After years of watching the federal government and managed-care companies chip away at reimbursements, a northern Indiana cardiology group has decided enough is enough.
In fall 1997, the 27-physician group put in motion plans to partner with a nearby hospital. In exchange for managing the hospital's cardiology department, including making purchasing and staffing decisions, the physicians will receive a portion of any resulting annual cost savings.
Under terms of the proposed partnership, the physicians will have to meet predetermined medical outcome objectives, such as early extubation of open-heart surgery patients and management of myocardial infarction patients. If the doctors don't meet patient satisfaction and quality-of-care marks, they won't receive any of the savings.
The physicians see this "gainsharing" opportunity, which they call value sharing, as an innovative solution to dealing with declining reimbursements -- and one that would benefit the hospital, physicians and patients alike. They realize, however, that the federal government might view the proposed partnership differently. As a result, the group is working closely with legal advisers to ensure compliance with federal laws banning physicians from referring patients to organizations in which they have a financial interest.
The so-called "Stark I" self-referral law was passed in 1989 in response to fears that excessive physician referrals were contributing to spiraling healthcare costs. Ten years after the original statute was enacted, providers are concerned that Stark I and follow-up legislation serve less to control self-referrals and more to thwart market evolution.
Under the laws, "virtually every model through which physicians have been seeking a higher degree of integration -- including mergers and acquisitions, physician practice management companies, management services organizations, hospital practice acquisitions, physician-hospital organizations and provider-sponsored organizations -- faces new regulatory risks or at least regulatory uncertainties," says Anders Gilberg, government affairs field representative of the Englewood, Colo.-based Medical Group Management Association. "Perhaps least regulated is the solo practice -- the very antithesis of physician integration."
The Indiana physicians have spent almost two years and hefty legal fees carefully crafting a partnership they believe will comply with self-referral laws. The group recently overcame its first hurdle when the Internal Revenue Service ruled not to interfere with the hospital's not-for-profit tax-exempt status. The group also has requested an advisory opinion from HHS' inspector general's office. A ruling is expected this summer, but until they get an OK, the physicians are opting to remain anonymous.
The Stark self-referral laws date back to 1988, when the inspector general's office reported to Congress that physicians who had financial interests in clinical laboratories were 45% more likely than other doctors to refer Medicare patients for laboratory services. In response, Congress enacted a ban on physician self-referrals to clinical laboratories in 1989. The law was dubbed Stark I for its author, Democratic Rep. Pete Stark of California.
The 1989 statute was just the tip of the Stark iceberg. The original law became effective in 1992, and in 1993 Congress expanded it to include 10 additional designated health services, including physical, occupational and radiation therapy. The 1993 statute, known as Stark II, took effect in 1995, the same year rules for implementation of Stark I became final. HCFA did not publish proposed rules for implementing Stark II until January 1998.
The proposed Stark II rules, which filled more than 70 pages in the Federal Register, have caused much confusion in the provider community because of several new provisions. The proposed rules expand the definition of a prohibited financial relationship to include an ownership interest, an investment interest, or a compensation arrangement between the physician and the entity providing the designated health service.
As a result, Stark now extends beyond self-referral and influences the internal business of group practices, Gilberg says. Under the new compensation rules, for example, a group practice cannot base physician payment on the volume or value of referrals the doctor makes.
The proposed rules also clarify which exceptions are allowed under Stark. Although the rules prohibit self-referrals, they make exceptions for arrangements that fit very specific criteria. Referrals of beneficiaries to prepaid health plans, for example, are exempt.
Final rules are not expected from HCFA until sometime next year, but providers and healthcare lawyers across the country are calling for at least a partial repeal of the proposed regulations. HCFA received between 20,000 and 30,000 letters during a five-month comment period that ended in May 1998.
Even Stark acknowledges that the rules are confusing and may need revisions. "I hope that HCFA will also consider and propose ways to simplify this law and its regulations," he wrote in his comments to the agency.
HCFA representatives say they are considering the comments but did not reveal which, if any, of the proposed rules would change. Some providers are appealing to Congress to draft an amendment that would offer them relief.
Proceeding with caution
In the meantime, provider groups are cautiously going about their business and trying to figure out if their dealings comply with Stark.
"The Stark laws are very vague in a lot of senses and are becoming more and more intrusive," says healthcare attorney Kevin Barry, a partner in the Washington-based firm Reed, Smith, Shaw & McClay. "This statute requires institutions and physician practices to undertake an exhausting internal review and evaluation that may -- even with the best of intentions and efforts -- be extremely difficult to do right."
Because the rules are not final, HCFA has not begun enforcing the statute or penalizing offenders. Once it does, providers will have good reason to be concerned about violations: Penalties range from repayment of funds collected and exclusion from Medicare to fines of $10,000 for each day a provider does not comply with Stark standards.
