On January 4, 2001 the Health Care Financing Administration (HCFA) published Phase I of the final Stark II rule (Final Stark Rule), which will become effective January 4, 2002 unless delayed by the Bush Administration. The comment period for the Final Stark Rule has been extended to June 4, 2001. Previous Health Law Updates have provided an overview of the Final Stark Rule, including a description and analysis of the new academic medical center exception (see Health Law Update, Volume 18, No. 2- Health Care Financing Administration Issues Phase I of the Final Stark II Rule, January 26, 2001 and Volume 18, No. 1- HCFA Issues Phase I of the Final Stark II Rule, January 15, 2001). This Health Law Update provides a more detailed discussion and analysis of the new academic medical center exception (AMC Exception) and recommends revisions to the AMC Exception that would protect legitimate financial arrangements between physicians and academic medical centers without undermining the policy concerns of the Stark Law.
Academic medical centers have been given special treatment under the Stark Law from its inception. Recognizing that faculty practice plan physicians routinely furnish professional services both inside and outside of the faculty practice plan setting, Congress permitted faculty practice plans to qualify as group practices under the Stark Law without having to demonstrate that their participating physicians substantially furnish all of their services through the faculty practice plan. However, academic medical centers have noted that the in-office ancillary services exception relied upon by group practices does not address the complex compensation arrangements frequently found among faculty members, medical schools and teaching hospitals, such as office space provided by the hospital to faculty practice plans, hospital funding of medical school research and payments by faculty physicians to the hospital or medical school (e.g., dean’s taxes). Any one of these compensation arrangements could create a direct or indirect financial relationship between a teaching hospital and a referring faculty member for which there is no exception under the Stark Law. Thus, the 1998 proposed Stark II rule drew criticism for not addressing these common compensation arrangements.
Convinced that academic medical centers raise questions under the Stark Law that are not adequately addressed by existing exceptions and persuaded that there was sufficient evidence of congressional intent to address the special circumstances of physicians practicing in academic settings, HCFA created a new exception in the Final Stark Rule for services furnished by an academic medical center. However, perhaps unintentionally, the resulting AMC Exception is not broad enough and should be expanded.
THE AMC EXCEPTION
The Final Stark Rule provides that designated health services (DHS) furnished by an academic medical center are excepted from the Stark Law’s prohibition on self-referrals if the referring physician:
- is a bona fide full-time or substantial part-time employee of a component of the academic medical center;
- is licensed to practice medicine in the state;
- has a bona fide faculty appointment at the affiliated medical school; and
- provides either substantial academic or substantial clinical teaching services for which the faculty member is compensated as part of his or her employment relationship.
The total compensation paid to the referring physician for the previous 12-month period (or fiscal year or calendar year) from all academic medical center components must be set in advance, may not exceed fair market value for the services provided and may not be determined in a manner that takes into account the volume or value of any referrals or other business generated by the referring physician within the academic medical center.
The exception is contingent upon the academic medical center satisfying the following conditions:
- all transfers of money between components of the academic medical center must directly or indirectly support the missions of teaching, indigent care, research and/or community service;
- the relationship of the components of the academic medical center must be set forth in a written agreement that has been adopted by the governing body of each component; and
- all money paid to a referring physician for research must be used solely to support bona fide research.
Finally, the exception does not apply if the referring physician's compensation arrangement violates the federal anti-kickback statute.
The AMC Exception defines an "academic medical center" as consisting of:
- an accredited medical school (including a university, when appropriate);
- an affiliated faculty practice plan that is a nonprofit, tax-exempt organization under Sections 501(c)(3) or (c)(4) of the Internal Revenue Code (or is a part of such an organization under an umbrella designation); and
- one or more affiliated hospital(s) in which a majority of the hospital medical staff consists of physicians who are faculty members and a majority of all hospital admissions are made by physicians who are faculty members.
THE (POTENTIAL) BENEFITS OF THE AMC EXCEPTION
The principal benefit of the AMC Exception is the protection that it provides for indirect compensation arrangements between teaching hospitals and the teaching physicians who make referrals to these hospitals for DHS. The Stark Law has always had exceptions for certain employment and personal services arrangements. In addition, certain faculty practice plans can qualify as "group practices" and take advantage of the Stark Law’s in-office ancillary services exception. However, these exceptions do not protect the indirect compensation arrangements that arise, for example, from transfers of money between a hospital and its affiliated medical school. The AMC Exception was intended to address this issue. The importance of the AMC Exception for such indirect compensation arrangements is significantly diminished, however, by the fact that the Final Stark Rule also includes a new, broad exception for indirect compensation arrangements.
