CMS Proposes New Stark Law Exception for Rural Emergency Hospitals

Firm Publication

On July 15, the Centers for Medicare & Medicaid Services (CMS) published the Calendar Year 2023 Hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgery Center (ASC) Payment System proposed rule. In the rule, CMS proposes a new exception to the federal physician self-referral law (Stark Law) that would protect an ownership or investment interest held by a physician in a rural emergency hospital (REH), a new provider type created by Congress through the Consolidated Appropriations Act, 2021 (CAA).

Part of the administration’s initiative to improve health equity and access to care in rural communities, this proposed rule also establishes payment policies and provider enrollment requirements for REHs. It follows an earlier proposed rule published on July 6 that proposes conditions of participation (CoPs) for REHs.

Rural Emergency Hospitals

A rural emergency hospital, or REH, is a special type of facility that will provide only emergency department services, observation care, and other outpatient services for which the average length of stay does not exceed 24 hours. A facility can become an REH only by converting from either a critical access hospital (CAH) or rural hospital, and only if the facility was a CAH or a rural hospital with 50 beds or less as of the enactment of the CAA, December 27, 2020.

Once a facility converts to an REH, it cannot provide inpatient services (except those furnished in a skilled nursing facility that is a distinct part of the REH). Services that qualify as “REH services” will be paid at 105% of the OPPS payment rate for equivalent services, and REHs will also receive a monthly facility payment. Services that an REH provides that do not qualify as “REH services” will be paid at the applicable rate (without the 5% increase).

Application of the Stark Law to Rural Emergency Hospitals

REHs will furnish services that are considered designated health services (DHS) under the Stark Law. Despite use of the word “hospital” in the name, an REH will not be considered a “hospital” for purposes of the Stark Law. Thus, its services will not be inpatient or outpatient hospital services. Under the proposed CoPs, REHs would be required to furnish certain other services that are DHS (namely, radiology and certain imaging services, clinical laboratory services, and outpatient prescription drugs). In addition, an REH may choose to furnish other types of DHS.

As a DHS entity, an REH’s financial relationships with physicians will implicate the Stark Law. A physician who has a financial relationship with an REH will be prohibited from making a referral to the REH for DHS (and the REH will be prohibited from billing such DHS) unless an exception is satisfied. For compensation arrangements, the familiar exceptions at 42 C.F.R. § 411.357 are available (e.g., the employment, personal services, space lease, equipment lease, and fair market value exceptions). For ownership or investment interests, however, however, the current options are more limited.

Conceivably, two existing exceptions for ownership or investment interests could be available. The first, the so-called “whole hospital” exception at § 411.356(c)(3), initially seems like a natural fit for REHs. Its requirements address CMS’s program integrity concerns with physician-owned facilities. But the exception is unavailable to REHs. Once a CAH or rural hospital converts to an REH, it will no longer be a “hospital” for purposes of the Stark Law.

The second, the rural provider exception at § 411.356(c)(1), could protect a physician’s ownership in an REH if the REH is located in a rural area and substantially all (i.e., not less than 75%) of the DHS it furnishes are to residents of a rural area. Because REHs will not be considered “hospitals,” the hospital-specific requirements at § 411.362 will not apply. Yet the continuous availability of the rural provider exception  is not guaranteed. If either condition changes—the area is reclassified as urban or more than 25% of the patients receiving DHS come from urban areas—the exception is unavailable.

Absent a broad exception that allows physician ownership in REHs, the Stark Law could inhibit access to medically necessary services furnished by REHs and thwart the underlying goal of safeguarding and expanding such access. To avoid this result, CMS proposed a new exception specifically for ownership or investment interests in REHs. CMS also proposed revisions to certain existing compensation arrangement exceptions to allow REHs to rely on them.

