The Potential Demise or Reform of the Stark Law in an Era of Value-Based Reimbursement

Transcription

1 3/23/2018 The Potential Demise or Reform of the Stark Law in an Era of Value-Based Reimbursement By Scott R. Simpson, Harter Secrest & Emery LLP "I have every lawyer in town bowing gratitude to me for the work they got out of that law." Rep. Fortney "Pete" Stark, chief sponsor of the Stark Law, remarking on its unpopularity save for one group of health care industry stakeholders[1] While the future of the various statutory provisions that comprise the Affordable Care Act is anything but certain, one thing that almost everyone can agree on is that the country's health care system is slowly but inexorably moving away from a fee-for-service (FFS) model and towards a value-based payment system.[2] Given that inevitability, it is worth scouting the current regulatory framework to identify the anachronisms of an increasingly bygone FFS era that may impede the implementation of a comprehensive value-based payment system. Perhaps the first candidate for reform to spring to any health care professional's mind is the federal Stark Law. Overview The Stark Law prohibits a physician from making a referral for certain designated health services (DHS) that are paid for by Medicare to any entity with which the physician or an immediate family member has a financial relationship.[3] Financial relationships can be either compensation arrangements or ownership arrangements.[4] There are numerous statutory exceptions to the above-stated general rule.[5] The Centers for Medicare & Medicaid Services (CMS) has expanded on the statutory list by issuing its own list of regulatory exceptions.[6] The most oft-used exceptions rely on three concepts: Remuneration received by a physician (1) cannot "take into account" the volume or value of the physician's referrals,[7] (2) must be "fair market value,"[8] and (3) must be "commercially reasonable" even if no referrals were made by the physician.[9] Though these concepts are defined vaguely by statute, regulation, and/or discussed in sub-regulatory guidance,[10] they are ultimately elastic, fact-based determinations. When a health care provider must defend against an alleged Stark violation, these concepts are frequently at the center of the government's case. Because they are factual in nature, the provider is often unable to obtain dismissal at an early stage, requiring instead a lengthy and costly litigation process.[11] Faced with the uncertain application of amorphous Stark concepts, the high cost of the litigation, and the enormous potential penalties, a provider is often unwilling to risk a trial even if it thinks its defense is meritorious. Further, before entering into any kind of significant transaction with a physician, a health care provider often believes it must obtain a third-party valuation to justify what it pays the physician. The need for a valuation injects more cost and less efficiency into a provider's transaction process. Stark is often mentioned in the same breath as its cousin the Anti-Kickback Statute (AKS), a federal criminal statute that basically prohibits any individual from offering or paying anything of value to another individual to induce or reward the referral of a federal health care program beneficiary for items or services paid for by the government.[12] Unlike the AKS, the Stark Law is a strict liability civil statute requiring no criminal or fraudulent intent for a violation. With no intent requirement for a

