Indiana Law Review Survey of Recent Developments in Health Care Law John C. Render* Introduction As in most other recent years, the 2002 survey year was marked by several significant and instructive developments in the ever-expanding field of health care law. The emphasis of this Survey is upon those issues of most immediate import to the health care law practitioner. This Survey is neither comprehensive nor exhaustive in detail, but instead focuses on important additions or modifications to law and regulation. In the discussion below, this article will address developments respecting: i) reimbursement under the Medicare and Medicaid programs; ii) fraud and abuse and the Stark law and regulations; iii) federal income taxation; iv) provider malpractice liability; v) labor and employment law; vi) Indiana health care legislation; vii) the federal HIPAA Regulations; and, viii) federal case law respecting the constitutionality ofcertain health care-related business and the reach of the ERISA preemption. I. Reimbursement A. Medicare: Regulations 1. Medicare Provider-Based Rule Changes.—On August 1, 2002, CMS 1 published changes to the provider-based rules in the annual update to Medicare hospital inpatient prospective payment systems. 2 In general, the status of an entity as either provider-based or freestanding determines the Medicare reimbursement amount it may receive for providing services. If an entity is considered provider-based, it may bill for services as though the services were provided in a hospital. Overall, these changes to the provider-based rules are positive for health care providers in that they broaden what were rather narrow requirements that an entity had to meet in order to obtain provider-based status. The effective date of the rule changes depends on the facility's original status. For a facility treated as provider-based as of October 1 , 2000, the new rules are effective for the facility's first cost reporting period beginning on or after July 1, 2003 . 3 The effective date for every other entity was October 1, 2002. Both procedural and substantive changes were made, including the recognition of a distinction between on-campus and off-campus provider-based entities. The final rule eliminates the need for an entity to seek CMS's conferral of * Partner, Hall, Render, Killian, Heath & Lyman, PSC. B.S., 1966, Butler University; J.D., 1971, Indiana University School of Law—Indianapolis. 1. Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services. 2. 42 C.F.R. § 413.65(b)(2) (2002). 3. Id. 1116 INDIANA LAW REVIEW [Vol. 36:1115 provider-based status. Rather, an entity now has the option voluntarily to self- attest to CMS that it qualifies as a provider-based entity. Moreover, an entity may begin billing as a provider-based entity even before CMS issues a ruling on an entity's provider-based status. 4 However, if an entity fails to submit a self- attestation statement to CMS, the entity may face serious adverse consequences. If no statement is submitted and CMS subsequently determines the entity does not qualify as a provider-based entity, the entity will be subject to overpayment recovery for provider-based services for all prior cost reporting periods. 5 Although CMS has not yet issued a uniform request or attestation form, the final rule did provide general guidelines an entity should follow in self-attesting. Regardless ofwhether an entity is an on-campus or off-campus entity, it should 6 : 1) provide the identity of the main provider and the facility or organization for which provider-based status is being sought; 2) identify each facility and state its exact location (that is, its street address and whether it is on-campus or off-campus); 3) list the date on which the facility became provider-based; and 4) provide "supporting documentation." The regulations state that an on-campus entity only has to "maintain documentation [supporting] the basis for its attestations and to make [it] available to CMS . . . upon request."7 However, an off-campus entity must submit documentation in support ofthe attestation. 8 The reason for this requirement is that the additional difficulty exists in determining whether an off-campus entity "is truly integrated with a main provider." 9 The final rule also makes significant substantive changes that offer relief to providers desiring to utilize management contracts or to operate as partners in joint ventures. As seen in the procedural modifications, these changes also treat on and off-campus entities differently. The provider-based rules formerly required an entity to operate under the main provider's ownership and control in order to qualify for favorable reimbursement status. As a result, all non- management employees had to be employed by the provider, essentially defeating the purpose of a management contract. However, the final rule eliminates this requirement and now permits a provider to operate through a management contract. 10 In addition, the final rule contains changes allowing an on-campus entity to be provider-based and to operate as a participant in a joint venture. 11 4. Id. §413.65. 5. 42 C.F.R. §413.65(1). 6. See 67 Fed. Reg. 49,982, 50,085 (Aug. 1, 2002) (to be codified at 42 C.F.R. pt. 405, 412, 413,485). 7. 42 C.F.R. § 413.65(b)(3)(i) (2002). 8. Id. § 413.65(b)(3)(h). 9. 67 Fed. Reg. 49,982, 5087 (Aug. 1, 2002) (to be codified at 42 C.F.R. pt. 405, 412, 413, 485). 10. 42 C.F.R. §413.65(2002). 11. Id. § 413.65(f). 2003] HEALTH CARE LAW 1117 Off-campus entities have not been afforded the same substantive relief and are still subject to the same provider-based requirements as in the original regulations. However, off-campus entities have been granted some flexibility in utilizing management contracts since CMS clarified that a managementcompany can hire or lease employees who provide patient care services "of a type that would be paid for by Medicare under a fee schedule." 12 Health care providers have generally welcomed these changes to the provider-based rules, particularly on-campus provider-based entities. Counsel for providers need to consider these changes in advising a client how to proceed in self-attesting and entering into a joint venture or management contract. 2. Prospective PaymentSystemforLong-Term Care Hospitals .—Prior to the recent publication of CMS's August 30, 2002 final rule implementing a prospective payment system for long-term care hospitals (individually, a "LTCH", and collectively, "LTCHs"), Medicare reimbursed these facilities through a reasonable cost-based payment system. 