The Centers for Medicare and Medicaid Services (“CMS”) recently issued on June 8, 2008 an advisory opinion in which CMS addressed whether a proposed physician ownership in a diagnostic center complies with the rural provider exception to the Stark Law. CMS concluded that the facts of the proposed physician ownership in the diagnostic center would satisfy the rural provider exception, but CMS also cautioned that meeting the elements of the rural provider exception is an ongoing requirement and must be continuously satisfied during the period of a physician’s ownership interest.

The rural provider exception applies to designated health services described in the Stark Law furnished in a rural area by an entity if substantially all of the designated health services furnished by the entity are furnished to individuals residing in a rural area. The terms “substantially all” have been interpreted by CMS to mean not less than 75% of the designated health services (e.g., radiology services, clinical laboratory services) that an entity furnishes to residents of a rural area. A rural area for purposes of the Stark Law is an area that is not an urban area as a Metropolitan Statistical Area (“MSA”) or a New England County Metropolitan Area.

Several physicians who are, or intend to become owners of a diagnostic center (“Diagnostic Center”) which provides various services, including physician consultations and ancillary services such as clinical laboratory and diagnostic radiology services, request this advisory opinion from CMS. Many of the physician owners of the Diagnostic Center have made, and will continue to make, referrals of Medicare patients to the Center for such services.

The physicians certified that all designated health services performed at the Center since its inception have been, and will continue to be, furnished outside a Metropolitan Statistical Area (MSA). Additionally, the requestors certified that, on an annual basis, at least 75% of the designated health services provided at the Diagnostic Center have been, and will continue to be, furnished to individuals residing outside of a MSA.

CMS noted that the rural provider exception applies only to ownership or investment interests in entities that provide designated health services and not to compensation arrangements with such entities. CMS concluded that physicians’ ownership in the Diagnostic Center satisfied the rural provider exception of the Stark Law. It is important to note CMS’ emphasis on the fact that the two primary elements of the rural provider exception are ongoing requirements. CMS further noted that if the Diagnostic Center ever fails in the future to maintain compliance with either or both requirements, the rural provider exception would no longer apply.