The Proposed New Stark Regulations (And How They Affect You)

I. Introduction.

On January 9, 1998, the Health Care Financing Administration ("HCFA") published new proposed regulations (the "Proposed Regulations") under Section 1877 of the Social Security Act, as amended (the "Stark Statute"). Under the Stark Statute, if a physician (or an immediate family member of a physician) has a financial relationship with an entity, consisting of either an "ownership or investment interest" in the entity or a "compensation arrangement" with the entity, then the physician may not make a referral to the entity for the furnishing of "designated health services" for which payment otherwise may be made under Medicare or Medicaid. The Stark Statute also prohibits the entity from billing Medicare or any other entity for "designated health services" furnished pursuant to a prohibited referral. "Designated health services" include clinical laboratory services; physical therapy services; occupational therapy services; radiation or other diagnostic services; radiation therapy services; durable medical equipment; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services.

In its original form, the Stark Statute addressed referrals only for clinical laboratory services. The Omnibus Budget Reconciliation Act of 1993 amended the statute, effective as of January 1, 1995, to cover referrals for all designated health services. In August, 1995, HCFA issued final regulations interpreting the original Stark Statute (the "Stark I Regulations"). Although the Stark I Regulations specifically address only referrals for clinical laboratory services, the preamble to the regulation expresses HCFA's intent to rely on the Stark I Regulations when reviewing referrals for all other designated health services, until a rule specifically covering all designated health services is published. When they become final, the Proposed Regulations will amend and supersede the Stark I Regulations.

The Proposed Regulations clarify much of the uncertainty left by the Stark Statute and the Stark I Regulations. However, they also add some restrictions and raise some additional problems for physicians and other health care providers. This article discusses the most significant provisions of the Proposed Regulations, focusing on proposed modifications of the Stark I Regulations and their effects on physicians and other health care providers.

II. Effect of the Proposed Regulations on Certain Exceptions.

The Stark Statute contains numerous exceptions to the prohibition against referrals. Although a complete discussion of those exceptions is beyond the scope of this article, an understanding of the potential impact of the Proposed Regulations requires a general knowledge of the exceptions. This article describes some of the potential effects of the Proposed Regulations on some of the more significant exceptions to the referral ban, focusing on the in-office ancillary services exception and the exception for physicians' services, which are particularly important to physician group practices. Before analyzing the effect of the Proposed Regulations on the group practice related exceptions, the article discusses the Proposed Regulations' revised definition of "referral," which also is particularly relevant to group practices. The article also briefly discusses certain effects on the exceptions for investment interests in publicly traded entities, rental of office space or equipment, employment relationships, personal service arrangements, isolated transactions (such as the purchase of a physician practice), and payments by a physician for items or services.

A. Definition of "Referral."

The Stark Statute defines "referral" very broadly to include (1) the request by a physician for an item or service for which reimbursement may be made under Medicare Part B, including a request for a consultation with another physician (and any test or procedure ordered by, or to be performed by or under the supervision of, that other physician), or (2) the request or establishment of a plan of care by a physician that includes the provision of a designated health service. The first part of this definition encompasses all requests for Medicare Part B services, regardless of whether a requested service is a "designated health service." This is problematic for group practices, because in order to constitute a "group practice" for purposes of the in-office ancillary services exception and the physicians' services exception, a physician group generally cannot compensate any physician who is a member of the group, directly or indirectly, based on the volume or value of "referrals" by the physician. This means that a group cannot compensate a physician based on any referrals by the physician for a Medicare Part B service, even if it is not a designated health service.

HCFA apparently believes that this definition is too restrictive. In the Commentary HCFA takes the position that the concept of a referral for a Part B service under the Stark Statute should be limited only to referrals for designated health services. Accordingly, the Proposed Regulations redefine "referral" as either:

B. Exceptions Particularly Relevant to Group Practices.

The Stark Statute contains two exceptions that are particularly relevant to physician group practices. These are the exception permitting referrals for in-office ancillary services and the exception permitting referrals for physician services. To rely on these exceptions, a physician group must satisfy the definition of "group practice."