Rural Emergency Hospital Ownership Exception

The REH exception at proposed § 411.356(c)(4) would protect an ownership or investment interest held by a physician (or a physician’s immediate family member) if all elements are satisfied. The REH ownership exception has nine elements, of which all but the first are borrowed from the whole hospital exception:

  • Enrollment. The entity must be enrolled in Medicare as an REH.
  • Ownership interest in the whole. The ownership or investment interest must be in the entire REH, not merely a distinct part or department of the REH.
  • Ownership not conditioned on referrals or other business generated. The REH cannot directly or indirectly condition ownership on a physician making or influencing referrals to the REH or otherwise generating business for the REH.
  • Physicians not offered more favorable terms. Ownership interests cannot be offered to physicians on terms more favorable than those offered to non-physicians.
  • Restrictions on loans or financing. Neither the REH nor any owner of the REH can directly or indirectly provide loans or financing for a physician’s investment in the REH.
  • Restrictions on guarantees. Similarly, neither the REH nor any owner of the REH can directly or indirectly guarantee any loan, make payment toward any loan, or otherwise subsidize a loan related to a physician’s investment in the REH.
  • Distributions proportional to ownership interest. Distributions must be directly proportional to the ownership or investment interest held by each owner or investor in the REH.
  • No guaranteed additional investment opportunities. Physician-owners cannot directly or indirectly receive any guaranteed right to purchase or receive business interests related to the REH (g., a right to purchase or lease any real property under the control of any other owner or investor in the REH).
  • No other opportunities on more favorable terms. The REH cannot offer physicians the opportunity to purchase or lease any property under the control of the REH or any of its owners or investors on more favorable terms than the terms offered to a non-physician.

While CMS borrows many of the whole hospital exception’s requirements, the fact that an REH is not a “hospital” has a silver lining. Because an REH is not a “hospital,” the significant restrictions Congress imposed through the Affordable Care Act (ACA) on physician-owned hospitals do not apply to REHs.

Most of the proposed REH exception’s requirements are self-explanatory. CMS’s commentary on the conditioning prohibition, however, warrants close attention. CMS offers detailed guidance and examples on what it means to condition ownership on a physician making or influencing referrals or otherwise generating business, including direct and indirect conditioning, and how a physician can make or influence referrals or otherwise generate business.

An REH runs afoul of the conditioning prohibition if the amount of the ownership interest a physician can purchase, receive, or maintain is directly or indirectly conditioned on the physician’s making or influencing referrals to (or otherwise generating business for) the REH. Conditioning can be direct or indirect, and it can be based on the physician making or influencing referrals to, or otherwise generating business for, the REH.

An REH directly conditions ownership when it implements policies that require a specific number, volume, or value of referrals to, or other business generated for, the REH. For example, if eligibility to invest (or maintain an investment) turns on whether a physician generates $100,000 or more of tests or facility fees, the REH has directly conditioned ownership on achieving that metric. Since the metric measures referrals or other business generated (seemingly without legitimate justification), the REH has improperly conditioned ownership in violation of proposed § 411.356(c)(4)(iii).

An REH indirectly conditions ownership when it adopts the policies of another organization and uses those policies to establish ownership qualifications. Suppose an REH requires a physician-owner to have active medical staff privileges. If the medical staff bylaws require a minimum of 20 patient encounters to maintain privileges, the REH has indirectly conditioned ownership on a physician performing 20 patient encounters. Whether this conditioning is improper depends on the circumstances, as discussed below. An REH also indirectly conditions ownership when it imposes requirements that are a proxy for referrals or other business generated. For instance, requiring a certain number of “points” per year could run afoul of the requirement if the points are nothing more than a proxy for referrals or other business generated.

Whether an REH has conditioned ownership on referrals or other business generated must be determined on a case-by-case basis. Returning to the medical staff example, CMS recognizes that medical staffs set their own qualification criteria. Since medical staff are responsible for peer review, they need a minimum body of work to determine whether to grant or continue privileges and may impose a minimum patient encounter or similar requirement. In this scenario, according to CMS, the inquiry turns on whether the medical staff requirements directly relate to its peer review obligations or are merely a proxy for referrals and other business generated. Key questions are: What is being measured? What level must be achieved? For both, why? And what suitable alternatives are available?