13 However, with the new prospective payment system (the "PPS"), LTCHs must now be more cost- effective in providing care. The PPS will develop diagnostic-related groups ("DRGs") into which patients will be categorized based on the expected treatment and resources each will need. Medicare reimbursement will be based on the DRGs. The new PPS took effect October 1, 2002, with a five-year phase-in period being adopted. Over the course ofthis period, the percentage of payments based on the PPS will increase while cost-based reimbursement payments will decrease. 14 A LTCH is defined as a facility characterized by having an average inpatient length of stay greater than twenty-five days. Initially there was some debate whether CMS should count only the days in which Medicare covered a patient's cost of care in determining whether a facility qualified as a LTCH. However, CMS clarified in the final rule that it will "count all the days in a Medicare patient's stay (covered and noncovered days) that is, total days, in the LTCH in calculating whether a LTCH meets the average 25-day length of stay requirement." 15 In charging Medicare beneficiaries, a LTCH may not bill a beneficiary for any amount greater than the deductible and coinsurance for which Medicare has made a full DRG payment. This rule applies even if the LTCH's cost of furnishing services to that beneficiary is greater than the PPS payment it received. 16 However, CMS created an exception to this rule for a Medicare payment for a short-stay outlier case that is less than the pertinent full LTCH- 12. Id. § 413.65(h)(1). 13. Medicare providers have been paid reasonable costs, as determined by CMS, necessary to the care and treatment of Medicare beneficiaries. 14. 42 C.F.R. §412.533(2002). 15. 67 Fed. Reg. 44,954, 55,971 (Aug. 30, 2002) (to be codified at 42 C.F.R. pt. 412, 413, 476). 16. 42 C.F.R. §412.507(2002). 1118 INDIANA LAW REVIEW [Vol. 36:1115 DRG payment amount. 17 In addition, the final rule requires a LTCH to furnish covered services to Medicare beneficiaries either directly or under an approved arrangement. ,8 Moreover, CMS will not pay any provider or supplier, but instead only the LTCH, for services provided to a Medicare beneficiary who is an inpatient of the LTCH. 19 Certain services not included as inpatient hospital services, however, may be excluded. The new regulation also requires that a LTCH establish a Quality Improvement Organization (a "QIO") to review and monitor the quality of the care provided by the LTCH. The LTCH's performance in the following areas is to be reviewed: the medical necessity, reasonableness, and appropriateness ofthe LTCH's admissions and discharges; the validity of the LTCH's diagnostic and procedural information; the completeness, adequacy and quality of the LTCH's furnished services; and the caliber of other medical services furnished by the LTCH to beneficiaries and the quality of LTCH's billing for such services.20 In addition, physicians are now required to complete a statement acknowledging the beneficiary's principal and secondary diagnoses and any major procedures performed. If, after reviewing the information submitted by the QIO, CMS determines that the LTCH has made any misrepresentations, CMS may deny payment or require the LTCH to take necessary actions to prevent or correct the inappropriate practice. 21 Finally, CMS must refer any determination ofa pattern of such inappropriate practice that it makes to the Health and Human Services Office of Inspector General for review. 22 3. Changes to the "Incident to " Billing Requirements.—For a service to be considered "incident to" the services a physician provides in an office and, therefore, to be covered by Medicare, a service had to be furnished either by the physician or by an individual who qualified as an employee of the physician. CMS issued a final rule on November 1, 2001, changing the regulations by eliminating this requirement. 23 This final rule only addresses coverage of "incident to" services that are provided in noninstitutional settings, which the regulation defines as "all settings other than a hospital or skilled nursing facility." 24 Therefore, "incident to" services provided in a physician's office by a non-employee may be covered by 17. Id. 18. Id. § 412.509(c). 19. Id. § 412.509(b). 20. Id. § 412.508. 21. Id. § 412.508(c). 22. Id. 23. Id. § 410.26. There are additional requirements that must be met in order for a service or supply item to be covered and that were not modified. These additional requirements prescribe that the service or supply item must be: 1) an integral part ofthe physician's professional service; 2) commonly rendered without charge or included in the physician's bill; 3) of a type that are commonly furnished in physicians' offices or clinics; and 4) furnished under the physician's direct personal supervision. 24. Id. § 410.26(a)(5). 2003 ] HEALTH CARE LAW 1119 Medicare Part B, provided that the other pertinent requirements are still satisfied. The regulation specifically states that Medicare Part B will pay for services and supplies incident to the service ofa physician (or other practitioner) if"furnished by the physician, practitioner with an incident to benefit, or auxiliary personnel." 25 The term "auxiliary personnel" is defined as any individual who acts under the supervision ofthe physician, regardless ofwhether that individual is an employee of the physician, a leased employee, or an independent contractor. 26 Although the final rule did not repeal or alter the other requirements, including requiring the physician directly to supervise the auxiliary personnel in furnishing the "incident to" service, this modification is still significant. Providers now have more flexibility in structuring their arrangements and will have a greater likelihood ofmeeting the requirements and obtaining coverage for services performed. B. Medicaid 1. Regulations.— a. Medicaidmanagedcare andpatients ' rights. 11—On June 14, 2002, CMS issued a final rule that provides to Medicaid beneficiaries enrolled in managed care plans protections and rights similar to those provided beneficiaries who are in private plans. 28 These regulations took effect on August 13, 2002. Considering that in the year 2000 approximately fifty-six percent of Medicaid beneficiaries received some service through a managed care plan, this final rule will positively affect the coverage of millions of people. 