By John Otrompke

Bob Neri— Bob Neri, CLMA executive vice president

Years in the making, Phase I of the new final regs to the federal Physician Self-Referral Prohibition law (also known as Stark II) contain a lot of new material, some beneficent to clinical labs, some dangerous. According to several commentators, however, the new material represents a step forward in this area of industry regulation.

“This is the best face they’ve ever put on this law,” said Bob Homchick, partner with the law firm of Davis Wright Tremaine in Seattle. “But as public policy, it is still inherently flawed.”

The new regs contain a great deal of new material, in addition to the new exceptions which have been added to the prohibition. Among the important items to note are the liberalization of the group practice regulations, protection for bundled services, general clarification of the reg, and the new indirect financial relationship concept, which ironically may contain a benefit to some providers, Homchick said.

Nonetheless, all these items and more will probably not make doctors any more eager to get into the practice of laboratory investment.

“If a hospital owns a clinical lab, if it’s not a for-profit mode, if it’s not out trying to market for new revenue streams, the lab is just another cost-center,” said George Krempel, associate vice-president of healthcare services at Loyola University Medical Center. “If the lab is marketing, there’s money associated. But if the lab’s mission is just to serve the institution, why would a doctor want to invest in it?”

According to Krempel, physicians in Loyola’s lab initially had a financial interest in the venture, but were “scared out of the arena with the Stark law.”

“Physicians are less likely to invest in an indirect way in a lab, unless they’re a pathologist,” said Bob Neri, executive vice president at the Clinical Lab Management Association. “If they’re going to set up a lab, it’s probably going to be to serve their own practice.”

Clinical labs, of course, were the first enterprises to be hit with the Stark paradigm in the early ’90s. Although the Stark II regs primarily extend the concepts of Stark I to numerous other “designated health services,” the exceptions, definitions and other materials in the reg also apply to the clinical lab setting.

The new regs are being released in two phases, Phase I having been introduced in January. Long unenforced, the law was supposed to go into effect next January when the Clinton Administration promulgated the final regs in its last days. Some commentators, however, wonder whether it will get that far. “When the Bush Administration took over, they put a lot of regulations on hold to be considered,” said Katharine Ayres, director of healthcare policy for the CLMA. “Stark was one of the first things they put on hold.”

Although most believe the law will go into effect in some form, there is little agreement about precisely when. “It took eight months for the administration even to get all its nominees into place,” said Neri.

In terms of the substance of the law, however, the new regs go quite far in clarifying some of the concepts, which ought to assist with compliance. For example, one area the regs have clarified is the “indirect financial relationship” concept. If a chain of financial relationships exists between entities, unbroken by a Stark exception, the entities might be liable for non-reimbursement or other penalties if one entity had reason to know that the other party’s compensation varied with the volume or value of referrals.

“It takes a little bit more of a realistic, common-sense approach to recognize relationships that exist out there,” said Neri. “It would have been impossible for a lab to search out every possible referral, especially if there are intermediaries, so they added a knowledge element. The standard has been relaxed.”

Other commentators say that the new knowledge element in the regs is more than just a liberalization. “The knowledge element is very important, even outside the indirect context,” according to Bob Homchick. “It now represents a general exception to the statute.”

That controversial view is important, because Stark has long been a strict liability statute, meaning that penalties can accrue even if nobody meant to do anything wrong.

The penalties? They can range, of course, from simple non-reimbursement (which can mean millions), to harsher measures.

“Any violation of Stark II is a potential violation of the False Claims Act (FCA),” said Ben St.John, spokesman for the Office of the Inspector General. That analysis from regulators may be what gives rise to the idea among some that the knowledge element is now generalized: according to St. John, the government must show some element of intent under the FCA.

While Phase 2 of the new final regs will contain significant additional material for the healthcare industry, including information on the application of Stark to the Medicaid program, physician recruitment and other exceptions, Phase I already contains quite a bit about which labs ought to be aware. Among the new exceptions are the non-monetary compensation exception (also known as the de minimis exception in other contexts), the self-explanatory fair-market-value exception and the new exception for academic medical centers. “For academic centers, this looks like a blessing for us,” said Loyola’s Krempel. “There are stipends for teachers, plus clinic times are large because of the teaching factor.”

The regulators look at academic centers as a special phenomenon, because of the traditionally complex number of compensation arrangements found in the academic setting. “Ancillary utilization is different, maybe heavier, because you’re teaching people,” said Krempel. “We have standard protocols, but there is leeway given. If the resident thinks the patient has a liver problem, the attending doctor may say, ‘Go ahead and order a test,’ even though the attending doctor knows the results are probably going to be negative.”

One of the most significant reg changes is in the definition of group practice. Under Stark, groups are significant because services, including lab services, are excepted from the prohibition on referrals if they are services performed within the group, under the physician’s services and in-office ancillary services exception. Of course, the group practice definition is cumbersome; the government seems to be trying to target the elusive “group practice without walls,” and, in so doing, it requires significant integration within group practices. Groups which do little non-Medicare business or have significant overlapping or part physician membership may find that they are not in compliance.

Among the most significant liberalizations to the reg is the allowance of profit-sharing centers for groups of five or more physicians. “Look at community-based hospitals,” said Krempel. “Most groups have five physicians or less anyway.”

A new rule of particular importance to the industry is the government’s interpretation, spelled out in the regs, that the Stark rule will not be applied to any services which must be billed on a bundled basis. This would apply, for example, to the skilled nursing area where many services must be bundled. Beware of exceptions, however.

Another area that has seen significant liberalization is in the definition of a “consultation.” The regs previously provided that a pathologist’s request for clinical lab tests or pathology services did not constitute a referral, but required supervision by the consulting doctor and other supporting documentation of medical necessity, such as the patient history.

This latter requirement was dropped, however. During the long notice-and-comment period preceding Phase I, the government received a letter pointing out “it is unlikely that a pathologist would ever see a patient or take a history.” Regulators amended the language accordingly.

According to commentators, the Prohibition’s analysis is probably already anachronistic anyway. “Now that Fee For Service (FFS) reimbursement in dwindling away, we have more capitation and managed care with huge discounts. Stark I came up when FFS was big, and doctors could make a lot of money on complete blood count tests,” said Krempel.

He noted that the key to lab profitability today is not to order more tests, but to streamline the process. “You don’t want clinicians to order more lab tests, and they do. You want the tests done on the spot, so the doctor and the patient won’t have to wait for results.”

Neri agrees that the clinical lab industry has little proclivity for wrongful utilization anymore. “I think the imaging area has a lot more potential problems, since it’s all new to them,” he said. “These are capital-intensive areas, so referral issues are there.”

Nonetheless, the clinical lab industry has little to fear and everything to gain by getting familiar with the changes which these new regulations entail.

John Otrompke, is a Chicago-based freelance writer and recent law graduate awaiting admission to the bar.