Health-Care Anti-Referral Laws

By Melvyn B. Ruskin and Ellen F. Kessler

New Federal and state laws impose limitations on referrals by health-care practitioners to health-care providers where the practitioner has a financial interest. Most of these laws have different definitions and requirements as to who is a health-care provider, the services covered, exceptions to the rules, and reporting requirements. Here is an explanation of the Federal and three state laws.

Every accountant for a health-care practitioner or a health-care provider, such as a laboratory, pharmacy, imaging facility, or hospital, should know about the new Federal law that prohibits patient referrals to entities with which the referrer has a financial relationship. An accountant consulted by a health-care practitioner or provider in connection with a real estate transaction, equipment lease, sale of a practice, employment relationship, investment opportunity in a health-care entity, or a myriad of other matters, must assess the impact on such transaction of the Federal and state anti-referral laws.

Effective January 1, 1995, Federal law prohibits physicians from referring Medicare or Medicaid patients to health-care providers with which they have a financial relationship unless an exception under the law applies. In addition, a growing number of states have enacted similar anti-referral laws that apply to physicians and/or other health-care practitioners.

Accountants for physicians or other health-care practitioners or providers are in a unique position to identify a potential referral problem and call it to their attention. Accountants, perhaps more than other professionals, are familiar with their clients' and employers' investments and financial and employment relationships with health-care providers as well as their leasing transactions, and thus, can help them avoid the minefield of prohibited referrals. If legal counsel determines it would violate Federal or state law for the practitioner to continue to refer patients to a particular provider, the accountant can help the practitioner to divest the offending interest or terminate the referral pattern.

Rationale Behind Referral Ban

Why have Federal and state legislators prohibited referrals by health-care practitioners to entities with which they have financial relationships?

Both the Federal and state laws resulted from a perception that physicians or other practitioners are inclined to order or perform more tests, procedures, and treatments where they can expect some personal financial benefit from such referrals. These bans were enacted to curb Medicare, Medicaid, and insurance abuse by health-care practitioners.

The Federal "Stark" Law

Amendments were enacted in August 1993 to Section 1877 of the Medicare Act (42 U.S.C. Sec. 1395-nn), commonly known as the "Stark" law because of its Congressional sponsor "Pete" Fourtney Stark (D-CA). Effective January 1, 1995, the Stark amendments prohibit a "physician" from referring Medicare or Medicaid patients to any entity that provides certain "designated health services" and prohibits the entity from billing for such referred services where the physician or his immediate family member has a financial relationship with the entity.

Physician. Who is included under the Federal "physician" referral ban? It is expected that "physician" will be interpreted by the Health Care Financing Administration (HCFA) to include doctors of medicine, osteopathy, dental surgery or dental medicine, podiatric medicine, optometry, and chiropractors who meet certain qualifications.

Designated Health Services. The Federal referral ban applies to the following designated health services:

* Clinical laboratory services;

* Physical therapy services;

* Occupational therapy services;

* Radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services;

* Radiation therapy services;

* Durable medical equipment;

* Parenteral and enteral nutrients, equipment, and supplies;

* Prosthetics, orthotics and prosthetic devices;

* Home health services;

* Outpatient prescription drugs; and

* Inpatient and outpatient hospital
services.

A physician with a financial relationship with a provider of any of the foregoing services may not refer a patient to such provider as of January 1, 1995. Similarly, the provider of the services cannot bill a patient for such services if furnished pursuant to a referral by such physician.

Financial Relationship. A "financial relationship" includes an ownership or investment interest in an entity by the physician or his immediate family member, or a compensation arrangement between the physician or his immediate family member and the entity. The ownership or investment interest may be through equity, debt, or other means and includes an interest in an entity that holds an ownership or investment interest in any other entity providing the designated health services.

A "compensation arrangement" is any arrangement that involves remuneration, directly or indirectly, overtly or covertly, in cash or in kind, between the physician (or an immediate family member of such physician) and the entity providing the designated health services.

