New Legal Challenges for Physician Recruitment
New Stark II rules effective July 26, 2004 significantly impact the ability of hospitals to participate in physician recruitment activities for non-employed medical staff physicians. Notably, the new rules distinguish between hospital recruitment assistance for physician who relocate as solo practitioners and those who join a physician practice. As of July 26, 2004 when a hospital participates in recruitment assistance of a physician joining a physician group, the group may not impose noncompetition covenants or other practice restrictions on the recruited physician, other than conditions related to quality of care. For more detail on these new rules, read the attached article.
OIG Issues New Advisory Opinions
OIG Advisory Opinion No. 04-07: An integrated non-profit health care delivery system provides professional consultative services to low-income school children in predominantly rural areas through a sponsored telemedicine network. Nurses at the school-based health centers conduct basic screening tests and consult with physicians through the telemedicine network regarding appropriate treatment and follow-up care. If as a result of the screening tests the student requires a referral to a physician, the student is referred to his or her regular primary care provider. If the student has no regular primary care provider, the nurse provides a list of primary care providers in the student’s community. The tele-consultations are not reimbursable by state Medicaid or Children’s Health Insurance Program (“CHIP”) or any other relevant federal health care program. The OIG opined that while the arrangement could potentially generate prohibited remuneration under the anti-kickback statute when the patients are referred for potential follow-up care, the OIG would not impose administrative sanctions on the health care system because: (1) the arrangement contains sufficient safeguards by only referring students to their own primary care provider or a list of providers in the student’s community; and (2) the arrangement promotes a public benefit by facilitating better access to screening services for low income children in rural areas.
OIG Advisory Opinion No. 04-08: A physician group practice proposes to create an LLC to develop and own a comprehensive physical therapy center and lease the center’s space, equipment, and personnel to physicians of the physician group and various other licensed physicians with patients requiring physical therapy services. Each lessee will enter into a one-year lease with the physical therapy center and pay a fixed monthly rental fee for unlimited use of the center. The OIG opined that the proposed arrangement could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions on the physician group. Safe harbor protection is not available for the proposed arrangement because, among other things, the lease arrangements do not specify exact intervals of use and do not specify the exact rent or charge for such intervals of use. The OIG also advised that several factors make the proposed arrangement susceptible to fraud and abuse, including: (1) fair market value is difficult to monitor, assess and document under the proposed arrangement; (2) there is a risk that at least some of the physicians will pay more or less than fair market value; (3) these above or below fair market value payments could be remuneration for referrals; and (4) since the rental payments from the lessees is a set price based on the total rental value of the equipment, space, and personnel services of the center rather than the usage of the center by the lessees, this appears to set a guarantee income stream to the LLC, and ultimately the physician group, which could be compensation in exchange for referrals.
OIG Advisory Opinion No. 04-0: A geriatric group practice proposes to employ certain primary care physicians to serve as consultants in connection with the group’s nursing home patients. The geriatric group practice was issued a private letter ruling by the Internal Revenue Service indicating that the primary care physicians qualify as bona fide employees of the group practice. The OIG hinted that they did not like the arrangement, but concluded that because the primary care physicians were bona fide employees, the proposed arrangement comes within the statutory and regulatory safe harbor for employees. The OIG emphasized that a similar arrangement with a nursing home, independent contractor physicians or other non-employees would not be protected and would raise fraud and abuse concerns.
Obesity Treatment Coverage Decision
On July 15, 2004, Department of Health and Human Services Secretary Tommy G. Thompson announced a new Medicare coverage policy that removes barriers to covering anti-obesity interventions. The new policy removes language in the Medicare Coverage Issues Manual stating that obesity is not an illness. Since Medicare covers specified medically necessary services for “illness and injury,” the previous language prevented Medicare from covering treatment for diseases related to obesity. Now members of the public may request that Medicare review scientific and medical evidence to determine whether specific obesity-related treatments will be covered by Medicare.