2 Stark violation, the failure to comply with even the most trivial requirements can trigger steep penalty provisions. Despite not having the criminal bite of the AKS, non-compliance with the Stark Law presents significant liability for health care providers. A referral made in derogation of Stark subjects the entity seeking Medicare payment to the mandatory refund of any amount paid to the health care provider for the DHS.[13] Though rarely used as a penalty by the government, the offending provider can be excluded from participation in the Medicare program altogether.[14] More significantly, the Stark Law is almost exclusively enforced through the federal False Claims Act (FCA).[15] The FCA allows individual "whistleblowers" to bring suit on behalf of the federal government against a health care provider alleged to have violated the Stark Law. Liability under the FCA is currently between $11,181 and $22,363 for each Stark-violating claim,[16]with the potential for triple damages.[17] Attorneys' fees can also be awarded.[18] In some cases, the Department of Health and Human Services Office of Inspector General (OIG) may require an onerous corporate integrity agreement.[19] Depending on whether the government decides to intervene in a qui tam action, the whistleblower can receive up to 30% of the overall recovery.[20] In fiscal year 2016, the Department of Justice raked in more than $2.5 billion from FCA enforcement against the health care industry.[21] The intent behind the Stark Law's enactment in 1989 was to combat perceived overutilization by physicians who referred patients to health care entities owned in whole or in part by the referring physician.[22] Shortly before Stark became law, the OIG issued a controversial report[23] finding, among other things, that patients of physicians who owned or invested in clinical laboratories received 45% more lab services than all Medicare patients generally.[24] The OIG estimated that overutilization of lab services as a result of physician lab ownership cost the federal government $28 million in 1987 alone.[25] While the original version of the Stark Law had already been introduced in Congress, the OIG's report helped to secure its passage. For his part, Representative Stark intended to create a clear, "bright line" rule to check overutilization caused by the economic interests of referring physicians.[26] However, even though it was initially intended to address physician ownership and investment interests, Stark was expanded to apply to the compensation arrangements that physicians had with entities to which they referred.[27] The rationale behind that expansion was concern that the Stark Law could be circumvented through compensation arrangements that would give physicians many of the benefits and risks of ownership without actually granting an equity interest.[28] Shifting Landscape: Repealing or Limiting the Stark Law Fast forward to today's health care landscape where payers and providers are slowly moving away from a FFS model of reimbursement to a value-based system. Instead of a FFS system that rewards a provider each time it provides an item or service, a fee-for-value (FFV) system rewards a provider for delivering higher-quality outcomes at lower costs without regard to the volume of work done by the provider. The Medicare program has experimented with numerous value-based initiatives like accountable care organizations and bundled payments for certain conditions and procedures.[29] In a FFV system, overutilization to bolster the bottom line through ordering additional diagnostic tests or performing potentially unnecessary services is no longer a concern. Health care providers are financially at risk in FFV systems in that the more services provided, the less chance for profit. Because the Stark Law was intended as a tool to combat overutilization, arguably reform or repeal of the controversial statute is warranted. In the event the Stark Law was fully repealed, the potential for overutilization of ancillary services driven by physician ownership could become a larger issue to the extent the FFS system remained. To avoid that problem, Congress could consider repealing the Stark provisions that apply to physician compensation arrangements but leave in place the portions applicable to physician ownership of DHS providers. However, Congress and CMS may be able to discourage physician

3 ownership in ancillary services simply by reducing the reimbursement for DHS provided through a physician's group practice. Alternatively, as CMS currently does in the outpatient hospital context, payment for physician office visits and services ordered at those visits could be packaged if performed by the same physician group on the same day.[30] As mentioned above, if the Stark Law's application was limited to ownership and investment interests, equity deals could likely be framed as compensation arrangements to avoid implicating the statute altogether. However, this concern is lessened by considering the difference between today's enforcement landscape and what existed at the time of the Stark Law's enactment. In the late 1980s and early 1990s, the Department of Justice (DOJ) was not certain it could bring AKS claims as part of an FCA case.[31] Without the Stark Law, the prevailing thinking at the time was that there was no civil enforcement mechanism to reach some potentially abusive financial arrangements. DOJ had to choose whether to pursue these complicated cases exclusively in a criminal context.[32] Today, it is well-settled that the AKS can serve as the basis for an FCA action, providing the government the flexibility it sought at least as early as the 1989 OIG Report. The AKS, then, can reach the same compensation arrangements as the Stark Law. The main difference is that the alleged perpetrator would have to be found to possess the requisite criminal intent.[33] From the government's perspective, the AKS safe harbors may need to be reworked if the Stark Law was inapplicable to compensation arrangements. For example, in a physician practice acquisition by a hospital, the physician often becomes a hospital employee post-closing. The AKS employment safe harbor requires only that the physician be a bona fide employee of the hospital for all compensation paid to that physician to be protected. However, the Stark employment exception goes further, requiring that compensation paid to an employed physician is both fair market value and commercially reasonable. Without those Stark requirements, it would be easier for the acquiring hospital to disguise payments for future referrals as employment compensation because of the comprehensive protection offered by the AKS employment safe harbor. To guard against such abuses, Congress and the OIG would likely need to bolster the requirements for certain AKS safe harbors. For all its flaws and technicalities, the Stark Law has helped foster the development of corporate compliance programs and policies. Especially among hospitals and other institutional providers, physician compensation and relationships are now a keen area of focus. While they may not know the intricacies of the Stark Law, hospital executives are only too aware of the potential implications should a deal with a physician be too generous. That awareness has led to a certain level of rigor and fiscal responsibility that may have been absent without Stark on the books. Potential for Reform Should Congress be unwilling to jettison Stark altogether or limit its application to physician ownership or investment arrangements, there are other reforms that could be considered in light of the changing health care marketplace. Per CMS Administrator Seema Verma, the agency is actively considering ways to modernize the Stark regulations.[34] Some of these reforms could include: 1. Creating regulatory exceptions to remove impediments to value-based payment systems. The implementation of several FFV reimbursement models could be hampered by the Stark Law's prohibition on certain physician compensation arrangements. For example, many hospitals would like to implement gainsharing components to compensation arrangements with both employed and independent physicians. In a gainsharing program, a physician receives a share of any reductions in a hospital's patient care costs that are attributable to the actions of the physician. Gainsharing helps to align the interests of the physician with those of the hospital. Without such programs, a physician (especially a physician in private practice) may have little incentive to assist the hospital in the containment of costs.