29 Emergency room care is one of the more significant additional rights Medicaid beneficiaries in managed care plans will receive. In general terms, managed care plans of Medicaid beneficiaries must pay for emergency room services: 1 ) though no prior authorization is granted; 2) regardless ofwhether the medical facility has an existing contract with the managed care plan; 3) though the beneficiary turns out not to have a condition that required immediate care; or, 4) if the beneficiary obtained emergency services based on the instructions of a practitioner or other representative of the managed care plan. 30 In addition, the regulations prohibit a managed care plan from limiting what constitutes an emergency medical condition by listing or defining symptoms or diagnoses. The regulation also outlines the general rule prohibiting a managed care plan 25. Id. § 410.26(b)(6). 26. Id. § 410.26(a)(1). 27. Please note that the regulations categorize the various types of managed care plans (i.e. MCO, PIHP, PAHP and PCCM), and sometimes create niche exceptions applicable to certain plans and not others. 28. 67 Fed. Reg. 40,989 (June 1 4, 2002) (to be codified at 42 C.F.R. pt. 400, 430, 43 1 , 434, 435, 438, 440, 447). 29. Id. at 40,992. 30. 42 C.F.R. §438.114(2002). 1120 INDIANA LAW REVIEW [Vol. 36:1115 from restricting communications and medical advice between a provider and a beneficiary. 31 This is significant in that it protects the beneficiary's interest by ensuring that a provider will not refrain from dispensing medical advice because the advised treatment plan is not covered by the managed care plan. Finally, the regulations have placed some procedural restrictions on managed care organizations. These restrictions include significantly limiting the marketing activities of managed care organizations, including prohibiting them from: 1) distributing marketing materials without State approval; and, 2) engaging in door-to-door, telephone or other cold-call marketing activities. 32 In addition, Medicaid managed care organizations are now required to have an internal grievance process that meets state-specified timeframes. 33 b. Transferring incomeprior to medicaid eligibility.—On May 1 , 2002, 405 Indiana Administrative Code title 405 rule 2-3- 1 . 1 was amended by final rule of the Indiana Office of the Secretary of Family and Social Services to specify the methodology for calculating the Medicaid Eligibility Penalty for Transferring Income. The rule states that when the right to a stream of income is transferred at less than fair market value, the penalty on the transferor is calculated based on the projected total income expected to be transferred during the individual's lifetime. It further provides that transferred "income" includes, but is not limited to: 1 ) transferring income producing real property; and 2) accepting less than fair market rental value on properties rented. The rule further provides that for purposes ofthe Medicaid eligibility penalty for transferring assets for less than fair market value, "assets" include any income or resources which the applicant or recipient or the applicant's or recipient's spouse is entitled to receive, but does not receive, because of a failure to take action to receive those assets. The rule also defines "net income" to mean income produced by real property after deducting allowable expenses of ownership. 34 Additionally, the rule permits transfers ofassets without affecting subsequent Medicaid eligibility if the transferor has purchased a "qualified long-term care insurance policy" 35 pursuant to Indiana Code section 12-15-39-6. If an asset is disregarded because it is used to purchase a qualified long-term care insurance policy, that asset and any income it otherwise would have generated are disregarded for purposes of Medicaid eligibility. The rule further specifies that a transfer of assets includes a transfer of the 31. Id. §438.102. 32. Id. §438.104. 33. Id. § 438.400-24. 34. Allowable expenses of ownership if the owner is responsible for the expenses include property taxes, interest payments, repairs and maintenance, advertising expenses, lawn care, property insurance, trash removal expenses, snow removal expenses, utilities, or any other expenses of ownership allowed by the Supplemental Security Income program, 42 U.S.C. § 1381 (2000). Non-allowable expenses of ownership include depreciation, payments on mortgage principal, personal expenses of the owner, and capital expenditures. 35. This term has the meaning set out in Ind. Admin. Code tit. 760, r. 2-20-30 (2002). 2003] HEALTH CARE LAW 1 121 right to receive income or a stream of income, the renting or leasing of real property, or the waiving of the right to receive a distribution from a decedent's estate, or the failure to take action to receive a distribution that the person is entitled to as a matter of law. A new subsection specifically addresses transfers ofstreams of income. The value ofsuch income is determined by calculating the greater of the fair market value or the actual amount of total net income that property or another income source is expected to produce during the lifetime of the transferor based on life expectancy tables. Other new subsections ofthe rule set out the methods to calculate value of income related to less than fair market rental arrangements and to calculate the value of income declined by a beneficiary, entitled to receive a benefit under law who fails to act to effectuate receipt ofthe benefit. The amended rule eliminated some uncertainty regarding types of income that can be retained or transferred by potential Medicaid beneficiaries or their spouses. 2. Statutes: Various Medicaid Program Modifications and Additions.— Effective March 26, 2002, Senate Enrolled Act 228 made various changes in the Medicaid program including provision for deposit of rebates obtained by the Medicaid program either as required under 42 U.S.C. § 1396r-8(a) (2000) or voluntarily negotiated under a prescription drug program that is established or implemented to provide access to prescription drugs for low income senior citizens. The Act also provides that any money remaining at the end of the State's fiscal year in the Indiana Prescription Drug Account 36 or the Indiana Tobacco Master Settlement Agreement Fund 37 shall be available for a prescription drug program established or implemented to provide access to prescription drugs for low income senior citizens. 38 In addition, money in either account may be used to match federal funds available under a Medicaid waiver under which a prescription drug program is established or implemented to provide access to prescription drugs for low income senior citizens. The Act also provides for the establishment of a Therapeutics Committee as a sub-committee of the Drug Utilization Review Board. 