Moving the HME Industry Forward

Respiratory/Sleep

Stark and Kickback Issues in the Sleep Arena

Jeffrey S. Baird, JD • April 21, 2018

AMARILLO, TX – The Medicare anti-kickback statute (“AKS”) prohibits anyone from knowingly and willfully soliciting, receiving, offering, or paying remuneration to another person in exchange for referring or arranging for the referral of items or services that are reimbursable by federal health care programs.[1] Remuneration includes anything of value, including non-monetary items, that is offered directly or indirectly, overtly or covertly. The AKS applies to any item or service that is reimbursable by a federal health care program (e.g., Medicare, Medicare Advantage, Medicaid, Medicaid Managed Care, and TRICARE). Due to the broad language of the AKS, a number of “safe harbors” have been enacted to protect certain types of arrangements. Failure to comply with a safe harbor does not cause the arrangement to be deemed illegal. Rather, all factors of the arrangement will be evaluated for the risk of fraud and abuse.

The AKS is an intent based statute. Several courts have concluded that if only “one purpose” of an arrangement is to induce referrals, then the arrangement violates the AKS. Accordingly, arrangements should be structured to comply with, or substantially comply with, a safe harbor to the AKS. If the arrangement cannot comply with (or substantially comply with) a safe harbor, then it needs to comply with other OIG guidance such as the OIG’s 1989 Special Fraud Alert (“Joint Ventures”) and the OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”).

The Stark physician self-referral statute states that a “physician may not make a referral to [an] entity for the furnishing of designated health services,” reimbursable by Medicare, Medicare Advantage, Medicaid, or Medicaid Managed Care (collectively referred to as “Medicare/Medicaid”), if the “physician (or an immediate family member of such physician) has a financial relationship with [such] entity,” unless a Stark exception is met.[2] To understand the scope of Stark’s prohibition against self-referrals, it is necessary to understand the definitions of various terms. “Referral” means “the request by a physician for, or ordering of . . . any designated health service for which payment may be made under” Medicare.[3] This is a very broad definition; it is not limited to a physician’s referral to a specific supplier.[4] “Designated health services” (“DHS”) are categorized into 10 distinct types of services, including “durable medical equipment and supplies.”[5] The definition of DME includes CPAPs and supplies.[6]

Stark is a strict liability statute. Unless an arrangement that implicates Stark meets a specific exception to the statute, then the arrangement violates Stark, even if the parties acted in good faith when they entered into the arrangement.

Five elements are needed to implicate Stark: a physician, a referral, DHS, an entity, and a financial relationship. For example, Dr. Jones (physician) may write orders (referral) for Medicare/Medicaid patients for CPAPs or other supplies (DHS) to ABC CPAP Equipment, Inc. (“ABC”) (entity), in which Dr. Jones has an ownership (financial relationship). Thus, Stark is implicated and unless the arrangement can fall within an exception to Stark, the law is violated.

There are three exceptions that apply to ownership or investment interests: (1) publicly-traded securities; (2) mutual funds; and, (3) specific providers.  The only potentially applicable exception would be the exception for specific providers. The specific providers exception states that an ownership interest in a rural provider is not considered a “financial relationship” under Stark. Rural providers are defined as those that furnish at least 75% of the DHS they provide to residents of a “rural area.” This exception is often referred to as the “rural provider” exception. Thus, whether this exception can apply depends on whether at least 75% of the patients that ABC services are located within a “rural area.”

“Rural area” is defined as “an area that is not an urban area as defined at § 412.62(f)(1)(ii) of this chapter.”[7] 42 CFR § 412.62(f)(1)(ii) states in relevant part that “the term urban area means  “A Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA), as defined by the Executive Office of Management and Budget…” Therefore, any area that is not an MSA or an NECMA would be considered a “rural area.” Thus, so long as no less than 75% of the DME that ABC furnishes is to patients located in a rural area, the rural provider exception would apply to ABC, regardless of where it is physically located.

The current list of MSAs can be found on the U.S. Census Bureau website.[8] Note that a town might fall within a Micropolitan Statistical Area, which is defined as an urban cluster of at least 10,000 but less than 50,000 people.[9] In regards to whether a Micropolitan Statistical Area could be considered a “rural area” under the definition of Stark, the Stark II, Phase III implementation final rule states “Micropolitan Statistical Areas are not within MSAs; thus, for purposes of the physician self-referral rules, Micropolitan Statistical Areas are not considered urban and are, therefore, rural areas.[10]

Based on the above, Stark would be implicated by the referral of Medicare/Medicaid patients by Dr. Jones to ABC. However, the rural provider exception may offer protection if ABC falls within the definition of a “rural provider.” Specifically, no less than 75% of the DHS (i.e., CPAPs and supplies) that ABC furnishes must be provided to residents of a rural area.[11] It is important to again emphasize here that Stark is a strict liability statute, meaning that all of the elements of the rural provider exception must be met, or the law is violated. There is no “wiggle room” for that percentage.