While providers may be terrified of the penalties, the rules are so confusing that it's not clear -- to HCFA or physicians -- who is violating what, says Richard Corlin, M.D., a gastroenterologist with a six-physician group in Santa Monica, Calif.
"It's almost as if you're driving down the road and there's a sign that says, 'Don't speed,' " he says. "But when you get pulled over and they tell you that you've been speeding, if you ask, 'What's the speed limit?' they say, 'Well, we haven't decided yet.' "
Members of group practices are allowed to refer patients among themselves and their satellite offices without violating the self-referral laws -- if they meet all Stark's group practice criteria. To do so, a physician practice must consist of two or more doctors legally organized as a single partnership. At least 75% of total patient-care services must be provided through the practice and billed under a single billing number assigned to the group.
Group practices with multiple sites are extremely vulnerable to Stark violations, unless they meet strict financial integration requirements, says healthcare attorney Ken Gordon of the Dallas-based firm Jenkens & Gilchrist.
HCFA expects sites to share computer systems, billing and collection, staff and, most important, costs and revenues.
In recent years, many smaller physician groups have joined forces to share costs and negotiate contracts with managed-care companies. Many of them, however, retained their financial autonomy and did not integrate their billing or overhead costs. They likely will fail Stark's unified business test, which requires a group to split revenues equally among all its satellite offices.
"You can see there would be disincentives for a group to join up with some surgeons or a multispecialty operation because then they would have to distribute all these revenues they would have been able to keep," the MGMA's Gilberg says. "It's an incentive to remain a small group practice because you get to keep your ancillary revenues, and it creates certain disincentives to innovate and integrate in an evolving industry."
Possible gainsharing pitfalls
Of particular interest to physicians considering gainsharing arrangements are two new compensation-related exceptions spelled out in the proposed Stark II rules. A new catch-all "fair market value" compensation exception and a personal services exception might allow financial partnerships between providers and hospitals.
The fair market value exception acknowledges the number of integrated delivery systems and attempts to address the complex nature of financial arrangements between physicians and other entities.
Under the new exception, a hospital and group of providers could enter a relationship in which the hospital would pay the physicians a predetermined amount as long as that amount is consistent with fair market value and meets certain restrictions. For instance, the written agreement must spell out in clear terms what services the physicians will provide, it must specify a timeframe for the arrangement, and it cannot violate anti-kickback laws.
The physicians in Indiana have structured their proposal around this exception, says their attorney, Stacey Murphy of the Chicago-based firm Sonnenschein, Nath & Rosenthal.
If other physician groups want to build a hospital partnership proposal around this exception, Murphy says their plan should:
The personal services exception also might be worthwhile for physician groups to pursue, according to healthcare attorneys. Although the statute prohibits compensating doctors based on the volume or value of their referrals, it allows physician incentive plans that "may directly or indirectly have the effect of reducing or limiting services provided with respect to individuals enrolled with the entity."
Stark experts say this exception is a correction of the law's original assumption that all incentive plans encourage overutilization. In reality, many current incentive plans seek to control utilization. The personal services exception allows physician incentives (for example, a salary withhold or bonus) to be based on volume and value of referrals if the plan meets requirements similar to the fair market value criteria.
In the proposed Stark II rules, however, the personal services exception seems intended for capitated health plans. It remains to be seen whether the exception will be extended to groups of physicians accepting risk, says Robert Homchick, a partner with the Seattle-based law firm Davis Wright Tremaine.
"Informally, they've said, 'If you're sharing financial risk, it is OK,' " he says. "You can make the argument that if the gainsharing arrangement is volume neutral, it could fit within the requirements of the personal services exception."
A coalition of St. Paul, Minn., specialists hopes to utilize the personal services exception in structuring its "co-management" agreements, according to Jeff Shackor, chief executive officer of the Eastern Metropolitan Health Organization, an independent practice association owned by 23 group practices with 70,000 contracted lives.
"We're working closely with the hospitals to develop a service-line agreement where we will work with them to develop the appropriate pathways and protocol for managing inpatient care and resource consumption," he says. "We're working very carefully with our attorneys to be sure that we haven't crossed any lines, but there will be no inducement to refer, and nothing will be tied to volume of services or to maintaining any volume of services."
No matter what path physicians choose, the only thing that's clear is just how unclear the Stark laws are.
"Stark continues to have a profound impact on how medical groups organize themselves -- not so much because of what it is attempting to do, but because of its enormous ambiguity concerning the integration of activities of medical groups and health systems, specifically in risk-sharing and gainsharing agreements," says Lawrence Garcia, director of BDC Advisors in San Francisco.