39 The Therapeutics Committee is composed of five physicians licensed under Indiana Code section 25-22-5, with one physician with expertise in each of the areas of family practice, pediatrics, geriatrics, psychiatric medicine, and internal medicine with a specialty in the treatment of diabetes. Two members of the Therapeutics Committee shall be pharmacists who are licensed under Indiana Code section 25-26 and who have a Doctor of Pharmacy degree or an equivalent degree. The purpose of the Committee is to identify pharmacological agents primarily characterized by a significant similarity of the bio-chemical or physiological mechanism by which these agents result in an intended clinical outcome. This allows the Committee to identify agents which are generically available and therapeutically equivalent to brand name drugs, thus assuring that 36. Ind. CODE §4-12-8-2 (2002). 37. See id. § 4-12-l-14.3(b)(l)-(3). 38. See id. § 4-12-8-2(b). 39. See id. § 12-15-35-20.5. 1 122 INDIANA LAW REVIEW [Vol. 36:11 15 the most cost-effective and clinically-appropriate drug is utilized. The Act also prohibits the use ofany prior authorization mechanism for the dispensing ofanti- anxiety, anti-psychotic, or anti-depressant drugs under the Medicaid program, except for specific formularies or prior authorization programs operated by managed care organizations. The Act also establishes a procedure for prior authorization for other types and classes of drugs and permits the Office of Medicaid Planning and Policy to limit quantities of drugs dispensed to beneficiaries. The purpose of Senate Enrolled Act 228 is to address the significantly increasing costs of pharmaceutical supplies for Medicaid beneficiaries. 3. Cases.— a. Wisconsin Department ofHealth and Family Services v. Blumer.™—In Blumer, the United States Supreme Court overturned the court of appeals and held that the income-first method, used by a majority of states to determine the Medicaid eligibility of institutionalized married individuals, is valid and may continue to be utilized. 41 In 1988, Congress enacted the Medicare Catastrophic Coverage Act ("MCCA"), which outlined certain requirements with which states had to comply in determining a couple's income and Medicaid eligibility. 42 Because spouses often have joint assets and income, the purpose of MCCA was to prevent the non-institutionalized spouse ("community spouse") from intentionally impoverishing himself or herselfjust so that the institutionalized spouse would qualify for Medicaid. 43 Therefore, the MCCA requires states to set a "minimum monthly maintenance needs allowance" ("MMMNA") for the community spouse. It also provides that a portion of the couple's resources, known as the "community spouse resource allowance" ("CSRA"), be reserved for the benefit ofthe community spouse. A state is prohibited from including this allowance in the institutionalized spouse's income in determining Medicaid eligibility. The MCCA grants a couple the right to a hearing to petition for a higher CSRA amount, which would often have the effect of increasing the institutionalized spouse's chances of qualifying for Medicaid sooner. Most states utilize the income-first method to determine whether a higher CSRA is necessary. The income-first method considers whether potential income transfers from the institutionalized spouse to the community spouse negate the need for an increase in the CSRA. Irene Blumer (the institutionalized spouse) applied for Medicaid coverage in 1996 through her husband and asked for an increase in their CSRA amount. In applying the income-first method, the county's hearing officer found that an increase was not permissible. Therefore, Blumer did not qualify for Medicaid at that time. 44 The Blumers appealed, arguing that the MCCA precluded the use 40. 534 U.S. 473 (2002). 41. Id. 42. 42 U.S.C. § 1396r-5 (2000). 43. Blumer, 534 U.S. at 480. 44. Id. at 487. 2003] HEALTH CARE LAW 1 1 23 of the income-first method in making such determinations. 45 The Court stated that the decision turned on whether "the words 'community spouse's income' may be interpreted to include potential, post-eligibility transfers of income from the institutionalized spouse" as permitted by the statute. 46 The Court found that the MCCA supported such interpretation, and in turn supported the use of the income-first method in implementing the MCCA. b. Indiana Family and Social Services Administration v. Culley.A1—In Culley, the Indiana Court of Appeals held that the transfer of assets to a funeral trust was not subject to a Medicaid transfer penalty. 48 Shortly after moving into a nursing home, Irene Culley purchased funeral trusts that were to provide burial funds for her two adult children. 49 Two days after making this purchase, Ms. Culley applied for Medicaid. 50 Through the Family and Social Services Administration ("FSSA"), the State of Indiana delayed her eligibility for seven months, claiming that she made the funeral trust purchases in order to decrease her net worth and become Medicaid-eligible.51 The court rejected this argument, noting, "[a] Medicaid applicant may, in some circumstances, use her assets as did Culley to purchase burial spaces for her family members without being subject to a transfer penalty."52 If, on the other hand, the Medicaid applicant transfers cash to a family member who then purchases a burial space, such a cash transfer is not exempt from the transfer penalty. 53 The court found no evidence to support the FSSA's conclusion that the transfers made were in cash rather than in the form of funeral trusts, as claimed by Ms. Culley. The court "accordingly [found] that the agency abused its discretion in determining that Culley's purchase offuneral trusts for her children and their spouses subjected her to a transfer penalty." 54 45. Id at 490. 46. IddX 489. 47. 769 N.E.2d 680 (Ind. Ct. App. 2002). 48. Id. 49. Id. at 682. 50. Id. 51. Id. The Indiana Administrative Code provides that "if a Medicaid applicant who is an inpatient at a nursing facility disposes of assets for less than fair market value during a period of thirty-six months before she is institutionalized and has applied for medical assistance (the 'look back date'), the applicant is ineligible for Medicaid for a certain period that is determined based on the value of the transferred assets." Id. at 683 (quoting Ind. Admin. Code tit. 405, r. 2-3-1.1 (2002)). 52. Id. 53. Mat 684. 