Centers for Medicare and Medicaid Services

This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federal laws.

M E M O R A N D U M

November 27, 2001

TO: Centers for Medicare and Medicaid Services

FROM: American Hospital Association

RE: Stark Law Issues Involving Hospitals and Physicians

On behalf of our member hospitals, we request confirmation that the guidance contained in this memorandum regarding certain issues arising under the physician self-referral law (the "Stark Law") 1/ and relevant regulations is consistent with the views of the Centers for Medicare & Medicaid Services (“CMS”). 2/ The issues raised below relate to typical hospital activities which arguably involve an in-kind economic benefit to referring physicians, including, among other things, various business and social activities that are paid for by hospitals. This memorandum describes our understandings of the Stark Law exceptions that are likely to apply (and, in some instances, not to apply) with respect to various activities. 3/

I. The General Issues

A. "Compensation Arrangement"

1/ 42 U.S.C. 1395nn. In this memorandum, references to the "Stark Law" are to the law as currently written (sometimes called "Stark II"). The law was expanded in 1993 to cover several categories of designated health services, including inpatient and outpatient hospital services.

2/ Proposed regulations under the Stark Law were published January 9, 1998 (the "Proposed Rule") and a portion of the final regulations (Phase I) was published January 4, 2001 (the "Final Rule").

3/ We are aware that each of the activities referenced herein also must be analyzed under the Federal Healthcare Programs Anti-Kickback Law, 42 U.S.C. 1320a-7b(b), (the "Anti-Kickback Law"). Certain of the Stark Law exceptions discussed herein specifically require compliance with the Anti-Kickback Law. This memorandum does not include an Anti-Kickback Law analysis of the activities in question, in part because that law is generally enforced and interpreted by the Office of Inspector General ("OIG"), not CMS. This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federalIn Section laws. III below, we list several business and social activities involving hospital representatives and referring physicians that are paid for by hospitals. If, by paying for these activities, the hospital were deemed to have a "compensation arrangement" with the physicians under the Stark Law, then the physicians would be precluded from making referrals of Medicare and Medicaid patients for designated health services (“DHS”) to the hospital, unless an exception applies. 4/ We ask for your confirmation that the types of activities identified below constitute "compensation arrangements" under the Stark Law and that CMS's position is that a statutory or regulatory exception must be available in order for the hospital and referring physicians not to be in violation of the Stark Law.

B. Exceptions

Assuming that these activities implicate the Stark Law by creating a compensation arrangement between the parties, several exceptions are potentially applicable. However, for purposes of this analysis, we assume that some of the exceptions will not be applicable. In particular, we assume that the exception for bona fide employment relationships would not apply to these activities, since in all cases we are referring to non-employed physicians. Similarly, most of the activities would not fit within the personal services exception 5/ or the fair market value exception 6/ because, among other things, in most cases there would not be a written agreement that covers the activities at issue. 7/ Also, most of these activities would not fit within the exception for medical staff incidental benefits. 8/

That exception requires, among other things, that the activity take place on the hospital's campus and that compensation be less than $25.

The most relevant exceptions for many of these activities, therefore, are the exception for remuneration unrelated to the provision of designated health services 9/ and the exception for non-monetary compensation up to $300. 10/ We are especially interested in

4/ "Compensation arrangement" is defined in the statute generally as "any arrangement involving any remuneration between a physician (or an immediate family member of such physician) and an entity . . ." (42 U.S.C. §1395nn(h)(1)).

5/ 42 U.S.C. § 1395nn(e)(3); 42 C.F.R. §411.357(d).

6/ 42 C.F.R. § 411.357(l).

7/ A few of the activities, most notably certain of the activities discussed in Section III.A below, are likely to be covered by a written agreement and could be structured to fit within the personal services exception.

8/ 42 C.F.R. § 411.357(m).

9/ 42 U.S.C. § 1395nn(e)(4).

10/ 42 C.F.R. § 411.357(k). - 2 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback confirmingLaw or other with federal you laws. which types of activities appropriately fit within the exception for remuneration unrelated to DHS.

II. Potentially Applicable Exceptions

This section summarizes the current requirements of the exception for remuneration unrelated to DHS and for non-monetary compensation up to $300.

