The Centers for Medicare and Medicaid Services (CMS) continue to have concerns regarding certain hospital-physician joint-venture arrangements, including “under-arrangement” service agreements.

Proposed changes
On July 12, 2007, CMS published its 2008 Medicare Physician Fee Schedule Proposed Rule, which seeks to change the definition of an “entity” (which is prohibited from receiving referrals from physician-owners) under the Stark law regulations to include both the entity that submits a claim to Medicare for designated health services (the hospital) and the entity that “performs” the service under arrangement to the hospital (the “under-arrangement” service provider).

CMS is concerned about the risk of overutilization of services provided under arrangement and also that such services are furnished in a less medically intensive setting than the hospital but billed at a higher hospital outpatient rate. According to CMS, “There appears to be no legitimate reason for these arranged services other than to allow referring physicians the opportunity to make money on referrals for separately payable services.”

Compensation vs. ownership interest
Congress and CMS have historically considered such arrangements to create a compensation arrangement, rather than an ownership interest. Congress created a compensation exception for under-arrangement services at Subsection (e)(7)(A) of the Stark law. The law further provides that under-arrangement contracts between hospitals and entities owned by one or more physicians – or groups of physicians – that provide designated health services under arrangement to the hospital will not be considered to create an ownership or investment interest in the hospital.

CMS’s proposed rule, by prohibiting referrals by a physician to an entity that performs the designated health services, would effectively make the under-arrangement relationship an ownership interest in the hospital, contradicting long-settled law on this matter. Further, CMS’s statement regarding the lack of legitimate support for these arrangements may ignore good-faith efforts by providers to provide comprehensive, cost-effective, high-quality diagnostic and therapeutic services.

Enter the Stark Phase III rules
On Sept. 5, 2007, CMS issued Phase III of the final Stark law regulations, finalizing and responding to public comments regarding the Phase II final rule. The Phase III final rule defined ownership and investment interests to exclude under-arrangement contracts between hospitals and entities owned by physicians, which means that such arrangements can still be acceptable.

However, CMS indicated that, while the definition of “entity” would remain the same, it would continue to examine arrangements involving referrals by physician-owners of leasing, staffing and similar entities that furnish items and services to service providers (in other words, under arrangements).

This inaction in Phase III by CMS with regard to under arrangements is important. The final rule for the Medicare Physician Fee Schedule, published on Nov. 27, 2007, held off on adopting these proposed changes. However, CMS indicated that it intends to address under arrangements in a future ruling.

CMS is concerned about the risk of overutilization of services provided under arrangement.

Be above-board with under arrangements
Although its approach appears to be somewhat inconsistent, it is clear that CMS is still concerned about under-arrangement contracts. CMS may, in the future, move to require restructuring or unwinding of under-arrangement ventures in which the supplier of services is at least partially owned by physicians who refer to the hospital. Providers that have entered, or are considering entering, into an under-arrangement service agreement should be aware of the risks.

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