ABC may dispense CPAPs/supplies to Medicare/Medicaid patients if Dr. Jones is not the physician who issues the order for the CPAPs/supplies. If Dr. Jones does not provide the referral directly to ABC, it is possible that his involvement with the patient’s care, coupled with a pre-printed order form (prominently listing ABC) provided by XYZ Sleep Lab, could give rise to concerns under both Stark and the AKS.

As discussed above, Stark is a concern if five elements are present. Let’s focus on the “referral” element. A referral is more than just an order written by a physician and sent to a DME supplier or pharmacy. “Referral” is defined as “the request by a physician for, or ordering of, or the certifying or recertifying of the need for, any designated health service”[12] If Dr. Jones does not write the order to ABC for the CPAPs/supplies, Dr. Jones may conduct the interpretation of the sleep test that determines whether the patient should be prescribed such DME. Thus, Dr. Jones, as the interpreting physician, could be characterized as “certifying the need for” DHS (e.g., CPAPs/supplies).

Assume that XYZ will send the patient’s physician a pre-printed order form that lists ABC at the top of the list of available suppliers, giving the patient’s physician the opportunity to select a supplier, but strategically placing ABC first. It is arguable that this scenario gives rise to a “referral” as defined under Stark, which would complete the five elements required to implicate the law. Absent an applicable exception, Stark would likely be violated by this arrangement. The specific providers exception, discussed above, may apply here if the requirements are met.

Both a Medical Director Agreement and a Sleep Test Interpretation Agreement can be scrutinized from two perspectives. First, whether the compensation provided under either agreement is actually compensation for referrals that Dr. Jones generates for XYZ. Second, whether the compensation provided under either agreement can be viewed as compensation to XYZ from Dr. Jones in exchange for referrals.

Medical directorships have seen increased scrutiny by the federal government in recent years. For example, on June 9, 2015, the Office of Inspector General (“OIG”) issued a Fraud Alert warning physicians about suspect compensation arrangements that can give rise to liability.[13] Specifically, the Fraud Alert addressed 12 recent OIG settlements with physicians who entered into questionable medical directorship and staff arrangements with entities. The OIG alleged that these arrangements violated the AKS for a number of reasons, including that the physicians were paid in a manner that did not reflect fair market value for the services, the physicians did not actually render the services outlined in the agreements, and that an affiliated entity paid the salaries of the physicians’ staff in exchange for providing referrals to the entities.[14]

The role that a medical director plays for an entity can vary. However, the OIG notes that successful medical directors should:

  • “Actively oversee clinical care in the facility;”[15]
  • “Lead the medical staff to meet the standard of care;”[16]
  • “Ensure proper training, education, and oversight for physicians, nurses, and other staff members; and,”[17]
  • “Identify and address quality problems.”[18]

Furthermore, it is crucial that the medical director actually performs whatever responsibilities s/he agrees to assume and that his/her compensation for such responsibilities is commensurate with fair market value.

A notable fraud and abuse judgment was against Tuomey Healthcare System (“Tuomey”).  Tuomey is a South Carolina based hospital system that entered into suspect arrangements with physicians wherein the physicians would provide services to Tuomey’s outpatient facilities, but required such physicians to refer patients to Tuomey in exchange for above fair market value compensation.[19] A jury determined that these arrangements violated Stark and the court entered judgement against Tuomey for more than $237 million. Principal Deputy Assistant Attorney General Benjamin Mizer said of the case, “[t]his case demonstrates the United States’ commitment to ensuring that the doctors who refer Medicare beneficiaries to hospitals for procedures, tests, and other health services do so only because they believe the service is in the patient’s best interest, and not because the physician stands to gain financially from the referral.”[20] Again, a “referral” under Stark does not only mean an order for an item or test, but can also include “the request by a physician for, or ordering of, or the certifying or recertifying of the need for, any designated health service.”[21]

In our example, if Dr. Jones is both the Medical Director and an interpreting physician, he is in a unique position to direct referrals to XYZ. Thus, it would be in the parties’ interest to ensure that the arrangement complies with an applicable exception to Stark. The personal services arrangements exception requires:[22]

  • The arrangement to be in writing, signed by the parties, and specifies the services that are covered by the arrangement;
  • The arrangement covers all services that are furnished by the physician to the entity;
  • The services provided are reasonable and necessary for a legitimate business purpose;
  • The agreement is for a term of at least 1 year.
  • Compensation is set in advance and does not exceed fair market value, and does not take into account the volume or value of referrals generated between the parties; and,
  • The services to be furnished do not involve activities that violate Federal or state law.

