PRACTICE RESOURCES > Regulation/AUA Positions, Letters, and Talking Points > HCFA Regarding Stark II

HCFA Regarding Stark II

May 30, 2001

Thomas Scully
Health Care Financing Administration
Department of Health and Human Services
Attn: HCFA-1809-FC
Post Office Box 8013
Baltimore, MD 21244-8013

RE: HCFA-1809-FC—Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities with Which They Have Financial Relationships; Final Rule (66 Federal Register 855), January 4, 2001.

Dear Mr. Scully:

On behalf of the American Urological Association, Inc. ("AUA") , which represents 9,200 urologists practicing in the United States, I am pleased to submit comments on Phase I of the Final Rule implementing the federal physician self-referral law (hereinafter "Stark II"). See 42 U.S.C. § 1395nn. The AUA recognizes and appreciates the Health Care Financing Administration ("HCFA") for its thoughtful and extensive review of the many comments to the proposed Stark II rule and its inclusion of certain helpful revisions into the Final Rule that affect services provided by urologists. At the same time, the AUA believes it is important to point out several areas of continuing ambiguity or difficulty that remain in the Final Rule and related commentary.

The AUA's major concern about the Stark II self-referral legislation has been its potential effect on the continued important provision of extracorporeal shock wave lithotripsy ("ESWL") services to Medicare beneficiaries. Our comments with respect to lithotripsy services are set forth below. In addition, we are asking HCFA to review and reconsider certain provisions in the Final Rule as they apply to urology group problems and multi-speciality practices with fewer than five urologists. We respectfully submit these comments for HCFA's consideration in further rulemaking.

  1. The Final Rule and Lithotripsy Services

    The AUA applauds HCFA for its revisions of the Proposed Rule, see 63 Fed. Reg. 1659 (1998), which have attempted to tailor the Final Rule in a manner consistent with the modern practice of medicine in today's health care environment. The Final Rule does not exclude lithotripsy services provided under arrangement to hospital patients from the final definitions of designated health services ("DHS"), or otherwise provide an explicit exception for the provision of lithotripsy services, as we believe would be supported by Stark II's legislative history. The AUA, however, does appreciate significant changes in the Final Rule that suggest HCFA's intent to allow many traditional physician owned lithotripsy service arrangements to continue. These changes include the addition of a new indirect compensation exception as well as clarification that fair market value per unit or per procedure payments will be permitted. See 42 C.F.R. § 411.357(p) & 411.354(d)(2).

    The issue of physician owned lithotripsy under Stark II is very important, as the physician ownership of independent lithotripsy ventures is common today due to the unique circumstances surrounding this medical service. When lithotripsy technology was first introduced in 1984, it was initially performed in a hospital inpatient setting. However, many hospitals did not have the financial resources required to purchase lithotriptors or were unwilling to bear the risk of investing substantial resources in this new technology in an unproven market. As a consequence of hospitals' inability or unwillingness to bear the risks of the one to two million in capital expenditures associated with lithotripsy, the service would not have been made available in the American health care system had physician investors not stepped in to bear the financial risk associated with the purchase and operation of this technology. This is especially true in areas of smaller population bases outside large cities where no hospital finds itself in need of lithotripsy services seven days a week. To insure that the best and most advanced treatment options were available to their patients, many AUA member urologists pooled their own resources and took on the substantial financial risk of financing the provision of lithotripsy services.

    As a result, in the present health care environment, lithotripsy services are usually performed on an outpatient basis in either fixed-site or mobile unit facilities serving hospitals and ambulatory surgical centers and owned by treating physicians. Because most lithotripsy services are billed through hospital outpatient departments ("under arrangement") they fall under the Final Rule's definition of DHS. Thus, if HCFA fails to provide clear guidance and regulatory relief from its expansive reading of DHS in regards to lithotripsy services, the availability of these services could become limited for all patients, or terminated for Medicare beneficiaries, in many locations throughout the United States.

  2. Ensuring Patient Access to Lithotripsy Services

    Although changes in the Final Rule should provide some comfort to physicians investing in lithotripsy ventures, the possibility exists that some physicians may, nonetheless, choose to opt out of lithotripsy investments. In addition, physicians could also choose to opt out of treating Medicare patients in such facilities due to continuing ambiguities in the Final Rule. Most significantly, even though HCFA has now clearly stated that fair market value per unit or per procedure payments are acceptable, we believe that HCFA's definition and commentary regarding fair market value leaves ambiguity in the rule that may continue to make traditional lithotripsy service contracting arrangements subject to regulatory concern. This continuing ambiguity may lead physician investors or hospitals to exit the market or at the least the Medicare market, significantly reducing the level and quality of services available to urology patients.