1. Definition of "Group Practice." Under the Stark Statute and the Stark I Regulations, a "group practice" is a group of two or more physicians legally organized as a partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan, or similar association:

The Proposed Regulations modify the definition of "group practice" in several respects, as discussed below.

Single Entity and Ownership Requirements. The Proposed Regulations require that a group practice be organized as a single partnership, professional corporation, or other legal entity. Two or more separate entities are not treated as a group practice, even if the entities have identical ownership or a parent-subsidiary relationship. The only exception permitted by the Proposed Regulations is that a group practice can consist of physicians who are individually incorporated as professional corporations.

HCFA's comments in the preamble to the Proposed Regulations (the "Commentary") state that any individuals or entities are allowed to set up a legal structure for a group practice, as long as two or more physicians "have a role in providing services" and meet all other requirements of the "group practice" definition. The Commentary also states that any individuals or entities may operate the group practice. For example, the Commentary states that a hospital may own and operate a group practice if it is permitted to do so under state law.

Distribution of Income and Expenses. The Stark Statute and the Stark I Regulations require that group practice expenses and income be distributed "in accordance with methods previously determined." The Commentary expresses HCFA's concern that this provision could be interpreted to allow a group practice to determine its method of income distribution on an "ad hoc" basis, shortly before the income is distributed, and thereby to manipulate the distribution of income based on physicians' referrals. Therefore, the Proposed Regulations require that overhead expenses and income of a group practice be distributed according to methods that are determined "prior to the time period during which the group has earned the income or incurred the costs."

This change could have a significant impact on some group practices. For example, assuming a group practice distributes income on a calendar year basis, the Proposed Regulations require the group to allocate its income and expenses for a particular calendar year in accordance with methods determined before the beginning of that calendar year. The Proposed Regulations do not allow modifications of a practice's compensation methodology during the calendar year in which the income is earned, even for legitimate reasons, nor do the Proposed Regulations address how to implement changes in compensation methodology that may be required when additional physicians become members of the group during the year, or when a practice merges or acquires another practice during the year.

The proposed definition of "group practice" also requires that the methods of distribution of overhead expenses and income reflect "centralized decision-making, a pooling of expenses and revenues, and a distribution system that is not based on each satellite office operating as if it were a separate enterprise." This means that a satellite office of a group practice, or a "group practice without walls," cannot allocate expenses and revenues to the physicians in the satellite office based on the performance of the satellite office. Instead, the income of the practice, as a whole, must be distributed to all physicians (regardless of their location) based on the same criteria. This does not prohibit a group practice from paying performance bonuses based on the performance of individual physicians, some of whom may practice in satellite offices.

Profit Sharing and Performance Bonuses. The Stark Statute permits the sharing of profits and the payment of productivity bonuses based on the services that a physician has personally performed or services "incident to" personally performed services, as long as the share or bonus is not determined in any manner that is "directly related" to the volume or value of "referrals" by the physician. The statute's use of the terms, "incident to," and "directly related," has resulted in uncertainty concerning (a) the level of supervision by a physician that is required in order for services to be deemed "incident to" the services of the physician, and (b) the dividing line between bonuses that are "directly" related to a physician's referrals and those that are only "indirectly" related.

Although the text of the Proposed Regulations does not clarify the meaning of "incident to" in this context, the Commentary indicates that this term should be construed to require a physician's direct supervision of the non-physician's services. This is consistent with other provisions of the Medicare law, concerning reimbursement of services "incident to" a physician's services. Under the Proposed Regulations' definition of "direct supervision," a physician must be "actually physically present" in the office suite in which the "incident to" services are furnished, throughout the time they are being furnished, and must be immediately available to provide assistance and direction.