Similarly, the AKS could be implicated here, as XYZ would be providing remuneration (compensation) in exchange for referrals. However, the Personal Services and Management Contracts Safe Harbor (discussed below) could offer protection from the AKS.

Assume that XYZ is providing referrals for CPAPs/supplies to ABC, an entity in which Dr. Jones has ownership and in whose success Dr. Jones will directly benefit. In other words, XYZ is providing referrals to / generating business for Dr. Jones. Dr. Jones, in turn, is providing services to XYZ in the form of his medical directorship and sleep test interpretation services. Such services, if not compensated for fair market value, could be viewed as remuneration to XYZ by Dr. Jones in exchange for the business being generated for ABC, implicating the AKS. In other words, it is possible that the government could take the position that Dr. Jones is providing XYZ with discounted services (i.e., remuneration) in exchange for the business that XYZ generates for ABC (i.e., referrals).  In that case, the arrangement between Dr. Jones and XYZ would have to substantially comply with a safe harbor to the AKS.

The Personal Services and Management Contracts Safe Harbor provides protection for such arrangements.[23] Specifically, the Safe Harbor excludes from the definition of remuneration any payment made as compensation for services to the entity so long as certain standards are met.  In other words, if the relationship between Dr. Jones and XYZ can fall within the Safe Harbor, then such relationship would not be considered “remuneration” and would be protected from the AKS.

The Personal Services and Management Contracts Safe Harbor requires that:

  • The agreement between the parties is set out in writing and signed.
  • The agreement includes all services that Dr. Jones is to provide for the term of the agreement.
  • If the services are to be provided on a part-time or periodic basis, the agreement outlines the specific schedule for the intervals of service.
  • The agreement is set out for a term of at least one year.
  • The aggregate compensation paid to Dr. Jones is set out in advance, reflects fair market value, and does not take into account the volume or value of referrals or business generated between the parties.
  • The services to be furnished do not involve activities that violate Federal or state law.
  • The services are reasonable and necessary to accomplish the business purpose of the services.

In analyzing the arrangement under the AKS, questions that are important to this analysis include: (1) does Dr. Jones actually perform all of the services outlined in the Agreement; (2) is Dr. Jones’ compensation commensurate with fair market value for such services; (3) although not obligated to full-time employment, how much time does Dr. Jones devote to such responsibilities; and (4) how often is Dr. Jones actually paid under this agreement?

Professional Reading Agreement

Similar to a Medical Director Agreement, a Professional Reading Agreement (“PRA”) should comply with the applicable exception to Stark and applicable Safe Harbor to the AKS. The PRA should be examined to ensure that the compensation is fair market value for the services that are rendered. It is possible that the government could take the position that in exchange for referrals to ABC, XYZ receives remuneration from Dr. Jones in the form of discounted services.

Therefore, it is imperative that the arrangement fit as closely as possible within the Personal Services and Management Contracts Safe Harbor to the AKS and that the parties are able to support the fee as fair market value for Dr. Jones’ interpretation services.

Assume that the PRA states that Dr. Jones will receive a flat $___ per “Fully Interpreted Test.” The fee should be consistent with fair market value for the services rendered. Also, although the fee is flat, the compensation will take into account the volume of the business that is generated by XYZ (i.e., the more interpretations that Dr. Jones performs, the higher his compensation). The OIG has stated that this “per-click” type of fee is “inherently reflective of the volume or value of services.”[24] However, “per-click” fees are not automatically considered a violation of the AKS. In our example, Dr. Jones’ fee does not appear to take into account any referrals that Dr. Jones may provide to XYZ; however, this general “red flag” should be noted.

Conclusion

Any time financial relationships intermingle with referrals for federally reimbursed services between health care entities, the parties involved should proceed with caution. Here, because of the financial relationships that Dr. Jones has with both XYZ (the referral source) and ABC (the referral recipient), compounded by the fact that Dr. Jones himself is in a position to, and does under certain circumstances, provide referrals to ABC, both the AKS and Stark are implicated.