    In the Final Rule, HCFA concludes that per unit or per procedure payment methodologies will be deemed not to fluctuate with the volume or value of referrals if the payment rate does not change during the term of the contract and reflects the fair market value of the services provided. See 42 C.F.R. § 411.354(d)(2). HCFA then defines fair market value as:

    [T]he value in arm's-length transactions, consistent with the general market value. "General market value" means the price that an asset would bring, as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party; or the compensation that would be included in a service agreement, as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement.

    42 C.F.R. § 411.351 (definition of Fair market value). In the commentary to the Final Rule, HCFA then generally discusses fair market value determinations and specifically addresses how fair market value is to be determined in the context of lithotripsy services. Generally HCFA suggests:

    To establish the fair market value (and general market value) of a transaction that involves compensation paid for assets or services, we intend to accept any method that is commercially reasonable and provides us with evidence that the compensation is comparable to what is ordinarily paid for an item or service in the location at issue, by parties in arm's-length transactions who are not in a position to refer to one another.

    66 Fed. Reg. at 944. More specifically, regarding lithotripsy, HCFA states:

    Applying Phase I of this rulemaking to the lithotripter example noted above, the "per use" rental payments would be protected, even for lithotripsies performed on patients referred by the physician-owner, provided that the '"per use" rental payment was at fair market value, did not vary over the lease term, and met the other requirements of the rental exception. In other words, if the "per use" payment is fair market value, we will not require a separate payment arrangement for use of the equipment on patients referred by the physician-owner. In determining whether the initial "per use" payment is at "fair market value," we will generally look to the price a hospital would pay to rent the equipment from a company that did not have any physician ownership or investment (and thus was not in a position to generate referrals or other business—DHS or otherwise—for the hospital) in an arm's-length transaction. In some cases, all the available comparables or market values may involve transactions between entities that are in a position to refer or generate other business. In such situations, we would look to alternative valuation methodologies, including, but not limited to, cost plus reasonable rate of return on investment on leases of comparable medical equipment from disinterested lessors.

    66 Fed. Reg. at 876-77 (emphasis added). See also 66 Fed. Reg. at 941 & 944. Accordingly, the Final Rule indicates that comparables would be the preferred method for determining fair market value. However, commentary to the rule suggests that in instances such as lithotripsy, where non-physician owned comparables are not available, cost plus reasonable rate of return on medical equipment leases would be the preferred method. At the same time, there is general commentary providing that any commercially reasonable valuation methodology would be acceptable.

    We believe the Final Rule and HCFA's commentary creates remaining uncertainty for physician investors in lithotripsy ventures in determining how fair market value may be demonstrated. As a preliminary matter, while we appreciate HCFA's general intention to allow any commercially reasonable valuation methodology to be used, the definition in the Final Rule regarding comparables and HCFA's discussion of cost plus reasonable rate of return in the lithotripsy context could be interpreted by some to suggest that these methods may be the only permissible ones for determining fair market value in the absence of valid non-physician owned market comparables. We believe that this result is both overly restrictive and inconsistent with traditional valuation methodology. Further, HCFA's suggestion in the commentary that lithotripsy services provided "under arrangement" by non-hospital entities are comparable to simple equipment lease arrangements oversimplifies the level of service involvement present in most "under arrangement" clinical service operations. The AUA asks that HCFA clarify generally that while certain methods such as comparables or cost plus reasonable rate of return may be used as valuation tools, any commercially reasonable methodology (consistent with professional standards of valuation) for determining the fair market value of the items and services provided would comply with the fair market value definition in the final Stark II rule.

    In addition, we respectfully submit that it is not at all evident why comparables should always be excluded as a permissible methodology for valuing lithotripsy services merely because competing entities are physician owned. Fair market value is to represent the market conditions as they are; it is not clear why the fact that the lithotripsy market is mainly composed of physician owned ventures should be grounds for altering this general conception. As noted above, the market is heavily physician investor dominated because physician investors were and continue to be the risk bearers in obtaining and operating this ever developing health service as an extension of their surgical practices when other health care providers have been unwilling to take the risk of acquiring such technology. Having borne that risk, physician investors should be able to compete in the existing market, not a hypothetical market that would have existed had other entities entered. Accordingly, it is both unrealistic and inequitable not to allow lithotripsy ventures to rely on the comparables of other competing physician owned entities. We would again suggest that HCFA reconsider this conclusion.

