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Guide to The Stark Law and the “Group Practice” Requirement

Even though self referral to DHS is prohibited, the Stark Law provides certain exceptions under which such referrals may be performed. To qualify for these exceptions, physicians must adhere to a number of complex legal and business structure requirements. One such exception is the “in-office ancillary services.”

Reza Ghafoorian, MD, JD

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Introduction

Many health care practices provide in-office clinical services to which they routinely refer their patients. For example, some practices own, operate, and refer patients to in-office clinical laboratories. Such in-office laboratories are convenient for patients and physicians alike. Patients enjoy the convenience of a one-stop shop for visiting with their physician and getting their lab work done. Physicians are able to provide a better and less interrupted service to their clients and receive laboratory results in a timely manner. However, referring patients to in-office services with which a physician has a financial relationship is not permissible, unless a health care practice qualifies as a “group practice” under the Stark Law and satisfies certain other statutory requirements.

Concerns over the ethical and economic impact of physician self referrals date back to the 1980s. In 1980, Dr. Arnold Relman’s publication in the New England Journal of Medicine sparked a national debate over the ethical risks inherent in physician self-referral.

This national debate forced Congress to mandate certain studies and promulgate a series of laws relating to the role of physicians in the health care business. In a study mandated by Congress in 1989, the Health and Human Services Inspector General concluded that if a physician has a financial relationship with an entity, the physician tends to refer more patients to that entity. This study documented that physicians who have a financial relationship with a clinical laboratory refer 45% more of their Medicare patients to that clinical laboratory as compared with physicians who do not have a financial relationship with a clinical laboratory. Following this study, Congress promulgated a series of laws to curb the abuses that may occur in the health care business. One such law is known as the Physician Self-referral Law (a.k.a. the Stark Law).

The Stark Law is primarily set forth in section 1877 of the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989). This law prohibits physicians from referring Medicare patients to an entity for designated health services (DHS), if the physician or the physician’s immediate family has a financial relationship with the entity. DHS includes clinical lab services; physical therapy, occupational therapy, and speech-language pathology services; radiology and other imaging services; radiation therapy services and supplies; durable medical equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; inpatient hospital services; outpatient hospital services; and parental and enteral nutrients, associated equipment, and supplies.

In a series of regulatory publications over almost two decades, the Centers for Medicare and Medicaid Services (CMS, formerly HCFA) and the Office of the Inspector General (OIG) have interpreted the Stark Law. As a result, today there exist a number of complex regulatory documents which address different aspects of this law. These regulatory documents may be found on the Department of Human Health Services’ (DHHS) website at http://www.cms.hhs.gov/PhysicianSelfReferral.

Even though self referral to DHS is prohibited, the Stark Law provides certain exceptions under which such referrals may be performed.

To qualify for these exceptions, physicians must adhere to a number of complex legal and business structure requirements. One such exception is the “in-office ancillary services.” Upon meeting the requirements set forth in this exception, a physician can refer patients for DHS provided that:

  • the physician is a member of a group practice (or a solo practice);
  • services are performed by the referring physician or under direct supervision of the referring physician or other physicians in the same practice group;
  • the designated health services are provisioned in a facility which is a part of the group practice;
  • the designated health services are billed according to the regulations; and
  • the referrals do not violate the anti-kickback laws.

Although the “in-office ancillary services” exception provides the basis of a myriad of rules and regulations with which referring physicians must comply, this article focuses on the first element of this exception—providing that a physician must be a “member” of a “group practice.” Physician practices must ensure that they comply with this first element (in addition to the other requirements) as intended by Congress and defined by DHHS.

Definitions

Member

The regulations define a “member” of a group practice to include any physician who owns, or is employed by, the group practice. Although non-physicians, such as nurses and physicians assistants, may be group practice “members,” their membership has no practical effect for purposes of the three group practice tests, or the profits and productivity bonuses provisions described in more detail below.