Exceptions. The Federal Stark law provides for a limited number of exceptions where the referral ban will not apply. The purpose of these exceptions is to permit "referrals" only under circumstances where the primary objective is to provide patient care rather than to generate economic benefit for the physician. To ensure the statutory objective is achieved, most of the exceptions require satisfaction of certain specified criteria, such as, requiring a signed, written agreement for at least a one-year term, with compensation consistent with fair market value set in advance, that does not vary based on the value or volume of any patient referrals, and that would be commercially reasonable even if no referrals were made. Since the specific requirements for each exception may differ, the statute must be reviewed carefully before a determination can be made as to whether a "referral" is permitted under one of the statutory exceptions. These exceptions include--

* referrals of physicians' services within a group practice if the services are rendered by or under the personal supervision of another physician in the same group practice and the "group practice" definition in 42 USC Sec. 1395nn(h)(4)(A) is met;

* referrals of in-office ancillary services if certain criteria are satisfied;

* prepaid plans (e.g., HMO services) as specified in the statute;

* ownership of publicly traded securities in a corporation with shareholder equity exceeding $75,000,000 if certain conditions are satisfied, or ownership of shares in an investment company with total assets exceeding $75,000,000;

* services provided by hospitals in Puerto Rico;

* services provided by an entity in a rural area to residents in the rural area; and

* services provided by a hospital in which the physician is authorized to practice and has an ownership interest.

Other exceptions under the Stark law include the following arrangements
that will not be considered prohibited compensation arrangements so as to
bar referrals:

* Rental or lease of office space or equipment if certain criteria are satisfied;

* Bona fide employment relationships if certain criteria are satisfied;

* Personal service arrangements for specific physician services if certain criteria are satisfied;

* Physician incentive plans, as defined in the statute [42 USC Sec. 1395nn(e)
(3)(B)(ii)], provided the plan meets certain requirements;

* Remuneration from a hospital unrelated to provision of designated health services;

* Remuneration provided by a hospital to a physician for recruitment purposes if certain criteria are satisfied;

* Isolated financial transactions, e.g., a one-time sale of practice or property, if certain criteria are satisfied;

* Certain group practice arrangements with a hospital wherein services are provided by the group but billed by the hospital if certain criteria are satisfied;

* Payments by a physician for items and services, e.g., to a clinical laboratory for lab services, or to another entity for items or services if payments are based on fair market value.

Reporting Requirements. Each entity that provides any of the designated health services has a duty under the Stark law to report to the Secretary of Health and Human Services information concerning the ownership of the entity, including the types of services, names and identification numbers of all physicians with an ownership or investment interest or a compensation arrangement with the entity (or whose immediate family member has such an interest).

Penalties. Violation of the referral ban under the Stark law can result in severe sanctions and penalties for the physician and the entity. These sanctions and penalties include a) denial of payment for services furnished pursuant to a prohibited referral; b) requiring a refund of any payments made for services rendered due to prohibited referrals; c) civil monetary penalties of up to $15,000 for each service; d) civil monetary penalties of up to $100,000 for each contravention scheme or arrangement (such as a cross-referral arrangement) whereby referrals are made in an indirect manner that would be prohibited if made directly; and e) possible exclusion from the Medicare and Medicaid programs. In addition, there is a civil monetary penalty of
up to $10,000 for each day an individual or entity fails to meet the reporting requirement.

State Anti-Referral Laws

A growing number of states have enacted some form of anti-referral law and the trend appears to be continuing. After considering the impact of the Federal Stark law, it is imperative to determine if a state referral law is also applicable and to assess its impact on the client's referral practices. Sampled below are highlights of the referral laws adopted by New York, New Jersey, and Connecticut.

The New York State Anti-Referral Law

New York State has adopted an anti-referral law, which, although modeled loosely on the Federal Stark law, is in some ways more restrictive.

The New York State Health Care Practitioner Referrals Act prohibits referrals to a health-care provider if a practitioner, or an immediate family member of the practitioner, has a financial relationship with the provider, and prohibits billing by the provider for such referred services.

The New York State law significantly differs from the Federal law in that it applies to a) a wider range of health-care practitioners including physicians, dentists, podiatrists, chiropractors, nurses, midwives, physician assistants, specialist assistants, physical therapists, and optometrists, rather than only "physicians," b) a limited number of services, i.e., clinical laboratory services, pharmacy services (including infusion therapy), x-ray, and imaging services, rather than the broader range of "designated health services," and c) services paid for by any third-party payor rather than only by the Medicare and Medicaid programs. Furthermore, although the New York State law became effective generally as of March 1, 1993, the referral prohibition will not go into effect until July 1, 1995, if the financial interest with the provider arose before July 1, 1992, for diagnostic imaging, x-ray, or clinical laboratory services; and before March 1, 1993, for pharmaceutical supplies and services.

The New York law departs further from the Federal law in that it includes a patient disclosure requirement that has been in effect since April 1, 1994, for all referrals that are not prohibited or excepted under the state referral law where there is a financial relationship between the referring practitioner and a health-care provider.