    As noted above, each of these ambiguous or inequitable conclusions will directly impact the provision of health care services to non-Medicare and Medicare patients. Any increased Stark II risk faced by physicians and hospitals may lead them to exit the lithotripsy market or, at least, exit the Medicare market. In many instances, this situation will leave program beneficiaries facing increasingly further distances of travel to reach the best and most advanced medical care. There is no reason for HCFA to impose this burden on non-Medicare and Medicare patients, particularly in regards to a therapeutic service, such as lithotripsy, which is subject to clearly defined clinical criteria that limit any risk of over-utilization and which is paid on a fee schedule basis. Therefore, we urge HCFA to clarify that any commercially reasonable method for determining fair market value will be acceptable and reconsider whether comparables of competing physician owned ventures is one of the appropriate methodologies for determining fair market value.

  3. Stark II's Application to Lithotripsy Services

    While HCFA has stated in the Final Rule that lithotripsy services constitute DHS and are, thereby, within the scope of Stark II's referral prohibition, we wish to encourage HCFA to reconsider this conclusion in its entirety.

    The scope and meaning of any statute should be determined by the language of the text first and foremost. It is, therefore, most compelling that lithotripsy services are not listed as one of the eleven statutory DHS. Accordingly, the presumption going forward from the language of the statute itself is against its application to lithotripsy services or other therapeutic interventions provided "under arrangement" by vendors. Despite this presumption, HCFA concludes in the commentary to the Final Rule that lithotripsy constitutes DHS by virtue of Congress including "inpatient and outpatient hospital services" as DHS and not then specifically excepting lithotripsy. See 66 Fed. Reg. at 940. However, the presumption in this case is against the inclusion of lithotripsy in DHS, as it is not otherwise listed as DHS. The existence of a specific exception is not evidence of lithotripsy's inclusion in DHS, but rather constitutes additional evidence in favor of the statutory presumption against including a non-listed service in DHS.

    Further, lithotripsy services need not be provided on an inpatient or outpatient hospital basis as previously noted by HCFA. See, e.g., 58 Fed. Reg. 51355 (1993); 56 Fed. Reg. 59502, 59517 (1991). The only reason why lithotripsy services are provided on an outpatient hospital basis is due to HCFA's requirement that they may only be billed on that basis, again despite the fact that HCFA has noted lithotripsy services do not require this level of care. Thus, HCFA has both unnecessarily required lithotripsy to be provided in a hospital environment, and then concluded that because lithotripsy is provided in that environment it constitutes DHS. Accordingly, HCFA's statutory argument in regards to the definition of inpatient and outpatient hospital services appears to be self-referential and, thereby, unsupportable. Under the plain terms of the statutory language, lithotripsy services should not constitute DHS.

    Similarly, the legislative history surrounding Stark II suggests that the inclusion of lithotripsy services as DHS is directly contrary to the intent of the statute's author, Rep. Fortney Stark, and the Congress that enacted Stark II. The following exchange on the floor of Congress provides the clearest evidence of this intent:

    Mr. Rose: . . .Mr. Speaker, I ask the chairman [of the Subcommittee on Health of the Committee on Ways and Means, Rep. Stark] this question: In Section 1877 (42 U.S.C. 1395nn(h)(6)(k)[)] the physician self-referral ban enumerates "inpatient and outpatient hospital services." It is my understanding that this provision is not intended to apply to physician owned lithotripsy facilities that furnish services under contract with a hospital. Is this correct?

    Mr. Stark: Mr. Speaker, the gentleman is correct.

    Mr. Rose: Mr. Speaker, I thank the gentleman for his response.

    139 Cong. Rec. H6238 (Aug. 5, 1993). Thus, the legislative history surrounding this provision indicates that HCFA's stance is in direct opposition to that of the statute's author and the interpretation of the statute addressed to and approved by Congress.

    At a minimum, we ask HCFA to address the specific provisions of legislative history noted above and explain to the provider community how HCFA can reasonably discount the clear Congressional intent expressed by Rep. Stark. Answering this question is particularly pressing in light of HCFA's stated goal in the Final Rule: "Our paramount concern is to implement section 1877 of the Act consistent with congressional intent." 66 Fed. Reg. at 859. How HCFA would reconcile this stated goal with Rep. Stark's clearly expressed intent on the floor of Congress at the statute's enactment is not at all evident. Consequently, the AUA asks HCFA to reconsider its conclusion that lithotripsy services constitute DHS.