In the “points” example, the propriety of the requirement would depend on how a physician earns points. A point system based on activities not tied to a physician’s referrals or other business generated (e.g., points for serving on committees, providing consultations for another physician’s patient, or activities that are either outside of the physician’s control or otherwise do not generate business for the REH) could be permissible. On the other hand, a point system closely tied to a physician’s referrals or other business generated could run afoul of the conditioning prohibition. For example, a point per REH patient encounter would likely be impermissible.

This is true even if the physician personally performs the patient encounter. The objective volume or value standards at § 411.354(d)(5) and (6), CMS cautions, do not apply for purposes of the ownership or investment exceptions at § 411.356, including the proposed REH exception. That is, for purposes of the conditioning prohibition, the question is not whether the condition  takes into account referrals or other business generated in a manner that can be reduced to a mathematical formula. Nor is it whether the requirement is based solely on services personally performed by the physician. Instead, the question is whether the conditions are tied to referrals or other business generated to the degree that ownership is effectively conditioned on making or influencing referrals or otherwise generating business. As such, if what is being measured closely ties to referrals or other business generated—even if those are not variables, strictly speaking, and even if only personally performed services are measured—the conditioning prohibition may be violated.

Finally, CMS offers guidance on a physician’s making referrals and influencing referrals (or otherwise generating business). A physician makes a referral by ordering, prescribing, certifying or recertifying, or establishing a plan of care that includes DHS or by requesting a consultation with another physician who, in turn, orders DHS. A physician influences a referral or the generation of business when circumstances demonstrate that the physician exerts “impactful pressure or persuasion to refer, or an enforceable requirement for or control over the referrals of another.” For example, if a physician who owns a practice requires all employees to refer to the REH, this could run afoul of the conditioning requirement.

Ultimately, CMS suggests a pragmatic inquiry. Although it cannot be distilled to an objective test, the apparent steps are as follows. One, is the REH directly requiring referrals or other business generated to obtain or maintain ownership? If so, the conditioning prohibition is likely violated. Two, is the REH indirectly requiring referrals or other business generated through other conditions? If so, are these conditions directly related and tailored to a bona fide requirement (e.g., medical staff peer review), or are they merely a proxy for referrals or other business generated? If the former, the conditioning prohibition is likely not violated, and if the latter it likely is.

Hospital-Specific Compensation Arrangement Exceptions

Some compensation arrangement exceptions are available only to certain entities (e.g., hospitals, federally qualified health centers, rural health clinics). To allow REHs to rely on these exceptions on the same terms as these other entities, CMS proposed revising the following exceptions:

  • Physician recruitment at § 411.357(e).
  • Obstetrical malpractice insurance subsidies at § 411.357(r).
  • Retention payments in underserved areas at § 411.357(t).
  • Electronic prescribing items and services at § 411.357(v).
  • Assistance to compensate a non-physician practitioner at § 411.357(x).
  • Timeshare arrangements at § 411.357(y).

Notably, CMS considered but did not propose changes to the exception for medical staff incidental benefits at § 411.357(m). CMS is soliciting comments regarding whether it should revise the exception to expressly include REHs as entities to which the exception applies.

Takeaways

The new REH provider type, particularly in conjunction with the proposed REH ownership exception to the Stark Law, creates new opportunities for CAHs and rural hospitals. Under the proposed rule, eligible CAHs and rural hospitals could not only convert to REHs but also tap into sources of capital that may have previously been prohibited under the Stark Law. Eligible hospitals that did not have physician ownership before the ACA could, for the first time, syndicate and be owned in whole or part by physicians who make referrals to the facility. In addition, physician-owned REHs could increase capacity without regard to the constraints placed on physician-owned hospital expansion.

CMS could have relied on the rural provider exception to protect physician ownership or investment in REHs. REHs could still choose to rely on that exception. But if they do, REHs risk being reclassified as urban or having their urban/rural patient mix shift, potentially resulting in noncompliance. Through the proposed REH exception, CMS would create certainty that a physician-owned REH can comply with the Stark Law even if its location is reclassified or its patient mix shifts. That certainty is especially important for an ownership or investment interest (as opposed to a compensation arrangement), which is more challenging to unwind.

If finalized, the proposed exception will be effective January 1, 2023. Interested parties have until September 13 to submit comments to CMS.

