The Centers for Medicare and Medicaid Services (CMS) published on September 5, 2007 the long-awaited Phase III of the federal regulations of the physician self-referral prohibition commonly known as the Stark Law. CMS commented that the Phase III regulations finalize, and respond to public comments to the first two phases, or Phase I and Phase II, of the rulemaking process by CMS to adopt regulations to interpret and enforce the Stark Law.

The significance of the release of the Phase III Stark Law regulations, however, is tempered by the inclusion of several proposed changes to the Stark Law by CMS in the 2008 proposed Medicare physician fee schedule. Physicians and other healthcare providers should nonetheless adopt the changes and new interpretations in the Phase III Stark Law regulations while continuing to monitor the changes to the Stark Law adopted in the “final” version of the 2008 Medicare Physician Fee Schedule.

Some of the significant changes and clarifications in the Phase III Stark regulations, which are effective December 4, 2007, affect: physician compensation, independent contractor physicians, hospital-physician relationships (e.g., recruitment), professional service arrangements and diagnostic testing arrangements.

CMS revered its comments in the Phase II Stark Law regulations that diagnostic testing was an example of “incident to” services and thus the revenues from the technical component of a diagnostic test could be allocated directly to the treating physician. In the Phase III Stark regulations, CMS specifically stated that diagnostic testing revenues may not be allocated directly to the treating physician because diagnostic testing is not an “incident to” service. However, the revenues from diagnostic testing may still be distributed through a distribution pool of at least five physicians.

CMS also reversed its previous position on non-compete provisions in employment agreements of physicians who also have a hospital recruitment agreement. CMS now allows a group practice to impose restrictions on physicians regarding moonlighting, prohibitions on soliciting patients, requirements to treat Medicare or indigent patients, require the recruited physician to repay losses generated by the physician which exceed the subsidy received by the group, and liquidated damages. CMS stated the Phase III regulations that if the group indemnifies the physician from their repayment obligation then there is a remunerative arrangement that could implicate the federal anti-kickback statute.

CMS stated that compensation related to patient satisfaction goals or other quality measures unrelated to reducing or limiting services could be paid under the personal services exception to the Stark Law self-referral prohibition. CMS also now explicitly requires independent contractor physicians to have a direct relationship with the group and not through another group if these physicians are to be considered “physicians in the group” for certain Stark Law exceptions.

CMS also reaffirmed its position that all revenues from “incident to” services may be allocated dollar for dollar directly to the treating physician, who may be the ordering physician and not the supervising physician. CMS also clarified that this may include supplies. For example, oncologists and infectious disease physicians may get direct credit for infusion services and infusion drugs as long as the “incident to” standards are satisfied.

These are only some of the changes and clarifications by CMS in the Phase III Stark Law regulations. The Kean Miller Healthcare Group will post a more extensive review of the Phase III regulations to the Kean Miller website.