PRACTICE RESOURCES > Regulation/AUA Positions, Letters, and Talking Points > Stark II Phase III Final Regulations Create Greater Flexibility in Some Areas


Stark II Phase III Final Regulations Create Greater Flexibility in Some Areas

On September 5, 2007 CMS issued the long awaited Phase III Final Stark Regulations. These final rules are effective, in general, on December 4, 2007. The Phase III final regulations are different from the proposed changes to the Stark rules in the 2008 Physician Fee Schedule, issued July 12, 2007. The proposed rules, if finalized, will limit current exceptions and re-define terms. The proposed rules may ultimately effect significant changes—and potentially require renegotiation of contracts between physician groups and entities providing designated health services (DHS). The Phase III Regulations do not make sweeping changes, rather they clarify the already existing regulations based on comments received in response to the Phase II Final Regulations. CMS has issued these clarifications by both changing the regulatory text and by putting forth new interpretations in its responses to comments in the preamble to the regulation. When reviewing the Phase III Rules to determine if arrangements need to be modified, it is key to look at both the regulation text as well as the preamble commentary.

Some of the most significant changes in the Phase III regulations include: (1) the addition of a "stand in the shoes" provision; (2) the modification of the definition of "physician in the group;" (3) the modification by CMS of its position regarding compensating physicians in the group through profit shares or productivity bonuses based on "incident to" services; and (4) changes to the physician recruitment and retention exceptions.

"Stand in the Shoes"

One significant change in the Phase III regulations is the addition of a "stand in the shoes" provision. Under this provision, physicians are required to "stand in the shoes" of their physician group. Accordingly, arrangements that would have been analyzed under the indirect compensation definition and exception will now be considered direct compensation arrangements and will be required to meet a direct compensation exception. For example, if a physician group practice has a medical director or on-call arrangement with a hospital, previously the arrangement with the physicians would have been analyzed under the indirect compensation definition and exception. Under the Phase III Regulations, the physicians in the group will "stand in the shoes of the group" and a direct compensation relationship between the physicians and the hospital will be present. Thus, the arrangement will need to meet a direct compensation exception, such as the fair market value or personal services exception. CMS made this change because many commenters stated that it made more sense to have such arrangements fall within a direct compensation exception, rather than having to use the unwieldy indirect compensation definition and exception. Further, CMS believed that the definition of an indirect compensation exception may have been read too broadly, thus potentially creating indirect compensation arrangements that were not intended, and would not be protected under a direct compensation exception. CMS has provided a grandfather provision for those arrangements that were in compliance with indirect compensation exception as of the date of the publication of the Phase III Regulations (September 5, 2007). The grandfather provision applies during the original term or the current renewal term. Subsequent renewal terms will be required to meet a direct compensation exception.

Physicians In a Group Practice

Phase III also implements a change in the definition of "physicians in the group." Prior Stark regulations drew a distinction between physicians who are "members of the group" (generally owners and employees) and "physicians in the group" (independent contractors). CMS modified the definition of "physician in the group" in the Phase III regulations to require that an independent contractor physician have a direct contract with the group. CMS explicitly stated that arrangement between a group practice and another entity, such as a staffing company would not meet the personal services exception. Accordingly, where there are arrangements between a group practice and another entity that provides physicians, the arrangement will require either a contract signed by all of the parties, including the physicians or two contracts—one between the group practice and the entity and other between the group practice and the physician affirming the terms of the contract between the group practice and the entity. CMS also reaffirmed that independent contractor physicians are considered "physicians in the group" only when performing services in the group practice's facilities. For example, pathologists are only considered "physicians in the group" if they are providing their interpretations at the facilities of the urology practice that bills for their services.

Profit Shares and Productivity Bonuses

Another important change in the Phase III Regulations concerns the ways physicians are compensated within their group practices with respect to profit shares and productivity bonuses. Under the previous Phase II Regulations, physicians could receive a profit share based on services that were performed "incident to" the physician service and receive direct credit for such services. Under the Phase III Regulations, CMS made clear in the preamble that profit shares to physicians in a group cannot be based directly on services performed "incident to" the physician's services. Thus, an individual physician cannot be compensated as part of his or her profit share based on services provided "incident to" that physician's medical services. With respect to productivity bonuses, however, CMS acknowledged that compensation may be directly based on "incident to" services. Accordingly, where a physician group provides the appropriate supervision to qualify a service as an "incident to" service, individual physician productivity bonuses may reflect services provided "incident to" that physician's services. It cannot, however, be directly related to a physician's profit share.

Recruitment and Retention

Finally, CMS made significant changes to the exceptions for physician recruitment and retention giving greater flexibility, especially in rural areas. CMS issued considerable clarification to the relocation requirements under the recruitment exception, including the definition of a hospital's geographic service area. CMS also modified its position with respect to practice restrictions, allowing non-compete clauses to the extent that they do not "unreasonably restrict the recruited physician's ability to practice medicine" in the hospital's GSA. Many of the changes enhance rural hospitals' ability to recruit physicians into their service areas. Finally, CMS expanded the retention exception by eliminating the requirement of a written offer and permitting the use of certification by a physician of a bona fide opportunity for future employment and gave greater latitude in retaining physicians in rural areas.

Additional Highlights in Phase III Include:

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