A. Remuneration unrelated to the provision of DHS

This is a statutory exception that specifically focuses on certain compensation provided by hospitals to physicians. 11/ The statute states that remuneration provided by a hospital to a physician is not considered a compensation arrangement under the Stark Law "if such remuneration does not relate to the provision of designated health services." In the Proposed Rule you included a provision that appears to reflect this portion of the statute. The provision, called "Arrangements with hospitals," would except the following: "Remuneration provided by a hospital to a physician if the remuneration does not relate, directly or indirectly, to the furnishing of designated health services. To qualify as 'unrelated,' remuneration must not in any way reflect the volume or value of a physician's referrals." 12/

You discussed this exception, which applies only to arrangements between hospitals and physicians, in the preamble to the Proposed Rule. You stated that the remuneration must be "completely unrelated" to the furnishing of

designated health services: "By this we mean that the parties must be able to demonstrate that the remuneration does not in any direct or indirect way involve these services, and that the remuneration in no way reflects the volume or value of a physician's referrals for designated health services." 13/

In the preamble to the Proposed Rule, you also provided examples of activities that fit within the exception and those that do not. Those that fit within the exception (i.e., are "unrelated" to the provision of DHS) include:

1. Rental payments from a teaching hospital to a physician for his or her house in order to use the house as a residence for a visiting faculty member (assuming rental payments are fair market value and do not reflect the physician owner's referrals to the hospital).

11/ 42 U.S.C. § 1395nn(e)(4).

12/ 42 C.F.R. § 411.357(g).

13/ 63 Fed. Reg. 1659, 1702 (Jan. 9, 1998). - 3 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federal laws.2. Payment from a hospital to a physician for teaching or for providing general utilization review or administrative services for the hospital.

Those that do not fit the exception (because they are related to the provision of DHS) include:

1. Payment from a hospital to a physician to supply a heart valve that the physician has perfected. (In the preamble you state that the physician is receiving payment for an item that will likely be used by the hospital in furnishing inpatient hospital services, which are a designated health service).

2. Payment by a hospital for a physician's medical malpractice insurance or other general costs to enable the physician to provide a designated health service, such as radiology.

Since virtually every hospital activity (including all four examples described above) can be viewed as relating in some way to inpatient or outpatient hospital services, the examples suggest where you have drawn the line with respect to degrees of relatedness in order to give the statutory provision meaning. In both of the second set of examples (those demonstrating relatedness to DHS), the financial arrangement in fact involves the furnishing of, or referrals for, DHS by the physician receiving the compensation. (In the case of the heart valve, it is likely the physician selling it to the hospital would be using it to implant in his patients.) By contrast, in the first set of examples, the financial relationship, although indirectly related to the furnishing of DHS by the hospital, does not implicate the furnishing or referral of DHS by the compensated physician. Thus, we understand that where the arrangement involves services which are of an administrative nature (including general clinical oversight activities), but do not implicate the physician's own referrals or provision of DHS, this exception would apply.

B. Non-Monetary Compensation up to $300

The Proposed Rule included an exception for "De minimis compensation." The Final Rule modified the requirements of that provision and renamed it as indicated above. 14/ This provision (as revised in the Final Rule) creates an exception for compensation from an entity in the form of items or services (not including cash or cash equivalents) that does not exceed an aggregate of $300 per year, if all of the following conditions are met:

14/ 42 C.F.R. § 411.357(k). Among other things, the Final Rule eliminates a $50 per gift limit that would have been imposed by the Proposed Rule. - 4 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federal laws.1. The compensation is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician.

2. The compensation may not be solicited by the physician or the physician's practice (including employees and staff members).

3. The compensation arrangement does not violate the Federal anti- kickback statute.

You provide additional guidance regarding this exception in the preamble to the Final Rule. First, you state that this exception only protects gifts to individual physicians, not to groups of physicians. "We caution . . . that the exception will not apply to gifts, such as holiday parties or office equipment or supplies, that are valued at not more than $300 per physician in the group, but are, in effect, given or used as a group gift." 15/ Also, the "gift" must be truly that – a voluntary transfer made without consideration or compensation expected or received in return. Finally, the preamble addresses the relationship between this exception and the other exception discussed above (remuneration from a hospital to physicians unrelated to the provision of designated health services). You state that these exceptions "are totally separate exceptions with separate criteria. The determinations as to which of these exceptions, if any, is applicable depends on the facts and circumstances of the case involved." 16/

As discussed in Section I above, our primary goal is to confirm our understandings about the facts and circumstances under which each of these two exceptions would and would not apply.

III. Analysis

Below we discuss several examples of typical hospital-physician activities and the potentially applicable Stark Law exceptions.

A. Meetings to Discuss Hospital-Related Issues

Several of the examples are similar because they involve business-related meetings with physicians. These examples, which we discuss below as a group, include the following:

15/ 66 Fed. Reg. 855, 921 (Jan. 4, 2001).

16/ 66 Fed. Reg. at 922. - 5 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federal laws.1. Hospital pays for travel, lodging and meal expenses for its board members, including physician board members, to participate in a board retreat.