54. Id. 1 1 24 INDIANA LAW REVIEW [Vol. 36:1115 II. Fraud and Abuse A. Cases In Healthscript, Inc. v. State, 55 the Indiana Supreme Court reviewed the Indiana Medicaid Fraud statute, Indiana Code section 35-43-5-7.1 (a)(1), and found that it was "too vague to meet the requirements of due process."56 Healthscript, Inc. ("Healthscript") provided pharmaceutical supplies to a long- term care facility and billed Medicaid for many of these supplies.57 The government alleged that Healthscript grossly overcharged Medicaid, when compared to charges made for the same supplies to private payors.58 Based upon this over-billing, Healthscript was charged with violating the Medicaid Fraud statute, which provides in relevant part, "A person who knowingly or intentionally . . . files a Medicaid claim, including an electronic claim, in violation of Indiana Code § 12-15 . . . commits Medicaid fraud, a Class D felony." 59 The Indiana Supreme Court framed the case around the following question: Was the criminal statute "sufficiently definite to put Defendant on notice that its alleged conduct was proscribed?" 60 The court found that the statute failed the requirements of due process because "[t]he effect of the statute, then, is to say that a provider is prohibited from filing a Medicaid claim 'in violation of nothing more specific than this vast expanse ofthe Indiana Code." 61 Due process requires that the law give "fair warning ... in language that the common world will understand, ofwhat the law intends to do if a certain line is passed." 62 In so holding, the Indiana Supreme Court placed the burden on the Indiana legislature to proscribe fraudulent conduct in a manner that is sufficiently precise to place the "common world" on notice. It remains to be seen how the Indiana legislature will respond. B. Stark II, Phase I, Final Regulations Section 6204 of the Omnibus Budget Reconciliation Act of 1989, 63 commonly known as the Stark Law,64 originally applied only to physician self- 55. 770 N.E.2d 810 (Ind. 2002). 56. Mat 812. 57. Id. 58. Mat 813. 59. Id. (quoting IND. CODE § 35-43-5-7. 1(a)(1) (2002)). 60. Id. 61. Mat 816. 62. Id. (quoting United States v. Bass, 404 U.S. 336, 348 (1971), where the United States Supreme Court described the rule of lenity as a component of due process). 63. Pub. L. 101-239, 103 Stat. 2106 (1989) (codified as amended at 42 U.S.C. § 1395nn (2000)). 64. So named for its progenitor, California Representative Fortney Pete Stark. 2003] HEALTH CARE LAW 1 1 25 referrals to clinical laboratories. The Stark Law was amended in 199365 to extend to physician self-referrals encompassing a wide array ofdesignated health services ("DHS"), 66 after which the law was commonly known as Stark II. Stark II enabled the Health Care Financing Administration ("HCFA"), now known as the Centers for Medicare and Medicaid Services ("CMS"), 67 to issue regulations implementing the statutory prohibitions against physician self-referrals. Stark II proposed regulations were issued in 1998, 68 and in 2001 the long-awaited Stark II final regulations (the "Phase I" regulations) 69 were promulgated. CMS has been promising Phase II final regulations under the Stark Law since it published the Phase I regulations. This portion of the article will focus on the Phase I regulations and will identify the substantive changes introduced into the Stark Law in that final rule. The bulk of the Phase I regulations became effective on January 4, 2003. 1. The General Statutory Prohibition.—In bold strokes, the Stark Law provides that if a physician or a member of a physician's immediate family has a financial relationship with a health care entity, the physician may not make referrals to that entity for the furnishing of DHS under the Medicare program, and the entity may not bill for the services, unless a statutory or regulatory exception exists. 70 The Social Security Act, which contains the Medicare and Medicaid laws, further extends the prohibitions of the Stark Law to patients covered by other federally funded health plans such as Medicaid. The Stark Law's numerous exceptions and special rules necessitate rather detailed regulations to implement the statutory prohibitions. 2. Key Provisions in the Phase I Regulations.—Source of the important provisions of the Phase I Regulations are noted below. a. "Financial Relationship" between physician and entity.—Financial relationships under the Stark Law include two varieties: ownership or investment interests, and compensation arrangements. 71 The Phase I regulations 65. Pub. L. 103-66, 107 Stat. 312 (1993) (codified as amended at 42 U.S.C. § 1395nn (2000)). 66. DHS include the following: 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 and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment, and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. 42 C.F.R. § 1 395nn(h) (2002). 67. Effective July 1 , 200 1 , HCFA changed its name to the Centers for Medicare and Medicaid Services. For consistency, this article continues to refer to the agency as CMS throughout. 68. 63 Fed. Reg. 1659 (Jan. 9, 1998) (to be codified at 42 C.F.R. pt. 411, 424, 435, 455). 69. Physicians Referrals to Health Care Entities with Which They Have Financial Relationships, 66 Fed. Reg. 856 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 41 1, 424). 70. 42 U.S.C. § 1395nn(a)(l) (2000). 71. Physician Ownership of, and Referral of Patients or Laboratory Specimens to, Entities Furnishing Clinical Laboratory or Other Health Services, 42 C.F.R. § 41 1 .354(a) (2002). 1126 INDIANA LAW REVIEW [Vol. 36:1115 provide a definition of "financial relationship," and distinguish between direct and indirect financial relationships. 72 The indirect financial relationship concept is of particular interest, as the Phase I regulations introduced a "knowledge" element into the equation, regardless of how remote the financial relationship may be. Entities are not under an "affirmative obligation to inquire as to indirect financial relationships," but have a duty of reasonable inquiry in the circumstances if there is reason to suspect an indirect financial relationship between the entity and a referring physician. 73 Entities and physicians are subject to the Stark Law prohibitions where the indirect financial relationship is deliberately ignored or recklessly disregarded. 74 The relevant test is whether some information that is available to the entity would put a reasonable person on alert that an indirect financial relationship may exist.75 On its face, the indirect compensation arrangement definition excludes most compensation arrangements, such as square footage space leases, hourly or fixed medical director contracts, and any arrangement where the physician is paying the money. 