The text of the Proposed Regulations also does not clarify the meaning of "directly related" for purposes of determining a physician's permissible share of profits or bonus compensation, although the Commentary addresses this issue. The Commentary indicates that a group practice may share its overall profits under a variety of methods that do not relate directly to the source of the referrals that gave rise to the profits. These methods may be based, for example, on an equal division of profits, a physicians' investment in the group, the number of hours a physician devotes to the group, or the difficulty of a physician's work.

The Commentary seems to indicate that HCFA is struggling over the permitted methods of determining bonus compensation. Consistent with the Stark Statute, the Commentary states that a productivity bonus can only indirectly reflect designated health services that a physician personally performs or that are incident to personally performed services. In addressing the meaning of "indirectly," the Commentary concludes, "a physician's compensation can reflect a bonus for designated health services the physician personally performs or `incident to' services the physician directly supervises, provided the services result from the referral of a physician other than the one performing or supervising the service . . . . A physician can receive compensation for his or her own referrals for designated health services only through the aggregation that occurs as part of over-all sharing of profits."

The revised definition of "referral" causes this interpretation to be much less problematic for group practices than it would be absent the revised definition. Nevertheless, this interpretation potentially raises problems.

For example, suppose that a large, multispecialty group practice located in the center of a medium sized city has a satellite office in one or more neighboring small towns, and that a single primary care physician, who is employed by the group practice, practices at the satellite location. Except in complex cases, the satellite location handles its own x-rays, EKGs, and simple laboratory tests, all of which are performed or directly supervised by the physician. The provision of these services at the satellite office is more convenient to the patient than requiring the patient to travel to the group practice's primary location or to another provider of these services. Virtually all the satellite office's patients reside in the local community and come to the satellite office because they are established patients of the physician.

Under HCFA's interpretation, the group practice in this example would be precluded from paying the physician at the satellite office any bonus based on his or her personal provision or supervision of appropriate x-rays, EKGs, and laboratory tests for his or her own patients. Such a bonus would be prohibited even if it were measured by hours that the physician worked in providing or supervising those services, instead of the volume of referrals for such services or revenues received from such referrals. Although the prospect of a bonus based on such services might provide the employed physician an incentive to overutilize those services, HCFA's interpretation treats the employed physician differently than it would treat a similarly situated physician who owns his or her own practice in the same community. The physician who owns his or her practice would be permitted to retain all income from the practice's provision of designated health services.

The Commentary recognizes the difficult issues related to productivity bonuses and specifically solicits comments concerning productivity bonuses.

"Members of the Group." The Proposed Regulations contain a definition of "members of the group," which differs from the Stark I Regulations. The Stark I Regulations define "members of the group" to include physician partners and full-time and part-time physician contractors and employees. The definition in the Proposed Regulations deletes the term "physician contractors." By excluding independent contractors from the definition of "members," the Proposed Regulations allow a group practice more easily to satisfy the requirements (1) that each "member of the group" furnish substantially the full range of patient care services that the physician routinely provides through the group's office space, facilities, equipment, and personnel, and (2) that at least 75% of the services of the "members of the group" be furnished through the group and billed under the group's billing number. Independent contractors who practice with the group would not have to provide substantially the full range of their services through the group, and the patient care services that they provide outside the group would not count against the 75% requirement.

According to the Commentary, a number of group practice organizations requested this revision of the definition of "members of the group." However, this revision could have a negative impact on group practices that use independent contractors to supervise ancillary services in reliance on the in-office ancillary services exception. That exception requires that ancillary services be provided by or under the direct supervision of the referring physician or another member of the same group practice as the referring physician. If a physician member of a group practice refers a patient for ancillary services provided by the group, the referral will not satisfy the in-office ancillary services exception if the ancillary service is supervised by a physician who practices with the group as an independent contractor.

2. Exception for In-Office Ancillary Services.

The Proposed Regulations change the in-office ancillary services exception in several respects.

Revised Definition of "Direct Supervision." To satisfy the in-office ancillary services exception to the Stark referral prohibition, the ancillary services (such as x-rays, EKGs, and clinical laboratory tests) must be furnished personally by either referring physician, a physician who is a member of the same group practice as the referring physician, or individuals who are "directly supervised" by the referring physician or another physician in the group practice.

