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New Revisions to Stark Law: Beware the “Per-Click Lease” – Maybe?

Scenario: You have an arrangement with your local hospital. You are a urologist and your practice owns a laser machine. You lease your laser machine to Hospital A, and your lease allows you to receive additional, but fair market value, money depending on how often your machine is used. Legal?

A new Final Ruling from the Centers for Medicare and Medicaid Services (CMS) provides murky guidance.

CMS finalized the 2017 Medicare Physician Fee Schedule (PFS) rule, which took effect on January 1, 2017. There have been few major revisions to the Stark Law since 2008…until now. The Stark Law is named for United States Congressman Pete Stark (D-CA), who sponsored the initial bill in 1988. Politicians love to name bills after themselves!

Absent an exception, the Stark Law prohibits a physician from referring Medicare patients for certain designated health services (“DHS”), for which payment may be made under Medicare, to any “entity” with which the physician (or an immediate family member) has a “financial relationship.” Conversely, the statute prohibits the DHS-furnishing entity from filing claims with Medicare for those referred services.

Despite the general prohibition on potentially self-interested referrals, the Stark Law permits Medicare referrals by physicians to entities in which they have a financial interest in certain limited circumstances. But these circumstances are limited and must be followed precisely and without deviation.

These exceptions are created by legally excluding some forms of compensation agreements and ownership interests from the definition of “financial relationship,” thus allowing both the relationships and the referrals. See 42 U.S.C. § 1395nn(b)-(e).

One of such exceptions to the Stark Law is the equipment lease exception.

This equipment lease exception to Stark law allows a financial relationship between physicians and hospitals for the lease of equipment, only if the lease (1) is in writing; (2) assigns the use of the equipment exclusively to the hospital; (3) lasts for a term of at least one year; (4) sets rental charges in advance that are consistent with fair market value and “not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties”; (5) satisfies the standard of commercial reasonableness even absent any referrals; and (6) meets “such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse.”

For example, like the scenario above, a urology group owns and leases a laser machine to Hospital A. As long as the lease meets the criteria listed above, the urologists may refer Medicare patients to Hospital A to their hearts’ content – even though the urologists benefit financially from their own referrals.

However, what if the monetary incentive is tied to the amount the machine is actually used – or the “per-click lease?”

In a court case decided in January 2015, Council for Urological Interests v. Burwell, a D.C. circuit court decided that CMS’ ban on per-click leases was unreasonable.

In CMS’ Final Ruling, effective January 1, 2017, CMS again re-issued the per-click lease ban. But CMS’ revised ban appears to be more parochial in scope. CMS states that it “did not propose and [is] not finalizing an absolute prohibition on rental charges based on units of service furnished” and that “[i]n general, per-unit of service rental charges for the rental of office space or equipment are permissible.” As CMS had previously stated, the per-click ban applies only “to the extent that such charges reflect services provided to patients referred by the lessor to the lessee.”

Considering how unclear the Final Rule is – We are banning per-click leases, but not absolutely – expect lawsuits to clarify. In the meantime, re-visit your equipment leases. Have your attorney review for Stark compliance – because for the first time since 2008, major amendments to Stark Law became effective January 1, 2017.

What is the Stark Law? And Why Is It Important to You?

It seems apropos that a US Congressman was named Pete Stark who first sponsored what came to be known as the Stark law, because the Stark law mandates stark penalties for financially driven physician referrals. Get it? Cheesy, I know.

The Stark law (42 U.S.C. 1395nn) prohibits physician referrals of designated health services (DHR) for Medicare and Medicaid if the physician has a financial interest with the “referred to” agency.

For example, Dr. Goneril is an internist. As an investment, he and his partner, Dr. Regan open a local laboratory “Gloucester” and hire Mr. Lear to run Gloucester. Drs. Goneril and Regan are silent partners. Dr. Goneril orders blood work on Patient Cordelia and refers her to Gloucester.

The above example would be a direct violation of the Stark law.

The penalties are severe. If caught, Dr. Goneril would have to repay all money received for services in which he referred Cordelia to Gloucester. In addition, he could be penalized $15,000 for every time he improperly referred Cordelia, plus three times the amount of improper payment he received from the Medicare/caid program, possible termination from the Medicare/caid program, and penalties of up to $100,000 for every time he tried to circumvent the Stark law.

On the federal level, the Department of Justice, the Center for Medicare and Medicaid Services (CMS), and the Department of Health and Human Services (DHHS) are tasked with enforcing the Stark law.

Recent years have seen the most Stark law violations since its inception and it is only being enforced more and more.

On June 9, 2015, the Office of Inspector General (OIG) issued a fraud alert regarding the Stark law. Investigations since June 2015 has risen significantly.

Here are some recent Stark settlements (for you to understand the severity):

  • Adventist Health System agreed to pay $118.7 million to the federal government and to multiple states.
  • Columbus Regional Healthcare System is paying $25 million.
  • Citizens Medical Center in Victoria, Texas, agreed to pay $21.75 million.

“O, reason not the need! Our basest beggars / Are in the poorest thing superfluous. / Allow not nature more than nature needs, / Man’s life’s as cheap as beast’s.” (King Lear, II, iv).

How do you defend yourself if you are accused of a Stark violation?

First and foremost, hire a qualified health care attorney. There are exceptions to the Stark law which, hopefully, you fall within. Furthermore, there are multiple legal arguments that can abate penalties. You do not always want to settle.There have been a number of agencies, that recently, decided to never settle. Oddly enough, the number of their audits decreased. Maybe the government targets easy money.