CMS releases Stark II Phase III

Michelle Leppert, for Compliance Monitor, August 31, 2007
The Centers for Medicare and Medicaid Services has issued the long-awaited Stark II Phase III final rules. Some of the biggest changes involve indirect compensation arrangements, physician recruitment, and personal service arrangements.

"These weren't exactly what we expected to see," says Sindey Welch, Esq., a partner with Powell Goldstein LLP. "There are a fewer number of changes and not necessarily on the topics we expected. Some of the changes raise more questions than answers."

"We were hoping for some consolidation of the rules," adds Sara Kay Wheeler, Esq., a partner at Powell Goldstein, LLP.

Under the new rules, CMS will consider physicians to "stand in the shoes" of their practice group when determining whether a compensation arrangement is direct or indirect. The change closes a loophole in the definition of indirect compensation arrangement by treating arrangements for designated health services (DHS) between entities and group practices as if the arrangements are with the group's referring physicians.

"I think this can have a material impact," says Robert Wade, Esq., an attorney with Baker and Daniel LLP. "It will make it more difficult to be in compliance because now you have to analyze [an arrangement] twice. It will make it more cumbersome and more expensive."

Under Phase III, many of the relationships that would have been considered indirect under Phase II will now be considered direct.

The changes in the Stark Law will also:
  • Eliminate the proposed safe harbor within the fair market value of physician compensation
  • Expand the non-monetary compensation exception
  • Add three new regulatory definitions
  • Add an alternative 45-minute transportation time test to the intra-family rural referrals exception
  • Add a holdover provision in the exception for personal service arrangements
  • Expand the geographic area into which a rural hospital may recruit physicians

Safe harbor and fair market value
In Phase II, CMS created a safe harbor provision in the definition of fair market value for hourly payments to physicians for their services. The safe harbor, which contained two methods for calculating fair market value, is not being retained in Phase III.

"A lot of people were using the methodology [(of the safe harbor)] to calculate fair market value," Wade says. "The methodology is still prudent to use. I am a little surprised there was so much push back. It seems peculiar that they would delete something that was really a voluntary requirement."

Wade says he will advise his clients to continue to use four benchmarks when determining fair market value for a physician's personal [services].

"I hope through eliminating that [(loophole)] providers don't immediately drop the methodology," Wade says.

Non-monetary compensation
CMS made two substantive (substantial?) changes to the non-monetary compensation rules. The first allows physicians to repay certain non-monetary compensation within the same calendar year to preserve compliance with the exception. The excess non-monetary compensation cannot exceed 50 percent of the permitted amount and must be repaid within 180 days of its receipt or the end of the calendar year, whichever is sooner.

"My best educated guess is less than 50 percent of hospitals are tracking this," Wade says. "It will only become an issue during an audit. This makes it incumbent upon the organization to track."

Some organizations saw the indirect compensation arrangement as a fallback, according to Wheeler.

"This is a significant deletion," Wheeler says. "If [(an organization)] absolutely satisfied the stated definition, that was something they had a bright line rule on."

The second change allows entities to provide one medical staff appreciation function for the entire medical staff per year, without regards to the monetary limitation. Any gifts associated with the function would still count against the monetary limitations.

Big changes in recruitment
CMS' changes to the physician recruitment rules could also have a big impact, according to Wade. In the past, a group that recruited a physician could not put restrictions on that physician except in the area of quality of care.

Under the new rules, groups recruiting a physician can restrict moonlighting and have non-compete agreements. Wade says in the past, many of his clients were frustrated because they could not create non-compete agreements.

"[Under Phase III] if you recruit a physician, you can establish a non-compete as long as it is arguably reasonable and defensible under state law," he says.

Wade was also pleased to see the holdover provision in the exception for personal service arrangements. This exception allows a [holdover] of an existing contract with a physician. For example, if a personal service arrangement expires, the holdover will allow the physician to continue to provide services and avoid a technical violation.

"I was shocked, but I applaud it," Wade says. "This is a good thing."

Welch says this change will be especially beneficial to hospitals or groups that are not keeping track of contract expirations.

"This is extremely beneficial," Welch says. "It buys them a little time. They may not have realized they were at the end of the contract."

Phase III responds to comments made about Phase II and addresses the entire regulatory scheme. Phase I, II, and III are intended to be read together as a whole.

"In order to analyze this, you have to be conversant in all three phases," Wheeler says. "That's not unexpected, but it is a significant clarification."

Michelle Leppert is the editor of Compliance Monitor. She may be reached at This story first appeared as a breaking news item from the editors of Compliance Monitor, a weekly e-mail newsletter by HCPro Inc. For information on all of HCPro's products, visit




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