The definition of "direct supervision" under the Proposed Regulations requires that the supervising physician be "actually physically present" in the office suite in which the services are furnished, throughout the time they are being furnished, and that he or she be immediately available to provide assistance and direction. The physician's physical absence is permitted only in the case of (a) a brief and unexpected absence, or (b) a routine absence of a short duration, such as a lunch break. Otherwise, it generally is not sufficient, for purposes of the in-office ancillary services exception, for the physician to be working in an adjacent or nearby office suite, or to be away from the office and available by telephone.

The Commentary states that it is up to the local Medicare carrier to determine whether a physician's absences are sufficiently "brief and unexpected" or of sufficiently "short duration" for purposes of the "direct supervision" requirement. The Commentary also defers to the carrier to determine (based on the physical configuration of each practice's office) the extent to which the supervising physician may practice from other areas of his or her office, such as a different floor of the same office suite in which the ancillary services are being provided. However, the Commentary states that practicing in a group of contiguous rooms should satisfy the "direct supervision" requirement in most cases.

"Same Building" Requirement. The in-office ancillary services exception requires that the ancillary services be furnished (a) in a building in which the referring physician (or another physician who is a member of the same group practice) furnishes physicians' services unrelated to the furnishing of the designated health services, or (b) in another building that is used by the group practice for the provision of some or all of the group's clinical laboratory services, or for the centralized provision of the group's designated health services (other than clinical laboratory services). The Proposed Regulations provide that the "same building" means "the same physical structure, with one address, and not multiple structures connected by tunnels or walkways." The Commentary indicates that the purpose of this requirement is to assure that the ancillary services are provided by the group practice (and not at a remote location that is physically separate from the group practice) and that a physician is physically present at the location where the ancillary services are being provided, and available to supervise the services.

The Commentary indicates that a group practice can appropriately use a centralized location to furnish any one or any combination of designated health services, and that a group practice can have more than one of these centralized locations. However, HCFA's position is that, to satisfy the in-office ancillary services exception, a group practice must have a physician present at the centralized location to perform or directly supervise the performance of the designated health services. The Commentary also states HCFA's view that, if a group practice furnishes designated health services in a hospital or skilled nursing facility, the services can be covered by the in-office ancillary services exception if (a) the hospital or nursing facility serves as a centralized location at which the group practice provides designated health services, or (b) a member of the group practice furnishes physicians' services at the hospital or nursing facility that are unrelated to the designated health services and the group practice meets the requirements for direct supervision and billing.

Billing. The in-office ancillary services exception requires that the ancillary services be billed by the physician performing or supervising the services, by a group practice of which that physician is a member under a billing number assigned to the group practice, or by an entity that is wholly owned by the physician or group practice. This permits a group practice to bill through an entity (such as a management services organization) that is wholly-owned by the physician group practice, even though the separate entity would not be considered a part of the group practice.

Crutches. The in-office ancillary services exception does not apply to referrals for most durable medical equipment (DME), other than infusion pumps. Because of this DME carve out, the Stark Statute literally prohibits a physician who sets a Medicare patient's broken leg from selling the patient a set of crutches. This seemingly absurd result led to much debate about the broad reach of the Stark referral prohibition. The Proposed Regulations attempt to lay this debate to rest by specifically providing that the in-office ancillary services exception does apply to the provision of crutches, although it does not apply to any other DME (except infusion pumps). However, the exception for crutches applies only if the physician who prescribes the crutches does not realize any profit, either directly or indirectly, from the furnishing of the crutches. Therefore, a physician practice that provides crutches to Medicare or Medicaid patients must assure that it charges no more than its cost for the crutches.

The Commentary states that, if an item is given to a patient at a physician's office but is meant to be used by the patient at home or outside the physician's office, or if an item is delivered to the patient's home, the item has not been "furnished in the physician's office," and consequently does not qualify as in "in-office ancillary service" for purposes of the exception. This seems inconsistent with the new provision for crutches.