Antitrust Report on Healthcare Competition
After a full year of public hearings, the US Department of Justice and Federal Trade Commission issued their joint report in July entitled "Improving Health Care: A Dose of Competition." While the report is a good primer on the current competitive environment of the various sectors of the health care industry (physicians, hospitals, and insurance), the FTC/DOJ struggled to provide any significant guidance. Of their ten observations, a few are worthy of additional discussion. The Agencies stated they would consider whether pay for performance arrangements among physicians in a network joint venture are a sufficient means for physicians to share financial risk and avoid per se violations of the antitrust laws. In addressing hospital mergers, the Agencies might consider narrowing their view of what constitute hospital product markets, given the increased prevalence of single-specialty hospitals and outpatient care. In addition, the Agencies state that they view nonprofit hospitals and for-profit hospitals on equal terms under a merger analysis. Finally, in spite of the actual impact third-party payers may have on the ability of providers to raise prices, the Agencies are holding firm to the position that disparities in bargaining power between payers and providers does not justify providers from exerting countervailing power through anti-competitive means. Without providing any direct guidance, the Agencies did refer to Chapter Two of the report as an outline for physicians seeking clues on how physician networks may be considered "clinically integrated" in order to justify a rule of reason analysis for physician networks that establish price. Although relatively sparse in clear guidance elsewhere, the Agencies did come out against CONs and legislative attempts to permit physician collective bargaining.
Whistleblower Lawsuit Settled for $6.1 Million
Banner Health System will pay $6.1 million to the federal government to settle allegations that it submitted false Medicare claims for home health visits in Wyoming. The allegations were brought to the government’s attention by a whistleblower lawsuit filed by a former Banner employee who will take a $1 million share of the settlement. According to the U.S. Justice Department, the filed claims were unreasonable and medically unnecessary. However, Banner denies any intentional fraud and believes the errors were unintentional. Unlike similar settlements of Medicare fraud cases, this settlement did not include a Corporate Integrity Agreement.
Payment Reductions for Cancer Drugs
CMS proposed to change the payment methodology for prescription drugs covered by Medicare Part B, which includes only a limited number of drugs, such as cancer drugs administered in a doctor’s office. CMS proposed to change payment calculations from an Average Wholesale Price methodology to an Average Sales Price methodology, which will take into account discounts, chargebacks, and rebates. The new methodology will reportedly save the Medicare program $320 million, and will reduce payment for some drugs by as much as 89 percent. Payment for the popular cancer drug, Taxol, would be reduced by 81 percent. CMS believes that the new payment methodology solves a long-time problem of overpayments to physicians for these drugs. To further justify its proposed change, CMS points to recent increases in reimbursement to oncologists for practice expenses related to the administration of cancer drugs. As small purchasers who do not have access to average discounts, some oncologists are concerned about their ability to purchase cancer drugs at the new Medicare payment amount. In recognizing the concern, CMS is encouraging physicians to participate in purchasing groups in order to obtain discounts on these drugs.
Wal-Mart and Rite Aid Settle False Claims Allegations
Two of the nation’s largest retail pharmacies, Wal-Mart Stores, Inc. and Rite Aid Corporation, settled allegations that the companies submitted false prescription claims to government health insurance programs. Wal-Mart agreed to pay $2.8 million to the federal government and various participating states for allegedly dispensing partial prescriptions due to insufficient stock but billing the government for the full quantities prescribed. Rite Aid agreed to pay the government $5.6 million and participating states $1.4 million for allegedly billing government health care programs for drugs that were never delivered to beneficiaries. Both Wal-Mart and Rite Aid entered into Corporate Integrity Agreements with the OIG addressing the companies’ prescription billing procedures and other compliance-related issues. Complaints against both companies were originally filed by whistleblowers in qui tam lawsuits that were later joined by the government. As a result of the settlement, the whistleblowers will receive a combined $1.2 million.