76 Further, commentary to the Phase I regulations states that this definition encompasses the "universe" of financial relationships that may be subject to the Stark Law prohibitions.77 While it may not be CMS' intent to exclude such arrangements from the purview of the Stark Law, this issue must be addressed in Phase II, and most likely will be. Since the purpose for the knowledge requirement is clearly to give some protection to the entity paying money ultimately received by a physician, clarification ofthe Phase I regulations is needed so that many of the compensation arrangements excluded from the definition of indirect compensation arrangements may be protected. b. Remuneration.—In the Phase I regulations, CMS modified the definition of the term "remuneration" to exclude the furnishing of items, devices, or supplies that are used solely to collect, transport, process, or store specimens for the entity furnishing the items, devices, or supplies or that are used solely to order or communicate the results oftests or procedures for the entity. 78 Ifan item can be used for anything other than these purposes, the item thus constitutes remuneration and thereby gives rise to a prohibition under the Stark Law. c. Referrals.—The term "referral" is worded broadly to include most requests by a physician for a DHS or a service that includes a DHS, including certifying or recertifying the need for such a service as well as services furnished by or under the supervision of a consultative physician, and including written, oral, or electronic referrals. This term also includes the establishment of a plan of care by a physician that includes the provision of a DHS. Under the Phase I regulations, an exception to the definition of "referral" 72. Id. 73. Id. §411.354(b)-(c). 74. Id. §411.354(b)(5)(I)(B). 75. 66 Fed. Reg. 856, 865 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 411, 424). 76. 42 C.F.R. § 41 1.354(c)(2) (2002). 77. Id. 78. Id. §411.351. 2003] HEALTH CARE LAW 1127 provides that self-referrals personally performed are not referrals for purposes of the Stark Law prohibitions.79 Further, a request by a pathologist for clinical diagnostic laboratory tests and pathological examination services, by a radiologist for diagnostic radiology services, or by a radiation oncologist for radiation therapy, is not deemed to be a referral if such request results from a consultation initiated by another physician and such tests or services are furnished by or under the supervision of such pathologist, radiologist, or radiation oncologist. 80 "Consultation" is defined in the Phase I regulations as a professional service furnished to a patient by a physician that meets three conditions. First, the physician's opinion or advice regarding evaluation and/or management of the specific medical problem must be requested by another physician. Second, the request and need for the consultation must be documented in the patient's medical record. Third, after the consultation is provided, the physician must prepare a written report of his or her findings and the report must be provided to the physician who requested the consultation. In addition, for radiation therapy services provided by a radiation oncologist, a course ofradiation treatments over a period oftime will be considered to be pursuant to a consultation, provided the radiation oncologist communicates with the referring physician on a regular basis about the patient's course of treatment and progress. 81 d. Volume or value ofreferrals and other business generated standards.— Compensation (including time-based or per unit ofservice-based compensation) will be deemed not to take into account "the volume or value of referrals" if the compensation is fair market value for services or items actually provided and does not vary during the course of the compensation agreement in any manner that takes into account referrals of DHS.82 Similarly, compensation (including time-based or per unit ofservice-based compensation) will be deemed to not take into account "other business generated between the parties" so long as the compensation is fair market value and does not vary during the term of the agreement in any manner that takes into account referrals or other business generated by the referring physician, including private pay health care business. 83 Under the Phase I regulations, CMS made it clear that compensation paid under aper-click lease arrangement will be considered "set in advance" ifa time- based or per unit of service-based amount is stated in the initial agreement between the parties in sufficient detail so it can be objectively verified. 84 Where a per-click payment is set at fair market value and does not change during the term of the lease, the compensation under the lease will be considered "set in advance." Consequently, such an arrangement may satisfy an exception to the 79. Id. 80. Id. 81. Id. 82. Id. §41 1.354(d)(2). 83. Id. §41 1.354(d)(3). 84. Id. § 41 1.354(d)(1); see 66 Fed. Reg. 855, 866-67, 876-78 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 411,412). 1 1 28 INDIANA LAW REVIEW [Vol. 36:1115 Stark Law, such as the rental of equipment or fair market value exception, so long as the other elements of the exception are satisfied. e. Generalrequirement offair market value.—Fair market value is discussed at length in the Phase I regulations. The burden of proving "fairness" is on the parties to the arrangement. Although no single approach is appropriate for each situation and the amount of documentation that will be sufficient to confirm fair market value will vary with the facts of each arrangement, CMS made the following suggestions in its preamble to the Phase I regulations: • obtain good faith, written assurances as to fair market value from the party paying or receiving the compensation (not a determinative assurance); • obtain a list of comparable and contemporaneous lease arrangements; • obtain an appraisal from a qualified independent valuation expert; • obtain documentation ofsimilar public transactions, where available, or similar public transactions involving comparable parties in similar areas, where local comparable transactions are unavailable; • obtain documentation of cost plus a reasonable rate of return on investment on leases of comparable medical equipment from disinterested lessors; • obtain pricing lists for similar equipment; local comparable transactions between parties in a position to refer business between them are less compelling than where no referral relationship exists; and • internally-generated fair market value surveys or comparisons are less compelling than external independent information. 85 The term "fair market value" means "the value in arm's length transactions, consistent with the general market value." 