Group practices

The Stark Law imposes strict conditions on and narrowly defines a “group practice.” In fact, the current laws and regulations govern formation, management, distribution of income and expenses, sharing of profits, and distribution of bonuses related to a qualified group practice. Although some physicians and trade associations have objected to these regulations as micromanaging physician businesses, today, physicians may violate the law if their group practices fail to comply with these regulations and they self refer patients for DHS.

Formation

Congress intended that a qualified group practice consist of physician members whose practices are fully integrated, medically and economically. Thus, the regulations define a group practice as a single legal entity that is a bona fide (i.e., true) group practice of two or more physicians. A single legal entity may be organized as a partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan, or similar association. For example, one non-physician entity may form a practice group as long as it organizes a single legal entity which employs at least two physicians. It must be noted that even though formation of group practices is allowed by non-physician entities, the regulations prohibit formation of a group practice by other group practices.

Management

The physician self-referral law also governs the way a group practice is managed by requiring that each group practice comport to the following tests:

full range of services,

  • substantially all, and
  • 75% physician-patient encounters tests.

“Full range of services” test

This test provides that each physician who is a member of the group practice must furnish substantially the full range of patient care services that the physician routinely furnishes, including medical care, consultation, diagnosis, or treatment, through the joint use of shared office space, facilities, equipment, and personnel. This test ensures that physicians in a group practice truly engage in the practice of medicine and identifies situations where a physician has joined a group in name only. This test also ensures that physicians are practicing as part of the group and not using the group to profit from referrals for DHS.

Patient care services

The regulations have defined the phrase “patient care services” as “any physician tasks that address the medical needs of patients that benefit the practice.” This may “include, for example, time spent training group staff members, arranging for equipment, or performing administrative or management tasks, as long as these activities befit the operation of the group practice.”

However, activities such as teaching, overseeing residents, or conducting medical research, are not considered “patient care services.” If a physician in a group practice performs only these non-patient care services activities, the physician will not be considered a member of the group practice. Such a non-member physician may not be considered when determining whether a physician business fits within the group practice definition.

Additionally, different profit distribution schemes must be used for the non-member physicians. For example, to qualify as a group practice, a solely owned Professional Corporation (PC) whose owner physician is considered a non-member must employ at least two other physician members who qualify under the full range of services test. In addition, the non-member sole physician owner would not be eligible for sharing in overall profits or productivity bonuses as prescribed under the “group practice” guidelines.

“Substantially all” test

This test provides that substantially all of the patient care services of the referring physicians who are members of the group practice must be furnished through the group and billed under a billing number assigned to the group. This test is designed to ensure that member physicians are economically bound to the group for services other than DHS referrals and are not just members of the group for purposes of profiting from DHS referrals.

“Substantially all” is defined to mean at least 75% of the physician members’ “patient care services” in aggregate. The regulations recommend measuring the “patient care services” by the total patient care time, concluding that the total patient care time is the most straightforward way of measuring “patient care services.” The total patient care time is the actual time spent performing patient care services, whether performed inside or outside of the group practice. For example, consider a two-member physician group in which one member performs 100% of his patient care services in the group practice, but the second member renders only 65% of her patient care services through the group practice. In such a scenario, about 82% [(100% + 65%)/2 = 82.5%)] of the physician members’ patient care services are rendered through this group practice, therefore satisfying the “substantially all” test.

Because the proposed total patient care time scheme may prove burdensome for some practices, group practices are allowed to adopt other alternative means of satisfying the “substantially all” test. However, the alternative measures used by group practices must be (1) reasonable; (2) fixed in advance of the performance of the services being measured (e.g., no ex post facto  methods); (3) uniformly applied over time; and (4) verifiable.

“75% physician-patient encounters” test

This test provides that physician members of a group practice must personally conduct 75% of the group practice’s patient encounters (measured per capita). An “encounter” is defined as any appointment during which a group practice patient is actually examined or treated by a physician. This test is designed to ensure that the group practice is established legitimately as a medical practice and not primarily for benefiting from the provision of ancillary services.

