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Home > Medical Professionals > Practice Resources > Practice Articles > Recent Changes in Academic Medical Center Exception Under Stark II

Recent changes in The Academic Medical Center Exception under Stark II: Relevance for the Academic Surgeon

Bhagwan Satiani M.D., M.B.A.
From the Division of Vascular Surgery,
Department of Surgery, The Ohio State University
College of Medicine, Columbus, Ohio
Email: Satiani-1@medctr.osu.edu
 

Congress in 1988 passed the Ethics in Patient referrals Act (EPRA) also known as Stark I named after the sponsor of the bill, U.S. Representative Pete Stark of California. (1) The EPRA bill prohibited physicians (or their immediate families) from referring Medicare patients to those entities with which they had a financial relationship for clinical laboratory services. In 1993 Centers for Medicare and Medicaid (CMS) formerly HCFA, issued further amendments that expanded the referral and billing prohibitions for clinical laboratory services to 10 other ‘designated health services’ (DHS) to include everything from physical and occupational therapy to inpatient and outpatient services. Even though Stark II became effective in 1995, these rules in the form of “Phase 1” were not finalized until January of 2001 and were effective January 4, 2002. (2) This second phase of the regulations responds to comments CMS received during the first phase of the regulations, were published in the Federal Register on Friday, March 26, 2004 and are effective on July 24, 2004. (3) The new regulations cover the remaining statutory exceptions not covered in the first phase, and create several new regulatory exceptions for financial relationships between physicians and healthcare entities.

Unlike the ‘safe harbors’ in the anti-kickback statute, where a financial relationship outside a safe harbor is not necessarily illegal, under Stark any relationship must fit into one of these exceptions to avoid prosecution. The goals of Stark were to negate any financial incentives for physicians when they are caring for their patients. Among the many ‘exceptions’ written into the Stark II Final Rule, the AMC exception is the usual exception chosen by academic entities to encompass most financial support arrangements. However, the AMC exception alone may be insufficient to allow for complex dealings between the hospital, the University, the faculty practice plan and the physician to be legally protected. Were it not for the ‘indirect compensation exception’, bonuses tied to academic achievement or clinical performance under the AMC would not qualify under Stark. Even though the Anti-Kickback Law is not the focus of this communication, AMC’s routine support of practice plans could be construed as “inducement” to refer patients to the hospital. Fortunately, these support arrangements are generally void of any unlawful intent, any correlation between payment and the desired conduct to refer patients, and finally at least conceptually all the entities within the AMC are well integrated (even though not single entities).

This discussion will concentrate on new changes or clarifications issued by HHS addressing solely the AMC exception under the Stark II Final Rule.

THE ACADEMIC MEDICAL CENTER’S EXCEPTION (Ownership/Investment and Compensation for payments to faculty of Academic Medical Centers (AMC’s).

Existing basic exception prior to new Rules.

Phase I of the final Stark II Law created an exception for full-time academic faculty because of the unique circumstances of employment. The typical AMC consists of multiple legal entities (the Hospital, College of Medicine and the faculty Practice Plan) that all fulfill the AMC’s three missions: education, medical research and service to the community.  Since the Hospital and the Medical College often support the faculty practice plan (tax-exempt) through which the faculty are salaried, the practice plan is designed to operate at a loss. Therefore, to fulfill its mission the hospital then transfers monies to support the faculty practice plan. CMS has recognized that faculty practice plans operate under “unique circumstances” and the interpretation of Stark and AKBS should acknowledge the “symbiotic” relationship among faculty, medical centers, and teaching institutions, and the educational and research roles of faculty in these settings.”(4) As long as the compensation paid to faculty for referring patients is in line with the aggregate compensation paid to other physicians in similar academic institutions (location, size, local marketplace), even productivity bonuses are not illegal. An “academic medical center” for purposes of this section consists of (i) An accredited medical school (including a university, when appropriate); (ii) An affiliated faculty practice plan that is a 501(c)(3) or (c)(4) of the Internal Revenue Code nonprofit, tax-exempt organization under IRS regulations (or is a part of such an organization under an umbrella designation); and (iii) 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. This exception is valid if:

a) the referring physician is a bona fide full time or substantial part-time employee of a component of an academic medical center

b) the referring physician is licensed to practice in the State and has a bona fide faculty appointment at the affiliated medical school, and provides substantial academic or clinical teaching services for which there is compensation as part of the employment relationship with the academic medical center

c) the total compensation for the previous 12 month period paid to the referring physician is set in advance, and in the aggregate does not exceed fair market value and does not take into consideration volume or value of referrals or other business generated by the physician. All compensation paid for research must be used solely for that purpose.

