Medicare Forces Hospitals to Violate Stark Law – Or Lose Funding

The American Hospital Association (AHA) wants Congress to build them a new and really big Stark Law safe harbor—also known as a physician self-referral safe harbor.

Since 1989 the Stark Law has been used by federal prosecutors to punish certain self-referral relationships between hospitals and physicians. Violating the law triggers False Claims charges. When faced with the threat of federal litigation, most hospitals settle. There’s real money at stake.

This past September, Adventist Health System agreed to pay the government $118.7 million to settle allegations it offered physicians excessive compensation for referrals. A week before that settlement, North Broward Hospital District agreed to pay the government $69.5 million to settle allegations it paid physicians more than fair market value based, in part, on their referrals. In October, Tuomey Healthcare System in Sumter, South Carolina, agreed to settle with the government for $72.4 million over similar allegations.

New Era of Payment Models

Designed and implemented in an era when hospitals and physicians were separate economic entities and government feared paying for unnecessary procedures under a fee-for-service payment model, the law is now over a quarter century old and potentially at odds with a new pay-for-performance payment incentive model which encourages hospitals and physicians to collaborate to save money.

On January 29, 2016, Thomas Nickels, the AHA’s executive vice president sent a letter to congressional leaders asking for an overhaul. On February 12, the American College of Surgeons chimed in, saying “it is clear” that coordinating care throughout the five phases of surgical care (pre-operative, peri-operative, intra-operative, post-operative and post-discharge) will be key to the success of alternative payment models. “Removal of real or perceived barriers inherent in the Stark Law will help to speed adoption” of those new payment models.

Exhibit one in making the hospital case, Nickels cited bundled payments for the Comprehensive Care for Joint Replacement model, where Medicare is conditioning a portion of payment to hospitals on achieving goals that require the collaboration of hospitals and physicians across the care continuum (e.g., specific metrics regarding readmissions and hospital-acquired conditions).

To make such a payment model work effectively, changes to the Stark Law are needed, argued the hospitals and surgeons.

Stark Law and Referrals

The Stark Law was passed in 1989 to prohibit physician referrals of services for Medicare and Medicaid patients if the physician (or an immediate family member) has a financial relationship with a hospital or other medical business receiving the referral. The fear was that such arrangements could encourage overutilization of services and drive up health care costs.

There were some exceptions called “safe harbors” which required that financial arrangements between hospitals and physicians be commercially reasonable and not take into account the number of a physician’s referrals to the hospital.

The concept of “referral”, under the Stark Law, means more than just recommending a vendor of services to a patient.

For instance, for Medicare Part B services, the term referral means, “the request by a physician for the item or service, ” or “the request or establishment of a plan of care by a physician which includes the provision of the designated health service.”

Those designated services includes clinical laboratory services as well as the following:

• Physical-therapy services;
• Occupational-therapy services;
• Radiology, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services;
• Radiation-therapy services and supplies;
• Durable medical equipment and supplies;
• Parenteral and enteral nutrients, equipment, and supplies;
• Prosthetics, orthotics, and prosthetic devices;
• Home health services and supplies;
• Outpatient prescription drugs;
• Inpatient and outpatient hospital services.

“Complex, Confusing and Continually Changing”

The Stark Law was originally intended to provide a “bright line” standard to assure hospitals and others clear guidance. But the self-referral law, says Nickels, “has evolved into a series of increasingly complex, confusing and continually changing rules. Many involve form and audit-type requirements that carry the same weight as the core requirements of a legitimate arrangement for compliance purposes.”

“As the reimbursement landscape changes for hospitals, physicians and other health care providers, moving to a value-based paradigm from a volume-based approach, enforcement mechanisms and perspectives tethered to a bygone era must be revisited, revised and, in some cases, abandoned to make way for innovation and improvement.”