NEW PHYSICIAN RECRUITMENT POSE CHALLENGES TOHOSPITAL RECRUITMENT ACTIVITIES
Earlier this year the Centers for Medicare and Medicaid Services (“CMS”) issued new final regulations to implement various aspects of the Stark self-referral statute. 69 Fed. Reg. 16054 (March 26, 2004). The new rules became effective on July 26, 2004. Among the most important changes made in the new rules are limitations on the circumstances in which hospitals may participate in physician recruitment activities to induce a physician to relocate and become a member of the hospital’s medical staff.
The previous Stark exception for physician recruitment payments contained a single set of fairly undisruptive restrictions, with no distinction between physicians relocating into the community as solo practitioners and physicians relocating into an existing medical group. 42 C.F.R. § 411.357(e). Now, however, hospitals must treat recruitment payments to solo practitioners differently than recruitment assistance to physician joining a medical practice. These new rules will make it difficult for hospitals to participate in recruitment of physicians relocating to join a medical practice.
For hospital payments directly to a physician who is not joining a medical practice, the Stark exception requirements under the new rules are similar to the previous rule: (1) the recruitment arrangement must be in writing and signed; (2) the arrangement is not conditioned on referrals to the hospital; and (3) the physician is allowed to establish staff privileges at, and refer to, other facilities. 42 C.F.R. § 411.357(e); 69 Fed. Reg. 16139.
The following additional criteria must be met if the hospital pays recruitment assistance either to a physician group or to a physician who joins a physician group: (1) the written agreement must be signed by the party that receives the funding, such as the physician’s professional corporation; (2) other than actual costs incurred by the physician or the group in recruiting the new physician, the hospital’s payment must be passed through to the physician; (3) when the hospital gives an income guarantee, only the actual additional incremental cost attributable to the recruited physician may be allocated to that physician; (4) the group must maintain records of the actual costs and passed-through amounts for a period of at least 5 years, and make the records available to the Department of Health and Human Services upon request; (5) the payment from the hospital must not take into account directly or indirectly the volume or value of any actual or anticipated referrals by the recruited physician or the group; (6) the group may not impose additional practice restrictions on the recruited physician, other than conditions related to quality of care; and (7) the arrangement must not violate the federal anti-kickback statute or any other Federal or state law governing billing or claims submission. 42 C.F.R. § 411.357(e)(4); 69 Fed. Reg. 16139.
With regard to the prohibition against additional practice restrictions on the recruited physician, CMS states that noncompete agreements are among the prohibited practice conditions. 69 Fed. Reg. 16095-16096. This means that if the group enters into a noncompetition agreement with the recruited physician, then the hospital is prohibited from billing Medicare for any hospital outpatient and inpatient and other designated health services referred to the hospital by the recruited physician. Effectively, the hospital is prohibited from participating in physician recruitment when the physician group insists on entering into a noncompetition agreement with the recruited physician.
It is also important for physician groups to recognize that when the hospital provides an income guarantee for the recruited physician, the group may not allocate a share of existing overhead to the recruited physician.
Unfortunately, the new Stark rules do not make exception for arrangements entered into prior to July 26, 2004. Accordingly, if a hospital makes any recruitment payments or income guarantees after July 24, 2004, even under an agreement already in place prior to July 26, then the new Stark rules apply to that arrangement, including the new rules on noncompetition agreements and income guarantee accounting. These new physician recruitment rules do not impact the Stark exception for employed physicians.
In addition, the new Stark rules have defined when a physician is “relocating” to a community such that the hospital’s recruitment payment can be considered a recruitment payment. These new Stark rules on hospital payments for physician recruiting will have a significant impact on the ability of hospitals to participate in physician recruitment activities for medical staff physicians, and should motivate hospitals to examine their recruiting activities and recruitment contracting practices.
For additional information or assistance regarding the Stark physician recruitment rules please contact Ross D’Emanuele at (612)343-2161 or d.emanuele.ross dorsey.com, or any other member of the Dorsey & Whitney LLP Health Care Practice Group.