3. Exception for Physicians' Services.

The Stark Statute does not prohibit a physician from referring patients for the provision of physicians' services provided personally by or under the personal supervision of the referring physician or another physician in the same group practice. Disregarding the effect of the modified definition of "group practice," the Proposed Regulations do not materially affect this exception.

In specifying those who may provide services in reliance on this exception, the text of the Proposed Regulations uses the term, "another physician in the same group practice," not "member" of the group practice. Therefore, the text of the Proposed Regulations is unclear concerning whether an independent contractor physician qualifies as "another physician in the same group practice" for purposes of the physician services exception. The Commentary states that the exception for physicians' services applies only to services that are provided personally by a physician who is a "member" of the same group practice as the referring physician or that are provided by a nonmember physician who is personally supervised by a "group practice physician" (implying a "member" of the group practice). The Commentary interprets "personal supervision" for this purpose to mean that the member of the group practice is legally responsible for monitoring the results of any test or other designated health service and is available to assist the individual who is furnishing the service, even though the member physician need not be present while the service is being furnished.

C. Effect of Proposed Regulations on Other Exceptions.

1. Exception for Interest in Publicly-Traded Securities.

The Proposed Regulations clarify the exception for a physician's referrals to a publicly-traded entity in which the physician has an ownership or investment interest. Assuming all other requirements are satisfied, the exception is available under the Stark Statute and the Stark I Regulations if the physician owns investment securities that "may be purchased on terms generally available to the public." The Proposed Regulations cover ownership of investment securities "that at the time they were obtained could be purchased on the open market." This revision clarifies that, as long as the investment securities that the physician owns could have been purchased on the open market when the physician acquired them, the physician is not prohibited from making referrals to the publicly-traded entity that issued the securities merely because the physician received the securities by gift or bequest or in a transaction not involving a purchase on the open market.

2. Exception for personal service arrangements.

Under current law, an entity's compensation of a physician for the physician's personal services is covered by the exception for personal services contracts only if the arrangement "covers all of the services to be furnished by the physician (or an immediate family member of the physician) to the entity." The Proposed Regulations liberalize this exception by permitting multiple arrangements between the physician and the entity, provided that all separate arrangements between the entity and the physician (or any of the physician's family members) incorporate each other by reference. (Each arrangement also would have to separately satisfy all other conditions to the personal services exception.) This proposed new rule is helpful, but cumbersome. It literally requires that the physician and the entity, whenever they enter into an additional agreement, to amend each prior agreement between them to incorporate by reference each subsequent agreement.

The exception for personal services arrangements requires a contract that has a term of at least one year. In addressing whether these contracts may have clauses that allow termination in less than one year, the Commentary states that clauses allowing termination for good cause are permitted, as long as the parties do not enter into a new arrangement within the originally established one year period. The Commentary also states HCFA's position that, if a contract for personal services provides for renewal, it must be renewed in at least one year increments, so that it is always an agreement that provides for a term of at least one year.

The same comments apply to leases that qualify for the exception for space or equipment leases. Such leases also must have terms of not less than one year.

3. Exceptions Based on Fair Market Value.

The Stark Statute and Stark I Regulations contain a definition of "fair market value" that is important for purposes of the exceptions for rental of office space or equipment, employment relationships, personal service arrangements, isolated transactions, and payments by a physician for items or services. These exceptions are available only if the compensation paid (rent, salaries, professional fees, the purchase price applicable to a practice acquisition or other isolated transaction, or the price paid by a physician for an item or service) is consistent with fair market value.

Under an expanded definition in the Proposed Regulations, "fair market value" means the price, determined in arms-length transactions, that an asset would bring as a result of bona fide bargaining between well-informed buyers and sellers, or the compensation that would be included in a service agreement, as the result of bona fide bargaining between well-informed parties to the agreement, on the date of acquisition of the asset or at the time of the service agreement. The definition states that, usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement.