  4. Profit Distributions from Group Practices

    Separate from the issues affecting lithotripsy services, the AUA respectfully asks HCFA to reconsider its subgrouping of physicians within the definition of a group practice to recognize smaller subgroups of physicians who share a similar practice focus or practice emphasis. Under the Final Rule, HCFA has expanded the permissible methods by which a group practice's profits may be distributed to its members, concluding that differing methodologies for distributing profits to sub-groups of five or more physicians may be employed by the group. See 42 C.F.R. § 411.352(i)(2). While HCFA considered permitting a grouping of only three physicians and rejected this suggestion, see 66 Fed. Reg. at 909, we would like to encourage HCFA to reconsider this conclusion in certain limited instances where the grouping of less than five constitutes an identifiable specialty or practice focus within the group.

    Group practices of urologists typically exist in one of two structures: (1) a single-specialty group practice of two to ten urologists, within which there are smaller sub-groupings with two to four physicians with entirely different clinical practice focus (e.g., urological oncology, pediatric urology, etc.), or (2) a multi-specialty group with two to four urologists. For example, according to the AUA's 2001 Gallup Survey of Practicing Urologists, 39 percent of urologists are in a single-specialty group practice or partnership and 10 percent of urologists practice in a multi-specialty group. Additionally, 40 percent of urologists are in a practice with two to five urologists and 18 percent are in a practice with six or more urologists, with the median number of urologists in a practice being two.

    Within these single-specialty and multi-specialty group practices, the most equitable distribution and the preferred manner of distributing profits within the group would be based on the subgroups of variant practice focus. While HCFA's Final Rule will permit this if the practice scope subgroup reaches five physicians, it is not permitted in the more common urological group in which only two or three physicians make up a practice subgroup or specialty focus due to HCFA's concern that such narrowly defined groups may too closely tie referrals of DHS to compensation, see 66 Fed. Reg. at 909. However, HCFA permits solo practitioners and group practices of less than five to be compensated in this method under the Final Rule.

    For example, if a group practice consists of three urologists, they would be able to divide their DHS profits so that each of them received one-third of the profit. However, if those same three urologists were the only urologists practicing within a multi-specialty group, they would, under the current rule, have to divide their DHS profit with at least two other physicians in the practice who were not urologists in order to meet the requirement of dividing profit among at least five physicians. Similarly, suppose the same three urologists were in a single-specialty urology group, but were the only three urologists in the group with a particular urological sub-specialty. These three urologists would also have to divide their DHS profit with at least two other urologists in the group in order to create a group of five that would comply with the current rules, even though the subgroup of three does entirely different work than the other urologists in the group.

    Therefore, the AUA urges HCFA to reconsider whether groupings of less than five physicians should be permitted when the group practice can reasonably justify such grouping on the basis of some identifiable practice focus or specialty. Such a conclusion would support HCFA's general intent expressed in the commentary to the final rule of permitting groupings based on location or specialty, see 66 Fed. Reg. at 909, and may actually more accurately reflect that intent insofar as groupings of less than five would be required to demonstrate an identifiable specialty or practice focus to support the differing profit distribution methodologies.

    While the sub-grouping in this instance may be narrowly drawn, it will reflect a bona fide specialty or practice emphasis preventing any ad hoc groupings for the sole purpose of rewarding high ancillary service referring physicians. Therefore, we believe that permitting such arrangements would reflect HCFA's stated intent, raise no greater risk of program abuse than that raised by the solo practitioner or group practices of less than five applications of the Final Rule, and permit group practices to pay profits to members in the most equitable manner. We therefore suggest that HCFA reconsider permitting sub-groupings of less than five physicians in these limited instances.


The AUA would like to again express its appreciation to HCFA for its clear intent to structure the Stark II Final Rule in a manner that reflects the practical realities of the financing and provision of health care services in the modern health care market. We believe HCFA's recognition of concerns expressed in regards to the Proposed Rule and restructuring in their light is necessary and beneficial to ensuring access to the best and most advanced urologic health care. Nevertheless, we respectfully request that HCFA continue to consider whether it has regulated the provision of lithotripsy in the most appropriate manner or, in fact, whether it should regulate lithotripsy at all under Stark II. Further, we would suggest HCFA also provide more flexibility in regards to the distribution of profits from group practices in certain limited and defined circumstances.

The AUA appreciates this opportunity to comment on the Phase I Final Rule and thanks HCFA for its careful attention to the comments provided herein. If you have any questions or need additional information, please contact Ms. Cherie McNett, AUA Director of Government Affairs, at 410-689-3710.


Irwin N. Frank, MD, F.A.C.S.
American Urological Association


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