Exceptions. Under the New York State law there is no prohibition for referrals in certain "exception" situations, as long as specified criteria are satisfied. These criteria, which are similar to the requirements under the Federal Stark law exceptions, are intended to ensure the statutory objective is achieved. The statute must be consulted to review the requirements for each exception under the New York State law to determine if an exception applies. The exceptions include the following:

* Services by a practitioner in the same group practice if the "group practice" definition as set forth in Sec. 238(5) of the Public Health law is satisfied;

* In-office ancillary services, if certain criteria are satisfied;

* Services to subscribers of an HMO or managed care program;

* In-patient hospital services;

* Referral of hospital inpatient, outpatient, or emergency services patients for clinical laboratory services, pharmacy services, or x-ray or imaging services provided by the hospital or its staff;

* A financial relationship between a general hospital and a practitioner if unrelated to the provision of the health services enumerated in the statute;

* Ownership of publicly traded securities (purchased on terms generally available to the public) in a corporation, with total assets exceeding $100,000,000;

* The service provider, practitioner, and referred patient are located in a rural area, provided disclosure is made to the patient of the ownership or investment interest and alternative sources of the service;

* The service is provided by a general hospital at which the referring practitioner is authorized to perform such services, and the ownership interest is in the general hospital itself and not in a subdivision thereof, provided disclosure is made to the patient of the ownership interest and alternative sources of the service; and

* The services are provided by a duly licensed Article 28 ambulatory surgical center, in conjunction with a surgical procedure performed by the referring practitioner, provided disclosure is made to the patient of the ownership interest and alternative sources of the service.

The New York State statute also exempts certain compensation arrangements from its purview, so that referrals would not be prohibited if the following remuneration arrangements exist:

* Payments for rental or lease of office space if certain criteria are satisfied;

* An arrangement for employment or administrative services between a general hospital and a practitioner or an immediate family member of such practitioner, if certain criteria are satisfied;

* An arrangement between a health-care provider other than a general hospital, and a practitioner for specific identifiable services if certain criteria are satisfied;

* Remuneration paid by a general hospital to a practitioner for recruitment purposes, if certain criteria are satisfied;

* Remuneration paid in an isolated financial transaction, such as a one-time sale of property, if certain criteria are satisfied;

* Payment by a group practice of the salary of a practitioner member of the group; and

* An arrangement between a provider and an immediate family member of a practitioner for employment of the immediate family member, where, on application by the parties, the Commissioner of Health determines there is no substantial potential for abuse.

Penalties. Health-care practitioners and providers will be jointly and severally liable to the payor for any amounts collected that are billed in violation of the New York State anti-referral law. Like the Federal Stark law, the New York State law also prohibits any contravention scheme or arrangement, such as a cross-referral arrangement, intended to indirectly promote referrals that would be prohibited if made directly.

Although not set forth expressly in the New York State anti-referral statute, there may be other sanctions that could result from a violation of the state's referral ban. These sanctions may include conviction under other sections of the New York Public Health Law that may be punishable by imprisonment, fine, civil monetary penalties, and/or a finding of professional misconduct.

Reporting and Record-Keeping Requirements. The New York State law includes a reporting requirement similar to the requirement contained in the Federal Stark law. It requires health-care providers who furnish the services enumerated in the statute to submit information to the State's Commissioner of Health every two years concerning the provider's ownership arrangement.

Disclosure Requirement. Unlike the Federal Stark law, the New York State law imposes a disclosure obligation on practitioners for all referrals that are not prohibited under the state law, unless a statutory exception would apply. It requires that, as of April 1, 1994, a practitioner must disclose to patients, on a form prescribed by recently adopted regulations, any financial relationship between the practitioner and the provider of any health or health related item or service, as well as alternative sources for the items or services, where the practitioner makes a patient referral to such provider.

The New Jersey State Anti-Referral Law

New Jersey prohibits a practitioner from referring a patient or directing an employee to refer a patient to a health-care service in which the practitioner, or his immediate family member, has a "significant beneficial interest."

The New Jersey anti-referral law defines a "practitioner" to include a physician, chiropractor, and podiatrist. A "significant beneficial interest" means any financial interest in a health-care service, and a "health-care service" is defined as a business entity that provides for testing for, or diagnosis or treatment of, human disease or dysfunction or dispensing of drugs or medical devices. A health-care service includes, but is not limited to, a bioanalytical laboratory, pharmacy, home health-care agency, rehabilitation facility, nursing home, hospital, or a facility that provides radiological or other diagnostic imaging services, physical therapy, ambulatory surgery, or ophthalmic services.

