Provider-Based Rule and Stark—Is Joint Compliance Impossible in 2017?

Hospital Industry Viewpoint

August 08, 2016

The Centers for Medicare & Medicaid Services (CMS) will be putting hospitals in an untenable position if recent proposed rulemaking is implemented as is. In its proposal for acting on legislation reducing payments to new, off-campus, provider-based clinics, CMS admits that it doesn’t have sufficient time to create the billing system the law requires. Instead, CMS is proposing a workaround that may create more problems than it solves. Specifically, CMS is suggesting that physicians in new off-campus clinics should bill all “non-excepted” services as if furnished in freestanding clinics, but then return some portion of their reimbursement back to the hospital. This proposal, however, ignores that such an arrangement cannot comply simultaneously with both the Stark rules and Provider-Based Rule in many cases. Hospitals should determine if they will be stuck between the proverbial rock and a hard place and, if so, submit comments prior to September 6 asking for regulatory relief.

It was widely anticipated that CMS’s implementation of Section 603 of the Bipartisan Budget Act (enacted on November 2, 2015) would have an enormous effect on hospitals. The law, in summary, requires CMS to pay for “non-excepted” services furnished in off-campus outpatient departments added after the date of the law’s passage as if the services were furnished in freestanding space. CMS has decided that all such added clinics still qualify as provider-based, but recognizes that it does not have time to create a system that allows hospitals to bill for the non-excepted services furnished at the added clinics.

Accordingly, CMS has proposed to have physicians bill for the services under the Physician Fee Schedule using place of service 11 (applicable to freestanding clinics) and then arrange with hospitals to pay for the facility component of their services. If a physician bills a patient globally for both the physician’s services and the hospital’s resources and services, a benefit is conferred on the physician receiving the payment. “Such a global billing arrangement involves remuneration between the parties that implicates the physician self-referral law,” as stated by CMS. Accordingly, such an arrangement must comply with the Stark Law, and the failure to comply with Stark could result in overpayments, civil monetary penalties, and False Claims Act liability. In addition, the arrangement must continue to comply with the Provider-Based Rule, and the failure to comply with the Provider-Based Rule could also result in overpayments, as well as retrospective loss of the right to use drugs purchased under the 340B program, where applicable. Hospitals must therefore get their arrangements correctly set up under both laws.

Yet such joint compliance may be a challenge. To comply with Stark, the physician would in many instances need to be in control of the space where services are furnished, which would, however, violate the Provider-Based Rule, which requires the hospital to remain in control. Compliance with Stark also requires that the physician pay fair market value for services received from the hospital. However, at the reduced physician fee schedule payment rate applicable to freestanding services, the Medicare payment will not suffice to allow for a fair payment to the hospital with enough remaining for the physician. Notably, compliance is much easier for clinics with employed physicians, which may increase the shift towards greater physician employment by hospitals.

Who Will Control the Space?

CMS just implemented a new exception to address timeshare arrangements between hospitals and physicians, and that is likely the only exception available to the parties to address the type of arrangement contemplated by CMS in its proposed Provider-Based Rule. However, certain requirements of that exception may be difficult to meet, such as the requirement that the physician utilize the premises, equipment, personnel, and supplies predominantly for the provision of evaluation and management services, and excluding advanced imaging equipment. Moreover, the compensation paid by the physician to the hospital under the timeshare exception must be consistent with fair market value and may not be based on a percentage of revenues billed or collected for the service, or any per-unit service fees that are not time based.

If that exception doesn’t work, there is very little that is left that solves all of the hospital’s regulatory needs. Space and equipment leases generally transfer the right to use and control over facilities and equipment to the physician. As such, they run counter to the requirement that hospitals retain 100% ownership of the “business enterprise” of a clinic, which at a minimum includes the space and equipment. Accordingly, none of the currently available Stark exceptions is ideal.

How Can the Physician Pay Fair Market Value?

Many suggest that physicians should pay hospitals the technical component received by the physician to make the hospital whole. The technical component is designed to reimburse the physician for practice expenses associated with the service, not the more extensive hospital services, and query whether this amount will be consistent with the fair market value of the totality of services furnished by the hospital. Payments to the physicians will likely be reduced by 20% or more, as compared with payments to the outpatient department. There may simply not be enough money to go around. Alternatively, physicians could pay the full amount of the facility fee that the hospital would otherwise have received, but that would cause physicians to incur significant reductions in their reimbursements. Neither solution is therefore perfectly compliant and also financially practical. Finally, this payment approach may not comply with CMS’s limitations on the use of percentage based or per-unit of services compensation methodologies.

Options for Hospitals

Since CMS does not have any ability to override a duly enacted law, it is clear that CMS will not simply delay implementation until it figures out how to create a system that works. In the meantime, hospitals can consider the following:

Submit Comments. Hospitals can suggest to CMS that there needs to be a moratorium on the Provider-Based Rule requirements pertaining to ownership of the business enterprise. They also should submit comments to the Physician Fee Schedule rule that seeks CMS acknowledgement that payment of the technical component of a service is payment at fair market value, at least for this upcoming year.

Restructure Physician Arrangements. Hospitals can either employ physicians directly, or they can set up wholly owned integrated physician practices. Under such circumstances, either the Stark employment exception or the indirect compensation arrangement provisions would be triggered, each of which poses fewer compliance issues.

Create an Alternative Payment Arrangement. Hospitals already considering establishing an accountable care organization (ACO) could turn lemons into lemonade. First, they would have the ability to apply Stark waivers that would remove the compliance issues discussed above. And second, they could benefit from the reduced reimbursement for services at the clinic. Those reductions in Medicare expenditures could translate to bonus payments to the ACO if care is otherwise furnished efficiently throughout the system.


If you have any questions or would like more information on the issues discussed in this Hospital Industry Viewpoint, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Andy Ruskin
Albert W. Shay