4 Gainsharing arrangements may be protected under several existing Stark exceptions, including the employment, personal services and fair market value exceptions. However, it can be tricky to structure and implement a gainsharing program to meet the fair market value, commercial reasonableness and the volume or value of referrals requirements that lie within those exceptions. More importantly, providers should be afforded a level of certainty that their pursuit of FFV goals will not be met with potentially ruinous financial exposure in the event they fail to jump through the right Stark hoops. While Congress has relaxed certain federal laws to ease some of the restrictions on gainsharing arrangements, Stark is not among them.[35] CMS did propose a Stark gainsharing exception as part of the 2009 Medicare Physician Fee Schedule, but never finalized it.[36] Notably, the proposed gainsharing exception contained no fair market value or commercially reasonable requirement, indicating that CMS recognized even then that those concepts do not apply neatly in a FFV world. By statute, CMS may only issue a regulatory exception if it determines the exception "does not pose a risk of program or patient abuse."[37] Many stakeholders have criticized CMS' narrow ability to issue new Stark exceptions. Given the increasing shift towards FFV models, Congress could consider expanding CMS' authority to issue Stark exceptions that do not pose a significant risk of program or patient abuse.[38] With this expanded authority, CMS could be more aggressive in issuing new Stark exceptions that protect gainsharing and other pay-for-performance compensation arrangements. Alternatively, many industry stakeholders favor expanding the current Medicare Shared Savings Program fraud and abuse waivers to other payment models.[39] 2. Allowing multi-hospital health systems to plan their physician staffing across facilities. For some time now, the trend has been for hospitals to employ more and more physicians directly. Close relationships with physicians are a prerequisite for a hospital before it can meet the quality and cost goals that are attendant to success in value-based models. However, most hospitals still have private practices that play important roles in their service areas. The recruitment of physicians remains a real challenge for these private practices, particularly in mid-sized and smaller cities and in rural areas. As a result, practices often turn to the local hospital for help in financially supporting new recruits. There is both a statutory and a detailed regulatory Stark exception that allows a hospital to financially support a physician who is recruited into the hospital's service area to join a private practice. The problem, however, is that in today's "bigger is better" environment, multi-hospital health systems are more common than ever. Of course, one of the benefits to such a structure is the centralization of business, administrative, and other functions. Health systems tend to make their physician needs plans at a system level, not a facility level. Especially at health systems with facilities that are geographically spread out, it is not unusual for a physician to work in separate and distinct hospital service areas. The Stark recruitment exception is written for a single recruiting hospital. If the recruited physician spends a substantial amount of her time practicing outside the recruiting hospital's geographic service area, the recruitment arrangement may fall outside the exception. When a multi-hospital health system plans for a physician to work in multiple service areas at more than one of its facilities, the narrow scope of the recruitment exception could potentially preclude the hospital's financial support altogether. CMS offers very little guidance on this issue. The agency issued a 2006 advisory opinion that approved a hospital's recruitment of a primary care physician when the physician would practice 10-20% of the time outside of the hospital's service area.[40] In doing so, CMS noted that the recruitment exception contained no explicit requirement that a recruited physician must spend all of her time in the recruiting hospital's geographic service area.[41] However, CMS warned that should