With respect to leases, however, the definition continues to provide that fair market value means the value of the rental property for general purposes, without taking into account its intended use. This restriction is inconsistent with the new provisions of the definition, because well-informed buyers and sellers in bona fide sales, negotiated at arms-length, naturally will consider the intended or potential use of rental property when they assess its value. The new definition, therefore, provides no meaningful guidance for determining the fair market value of rental property that is built to specifications that are particular to health care providers or that is located within a medical office complex or another area where there is a high concentration of health care providers.

III. Proposed New Exceptions.

The Proposed Regulations propose three additional exceptions applicable to certain compensation arrangements.

A. Discounts.

The Stark I Regulations and the Proposed Regulations both specifically provide that a discount granted by an entity to a physician constitutes a compensation arrangement between the entity and the physician. The Proposed Regulations provide an exception that permits the physician to make referrals to an entity that grants discounts to the physician, as long as any such discount is passed on in full to either the patient or the patient's insurers (including Medicare) and does not inure to the benefit of the physician.

B. De minimis compensation.

The Stark Statute and Stark I Regulations do not address whether nominal compensation that a health care provider entity may give to a referring physician (for example, free drug samples, nominal gifts, or entertainment) creates a financial relationship with the physician that precludes the physician from making referrals to the entity. The Proposed Regulations contain a new exception that permits physicians to make referrals to an entity that provides "de minimis" compensation to the physician. The exception applies to items or services (excluding cash or cash equivalents, such as marketable securities and gift certificates) having a value that does not exceed $50 per gift or an aggregate of $300 per year, if the following two conditions are satisfied:

The meaning of "makes the compensation available to all similarly situated individuals" is unclear. Suppose, for example, that a home health agency wants to present a referring physician with a birthday gift valued at $30. Do the Proposed Regulations require the home health agency to make a similar gift to all physicians who practice in the service area served by the home health agency? Does it require the home health agency to offer to share the gift with all physicians in the area? If the home health agency is owned by a large chain, must the owner offer a similar gift to all physicians in all service areas where the owner's homes health agencies operate? Because of this uncertainty, the Proposed Regulations provide no definitive guidance to health care providers in determining the extent to which gifts to, or entertainment of, referral sources is appropriate.

C. Fair market value compensation.

The Proposed Regulations contain a broad new exception for "fair market value compensation." This new exception is a "catch-all" for various of compensation arrangements that might not fit squarely within one of the other exceptions for compensation arrangements. The new exception applies to compensation resulting from an arrangement between an entity and a physician (or immediate family member) or any group of physicians (regardless of whether the group meets the definition of a group practice) if the arrangement is set forth in an agreement that meets the following conditions:

The fifth condition to this exception requires that the compensation arrangement be analyzed under the Medicare anti-kickback statute. Many compensation arrangements that do not satisfy a safe harbor under the anti-kickback statute may, nevertheless, comply with the anti-kickback statute. However, compliance with the anti-kickback depends to a significant extent on the intent of the parties to the transaction at issue. Because the parties' intent ordinarily cannot be determined with certainty, determining whether a financial arrangement complies with the anti-kickback statute, absent compliance with a safe harbor, is challenging. The proposed Stark exception for fair market value compensation generally will require a determination of the intent of the physician and the entity in entering into the compensation arrangement. The intent of the physician and the entity is not relevant under any other exception to the Stark referral prohibition.

IV. Certain Definitions.

The Proposed Regulations add definitions of each of the "designated health services" and add or revise certain other key definitions that have broad application.

A. Definition of "Entity." The definition of the term "entity" has been expanded specifically to include a physician's sole practice or a practice of multiple physicians that provides for the furnishing of designated health services, as well as any other sole proprietorship, trust, corporation, partnership, foundation, not-for-profit corporation, or unincorporated association. The purpose of this revision is to clarify that a referral to a physician's own medical practice constitutes a "referral" for purposes of the Stark prohibitions.

