Stark Act and Anti-kickback Considerations with Hospital-Physician Joint Ventures

Christine L. Noller, J.D., L.L.M.
Vezina Law Group

Healthcare joint ventures serve a valuable purpose as hospitals and physicians move toward greater integration and collaboration in an accountable care environment. Inherent in such transactions lie Stark act and anti-kickback statute considerations. While both statutes have similar exceptions for certain employees, personal service arrangements and space and equipment rental agreements, proposed joint ventures should first be assessed for Stark compliance particularly in light of changes made by the 2009 Inpatient Prospective Payment Services (IPPS) Final Rule.

In short, Stark prohibits physicians from referring patients to an entity in which they have an ownership interest or compensation arrangement for designated health services (DHS) covered by Medicare and Medicaid. Designated health services include clinical laboratory services; radiology and certain other imaging services; durable medical equipment and supplies; radiation therapy services and supplies; physical and occupational therapy; speech and language therapy; parental and enteral nutrients, equipment and supplies; outpatient prescription drugs; prosthetics, orthotics and prosthetic devices and supplies; home health services and inpatient and outpatient hospital services.

Prior to 2009 Stark permitted physicians to invest in entities providing services “under arrangements” meaning that a hospital could bill for a service furnished by another entity (namely the physicians) under contract with the hospital. Such arrangements were permissible as the physicians did not have an ownership interest in the hospital, i.e. the “entity” furnishing the DHS. Only those entities to which CMS made payments were considered to be furnishing DHS. As a result, under arrangements between hospitals and referring physicians were commonly used to furnish imaging and cardiac catheterization services. This was due in part because of physician self-referral rules as well as the fact that Medicare payments for hospital services were greater than those under the Medicare physician fee schedule.

That all changed with the 2009 IPPS Final Rule as CMS revised the definition of a DHS entity to include not only the entity that submits the claim and receives payment from Medicare for the service (the hospital) but also the entity that performs the service (the “under arrangement” physicians). This provision essentially eliminated physician ownership or investment in “under arrangements” unless structured in a manner to fit within one of the Stark allowable exceptions, one of which being the “rural provider” exception. As such, CMS exempts physician ownership interests in an entity that furnishes DHS in a rural area so long as the entity furnishes substantially, but not less than 75 percent of its DHS to rural patients, 42 CFR 411.356.

A rural area is defined by 42 USC 1395ww(d)(2)(D) to be any area not listed as a Metropolitan Statistical Area by the Office of Management and Budget. A Metropolitan Statistical Area (MSA) has at least one urbanized area with a population of 50,000 or more as well as surrounding territory with a degree of social interaction and commuting. While a Metropolitan Statistical Area is named by its principal city, MSAs are defined in terms of whole counties. Care must be taken when assessing whether an entity is furnishing DHS in a rural area. While an entity may appear to be furnishing services in a rural area it may not qualify as a rural provider if there is a city classified as a Metropolitan Statistical Area within its given county.

Suppose a hospital and cardiology group seek to utilize the joint venture structure to provide DHS in a rural area as defined by 42 USC 1395ww(d)(2)(D). Let’s assume that the “rural provider” exception to Stark is met. The locale is in a county not containing a city with a population of 50,000 or a surrounding area within commuting distance. The physicians’ ownership interest is limited to the joint venture. Their only financial relationship with the hospital is the lease of equipment utilized to provide services to Medicare and Medicaid patients. As the lease provides compensation to the physicians it must comply with the Stark equipment lease exception. Prior to 2009 the parties would most likely have employed a per-click rental agreement whereby the hospital would pay the physicians a set fee for each unit of service furnished.

However, the 2009 IPPS Final Rule revised space and lease exceptions under Stark to prohibit per unit of service (per-click) rental charges where said charges reflect services furnished to patients by either physician lessors or lessees. In our example the hospital would not be able to lease the cardiology practice’s 64 slice CT on a per click basis, at least for referrals from the cardiology group requiring CT scans, as was common practice in such arrangements prior to 2009. Rather, any such lease must fall strictly within the equipment lease exception requirements of 42 CFR 411.357(b) in which per unit of service (per-click) is clearly prohibited.

To qualify for the equipment lease exception payments made by lessee to lessor must meet the following conditions: the rental or lease agreement must be in writing, signed by the parties specifying the equipment covered; the equipment leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease and is used exclusively by the lessee when being used by the lessee and is not used by the lessor or any other entity related to the lessor; the agreement provides for a term of at least one year; the rental charges are set in advance consistent with fair market value and not determined in a manner taking into account the volume or value of any referral or other business generated between the parties or using a formula based on a percentage of revenue raised, earned, billed, collected or otherwise attributable to the services performed or per-unit of service rental charges (per-click) to the extent that such charges reflect services provided to patients referred between the parties; the agreement would be commercially reasonable even if no referrals were made between the parties and a holder over month-to-month rental for up to six months immediately following the expiration of an agreement of at least one year having meet all other conditions as specified above.

Of particular significance in equipment lease arrangements is the exclusive use requirement, i.e. that the equipment “be used exclusively by the lessee when being used by the lessee.” This provision requires the specific lease times during which the hospital may use the equipment. Suppose, due to the rural nature of the locale, it is simply impractical for the hospital to comply with the exclusive use requirement. The parties could instead employ the fair market exception set forth in 42 CFR 441.357(l). The fair market value provisions are similar to that of the equipment rental exception but without the exclusive use requirement. Compensation must be set in advance, consistent with fair market value, and not determined in a manner taking into account volume or value of referrals. Like the equipment lease exception, per-unit of service rental charges (per-click) and percentage of revenue earned methods are strictly prohibited. The fair market value exception requires that the compensation arrangement not violate the anti-kickback statute or any Federal or State law or regulation governing billing or claims submission.

The proposed lease arrangement is subject to the anti-kickback statute as one party would have the ability to induce referrals to the other party for services payable by Medicare and Medicaid 42 U.S.C. 1320a-7b(b). But, as noted above the anti-kickback statute provides exceptions including a safe harbor for equipment rental at 42 CFR 1001.952(c). To fall within the equipment lease safe harbor certain requirements must be met. The lease agreement must set out in writing and signed by the parties and covers all equipment leased between the parties for the term of the lease and specifies the equipment covered by the lease. If the lease is intended to provide the lessee with use of equipment for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, their precise length and the exact rent for such interval. The term of the lease is for not less than one year. The aggregate rent must be set in advance, consistent with fair market value in arms-length transactions and not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or all other Federal health care programs. And finally, the aggregate equipment rental does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.

With strict adherence to the equipment lease exceptions to both the Stark act and the anti-kickback statute our hypothetical hospital and cardiology group could conceivably meet their objectives utilizing a joint venture structure. While the 2009 IPPS Final Rule significantly narrowed the scope of allowable under arrangements, joint ventures can nevertheless be carefully crafted to fit within an applicable safe harbor exception. It is true that many joint venture arrangements were unwound in light of the revised “entity” definition in 2009. Many hospitals simply acquired existing cardiology group practices in the years that followed. But there still exist rural community hospitals facing the threat of specialty service outmigration. For them, joint venture lease arrangements meet a critical need, providing a means by which their patients can receive technological advancements close to home.