86 "General market value" means "the price that an asset would bring, as the result of bona fide bargaining between well-informed buyers and sellers" who are not otherwise in a position to generate business for the other party, or, "the compensation that would be included in a service agreement," as a result of bonafide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. 87 Usually, the fair market value price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement. 88 85. 66 Fed. Reg. 856, 944-45 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 411, 424). 86. 42 C.F.R. §411.351(2002). 87. See 66 Fed. Reg. 856, 944 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 41 1, 424). 88. Id. 2003] HEALTH CARE LAW 1 1 29 With respect to rentals and leases, "fair market value" means the value of rental property for general commercial purposes (not taking into account its intended use). 89 In the case of a lease of space, this value may not be adjusted to reflect the additional value a prospective lessee or lessor would attribute to the proximity or convenience to the lessor when the lessor is a potential source of patient referrals to the lessee. 90 For purposes ofthis definition, a rental payment does not take into "intended use" if it includes costs incurred by the lessor in developing or upgrading the property or its improvements. 91 / Physician services exception.—The exception for physician services applies to "incident to" services that are physician services under 42 C.F.R. § 410.20(a) and not to other services. 92 Such services must be furnished by or under the supervision of another physician who is a member of the referring physician's group practice or is a physician in the same group practice as the referring physician. 93 A "physician in the same group practice" is defined in the Phase I regulations to include employees and independent contractors, thus expanding the scope of the special treatment afforded to group practices. 94 g. The in-office ancillary services exception.—The in-office ancillary services exception applies to services and a narrowly-tailored list of durable medical equipment ("DME") items that are furnished personally by the referring physician, a physician who is a member of the same group practice as the referring physician, or an individual who is supervised by the referring physician or by another physician in the group practice. 95 For purposes of this exception, the supervision must comply with all other applicable Medicare payment and coverage rules for the services. 96 The supervision requirement was modified in the Phase I regulations to reflect Medicare requirements. The in-office ancillary service exception requires that services be furnished in the "same building" in which the referring physician furnishes substantial physician services that are unrelated to the furnishing ofDHS or in a "centralized building" from which the group practice provides DHS.97 The "same building" is defined as one or more structures sharing a common street address.98 Exterior spaces, interior parking garages, and mobile units are not part of the "same 89. Id. 90. Id. 91. Id. 92. 42 C.F.R. § 411.355(a) (2002). 93. Id. 94. Id. §411.351. 95. Id. § 411.355(b). 96. Id. 97. Id. § 411.355(b)(2). A designated health service is "furnished" for purposes of this exception in the location where the service is actually performed upon a patient or where an item is dispensed to a patient in a manner that is sufficient to meet the applicable Medicare payment and coverage rules. 98. Id. § 411.351; we 66 Fed. Reg. 856, 952 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 411,424). 1130 INDIANA LAW REVIEW [Vol. 36:1 115 building." 99 This definition allows for sharing arrangements for groups working at the same street address. Further, according to CMS commentary in the preamble to the Phase I regulations, if a group practice uses an independent contractor to furnish or supervise services, the service must be in the "same building" as opposed to a "centralized building." 100 In the case of a referring physician whose principal medical practice consists of treating patients in their private homes, the "same building" requirements ofthe exception are met if the referring physician (or a qualified person accompanying the physician, such as a nurse or technician) provides the DHS contemporaneously with a physician service that is not a DHS provided by the referring physician to the patient in the patient's private home. 101 A "private home" does not include a nursing, long- term care, or other facility or institution. 102 The term "centralized building" is defined in the Phase I regulations as all or part ofa building, including a mobile unit, that is owned or leased on a full-time basis, and is used exclusively by the group practice. 103 Shared facilities are not centralized buildings, though a group may provide services to other providers (e.g., purchased diagnostic tests) from within its centralized building. 104 Further, a group may have more than one centralized building. 105 In-office ancillary services must be billed by the physician performing or supervising the service, the performing or supervising physician' s group practice, an entity that is wholly owned by the performing or supervising physician (or by that physician's group practice), or an independent third party billing company acting on behalf of one ofthe foregoing. 106 For purposes of this requirement, a group practice may have, and bill under, more than one Medicare billing number, subject to any applicable Medicare program restrictions. 107 h Grouppractice definition.—The physician services and in-office ancillary service exceptions contemplate a physician group practice situation, although it is wrong to say that there exists a "group practice" exception under Stark II. A physician group must first qualify as a "group practice" as defined under the law, and then it may be eligible to meet the above exceptions. Under Stark II, the term "group practice" means a physician practice organized as a single legal entity with at least two physicians who are "members of the group" (whether employees or direct or indirect owners). 108 Non- physicians may own an interest in the group practice, provided that at least two physicians also own an interest in the group. Each member of a group practice 99. 42 C.F.R. 41 1.351 (2002). 100. 66 Fed. Reg. 866, 887 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 411, 424). 101. 42 C.F.R. § 41 1.355(b)(6) (2002). 102. Id. 103. Id. §411.351. 104. Id. 105. Id 106. Id. §41 1.355(b)(3). 107. Id. 108. Id. §41 1.352(a), (b). 2003] HEALTH CARE LAW 1131 "must furnish substantially the full range of patient care services that the physician routinely furnishes, including medical care, consultation, diagnosis, and treatment, through thejoint use ofthe group's shared office space, facilities, equipment, and personnel." 