B. Definition of "Financial Relationship." The definition of "financial relationship" has been revised to clarify that an "investment interest" includes an option or nonvested interest in any entity, and that an indirect ownership or investment interest exists no matter how many levels removed it is from a direct interest. For example, if a physician owns stock, a stock option, or debt of a corporation that owns numerous subsidiaries, the physician is deemed to have an investment interest even in the most remote subsidiary, regardless of the number of layers of subsidiaries that exist between the remote subsidiary and the parent corporation.

C. Eyeglasses and Contact Lenses as "Prosthetic Devices." The definition of "prosthetic devices and supplies" specifically includes "one pair of conventional eyeglasses or contact lenses furnished subsequent to each cataract surgery with insertion of an intraocular lens." This definition clarifies the application of the Stark Statute to referrals by a physician to an optical shop that is owned by the physician or the physician's group practice. In most cases, conventional eyeglasses and contact lenses do not constitute "designated health services," so most referrals for conventional eyeglasses and contact lenses are not prohibited by the Stark Statute. However, unless an exception applies, the Stark Statute prohibits a physician from referring a patient to an optical shop owned by the physician (or by the physician's group practice) for eyeglasses or contact lenses furnished subsequent to cataract surgery involving the insertion of an intraocular lens. For this purpose, a "referral" would include preparing a plan of care for the patient that includes the provision of such eyeglasses or contact lenses.

D. Definition of "Transaction." The Proposed Regulations retain the existing definition of "isolated transaction," which makes it clear that an isolated transaction (for example, the purchase of a physician practice) is exempt from the referral ban only if it involves a single payment between two or more persons or entities. A transaction that involves long-term or installment payments is not considered an isolated transaction.

V. "Missing" Provisions.

The Proposed Regulations are conspicuously silent concerning certain issues. For example, some providers of lithotripsy services anticipated that the Proposed Regulations would exclude certain lithotripsy services from the definition of "inpatient hospital services," based on the supposition that there is no risk of overutilization of such lithotripsy services. In its Commentary, HCFA expressed concern that lithotripsy arrangements could potentially lead to patient abuse because of "physicians requiring the use of certain equipment based on financial incentives, rather than on the best interests of the patient." HCFA concluded, therefore, that "[b]ecause of the controversial nature of lithotripsy, we have not excluded it from the definition, but specifically solicit comments on this issue."

The Proposed Regulations also do not provide any additional exception for a physician's ownership interest in a "provider sponsored organization." In discussing the existing exception for services provided under prepaid health plans, the Commentary acknowledges that "a host of organizations and integrated delivery systems are not specifically excepted under the statute, so the services they provide to Medicare and Medicaid patients may be subject to the referral prohibition." Although the Commentary does not specifically mention provider sponsored organizations, it states, with respect to "hybrid" managed care organizations, generally, that "We can find no grounds to create a blanket exception for these arrangements; we see no guarantee that these `hybrid' structures will all be free from any risk of patient or program abuse."

The Commentary further states, "It is our view that a large percentage of the new and evolving structures will continue to thrive by meeting the exceptions in the statute and in this proposed regulation." The basis for this view is that a managed care organization that is unable to rely on the existing exception for prepaid health plans typically contracts with physicians to provide services to the organization's patients. According to HCFA, those physicians can continue to refer Medicare and Medicaid patients to the organization, provided that their contracts satisfy the exception for personal services contracts or the proposed new exception for fair market value compensation arrangements. The Commentary states the new exception was added "to accommodate the many complex arrangements that we believe exist between physicians and entities." The exception for personal services contracts and the proposed exception for fair market value compensation, however, apply only to compensation arrangements. They provide no protection for a physician's ownership interest in a provider sponsored organization that provides designated health services to Medicare or Medicaid patients.

VI. Conclusion.

Although the Proposed Regulations contain several helpful and clarifying provisions, further clarification is needed. Health care providers that may be adversely affected by the Proposed Regulations should exercise their right to comment to HCFA during the comment period. Finally, in planning business arrangements, health care providers should consider the potential effects of state laws and other federal laws, as well as the Stark Statute.