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Nearly 20 years ago, Congress passed laws barring physicians from referring patients to facilities in which they have a direct or indirect financial interest. Now the gentleman after whom these laws are named, Representative Fortney “Pete” Stark, D-Calif., has retaken the gavel over the House Ways and Means Committee’s health subcommittee, and additional scrutiny and possible reform surrounding financial incentives for physicians are expected. This article analyzes the history and evolution of the Stark Law and the regulatory exceptions for physician referrals. Studies conducted in the late 1980s and early 1990s showed that significant percentages of ancillary service centers were owned in part by physicians. A 1989 study by the Office of Inspector General in the Department of Health and Human Services found that patients treated by physicians who owned stakes in the facilities studied received 45% more clinical laboratory services and 34% more services directly from independent clinical laboratories than beneficiaries in general. This additional utilization was estimated to cost Medicare $28 million ( 1989 Inspector General Report to Congress). In response to this study and several like it, Congress passed the Ethics in Patient Referrals Act and its amendments, commonly known as the Stark Law. The original Stark Law prohibited both referrals by physicians and Medicare payment for services provided to beneficiaries whose physicians refer them to clinical labs with which the physicians or their immediate family members have financial relationships. Later changes expanded the prohibition’s scope to include 11 additional services: physical and occupational therapy; radiology; radiation therapy; durable medical equipment and supplies; parenteral and enteral nutrients and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. The changes also extended the prohibition to Medicaid. 42 U.S.C. 1395nn. If a prohibited referral is made to any entity, that entity may not bill Medicare, Medicaid or any individual or third-party payor for the services provided as a result of the referral. The law imposes strict liability for self-referral; even if the referring physician acted without knowledge that a prohibited referral was being made, payment still will be denied. Violation of the law is also punishable by civil money penalties, exclusion from federal health care programs and possible False Claims Act liability. There are no criminal sanctions. Significant exceptions The Stark Law contains several significant exceptions, both statutory and regulatory. Some exceptions address referrals within physician groups and only apply to entities that meet the law’s definition of “group practice.” These exceptions include physician services, in-office ancillary services and some practice arrangements with hospitals. The physician-services exception allows referrals for physician services provided personally by or under the supervision of another physician in the same group practice as the referring physician. The in-office ancillary-services exception allows referrals for services provided or supervised by the referring physician who is a member of the same group practice and must be furnished in a centralized building used by the group practice for these services, or in the same building in which the physician or practice has an office that regularly serves patients. Notably, this exception extends to referrals for lab and imaging services performed within a group practice. The law also exempts certain referrals to separate entities in which the referring physician has an ownership stake. The most utilized of these exceptions is the “whole hospital exception,” which applies if the referring physician owns an interest in the entire hospital itself, not a subdivision of the hospital. This exception has been interpreted to apply to physician-owned specialty hospitals, a relatively new creation including cardiac, orthopedic and surgical hospitals. Some studies may suggest that physicians have been permitted under several of these exceptions to make patient referrals for certain services in which they have a financial interest. In fact, utilization rates of cardiac and orthopedic hospital care, diagnostic imaging and outpatient surgical care have increased significantly since the Stark Law was implemented. A study determined that from 1996 to 2002, the entrance of a cardiac specialty hospital into a community led to a 6% increase in cardiac surgeries and a 9% increase in coronary artery bypass graft surgeries above what would otherwise be expected per 1,000 patients Medicare Payment Advisory Commission (MedPAC). Diagnostic imaging Recent studies also show that diagnostic imaging services paid for by Medicare grew faster than any other type of physician service between 1999 and 2004, a phenomenon that may be fueled by exceptions in the laws. According to MedPac, all physician services grew 31% over those years, while diagnostic imaging services grew 62%. This represents a growth rate twice as great as all other services, even after adjusting for increases in the number of beneficiaries and changes in prices. Among these imaging services, some of the most expensive procedures grew the fastest; MRIs of body parts other than the brain grew by 140%, nuclear medicine grew by 112% and CT scans of body parts other than the head grew by 112%. While MedPAC estimates that 20% of the growth in imaging services is attributable to shifts in sites of care (i.e., from hospitals to physicians’ offices), 80% of that growth was related to other factors, which could include possible misalignment of fee schedule payment rates and costs and economic incentives for physicians to order ancillary services, among others. Hackbarth testimony, supra. The Medicare agency and MedPAC both have alerted Congress to these increases. In 2006, Congress drastically reduced the rates paid to imaging providers for the technical component of all imaging studies furnished in nonhospital settings. P.L. 109-171. A 2007 study in California revealed significant self-referral among imaging providers in the private-insurance context. Researchers analyzed the 2004 billing records from a private insurer with more than 5.8 million members. After classifying certain providers as self-referrers, the researchers compared their practices to those of nonself-referring providers. Nonradiologist physicians who were members of small- to medium-sized groups and self-referred for imaging services comprised 33% of the providers who billed the insurer for MRIs, but only 11.5% of the statewide volume of the procedures