Nevertheless, the AMC Exception has the potential benefit of simplifying Stark Law compliance for academic medical centers by giving them a single, broad exception that protects the wide array of direct and indirect compensation arrangements that they have with faculty members. Rather than having to separately analyze each direct and indirect compensation arrangement with a referring physician under a different Stark Law exception, academic medical centers can potentially find protection for all such arrangements under the AMC Exception alone. However, if the AMC Exception is going to be truly meaningful, HCFA will need to address certain problems with the exception.
THE PROBLEMS WITH THE AMC EXCEPTION
There are two significant problems with the AMC Exception. First, the Final Stark Rule’s definition of academic medical center is too narrow, unnecessarily preventing many legitimate academic medical centers from relying on the AMC Exception. Specifically, many academic medical centers do not have separately incorporated faculty practice plans, and, therefore, cannot qualify as an "academic medical center" under the current definition.
Second, the compensation provisions of the AMC Exception place significant restrictions on the types of compensation methodologies that may be used to compensate faculty members. Although these restrictions apply to all academic medical centers relying on the AMC Exception, they especially prejudice academic medical centers that do not have separately incorporated faculty practice plans, because these plans do not have the option of qualifying as a "group practice" and relying on the Final Stark Rule’s in-office ancillary services exception. Each of these problems is discussed in more detail below.
Definition Of "Academic Medical Center"
The AMC Exception is limited to services furnished by an "academic medical center" as defined in the Final Stark Rule. Although HCFA clearly intended to create an exception that will apply to all academic medical centers, this definition of "academic medical center" has the unintended effect of excluding from the AMC Exception academic medical centers that do not have separately-incorporated faculty practice plans.
It is not unusual for an academic medical center to be part of a single, fully-integrated academic health care system that employs the physicians who teach and practice medicine in the medical school, affiliated hospital and other health care facilities. While the faculty members practice medicine in association with a university wide school or departmental faculty practice plans, those plans often are not separately incorporated.
Such academic medical centers cannot satisfy the Final Stark Rule's definition of an "academic medical center" and are, therefore, excluded from the protections afforded by the AMC Exception. This is presumably an unintended consequence of the Final Stark Rule's definition of "academic medical center" because academic medical centers without separately-incorporated faculty practice plans use the same array of direct and indirect compensation and referral arrangements that the AMC Exception was designed to address.
Regardless of whether faculty physicians are employed by a separately-incorporated faculty practice plan or by a teaching hospital or medical school, funding for all or part of a faculty physician's compensation may come from a hospital and other providers of DHS to which the physician makes referrals. As HCFA notes in the preamble to the Final Stark Rule, these referrals and indirect compensation arrangements do not qualify for the in-office ancillary services exception and may not qualify for other statutory exceptions. Thus, broadening the definition of "academic medical center" to include centers that operate faculty practice plans as part of the teaching hospital or medical school is consistent with HCFA's recognition of the limitations of existing exceptions to adequately address the unique Stark Law compliance problems faced by academic medical centers.
Moreover, a broader definition should not open up the AMC Exception to abuse. Referrals to components of the academic medical center furnishing DHS would still have to be made by physicians who are bona fide employees of a component of the AMC and who provide substantial academic or clinical teaching services. Thus, it denies the AMC Exception to those centers which by virtue of state law and policy (in the case of state university systems) or historical artifact do not have a separately incorporated faculty practice plan that is tax-exempt under Sections 501(c)(3) or 501(c)(4) does not seem to be supported by compelling policy concerns.
Permissible Faculty Compensation Methodologies
In an integrated academic medical center, the employed faculty physicians engaged in clinical activity are organized as either a multi-specialty group practice or as departmentally-based single specialty group practices. Faculty physicians’ compensation is commonly structured to include production incentives calculated as a percentage of collections or charges for services personally performed and services "incident to" such personally performed services. Clinical income from professional and ancillary services may (subject to restrictions on private inurement) be pooled and allocated to physicians within the group as well.