Safe Harbors

He noted that Congress recognized last year in the Medicare Access and CHIP Reauthorization Act (MACRA), that the Stark Law is not the only law that has created “impediments” to implementation of these new payment models. “We applaud Congress’s elimination of a barrier created by the ‘gainsharing’ Civil Monetary Penalty (CMP). As interpreted by the Office of Inspector General (OIG), it prevented hospitals from sharing financial incentives with physicians for developing and implementing evidence-based care guidelines.”

In the MACRA, Congress made clear that a penalty was intended only if a hospital made payments to a physician to reduce or limit medically necessary care. As a result, hospitals and physicians can share the rewards for improving quality of care without risk of sanction under that law.

But more is needed than just fidgeting with the existing seven safe harbors in the Stark Law that allow physicians and hospitals can work together.

To be safe, contracts between physicians and hospitals must:

1. Must be at least a year in duration;
2. Be in writing and signed by both parties;
3. Specify aggregate payment which is set in advance;
4. Payments must be reasonable and fair market value;
5. Payments must not relate to volume or value of business;
6. The exact services to be performed must be outlined; and
7. Must be commercially reasonable.

The definition and interpretation of fair market value, commercial reasonableness and the volume/value prohibition are all critical in gaining entrance to the safe harbors.

The Chill of the Lawyers

The hospitals fear that the “specter of relators and the relator’s bar taking control of how to interpret the Stark Law in service of achieving the financial bounties available under the False Claims Act, will no doubt chill, and could extinguish, the development of new relationships essential to the success of the new reimbursement models.”

Fair market value and commercial reasonableness, “are not suited to the collaborative models that reward value and outcomes.” They especially don’t work when the ability to share the rewards of collaboration are different for hospital-physician relationships than when a physician practices alone or as part of a group, added Nickels

Building a Bigger Harbor

The hospitals and surgeons say a “legal safe zone” needs to be implemented in order to further incentivize healthcare providers and payers to focus their efforts on adopting value-based care reimbursement models.

“Congress should adopt a single, broad exception that cuts across the Stark Law and the anti-kickback statute for financial relationships designed to foster collaboration in the delivery of health care and incentivize and reward efficiencies and improvements in care. We recommend that the exception be created under the anti-kickback statute and arrangements protected under the exception be deemed compliant with the Stark law, ” the AHA letter states.

Fair market value has become a rigid measure of hourly wage equivalents, said Nickels. Commercial reasonableness has been “contorted to cap a physician’s compensation at levels that he or she could generate if he or she remained an independent seller of physician services, even if part of that compensation is paid for supervising non-physician members of a multidisciplinary team in the efficient delivery of quality care.”

He adds that the statutory and regulatory caveat that compensation may not take into account or vary with the volume or value of referrals, as interpreted by law enforcement officials today, has become a “gotcha, ” since compensation tied to successful outcomes almost necessarily includes some nexus to the number of patients whose treatment a physician oversees.

A new exception also would address the impediments created by the anti-kickback statute on implementation of new payment models. The enforcement landscape, argues Nickels, has effectively made any financial relationship between hospitals and physicians questionable. “If a hospital rewards a physician for following evidence-based clinical protocols, the reward could be construed as violating the law, since technically such a reward could influence a physician’s order for treatment or services.”

Payer Demands and Incentives

Increasingly, public and private payers are holding hospitals accountable for reducing costs and improving quality, and using financial incentives to drive behavior. Payment models for physicians also are using financial incentives to drive behavior. “Achieving Congress’s goals for the government health care program and beneficiaries can be accomplished only through teamwork among hospitals, physicians and other health care providers across sites of care. An essential component for the success of their efforts is also the use of financial incentives—specifically, arrangements that align incentives. “

Nickels reminds Congress that by 2019 most physicians’ Medicare payments will be tied to performance on specified metrics. It also includes financial incentives to encourage physician participation in alternative payment models. “While these changes in hospital and physician payments have been made on separate, but parallel, tracks, all are making shared performance objectives and financial incentives important among providers across the care continuum.”

And for that, say the hospitals and surgeons, a much bigger harbor is needed to protect the providers from the lawyer sharks ready to pounce on arbitrary definitions made for a bygone era.