For example, if a group practice examines or treats 100 patients, only 25 patient encounters may be performed by non-member providers. Thus, in a group practice that encounters 100 patients, if the group practice delegates 26 of the patient encounters to non-member providers (e.g., contract physicians, nurses, or physician assistants), the group practice fails to qualify as a group practice under the “75% physician-patient encounters” test.

Distribution of income and expenses

The Stark Law requires that “the overhead expenses of and the income from the group practice are distributed in accordance with methods previously determined.” In general this provision of the statute may be interpreted to mean that overhead expenses and income be distributed according to methods that are determined prior to the receipt of payment for services (i.e., services giving rise to the overhead expenses or producing the income).

For instance, if a physician bills a patient for $100, the group practice can determine a method for distributing this income before payment is received from the patient. Also, if the payment for this service is to be applied to an expense borne from providing this service, the group practice must also establish methods for determining distribution of such expense prior to receipt of the payment. Consequently, group practices can frequently adjust their compensation methodologies as long as they adhere to the requirements of this provision and remain subject to the restrictions on the distribution of DHS revenues as described in more detail below.

The Secretary of DHHS added an additional requirement to this provision of the Stark Law. This newly added provision further requires that a group practice be a “unified business” before distributing its overhead expenses and income.

“Unified business” test

The “unified business” test requires that a group practice possess (1) a centralized decision-making body, representative of the practice, that maintains effective control over the group’s assets and liabilities (including budgets, compensation, and salaries); and (2) consolidated billing, accounting, and financial reporting. This test is designed to ensure that group practices are integrated businesses and precludes group practices which are not bona fide group practices and only operate to benefit from lucrative DHS referrals.

It is important to note that while the “unified business” test restricts integration of a group practice, it does not dictate specific compensation methods. As such, group practices may adopt different compensation schemes, such as cost center or location-based accounting, as long as the physician member compensation is not based on volume or value of Medicare referrals.

Profit sharing and productivity bonuses

The profit sharing and productivity bonus restrictions set forth yet another layer of requirements which health care providers must comply with to qualify as a group practice. For example, to self refer patients to an in-office clinical laboratory, a physician group must ensure that it meets the required group practice methodologies for distributing profits and allocating bonuses to the physicians in the practice.

According to the Stark Law, a physician who is a member of a group practice may not be compensated directly or indirectly based on volume or value of DHS referrals. However, physicians in group practices may receive profit shares or productivity bonuses based on services performed personally (and services incident to the physician’s personally performed services) as long as the shares or bonuses are not directly based on referred services. Thus, revenues generated by DHS should be distributed based on methods that indirectly take into account DHS referrals.

The regulations set forth certain examples of indirect methodologies according to which revenues may be distributed to group practice members and physicians.

Overall profit sharing methodologies

Before exploring the different sample methods for distributing overall profit shares, it is important to determine the regulatory definitions of “share of overall profits.” “Share of overall profits” may mean a share of the entire profits derived from DHS of the entire group practice. “Share of overall profits” may also mean the entire profits derived from DHS of any component of the group practice that consists of at least five physicians. Following are three sample methods for distributing overall profits derived from DHS according to the regulations:

Sample Method 1. Share of overall profits may be distributed on a per capita basis. In this method, the overall profits are divided by the number of physicians and members sharing the profits. Each physician and member may then receive an equal share based on this calculation. This linear profit sharing method works well for groups in which all partners have equal shares, but it fails to adequately distribute profits in group practices with unequal shareholders. Additionally, this method fails to reward physician members who contribute more time to patient care as compared with those who choose to work less.

Sample Method 2. Revenues received from DHS may be distributed according to the revenue distribution of non-DHS profits. This method provides a more just distribution of profits in group practices where one physician provides more health care services as compared with other physicians in the same group practice. Under this methodology, physicians who work more are rewarded with a larger share of the DHS revenues.

Sample Method 3. Any distribution method may be employed under two conditions: (1) if the DHS revenues are less than 5% of the total revenues of the group practice; and (2) if the portion of the DHS revenues allocated to each physician is less than 5% of the physician’s total compensation from the group practice.