5 a physician's time outside a recruiting hospital's service area be more substantial, it could reach a different conclusion.[42] Given that caveat, health systems are left without explicit guidance as to whether they can enter into recruitment deals when the recruit will spend more than one day a week outside the recruiting hospital's service area. In light of the centralized nature of today's multi-hospital health systems, and the recruiting challenges in all but the major cities, CMS should clarify in the recruitment exception itself the extent practice outside a hospital's service area jeopardizes protection. 3. Reducing the penalties for technical violations. Many Stark exceptions require financial arrangements to be in writing and signed by both parties. Should the parties fail to fully execute the document or documents that comprise the arrangement, a "technical" Stark violation exists, subjecting the offending health care provider to the full panoply of Stark liability. The provider faces these severe consequences even if the parties are governing their business in accordance with the written arrangement. One of the few Stark reforms to gain any traction is to subject technical violations such as the failure for a written arrangement to bear the signature of both parties to greatly reduced penalties and a special self-disclosure process that would allow for easy resolution of these minor transgressions. Legislation was introduced in the House of Representatives during the last two sessions of Congress that would accomplish these goals.[43] Conclusion As government payers continue to move toward value-based purchasing, the need to reexamine the Stark Law likely becomes increasingly critical. The complexity and technical requirements of the Stark Law may impede creative compensation methodologies that pose little risk of harm to either patients or the government fisc. Eliminating or substantially reforming the Stark Law could encourage providers, payers, and other stakeholders to invest fully in these innovative new financial models that may help to deliver better care, at a lower cost and with better outcomes. Scott R. Simpson is Counsel in the Health Care practice group at Harter Secrest & Emery LLP, a full-service business law firm headquartered in Rochester, NY. He provides legal counsel to a wide array of clients, including health care systems, hospitals, nursing homes, home health agencies and physician groups. Mr. Simpson previously served as Assistant General Counsel at Rochester Regional Health, an integrated health services organization, including five hospitals and other health care facilities and services. ssimpson@hselaw.com. [1] Janet Adamy, Pete Stark: Law Regulating Doctors Mostly Helped Lawyers, Wall St. J.: Wash. Wire (Oct. 22, 2014), available at [2] See, e.g., New York Department of Health, Medicaid Redesign Team, A Path Toward Value Based Payment: Annual Update3 (Jun. 2016), available at (stating that, as part of its Medicaid Delivery System Reform Incentive Payment program, New York has an expressed goal to make ninety percent (90%) of all Medicaid managed care payments using value-based payment methodologies by 2020). [3] 42 U.S.C. 1395nn(a)(1); 42 C.F.R (a). [4] 42 U.S.C. 1395nn(a)(2); 42 C.F.R (a). [5] 42 U.S.C. 1395nn(b)-(e).