d) all transfers of monies between various components of the academic medical center must directly/ indirectly support the missions of teaching, research, indigent care or community service. Component is defined as: affiliated medical school, faculty practice plan, hospital, teaching facility, or departmental professional corporation.

e) the relationship of the various components of the academic medical center must be set in a written agreement and be adopted by the governing bodies

f) the physician’s compensation agreement must not violate the anti-kickback statute.
Change in the definition of an AMC:  During the comment period after Phase I, many respondents asked for greater flexibility for the practice plan, and wanted a change in the requirement that a majority of the affiliated hospital’s medical staff be ‘faculty members’ who then admitted the majority of patients to the hospital. The definition of an AMC in § 411.355 (e)(2) has been modified 1) to permit hospitals or health systems that sponsor four or more approved medical education programs. In addition, a change made allows a referring physician to be on the faculty of the affiliated medical school or the accredited academic hospital.

Change in tax exempt status: Prior to the new Phase II announcement, another feature defining an AMC was an affiliated faculty practice plan that was a 501(c)(3) or (c)(4) of the Internal Revenue Code nonprofit, tax-exempt organization under IRS regulations (or was a part of such an organization under an umbrella designation) (§ 411.355 (e)(2)(ii)). HHS has acknowledged that there are many variants of an AMC and as long as a faculty practice plan is part of a bona fide AMC and it supports the core teaching mission, it is eliminating the requirement that the practice plan be organized in any particular manner. This presumably does away with the necessity of a non-profit, tax- exempt organization. In addition, HHS also clarified that an AMC may have more than one affiliated practice plan, which can be affiliated with the teaching hospital, the medical school or the accredited academic hospital.

Change in requirement that majority of medical staff be faculty members.  It was previously required (§ 411.355 (e)(2)(iii) that a majority of the affiliated hospital’s medical staff be faculty members and that a majority of the hospital’s admissions be made by faculty members. HHS stated that believe in a strong core mission of AMC’s but have now changed the type of faculty of a teaching hospital to include courtesy and volunteer faculty. However, they also clarified that the majority of physicians on the medical staff must be on the faculty, but allowed aggregation of faculty from any affiliated medical school. They agreed with the suggestion that residents and non-physician professionals need not be included as medical staff.

Clarification of ‘referring physician’ in an AMC who provides ‘substantial academic or substantial teaching services.’ Due to some confusion of the previous wording defining what constitutes ‘substantial academic or substantial teaching services’, HHS has set up a new safe harbor that defines this activity. Any referring physician who spends at least 20 percent of his/her professional time or 8 hours per week providing academic services or clinical teaching services (or a combination) now fulfills the requirement.

Clarification of fair market value comparison to other academic or private practice physicians. It was previously understood that in establishing a ‘referring’ physician’s compensation by the AMC, that the proposed compensation would be compared to other AMC’s. HHS now clarifies that an AMC can use fair market values in either other AMC’s or private practice physician’s.

Clarification regarding use of research money for indigent care, community services and other missions.  HHS has previously maintained that the use of research money be restricted to bonafide research purposes. The new rules allow some flexibility so research money can be used for teaching, but because of the potential for abuse does not allow for use towards indigent care and community services.

Sanctions and penalties for violation of Stark Laws.5

	•	Denial of payment for DHS rendered in relation to a prohibited referral
	•	Timely refund of any amounts collected in violation of Stark Laws
	•	Civil monetary penalties of up to $15,000 per prohibited service
	•	Exclusion from Medicare and Medicaid
	•	Penalty of up to $100,000 if a physician and another entity enter into a plan to circumvent the law where they knew or should have known that the referrals would be prohibited

  

References

1. 42 U.S.C. § 1395nn(h)(3))
2. 42 U.S.C. § 1395x(b)(3); (2) 
3. Federal Register: Volume 69, No. 59, Friday March 26, 2004/ Rules and Regulations. Part III. Department of Health and Human Services
4. Federal Register Volume 66,  855-965 Department of Health and Human Services. (Jan 4, 2001)
5. Federal Register / Vol. 68, No. 247 / Department of Health and Human Services Wednesday, December 24, 2003 / Rules and Regulations, 42 CFR Part 411