New Jersey's anti-referral law also contains a number of exceptions including the following:

* Beneficial interests acquired prior to July 31, 1991, if written disclosure is made to the patient and the disclosure form required by the statute is posted in the practitioner's office.

* Services provided at the practitioner's medical office, for which the patient is billed directly by and in the name of the practitioner.

* Radiation therapy services pursuant to an oncological protocol, or lithotripsy, or renal dialysis treatment, provided there is disclosure of the financial interest.

* Ownership of a building where space is leased to a person at the prevailing rate under a straight lease arrangement (i.e., a fixed fee for a fixed term).

* Any interest held in publicly traded securities.

The New Jersey law requires written disclosure to a patient for referrals to a health-care service that are permitted under the statute. However, the disclosure requirement does not apply in the case of a practitioner providing health-care services under a prepaid capitated contract entered into with a division of the Department of Human Services.

Violation of the New Jersey law can result in civil monetary penalties and the return of any monies acquired by means of an unlawful referral act or practice.

The Connecticut State Anti-Referral Law

The State of Connecticut enacted a form of referral law that only requires disclosure to patients of any ownership or investment interest in an entity that provides diagnostic or therapeutic services, or of any compensation for referral of a patient to such an entity. Connecticut's law is applicable to any "practitioner of the healing arts" and includes doctors of medicine, osteopathy, chiropractic, podiatry, and naturopathy. Although diagnostic services are not identified in the statute, therapeutic services are defined and include physical therapy, radiation therapy, intravenous therapy, rehabilitation services, occupational therapy, and speech pathology. Connecticut's referral law also contains exceptions for in-office ancillary services and ownership of publicly traded investment securities. Violation of the state law can subject the practitioner to disciplinary action.

What Actions Should the Health-Care Practitioner Take?

First, each health-care practitioner must determine if he or she has a financial relationship with any health-care provider and whether any referrals are being made by the practitioner to such provider. If referrals are being made or are anticipated, the health-care practitioner should confer with legal counsel to determine if one or more of the statutory exceptions may be applicable. The health-care practitioner should also ascertain from legal counsel what actions must be taken to comply with Federal and state reporting or disclosure requirements, if applicable.

If the referrals cannot be exempted under any of the statutory exceptions, the health-care practitioner must decide whether to divest his or her interest in the provider or terminate any compensation arrangement with the provider. Alternatively, the health-care practitioner may decide to maintain the financial relationship with the provider but cease making any patient referrals to the provider.

A similar evaluation and analysis must be made from the perspective of the health-care provider or entity.

As an accountant to either a practitioner or a health-care provider or entity, you are in a position to assist in the evaluation process, the record-keeping and reporting requirements, and the process of divesting the ownership interest or terminating the financial relationship if it should become necessary. *

Melvyn B. Ruskin, Esq., heads the health-law department of Ruskin, Moscou, Evans & Faltischek, P.C., a law firm with offices in Mineola, New York and Manhattan. Ellen F. Kessler, Esq., is an attorney in the health-law department of Ruskin, Moscou, Evans & Faltischek, P.C. and a registered nurse.

NOTICE TO PATIENTS--NEW YORK LAW

Regulations found in 10 NYCRR Sec. 34.1 et. seq. were promulgated by the state Public Health Council and became effective December 15, 1993. The regulations include a disclosure form, reproduced below, which must be provided to patients by practitioners as of April 1, 1994, for referrals not prohibited in the statute. The form must also be posted prominently in the practitioner's office, and a disclosure notation must be entered in the patient's record. The statutory form required by Sec. 34.1 reads as follows:

NOTICE TO PATIENTS

Because of concerns that there may be a conflict of interest when a physician refers a patient to a health-care facility in which the physician has a financial interest, New York State passed a law. The law prohibits me, with certain exceptions, from referring you for clinical laboratory services, pharmacy services, or x-ray or imaging services to a facility in which I or any of my immediate family members have a financial interest. If any of the exceptions in the law apply, or if I am referring you for other than clinical laboratory, pharmacy, or x-ray or imaging services, I can make the referral under one condition. The condition is that I disclose this financial interest and tell you about alternative places where you may go to obtain these services. This disclosure is intended to help you make a fully informed decision about your health care.

I or my immediate family members have a financial relationship with the following providers:

_______________________________________________________

_______________________________________________________

_______________________________________________________

For more information about alternative providers, please ask me or my staff. We will provide you with names and addresses of places best suited to your individual needs that are nearest to your home or place of work.

Name of Physician