6 [6] 42 C.F.R [7] See, e.g., 42 U.S.C. 1395nn(e)(2)(B)(ii) (employment) and (e)(3)(a)(v) (personal services); 42 C.F.R (c)(2)(ii) (employment) and (d)(1)(v) (personal services). [8] See, e.g., 42 U.S.C. 1395nn(e)(2)(B)(i) (employment) and (e)(3)(a)(v) (personal services); 42 C.F.R (c)(2)(i) (employment) and (d)(1)(v) (personal services). [9] See, e.g., 42 U.S.C. 1395nn(e)(1)(A)(v) (office space) and (e)(2)(c) (employment); 42 C.F.R (a)(6) (office space) and (c)(3) (employment). [10] 42 U.S.C. 1395nn(h)(3) and 42 C.F.R (fair market value); 69 Fed. Reg , , (Mar. 26, 2004) (volume or value standard and commercially reasonable). [11] U.S. Senate Finance Committee Majority Staff, Why Stark, Why Now? Suggestions to Improve the Stark Law to Encourage Innovative Payment Models 5 (Jun. 30, 2016), available athttps:// 0Staff.pdf (hereinafter, the Senate Finance Committee Report). [12] 42 U.S.C. 1320a-7b(b). The Stark Law and the AKS are frequently described together as the "fraud and abuse laws." However, that description is not entirely accurate. Stark is more akin to a Medicare condition of payment, a requirement that must be met by a health care provider to be reimbursed by the Medicare program for its services. [13] 42 U.S.C. 1395nn(g)(2); 42 C.F.R (d). [14] 42 U.S.C. 1395nn(g)(3). [15] Marc S. Raspanti & Sarah R. Lavelle, Who is Enforcing the Stark Law of the United States?, AHLA Connections, Sept. 2012, at 24, 25 n.4. [16] 31 U.S.C. 3729(a)(1); 28 C.F.R [17] 31 U.S.C. 3729(a)(1). [18] 31 U.S.C. 3730(d). [19] For more on corporate integrity agreements, see [20] 31 U.S.C. 3730(d)(2). [21] While drug and medical device companies accounted for most of that $2.5 billion, hospitals and outpatient clinics paid about $360 million. Press Release, U.S. Dep't of Justice, Justice Department Recovers Over $4.7 Billion From False Claims Act Cases in Fiscal Year 2016 (Dec. 14, 2016), available at [22] See Nicholas J. Diamond, Giving Disclosure its Due: A Proposal for Reforming the Stark Law, 16 DePaul J. Health Care L. 1, 8-9 (2014). [23] Office of Inspector General, U.S. Department of Health & Human Services, Financial Arrangements Between Physicians and Health Care Businesses (May 1989), available at (hereinafter, the 1989 OIG Report). [24] Id. at 18. [25] Id. [26] Diamond, supra note 22, at 8-9.

7 [27] Senate Finance Committee Report, supra note 11, at 4. [28] Id. at 8. [29] See, e.g., Comprehensive Care for Joint Replacement model, [30] 42 C.F.R (b). [31] Senate Finance Committee Report, supra note 11 at 6; American Health Lawyers Association Public Interest Committee, A Public Policy Discussion: Taking the Measure of the Stark Law 8 (2009), available athttps:// Paper.pdf. [32] Id. [33] In addition to the AKS and Stark Law, compensation arrangements between tax-exempt health care providers and physicians must be reasonable under the common law rules applicable to private inurement and private benefit (see World Family Corp. v. Comm'r, 81 T.C. 958 (1983), non-acq. in part, C.B. 2; B.H.W. Anesthesia Found., Inc. v. Comm'r, 72 T.C. 681 (1979), non-acq., C.B. 2; Mabee Petroleum Corp. v. United States, 203 F.2d 872 (5th Cir. 1953)) and the statutory and regulatory requirements applicable to excess benefit transactions (26 U.S.C. 4958; 26 C.F.R ). [34] See American Hospital Association, AHA/CMS Regulatory Relief Town Hall Webcast: Stark Law, at (posted Jan. 18, 2018) (last viewed Feb. 2, 2018). [35] The Civil Monetary Penalty (CMP) statute prohibits a hospital from knowingly making a payment directly or indirectly to a physician as an inducement to reduce or limit medically necessary services furnished to Medicare or Medicaid beneficiaries under the physician's direct care, and a physician from knowingly accepting such payment. 42 U.S.C. 1320a-7a(b)(1) and (b)(2). Until Section 512 of the Medicare Access and CHIP Reauthorization Act of 2015 added the "medically necessary" modifier, the CMP effectively operated as a bar to many gainsharing arrangements because it applied to any reduction or limitation of services. [36] 73 Fed. Reg , (Jul. 7, 2008). [37] 42 U.S.C. 1395nn(b)(4). [38] Senate Finance Committee Report, supra note 11, at [39] Id. at 9. [40] Centers for Medicare and Medicaid Services, Advisory Opinion No. CMS-AO (Nov. 2006), available athttps:// Abuse/PhysicianSelfReferral/Downloads/CMS-AO pdf. [41] Id. at 5. [42] Id. [43] H.R. 3726, Stark Administrative Simplification Act of 2017 (115th Congress) (Intro. Sept. 11, 2017); H.R. 776, Stark Administrative Simplification Act of 2015 (114th Congress) (Intro. Feb. 5, 2015). After voting H.R out of committee on September 13, 2017, the House Committee on Ways and Means reported on and advanced the bill to the full House of Representatives for consideration on December 21, The bill's progress can be tracked at (last visited Feb. 2, 2018).

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