2. Hospital administrator meets with a physician to discuss hospital matters, and the meeting occurs at a restaurant; administrator pays for the meal.

3. Hospital administrator meets with a physician to discuss issues relating to the physician's medical directorship, and the meeting occurs at a restaurant; administrator pays for the meal.

4. Hospital administrator pays for dinner at a restaurant for Physicians A and B. Physician A is being recruited to be on staff at the hospital, and Physician B, who is already on the medical staff at the hospital, was asked to help with the recruitment efforts.

5. Hospital provides dinners at monthly hospital executive committee meetings.

First, we note that the personal services exception likely could apply to at least two of these examples. Specifically, the meetings with medical directors and executive committee members (#3 and 5) would seem to involve arrangements for the provision of ongoing services that could be structured to satisfy the requirements of that exception. The personal services exception requires, among other things, a written contract with a term of at least one year and compensation that is set in advance, does not exceed fair market value, and does not reflect the value of volume of the physician’s referrals. Arrangements for these types of services often are, or easily can be, memorialized in written agreements anyway, and it would be reasonable to include as compensation a certain number of meals during business-related meetings.

With regard to the three other examples of activities (#1, 2, and 4), we believe that the exception for remuneration from a hospital to physicians unrelated to the provision of DHS should apply. 17/ While this exception is broadly worded

17/ We note, however, that if the meeting between the administrator and physician described in example 2 relates to the physician's furnishing or referral of DHS (which often will be the case), then this exception would not apply and the arrangement would need to be treated similarly to the activities described in Section III.C below. - 6 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federal laws. with respect to the types of compensation relationships it covers, its application is limited to physician relationships with hospitals, and not other types of providers. Thus, in enacting this exception, it appears that Congress implicitly recognized that hospitals and physicians share a special, multi-dimensional relationship, presumably based upon the need for an integration of their efforts in the care of patients. 18/ The activities listed above in examples 1, 2, and 4 each appear to relate to joint efforts between a hospital and physicians regarding hospital-related business. These efforts may require or be facilitated by meetings with attendant expenses, such as meals, which it is reasonable for the hospital to cover, assuming they are not excessive.

A relevant analogy is one of the examples you included in the preamble to the Proposed Rule. As described earlier in this memorandum, you stated that providing general utilization review or administrative services to a hospital is "unrelated" to the furnishing of DHS. 19/ The activities described in examples 1, 2, and 4 above are similar. They involve services which benefit the hospital, but do not involve the provision or referral of DHS. Moreover, consistent with the requirement set forth in the Proposed Rule, the remuneration involved does not in any way reflect the volume or value of referrals. We therefore believe that these activities appropriately fit within this exception.

B. Hospital Celebratory Functions

The activities below include certain holiday season events, as well as events recognizing hospital achievements to which physicians are invited.

1. Hospital hosts a holiday party at a local restaurant and invites its medical staff and their spouses. The party includes dinner and musical entertainment. The total cost per person is $100.

Assuming that all members of the medical staff are invited to the party (i.e., guests are not selected on the basis of their referrals), this activity should fit within the exception for remuneration unrelated to DHS. The party does not in any way involve DHS, and the remuneration does not reflect the volume or value of referrals if all members of the medical staff are invited. Moreover, a holiday party attended by both hospital and medical staff is not simply a gift. Rather, it is an event intended to recognize and solidify the joint hospital-physician enterprise in the delivery of patient care. For this reason, it is clear that the physicians contribute to this function by attending it.

18/ CMS also recognized this relationship in its creation of a regulatory exception for incidental medical staff benefits (42 C.F.R. § 411.357(m); 66 Fed. Reg. at 920).

19/ 63 Fed. Reg. at 1702. - 7 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federal laws. 2. Hospital annually recognizes cardiac surgeons when annual mortality data is released. Hospital normally presents very well in mortality data. A special dinner is hosted each year for physicians and their spouses. Estimated cost per person is $125.

3. Hospital hosts a dinner at a restaurant or administrator's home to celebrate milestone for the hospital such as the end of a project or the launch of a new service and includes physicians and family members.

These examples also involve an event which is intended to recognize the effective working relationship between a hospital and its physicians. In these examples, although the remuneration would not appear to reflect the volume or value of referrals (assuming that all cardiac surgeons, department members, or other relevant physicians are invited), the event is clearly connected to inpatient or outpatient hospital services (DHS). Therefore, these activities are different from example 1 above, which involved a holiday party unrelated to DHS. As a result, the exception most applicable to events like these (which specifically recognize certain hospital departments or services) is the exception for non-monetary compensation up to $300.

