Self-Referral Statute Requires Self-Scrutiny of Practices

January 1, 1995

This article launches a three-part series on Medicare fraud and abuse laws. It reviews the laws prohibiting self-referrals, which were expanded this month. Part 2, which will appear in an upcoming issue of Oncology News International reviews the federal statutes regarding false claims and offers advice to physicians on how to avoid any conflicts with the fraud and abuse laws. Part 3 will discuss the Medicare and Medicaid anti-kickback statute.

This article launches a three-part series on Medicare fraudand abuse laws. It reviews the laws prohibiting self-referrals,which were expanded this month. Part 2, which will appear in anupcoming issue of Oncology News International reviews the federalstatutes regarding false claims and offers advice to physicianson how to avoid any conflicts with the fraud and abuse laws. Part3 will discuss the Medicare and Medicaid anti-kickback statute.

The federal self-referral prohibition (Stark statute), as initiallywritten, prohibited the "self-referral" of clinicallaboratory services covered by Medicare. Effective January 1,1995, the statute was expanded to apply to a much broader rangeof "designated health services" covered by Medicareor Medicaid, including, among other things, radiology, computerizedtomography (CT), magnetic resonance imaging (MRI), ultrasound,radiation therapy, and hospital services.

Under the expanded statute, generally, a physician may not refera patient to an entity with which he or she has a financial relationshipfor the provision of any of these designated health services coveredunder Medicare or Medicaid.

A physician may have a prohibited financial relationship withan entity providing health-care services as a result of a compensationarrangement with the entity, for example, a contract. The physicianmay also have a financial relationship as an owner or investor.Ownership interests include indirect interests in an entity. Forexample, a physician owning stock in a corporation that is a partnerin an MRI joint venture will be viewed as having a financial relationshipwith the MRI facility.

In addition, the chief counsel for the Office of the InspectorGeneral (OIG) has stated that a physician receiving payments froma joint venture under an installment sales contract has "anownership by debt" and is barred from referring patientsto the joint venture entity after the effective date of the statute.Thus, physicians must have been completely paid for their interestsin any joint venture providing newly designated health servicesby January 1, 1995, or be precluded from referring Medicare andMedicaid patients to the entity.

The statute includes various exceptions, which are listed in thetable.

The exception for payments by a physician makes it possible forphysicians to purchase goods and services from an entity at fairmarket value without jeopardizing their ability to refer patientsto that entity.

Like the "safe harbors" provided under the Medicareand Medicaid anti-kickback statute (which will be discussed inpart 3 of this series), each exception has various criteria thatmust be met.

Group Practice Arrangements

A physician who requests a designated health service, such asa clinical lab test, radiology procedure, or radiation therapy,to be performed in his or her practice has made a referral toan entity with which he or she has a financial relationship. However,the physician should be able to invoke the in-office ancillaryservices exception to the self-referral prohibition. The exceptionrequires that services provided by nonphysician personnel be directlysupervised by the referring physician or by another physicianwithin his or her group practice.

Similarly, as a general rule, the ser-vices must be performedwithin a building used by the physician or group practice to furnishphysician services unrelated to designated health services. Theservices may be billed by the physician performing or supervisingthe services, by his or her group practice (using a group billingnumber), or by an entity that is wholly owned by the physicianor group practice.

If two or more physicians own the legal entity providing theseservices, the arrangement must meet the statutory definition ofa "group practice."

The requirements for a group practice are complex. Generally,all assets used by the group practice physicians must be heldor leased by the medical group; the group practice should be aparty to all lease agreements. Nonphysicians should be employedby the medical group, and the operations of the participatingphysicians should be integrated. This does not necessarily requireall members of the group to practice in the same office suite,however.

Essentially, the group practice criteria require that the medicalpractice activities of each of the physicians be operated outof a single group practice checking account. All expenses shouldbe paid from that account. In addition, statements for physicianservices must be billed in the name of the group practice, usinga billing number assigned to the group. Individual physicianscannot bill in their own names using their own billing numbers.This will require that the entire medical group "participate"in Medicare or not.

By way of example, if Drs. Smith, Jones, and Brown practice inthe name of Hematology-Oncology, PA, all payments for office space,facilities, equipment, and personnel should be made from a checkingaccount held in the name of Hematology-Oncology, PA.

Similarly, statements for patient care must be submitted in thename of Hematology-Oncology, PA. Finally, funds received frompatients and third-party payers should be deposited into Hematology-Oncology,PA's bank account.

The statute requires a group practice to distribute costs andincome among its member physicians based on a previously determinedformula. As of January 1, 1995, consideration of "intragroup"referrals are precluded. However, so long as the amount paid toa physician is not directly related to his or her referrals, thephysician (1) can be paid based on the group's overall profitsand (2) may receive a productivity bonus reflecting services personallyperformed or services "incident to" personally performedservices, eg, injections provided by employed nurses. There appearsto be similar flexibility regarding allocation of expenses.

To return to the Hematology-Oncology, PA example, the compensationsystem cannot reward Dr. Jones for his referrals to Dr. Smith.In addition, effective January 1, 1995, the three physicians arelikely to be precluded from dividing revenues from ancillary services,such as clinical lab tests, based on each particular physician'suse of the ancillary facility.

Physicians should be able to allocate ancillary profits basedon productivity, reflecting each physician's "hands-on"care. For example, if Dr. Smith generated 30% of Hematology-Oncology,PA's income from physician services, then the group may decidethat Dr. Smith should be credited with 30% of the laboratory profits.

Notwithstanding legal limitations, a properly structured compensationformula should be able to allocate group practice profits amongits members in a manner that the parties agree is fair and thatthe federal government views as legally permissible.

Exceptions to the Federal Self-Referral Prohibition

Referrals for physician services

In-office ancillary services

Contracts with specified prepaid plans

Ownership interests in publicly traded companies

Referrals to rural entities

Payments for rental of office space or equipment

Payments resulting from bona fide employment relationships orpersonal service (independent contractor) arrangements

Payments by hospitals unrelated to the provision of designatedhealth services

Physician recruitment arrangements

Payments by a physician

Robert E. Mazer is a partner in the Baltimore-based law firm ofOber, Kaler, Grimes & Shriver, concentrating in the representationof physicians, hospitals, and laboratories, particularly in connectionwith Medicare payment and fraud and abuse laws and related businessissues. He is coauthor of Medicare Anti-Fraud and Abuse--A Guidefor Hospitals, Labs & MDs (Washington G-2 Reports, 1992 RevisedEd.).