Stark is implicated by Dr. Jones’ referral of Medicare/Medicaid patients to ABC where Dr. Jones performs the sleep test interpretation and orders the CPAPs/supplies. Therefore, any such referrals for DME that Dr. Jones makes to ABC, in which he has ownership, must meet an exception to Stark. The rural provider exception to Stark will shield the arrangement if no less than 75% of the DHS that ABC furnishes is to patients that are located in a rural area. Although Dr. Jones does not directly order the CPAPs/supplies from ABC, he does provide referrals because he is in a position to, and does in fact, “certify or recertify” the need for the DME that will ultimately be provided by ABC. Here, again, the arrangement must fall within the rural provider exception to Stark in order to be afforded protection.

Medical directorships have seen increased scrutiny over the years. Any arrangements in which an entity compensates a provider based on the number of patients that the provider sees are inherently suspect. With both the Medical Director Agreement and Professional Reading Agreement, the government could argue either that (1) Dr. Jones is being compensated for referrals that he provides to XYZ or that (2) XYZ is being compensated for referrals that it is providing to Dr. Jones.  Whether this argument can be substantiated depends on a close look at the arrangement itself; whether the services being provided by Dr. Jones are fair market value; and whether such services are reasonable and necessary for the purpose of the arrangements. In order to provide protection to the arrangements, both agreements should be drafted to comply with the Personal Service arrangements exception to Stark and with the Personal Services and Management Contracts Safe Harbor to the AKS.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or jbaird@bf-law.com.

[1] 42 U.S.C. § 1320a-7b(b).

[2] 42 U.S.C. § 1395nn.

[3] 42 C.F.R. § 411.351.

[4] See Medicare and Medicaid Programs; Physicians’ Referrals to Health Care Entities With Which They Have Financial Relationships, 63 Fed. Reg. 1659 (Jan. 9, 1998) (“The ‘referral’ provision requires that a physician only request an item or service or include it in a plan of care; it does not require that the physician directly send a patient to a particular entity or specifically indicate in a plan of care that the service must be provided by a particular entity.”).  See also Medicare and Medicaid Programs; Physicians’ Referrals to Health Care Entities With Which They Have Financial Relationships, 66 Fed. Reg. 856, 873 (Jan. 4, 2001) (“[T]he direction or steering of a patient ‘to an entity’ does not need to be in writing, nor does it have to be absolute; it need only be reasonably intended to result in the patient receiving service from an entity.  Thus, for example, when a physician provides an order or prescription for DHS to a patient that ostensibly can be filled by any number of entities and then suggests or informs the patient that the order can be serviced by a particular entity, there would be a referral ‘to’ that entity.”).

[5] 42 C.F.R. § 411.351.

[6] 42 C.F.R. § 411.351.

[7] 42 C.F.R. § 411.351.

[8] U.S. Census Bureau, Office of Management and Budget (OMB) Bulletins,

 http://www.census.gov/population/metro/data/omb.html.

[9] From the Office of Management and Budget to the Heads of Executive Departments and Establishments, OMB Bulletin No. 13-01, Revised Delineations of Metropolitan Statistical Areas, Micropolitan Statistical Areas, and Combined Statistical Areas, and Guidance on Uses of the Delineations of These Areas (Feb. 28, 2013), available at https://www.whitehouse.gov/sites/default/files/omb/bulletins/2013/b-13-01.pdf.

[10] Medicare Program; Physicians’ Referrals to Health Care Entities With Which They Have Financial Relationships (Phase III), 72 Fed. Reg. 51012 (Sept. 5, 2007).

[11] 42 C.F.R. § 411.356(c).

[12] 42 C.F.R. § 411.351.

[13] Fraud Alert, Office of Inspector General, Physician Compensation Arrangements May Result in Significant Liability (June 9, 2015), available at

http://oig.hhs.gov/compliance/alerts/guidance/Fraud_Alert_Physician_Compensation_06092015.pdf.

[14] Id.

[15] U.S. Department of Health & Human Services Office of Inspector General, A Roadmap for New Physicians: Avoiding Medicare and Medicaid Fraud and Abuse, available at http://oig.hhs.gov/compliance/physician-education/roadmap_web_version.pdf.

[16] Id.

[17] Id.

[18] Id.

[19] Press Release, Department of Justice, United States Resolves $237 Million False Claims Act Judgment Against South Carolina Hospital that Made Illegal Payments to Referring Physicians (Oct. 16, 2015), available at http://www.justice.gov/opa/pr/united-states-resolves-237-million-false-claims-act-judgment-against-south-carolina-hospital.

[20] Id.

[21] 42 C.F.R. § 411.351.

[22] 42 C.F.R. § 411.357(d).

[23] 42 C.F.R. § 1001.952(d).

[24] See U.S. Department of Health & Human Services Office of Inspector General, OIG Advisory Opinion No. 10-23, available at http://oig.hhs.gov/fraud/docs/advisoryopinions/2010/AdvOpn10-23.pdf.