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CMS Limits "Under Arrangement" Relationships with Physicians in Latest Stark Regulations
Corridors Winter 2008


An “under arrangement” relationship is one in which a hospital contracts with a third party to provide a service to the hospital and its patients. The hospital bills and collects for the service and pays the third party a fee for providing it. Hospitals often enter this type of arrangement with physician groups that already have specialized services, such as cardiac catheterization, radiation therapy or lithotripsy, as a more cost-effective means of providing these services to hospital patients. An under arrangement relationship can be effectuated through a contract directly between a hospital and a physician or physician group or through a joint venture arrangement whereby both the hospital and physician or physician group take ownership interests in a company that contracts with the hospital to provide a service.

Under the latest Stark regulations promulgated by the Centers for Medicare & Medicaid Services, many under arrangement relationships between hospitals and physicians will require restructuring or termination before October 1, 2009, the effective date. (See 73 Fed. Reg. 48721 (August 19, 2008); to be codified at 42 C.F.R. § 411.351).) The Stark law prohibits a physician from referring a patient to an entity with which the physician has a financial relationship absent an applicable exception and also prohibits a hospital from billing for services provided pursuant to a referral that violates the Stark law. The latest regulations redefine the term “entity” to include both the provider of the service (the physician or physician group) and the party billing Medicare for the service (the hospital). Prior to this regulation, an “entity” was defined to include only the party billing for the service, not the provider or furnisher of the service. Thus, a physician involved in an under arrangement relationship could still refer patients to the hospital for the service being provided “under arrangement” without violating the Stark law. However, as of October 1, 2009, both the physician or physician group providing the service and the hospital billing for the service “under arrangement” will be considered entities under the Stark law.

Under the new rules, in a joint venture under arrangement, a physician’s ownership interest in the company constitutes a financial relationship with an entity. Thus, in order to comply with the Stark law, the arrangement will have to meet a Stark law exception. There are some Stark law exceptions, including exceptions for compensation arrangements and referrals, that will still be available to salvage direct contracts that are under arrangement. However, few of the exceptions will be available to save a joint venture that is under arrangement, other than the following: rural providers as defined; radiologists, radiation oncologists and pathologists who refer pursuant to a request for consultation by another physician; physicians who are not owners or investors in the entity that furnishes the services; and physician-owned lithotripsy.

A lawsuit has recently been filed to challenge the validity of the new “entity” definition. (Colorado Heart Institute LLC v. Leavitt, Civil Action No. 1:08-cv-01626 (D.D.C. September 23, 2008)) In the meantime, the bottom line is this- if your hospital provides designated health services under arrangement with physicians or physician groups and these under arrangement relationships were structured to comply with the 2001 Stark Phase I Rules, they should be examined now to identify the need for restructuring or termination and to plan for this prior to October 1, 2009.
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