C. Other Entertainment and Gifts

1. Hospital sponsors a team in a golf tournament benefiting the local United Way. Sponsorship costs $1000. Stated value of green fee and associated costs is $100 per person. CEO invites three physicians to join him on team.

2. Hospital provides sporting event tickets for physicians.

3. Hospital provides holiday gift baskets for physicians.

4. Hospital sends flowers to a member of the medical staff or family member who is hospitalized, or a gift to recognize a birthday or other family occasion.

Unlike some of the other activities above, these activities appear to be purely social activities, not involving a discussion of business or celebration of hospital-physician joint efforts. Thus, although the remuneration is not on its face related to DHS, the fact that there is no consideration or contribution by the physicians suggests that these activities are properly viewed as gifts. Therefore, the exception for non-monetary compensation up to $300 probably is the more pertinent one for these activities. Further, even if the activities involving a golf

- 8 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback tournamentLaw or other and federal a sporting laws. event (#1 and 2) are intended to facilitate discussion of hospital business, the likelihood is that this would focus on DHS performed or referred by the physicians. Under such circumstances, the exception for remuneration unrelated to DHS clearly would be inapplicable. 20/

D. Other Hospital – Medical Staff Arrangements

1. Hospital pays for physicians' CME program costs.

The exception for non-monetary compensation up to $300 is likely to be the only exception that applies to this activity, unless the payment is provided pursuant to a written contract for services fitting within the personal services exception. Payment for CME unrelated to DHS is simply a gift to the physician; however, if the program relates to DHS, it will not fit the exception for unrelated remuneration. We also note that this activity is different than most of the others in

that the remuneration in this case eliminates an expense that the physicians otherwise likely would incur themselves.

2. Pursuant to a well-defined policy, Hospital offers professional courtesy discounts to any physician who receives medical services at the hospital. The discount in the particular instance is $750.

This activity also eliminates a substantial expense that physicians would otherwise incur, and it does not reflect joint efforts in the hospital-physician enterprise. In fact, in this activity, the hospital and the physician are not operating as partners in the delivery of health care, but rather as provider and patient. To the extent this policy provides remuneration in excess of $300, there probably is not an exception that clearly would protect it. In the Final Rule you specifically solicited comments on the issue of professional courtesy discounts for a possible new exception. You stated that the agency will address the matter further in Phase II of the Final Rule. 21/ Because the issue of professional courtesy discounts is likely to cause significant confusion among hospitals, we urge you to issue interim guidance well in advance of release of the Phase II Final rule.

20/ Moreover, for certain of these activities (including the golf tournament and the sporting event tickets), the compensation may be deemed excessive, which is another reason why the exception for remuneration unrelated to DHS would not apply. In the discussion about this exception in the Proposed Rule, you cautioned hospitals about paying remuneration that is "inordinately high," even if the remuneration is supposedly "unrelated" to DHS (63 Fed. Reg. at 1702).

21/ 66 Fed. Reg. at 922. - 9 - This memo was submitted by AHA to the Centers for Medicare & Medicaid Services as a request for confirmation of the guidance contained herein and does not incorporate any views the agency may have on the Stark Law issues raised here. Also, the memo does not analyze the issues raised here under the Anti-Kickback Law or other federalE. laws.Activities Involving Personal Relationships

These activities arise generally out of friendship or personal relationships between hospital administrators and physicians.

1. Hospital administrator, who has become friends with a physician on the medical staff, socializes with physician and picks up expenses out of own pocket.

The Stark Law applies only when a physician has a financial relationship with an entity such as a hospital. Therefore, to the extent that this activity is paid for personally by a hospital administrator, it should not trigger Stark Law concerns. In order to qualify as a personal expense, the administrator should not include this item as a business expense for tax purposes and should not charge the hospital or otherwise receive reimbursement from the hospital to cover this expense.

2. Referring physician who also is hospital CEO's spouse attends certain hospital social events in capacity as CEO's spouse.

This activity should fit within the exception for remuneration unrelated to DHS, since the CEO's spouse attends these events in this capacity, not as a medical staff physician. Thus, consistent with the requirements of that exception, the remuneration does not involve DHS and does not reflect the volume or value of the physician's referrals.

VI. Conclusion

The activities discussed herein represent very common examples of typical hospital-physician activities. The Stark Law implications of these types of activities are of great concern to our members. As discussed above, we ask you to confirm certain understandings: 1) that these activities constitute "compensation arrangements" under the Stark Law, necessitating the use of a relevant exception if the physicians are to refer Medicare or Medicaid patients for DHS, and 2) that our analysis of the applicable exceptions (discussed in Sections II and III above) is consistent with the views of CMS.

* * * *

Thank you for your consideration of these issues.

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