Productivity bonus distribution methods

The regulations have also provided sample methods for distributing productivity bonuses. Three such examples are as follows:

Sample Method 1. A productivity bonus may be based on the physician’s total patient encounters or Relative Value Units (RVUs). Under this method, physicians who encounter more patients will receive a higher productivity bonus. RVUs describe the resources used to provide physician services and are used to create a fee schedule based on which Medicare pays for physician services. There are different types of RVUs. For example, the physician work RVUs account for the time, technical skill and effort, mental effort and judgment, and stress to provide a service.

Sample Method 2. Similar to the Sample Method 2 for distributing overall profits discussed above, a productivity bonus may be distributed based on the revenue distribution of non-DHS profits. Thus, physicians who receive a larger portion of the non-DHS revenues will receive a greater portion of the DHS related revenues.

Sample Method 3. Again, similar to the Sample Method 3 for distributing overall profits discussed above, a productivity bonus may be distributed under two conditions: (1) if the Medicare or Medicaid DHS revenues are less than 5% of the total revenues of the group practice; and (2) if the portion of the Medicare or Medicaid DHS revenues allocated to each physician is less than 5% of the physician’s total compensation from the group practice.

Conclusion

Definitions of “member” and “group practice” present only a part of the requirements that health care businesses must fulfill to comply with the “in-office ancillary services” exception of the Stark Law. Meeting other requirements presented within this exception, other provisions of this statute, and other laws may be required to fully comply with the existing laws that govern physician self referrals.

Although these complex regulatory laws are regarded as barriers in the path of the practice of medicine, they were designed with the intention of preventing fraud in the health care business. One can only hope that in the future Congress finds a way to simplify these complex laws to reduce the current burden that they impose on health care businesses.

Why Hire a Healthcare Attorney?

Healthcare laws are complicated and over 40 different different regulatory bodies, including federal, state and private agencies, can oversee healthcare operations at the same time.

Healthcare attorneys understand these regulations and are trained to help you navigate these complex regulations so that you can grow and stay safe.  

What Can Perla Do for My Health Care Business?

Perla allows you to immediately connect with health law and healthcare regulatory attorneys such as those knowledgeable about HIPAA, Stark, Anti-kickback, Medicare/Medicaid, etc.  And, it is free to search for and contact attorneys using Perla. 

Everyone needs legal help to get through tough times and prepare for the future. Don’t wait for days to get a referral from a friend or get stuck with the wrong attorney for lack of options. Instantly connect with a growing number of healthcare lawyers to add to your team.  And, sleep well knowing your healthcare lawyer will fight for the best possible outcomes for you or your business.  

Stark lawyers can assess your business’s compliance with self-referral regulations. Whether as a preventative measure or as a response to an ongoing investigation by HHS, Stark lawyers know how to assess, reduce, and control regulatory risks. A Stark lawyer can give you the tools you need, such as a risk management plan, mitigation procedures, evaluation and training materials, and best practices regarding remaining compliant with fraud and abuse statutes to assist you in managing the state and federal self-referral requirements.

Stark lawyers and healthcare attorneys, in general, can also defend you in investigations for violations of the self referral regulations before state agencies such as the State Health Professional Boards or in Federal investigations, such as before the Office of Inspector General (OIG).

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Photo: National Cancer Institute

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Reza Ghafoorian, MD, JD

about the author

Reza Ghafoorian, MD, JD

G2Z Law Group, PLLC

Dr. Ghafoorian provides legal advice to clients on businesses law, health law and health care regulations, such as, contracts and employment matters, fraud and abuse statutes, privacy and security, and telemedicine/telehealth. Dr. Ghafoorian also represents clients in obtaining state Certificate of Needs, peer-review/hospital privilege proceedings related to medical staff privileges, and health care professional disciplinary hearings.

Guide to The Stark Law and the “Group Practice” Requirement

Even though self referral to DHS is prohibited, the Stark Law provides certain exceptions under which such referrals may be performed. To qualify for these exceptions, physicians must adhere to a number of complex legal and business structure requirements. One such exception is the “in-office ancillary services.”

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