Related Professionals
Related Services
Firm Publication

On July 15, the Centers for Medicare & Medicaid Services (CMS) published the Calendar Year 2023 Hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgery Center (ASC) Payment System proposed rule. In the rule, CMS proposes a new exception to the federal physician self-referral law (Stark Law) that would protect an ownership or investment interest held by a physician in a rural emergency hospital (REH), a new provider type created by Congress through the Consolidated Appropriations Act, 2021 (CAA).

Part of the administration’s initiative to improve health equity and access to care in rural communities, this proposed rule also establishes payment policies and provider enrollment requirements for REHs. It follows an earlier proposed rule published on July 6 that proposes conditions of participation (CoPs) for REHs.

Rural Emergency Hospitals

A rural emergency hospital, or REH, is a special type of facility that will provide only emergency department services, observation care, and other outpatient services for which the average length of stay does not exceed 24 hours. A facility can become an REH only by converting from either a critical access hospital (CAH) or rural hospital, and only if the facility was a CAH or a rural hospital with 50 beds or less as of the enactment of the CAA, December 27, 2020.

Once a facility converts to an REH, it cannot provide inpatient services (except those furnished in a skilled nursing facility that is a distinct part of the REH). Services that qualify as “REH services” will be paid at 105% of the OPPS payment rate for equivalent services, and REHs will also receive a monthly facility payment. Services that an REH provides that do not qualify as “REH services” will be paid at the applicable rate (without the 5% increase).

Application of the Stark Law to Rural Emergency Hospitals

REHs will furnish services that are considered designated health services (DHS) under the Stark Law. Despite use of the word “hospital” in the name, an REH will not be considered a “hospital” for purposes of the Stark Law. Thus, its services will not be inpatient or outpatient hospital services. Under the proposed CoPs, REHs would be required to furnish certain other services that are DHS (namely, radiology and certain imaging services, clinical laboratory services, and outpatient prescription drugs). In addition, an REH may choose to furnish other types of DHS.

As a DHS entity, an REH’s financial relationships with physicians will implicate the Stark Law. A physician who has a financial relationship with an REH will be prohibited from making a referral to the REH for DHS (and the REH will be prohibited from billing such DHS) unless an exception is satisfied. For compensation arrangements, the familiar exceptions at 42 C.F.R. § 411.357 are available (e.g., the employment, personal services, space lease, equipment lease, and fair market value exceptions). For ownership or investment interests, however, however, the current options are more limited.

Conceivably, two existing exceptions for ownership or investment interests could be available. The first, the so-called “whole hospital” exception at § 411.356(c)(3), initially seems like a natural fit for REHs. Its requirements address CMS’s program integrity concerns with physician-owned facilities. But the exception is unavailable to REHs. Once a CAH or rural hospital converts to an REH, it will no longer be a “hospital” for purposes of the Stark Law.

The second, the rural provider exception at § 411.356(c)(1), could protect a physician’s ownership in an REH if the REH is located in a rural area and substantially all (i.e., not less than 75%) of the DHS it furnishes are to residents of a rural area. Because REHs will not be considered “hospitals,” the hospital-specific requirements at § 411.362 will not apply. Yet the continuous availability of the rural provider exception  is not guaranteed. If either condition changes—the area is reclassified as urban or more than 25% of the patients receiving DHS come from urban areas—the exception is unavailable.

Absent a broad exception that allows physician ownership in REHs, the Stark Law could inhibit access to medically necessary services furnished by REHs and thwart the underlying goal of safeguarding and expanding such access. To avoid this result, CMS proposed a new exception specifically for ownership or investment interests in REHs. CMS also proposed revisions to certain existing compensation arrangement exceptions to allow REHs to rely on them.