The AMC Exception includes restrictions on physician compensation that are similar to the restrictions imposed by the statutory personal services exception and the new regulatory fair market value exception. Specifically, the AMC Exception includes a "set in advance" requirement that precludes paying a physician faculty member productivity compensation that is structured as a percentage of collections (or charges if multiple fee schedules are involved). Further, the AMC Exception includes a volume/value standard that prohibits giving a physician production credit for DHS furnished by a limited license practitioner "incident to" the physician's personally rendered services and prohibits allocating a share of departmental income from DHS. The AMC Exception's "set in advance" requirement and volume/value standard are each discussed separately below.
The "Set in Advance" Requirement
Notably, the "set in advance" requirement included in the AMC Exception does not appear in the statutory employment exception or in the in-office ancillary services exception. The "set in advance" requirement effectively prohibits an entity furnishing DHS from structuring a referring physician's compensation as a percentage of collections, even if the percentage-based compensation is solely based on services personally rendered by that physician. For the following reasons, HCFA should eliminate the "set in advance" requirement from the AMC Exception.
First, in the preamble to the Final Stark Rule, HCFA states that "(n)othing in this regulation is intended to preclude productivity bonuses paid to academic medical center physicians on the basis of services they personally perform." 66 Fed. Reg. 856, 916 (2001). Physician compensation that is structured as a percentage of collections is the most common form of productivity compensation used by employers such as hospitals and group practices. Thus, a "set in advance" requirement in the AMC Exception is inconsistent with HCFA's express desire to permit academic medical centers to pay productivity compensation to referring physicians, provided, however, that the compensation does not take into account the volume or value of referrals or other business generated for the academic medical center.
Second, because the AMC Exception requires an employment relationship between the referring physician and the academic medical center, and the statutory employment exception permits productivity compensation structured as a percentage of collections, the AMC Exception should also permit such productivity compensation methodologies. There is no sound policy reason for including in the AMC Exception a restriction on productivity compensation not found in the statutory employment exception.
Finally, the AMC Exception is regulatory and, therefore, HCFA is not bound by a statutory "set in advance" requirement. Thus, HCFA is free to craft an AMC Exception that accommodates the legitimate productivity compensation methodologies commonly found in the academic medical center setting. The volume/value standard (discussed below) adequately prevents abusive compensation arrangements without the unnecessarily restrictive "set in advance" requirement.
The AMC Exception requires that compensation paid by academic medical centers to faculty members not be determined in a manner that takes into account the volume or value of any referrals for DHS or other business generated by the referring physician for the academic medical center. However, the AMC Exception does not include exceptions to the volume/value standard enjoyed by group practices, such as the exception for productivity bonuses for personally performed DHS, including DHS performed by limited license practitioners "incident to" the physician’s personally performed services. Thus, faculty practice plans that cannot qualify as a group practice under the Final Stark Rule because, for example, they are not separately incorporated legal entities, are not permitted the same flexibility in structuring physician compensation as group practices.
Giving academic medical centers the same flexibility to structure physician compensation as group practices would not create any additional risk of abuse. It would do nothing more than create a level playing field for group practices and faculty practice plans. Moreover, for those faculty practice plans that qualify as a group practice and compensate their physicians accordingly (but inconsistent with the AMC Exception), it is unreasonable to deprive them and their affiliated teaching hospitals of the protection the AMC Exception provides for indirect compensation arrangements. Although these faculty practice plans could rely on the Final Stark Rule’s new indirect compensation exception, this would defeat HCFA’s objective to create a broad AMC Exception that addresses all of the legitimate direct and indirect financial relationships among the components of an academic medical center.
Thus, permitting academic medical centers the same flexibility to structure compensation as group practices would not undermine the important policy concerns of the Stark Law.
The AMC Exception appears to have been intended to protect the array of direct and indirect financial relationships that arise in the academic medical center context. However, notwithstanding its intended breadth, the AMC Exception contains design flaws that significantly limit its utility. Specifically, the AMC Exception’s definition of "academic medical center" is unnecessarily narrow, and its "set in advance" and volume/value standards unnecessarily deprive academic medical centers of the flexibility enjoyed by other employers and group practices to fashion compensation methodologies that provide an incentive for increased productivity. Unless revised by HCFA, many academic medical centers will still need to rely on other sometimes ill-suited exceptions (e.g., the in-office ancillary services exception, the employment exception and the indirect compensation exception) to protect the various legitimate financial relationships among components of the academic medical center. Thus, academic medical centers may wish to take advantage of the extended comment period (ending June 4, 2001) for the Final Stark Rule to seek revisions to the AMC Exception.