitioners from making referrals for

certain services to healthcare providers with whom the practitioner or his/her immediate family member has a financial relationship. The coverage includes:

- clinical laboratory services

- pharmacy services

- radiation therapy services

- physical therapy services

- x-ray imaging services.

The law also bars demands for payment for any prohibited referrals.

In 2012 the New York legislature adjusted the self-referral regulations, but the governor vetoed the measure. To date there is no enforcement under NY's Baby Stark Law.

(114) Public Health Law §§ 238 to 238-e; § 4501, Article 2: DH Title 2-D - (238 - 238-E) HEALTH CARE PRACTITIONER REFERRALS.

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Fed and State Stark Laws: Inclusions, ExclusionsFederal Stark Baby Stark (MD) Codey Law (NJ) Baby Stark (NY)

(1) Prohibits self-referrals of Medicare patients for DHS including when the physician (or an immediate family member) has a financial relationship with the entities providing DHS.

(2) Exceptions cover: FMV; AMC; non-monetary compensation with up to $300;

incidental medical staff benefits; indirect compensation agreements.

(1) Applies to health practitioners and not only to physicians.

(2) Applies to all services provided by health practitioners.

(3) Bars the self-referrals regardless the source of payment.

(4) The group-practice exception applies only to the multi-specialty transfer cases.

(5) Exceptions do not apply to certain specialties, like radiology.

(1) Bars health practitioners from referring a patient to any healthcare services in which the practitioner or his immediate family member has a significant beneficial interest.

(2) Health services include: diagnostic lab, pharmacy, home healthcare, home infusion therapy, rehabilitation facility, nursing home, hospital, imaging services, radiology, physical therapy, ambulatory, surgery, optometry.

(1) Applies only to a limited sector of services that is even narrower than the DHS covered by the federal Stark.

(2) Bars referrals of specific services to any payer, even to non - Medicare patients.

(3) Includes several exceptions largely mimicking federal exceptions but does not include exceptions related to the:

EHR and e-prescribing fair market value temporary non-compliance

grace period bona fide charitable

donation.103