Rural Emergency Hospital Ownership Exception

The REH exception at proposed § 411.356(c)(4) would protect an ownership or investment interest held by a physician (or a physician’s immediate family member) if all elements are satisfied. The REH ownership exception has nine elements, of which all but the first are borrowed from the whole hospital exception:

  • Enrollment. The entity must be enrolled in Medicare as an REH.
  • Ownership interest in the whole. The ownership or investment interest must be in the entire REH, not merely a distinct part or department of the REH.
  • Ownership not conditioned on referrals or other business generated. The REH cannot directly or indirectly condition ownership on a physician making or influencing referrals to the REH or otherwise generating business for the REH.
  • Physicians not offered more favorable terms. Ownership interests cannot be offered to physicians on terms more favorable than those offered to non-physicians.
  • Restrictions on loans or financing. Neither the REH nor any owner of the REH can directly or indirectly provide loans or financing for a physician’s investment in the REH.
  • Restrictions on guarantees. Similarly, neither the REH nor any owner of the REH can directly or indirectly guarantee any loan, make payment toward any loan, or otherwise subsidize a loan related to a physician’s investment in the REH.
  • Distributions proportional to ownership interest. Distributions must be directly proportional to the ownership or investment interest held by each owner or investor in the REH.
  • No guaranteed additional investment opportunities. Physician-owners cannot directly or indirectly receive any guaranteed right to purchase or receive business interests related to the REH (g., a right to purchase or lease any real property under the control of any other owner or investor in the REH).
  • No other opportunities on more favorable terms. The REH cannot offer physicians the opportunity to purchase or lease any property under the control of the REH or any of its owners or investors on more favorable terms than the terms offered to a non-physician.

While CMS borrows many of the whole hospital exception’s requirements, the fact that an REH is not a “hospital” has a silver lining. Because an REH is not a “hospital,” the significant restrictions Congress imposed through the Affordable Care Act (ACA) on physician-owned hospitals do not apply to REHs.

Most of the proposed REH exception’s requirements are self-explanatory. CMS’s commentary on the conditioning prohibition, however, warrants close attention. CMS offers detailed guidance and examples on what it means to condition ownership on a physician making or influencing referrals or otherwise generating business, including direct and indirect conditioning, and how a physician can make or influence referrals or otherwise generate business.

An REH runs afoul of the conditioning prohibition if the amount of the ownership interest a physician can purchase, receive, or maintain is directly or indirectly conditioned on the physician’s making or influencing referrals to (or otherwise generating business for) the REH. Conditioning can be direct or indirect, and it can be based on the physician making or influencing referrals to, or otherwise generating business for, the REH.

An REH directly conditions ownership when it implements policies that require a specific number, volume, or value of referrals to, or other business generated for, the REH. For example, if eligibility to invest (or maintain an investment) turns on whether a physician generates $100,000 or more of tests or facility fees, the REH has directly conditioned ownership on achieving that metric. Since the metric measures referrals or other business generated (seemingly without legitimate justification), the REH has improperly conditioned ownership in violation of proposed § 411.356(c)(4)(iii).

An REH indirectly conditions ownership when it adopts the policies of another organization and uses those policies to establish ownership qualifications. Suppose an REH requires a physician-owner to have active medical staff privileges. If the medical staff bylaws require a minimum of 20 patient encounters to maintain privileges, the REH has indirectly conditioned ownership on a physician performing 20 patient encounters. Whether this conditioning is improper depends on the circumstances, as discussed below. An REH also indirectly conditions ownership when it imposes requirements that are a proxy for referrals or other business generated. For instance, requiring a certain number of “points” per year could run afoul of the requirement if the points are nothing more than a proxy for referrals or other business generated.

Whether an REH has conditioned ownership on referrals or other business generated must be determined on a case-by-case basis. Returning to the medical staff example, CMS recognizes that medical staffs set their own qualification criteria. Since medical staff are responsible for peer review, they need a minimum body of work to determine whether to grant or continue privileges and may impose a minimum patient encounter or similar requirement. In this scenario, according to CMS, the inquiry turns on whether the medical staff requirements directly relate to its peer review obligations or are merely a proxy for referrals and other business generated. Key questions are: What is being measured? What level must be achieved? For both, why? And what suitable alternatives are available?