performed. For PET scans, self-referring physicians represented 17% of providers who billed, but more than 25% of the volume of PET scans performed. For CT scans, self-referring providers represented 22% of those who billed, but less than 7% of the volume of CTs performed. While CT scans did not manifest the same volume patterns as other procedures, the share of CT scans linked to self-referring providers had greatly increased from previous studies. Jean M. Mitchell, The Prevalence of Physician Self-Referral Arrangements After Stark II: Evidence From Advanced Diagnostic Imaging, Health Affairs, April 2007, at w422. The number of ambulatory surgery centers (ASCs) in the United States also has significantly increased since the Stark Law was implemented, as has their procedure volume. Between 2001 and 2005, the number of ASCs nationally grew by 34%. MedPAC, A Data Book: Healthcare spending and the Medicare program (June 2006). From 2001 to 2004, the average annual percent change in outpatient surgical volume in ASCs was 15.4%; in hospital outpatient departments, it was 5.7%. Avalere Health for the American Hospital Association, “The Migration of Care to Non-hospital Settings: Have Regulatory Structures Kept Pace with Care Delivery?,” TrendWatch, July 2006, at 3. Notably, the surge in ASC growth has occurred in states without certificate of need (CON) laws. CON laws are designed to eliminate unnecessary increases in health care services and costs and generally require entities that wish to open or expand certain types of health care facilities to obtain state approval before doing so. The ASC growth in non-CON states has involved the formation of these facilities, in many cases by physicians, without a demonstration of need in the community. However, patient demand for safe, efficient alternatives to inpatient hospital-based surgical care is high and, in some cases, patient out-of-pocket costs can be lower in nonhospital settings like ASCs where coinsurance is generally set at 20%. Conversely, coinsurance rates for surgical services performed in hospital outpatient departments can be as high as 33%. MedPAC Data Book, supra. Specialty hospitals Largely in response to data from MedPAC studies that showed high case volumes in orthopedic and cardiac surgeries flowing out of community hospitals and into physician-owned specialty hospitals, Congress instituted a temporary moratorium on physician self-referral to specialty hospitals as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA). The MMA defined specialty hospitals as those engaged primarily or exclusively in the care and treatment of patients with cardiac or orthopedic conditions or patients receiving surgical treatments. Two years later, in the Deficit Reduction Act, Congress required the Department of Health and Human Services to submit a strategic plan to address physician investment in specialty hospitals. It also instructed the department to continue the moratorium on enrolling new specialty hospitals (which the Centers for Medicare and Medicaid Services instituted from June 2005 to February 2006) until the report was released. The enrollment moratorium expired in August 2006, and specialty hospital expansion and construction is abundant, especially in Ohio, Louisiana, Nebraska and Texas. In addition to the MedPAC studies on service utilization in specialty hospitals, further research has raised concern that opening of physician-owned hospitals may lead to greater procedural utilization beyond the addition of capacity to a market. In its analysis of cardiac care, researchers found that physician-owned cardiac hospitals were responsible for more than twice the share of revascularizations within a health care market. Brahmajee Nallamothu, “Opening of Specialty Cardiac Hospitals and Use of Coronary Revascularization in Medicare Beneficiaries,” JAMA, March 2007, at 967. Congressional proposals Several members of Congress continue to advance proposals that would restrain application of the “whole hospital” exception under the Stark Law, which is crucial to specialty hospitals. In 2005, senators Max Baucus, D-Mont., and Charles Grassley, R-Iowa, leaders of the Senate Finance Committee, which oversees and authorizes federal health care programs, introduced legislation that would extend permanently the MMA specialty hospital moratorium. More recently, the House passed legislation introduced by Stark to eliminate the whole hospital exception all together. This provision was contained in the House version of the reauthorization of the State Children’s Health Insurance Program, H.R. 3162, which was passed on Aug 1. The Medicare agency has indicated that it thinks the in-office ancillary-service exception possibly has been a source of Medicare program abuse. In the Calendar Year 2008 Physician Fee Schedule Proposed Rule, the Centers for Medicare and Medicaid Services stated that some ancillary-service arrangements between physicians seem “to be nothing more than enterprises established for the self-referral of [designated health services].” 72 Fed. Reg. 38181 (July 12, 2007). In addition to their concerns about utilization growth under the Stark Law exceptions, Congress, the Medicare agency and health policy makers are concerned about financial incentives that may drive physicians to use the exceptions for profit, rather than to make referrals based solely on what is best for the patient. A recent report by McKinsey and Co. stated that annual physician income from ownership stakes in outpatient facilities such as diagnostic imaging centers and ASCs accounts for an additional $8 billion in U.S. health care spending above and beyond fee-for-service payments. Conceivably, that statistic could be seen as an indication that arrangements undertaken under the Stark Law exceptions are adding to the overall cost of the Medicare program. In a political environment dominated by concerns about high health care costs, it would not be surprising to see legislators like Baucus, Grassley and Stark review the Stark Law exceptions and realign them in ways that narrow the ability of physicians to own interests in the health care services to which they may refer their patients. Jennifer Bell, a senior policy adviser in the Washington office of Atlanta-based Alston & Bird, assists health care companies and organizations in designing and implementing legislative and regulatory strategies. She is a former health policy adviser to the Senate Finance Committee. Jacqueline Baratian, also based in Washington, is counsel to the firm. Sara Kraner is a summer associate at the firm and a law student at Georgetown University.

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