In the “points” example, the propriety of the requirement would depend on how a physician earns points. A point system based on activities not tied to a physician’s referrals or other business generated (e.g., points for serving on committees, providing consultations for another physician’s patient, or activities that are either outside of the physician’s control or otherwise do not generate business for the REH) could be permissible. On the other hand, a point system closely tied to a physician’s referrals or other business generated could run afoul of the conditioning prohibition. For example, a point per REH patient encounter would likely be impermissible.

This is true even if the physician personally performs the patient encounter. The objective volume or value standards at § 411.354(d)(5) and (6), CMS cautions, do not apply for purposes of the ownership or investment exceptions at § 411.356, including the proposed REH exception. That is, for purposes of the conditioning prohibition, the question is not whether the condition  takes into account referrals or other business generated in a manner that can be reduced to a mathematical formula. Nor is it whether the requirement is based solely on services personally performed by the physician. Instead, the question is whether the conditions are tied to referrals or other business generated to the degree that ownership is effectively conditioned on making or influencing referrals or otherwise generating business. As such, if what is being measured closely ties to referrals or other business generated—even if those are not variables, strictly speaking, and even if only personally performed services are measured—the conditioning prohibition may be violated.

Finally, CMS offers guidance on a physician’s making referrals and influencing referrals (or otherwise generating business). A physician makes a referral by ordering, prescribing, certifying or recertifying, or establishing a plan of care that includes DHS or by requesting a consultation with another physician who, in turn, orders DHS. A physician influences a referral or the generation of business when circumstances demonstrate that the physician exerts “impactful pressure or persuasion to refer, or an enforceable requirement for or control over the referrals of another.” For example, if a physician who owns a practice requires all employees to refer to the REH, this could run afoul of the conditioning requirement.

Ultimately, CMS suggests a pragmatic inquiry. Although it cannot be distilled to an objective test, the apparent steps are as follows. One, is the REH directly requiring referrals or other business generated to obtain or maintain ownership? If so, the conditioning prohibition is likely violated. Two, is the REH indirectly requiring referrals or other business generated through other conditions? If so, are these conditions directly related and tailored to a bona fide requirement (e.g., medical staff peer review), or are they merely a proxy for referrals or other business generated? If the former, the conditioning prohibition is likely not violated, and if the latter it likely is.

Hospital-Specific Compensation Arrangement Exceptions

Some compensation arrangement exceptions are available only to certain entities (e.g., hospitals, federally qualified health centers, rural health clinics). To allow REHs to rely on these exceptions on the same terms as these other entities, CMS proposed revising the following exceptions:

  • Physician recruitment at § 411.357(e).
  • Obstetrical malpractice insurance subsidies at § 411.357(r).
  • Retention payments in underserved areas at § 411.357(t).
  • Electronic prescribing items and services at § 411.357(v).
  • Assistance to compensate a non-physician practitioner at § 411.357(x).
  • Timeshare arrangements at § 411.357(y).

Notably, CMS considered but did not propose changes to the exception for medical staff incidental benefits at § 411.357(m). CMS is soliciting comments regarding whether it should revise the exception to expressly include REHs as entities to which the exception applies.

Takeaways

The new REH provider type, particularly in conjunction with the proposed REH ownership exception to the Stark Law, creates new opportunities for CAHs and rural hospitals. Under the proposed rule, eligible CAHs and rural hospitals could not only convert to REHs but also tap into sources of capital that may have previously been prohibited under the Stark Law. Eligible hospitals that did not have physician ownership before the ACA could, for the first time, syndicate and be owned in whole or part by physicians who make referrals to the facility. In addition, physician-owned REHs could increase capacity without regard to the constraints placed on physician-owned hospital expansion.

CMS could have relied on the rural provider exception to protect physician ownership or investment in REHs. REHs could still choose to rely on that exception. But if they do, REHs risk being reclassified as urban or having their urban/rural patient mix shift, potentially resulting in noncompliance. Through the proposed REH exception, CMS would create certainty that a physician-owned REH can comply with the Stark Law even if its location is reclassified or its patient mix shifts. That certainty is especially important for an ownership or investment interest (as opposed to a compensation arrangement), which is more challenging to unwind.

If finalized, the proposed exception will be effective January 1, 2023. Interested parties have until September 13 to submit comments to CMS.

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