109 Members ofthe group must also furnish at least seventy-five percent oftheir total patient care services through the group, and these services must be billed as receipts ofthe group under a billing number assigned to the group. 1 10 In addition, "members of the group must personally conduct no less than [seventy-five] percent of the physician-patient encounters of the group practice." 111 This requirement effectively limits the extent to which independent contractors may participate in a group practice. To qualify as a group practice, the practice's overhead expenses and income must be distributed according to predetermined methods, though the distribution mechanism may be modified prospectively from time to time. 112 A group practice must also be a "unified business," with a "centralized decision-making body"; "consolidated billing, accounting, and financial reporting"; and "centralized utilization review." 113 This requirement is intended to set some "general parameters of integration." 114 As such, some type of "board" and financial integration are necessary. In addition, no member of the group practice may be compensated in a manner that reflects the volume or value ofreferrals by the group member except through certain productivity bonuses and profit shares. 115 A group practice member may receive a share of the group's overall profits, or a productivity bonus based on that physician's personally performed services, provided that the calculation of such payment does not reflect in any manner the volume or value ofreferrals ofDHS by the physician. 116 Supporting documentation verifying the method used to calculate the profit shares or productivity bonus and the resulting amount ofcompensation must be made available to the secretary upon request. ! 17 A group practice must select an appropriate allocation mechanism for purposes of DHS profit distribution. Several such allocation options are presented in the Phase I regulations. 1 18 Methods other than those presented in the regulations, such as ownership or seniority, are acceptable. Regardless, such other methods must be reasonable, objectively verifiable, and indirectly related to referrals, and a group should maintain objective documentation of 109. Id. § 411.352(c). 110. Id. §41 1.352(d). 111. Id. § 411.352(h). 112. Id. §41 1.352(e). 113. Id. §411.352(f)(l). 1 14. 66 Fed. Reg. 856, 906 (Jan. 4, 2001) (to be codified at 42 C.F.R. pt. 41 1, 424). 115. 42 C.F.R. §41 1.352(h) (2002). 116. Id. §411.352(i). 117. See id. §411.352(i)(4). 118. See id. § 411.352(i)(3). 1132 INDIANA LAW REVIEW [Vol. 36:1115 compliance. 119 A potentially problematic issue is found in commentary to the final rule wherein CMS states that it believes that "a compensation structure does not directly take into account the volume or value of referrals if there is no direct correlation between the total amount of a physician's compensation and the volume or value of the physician's DHS referrals (regardless of whether the services are personally performed)." 120 Ifthe services are personally performed, however, there is no referral within the meaning of the Stark Law. 121 CMS should clarify this commentary to reflect that there be no direct correlation between volume or value of referrals. i. Prepaidplans.—Phase I provides a new exception for services furnished by a specified federally qualified HMO or prepaid health plan that has a contract with Medicare. 122 This exception does not include "services provided to enrollees in any other plan or line of business offered or administered by the same organization." 123 An additional regulation that would extend this protection to Medicaid prepaid plans is not yet final. 124 j. Academic medical centers.—CMS was persuaded that the peculiarities of the academic setting warranted a special exception for DHS furnished by academic medical centers. Thus, an exception to the Stark Law for any financial relationship applies where a referring physician is a bona fide employee of an academic medical center on a full-time or substantial part-time basis. 125 The physician may also be employed by or under contract with a component of an academic medical center, including an affiliated medical school, faculty practice plan, hospital, teaching facility, institution ofhigher education, or departmental professional corporation. 126 In addition, this exception requires that the physician be licensed to practice medicine in the State, have a bona fide faculty appointment at the affiliated medical school, and provide substantial academic or clinical teaching services, compensated as part of the employment relationship. 127 This exception also includes requirements that the physician's compensation be set in advance in an amount not greater than the fair market value of the services provided and be determined in a manner that does not reflect the volume or value ofany referrals or other business generated by the referring physician within the academic medical center. 128 119. See id. § 411.352(i)(2)(iv). 120. See 66 Fed. Reg. 856, 908 (Jan. 4, 2001). 121. See supra note 70 and accompanying text. 122. See 42 C.F.R. § 41 1.355(c) (2002). 123. See id. 124. See 66 Fed. Reg. at 91 1 (referring to a proposed regulation to be codified at 42 C.F.R. §435.1012). 125. See 42 C.F.R. §41 1.355(e). 126. See id. 127. See id. 128. See id. 2003] HEALTH CARE LAW 1133 k. Fair market value compensation arrangements.—Another new exception created by the Phase I regulations provides that certain fair market value compensation arrangements are not proscribed financial relationships under the Stark Law. 129 This exception applies to an arrangement between an entity and a physician or any group of physicians (whether or not a "group practice" within the meaning of the Stark Law) for the provision of items or services by the physician or group practice to the entity, if the arrangement is set forth in an agreement that meets the following conditions: (1) It is in writing, signed by the parties, and covers only identifiable items or services, all ofwhich are specified in the agreement. (2) It specifies the timeframe for the arrangement, which can be for any period oftime and contain a termination clause, provided the parties enter into only one arrangement for the same items or services during the course of a year. An arrangement made for less than 1 year may be renewed any number of times if the terms of the arrangement and the compensation for the same items or services do not change. (3) It specifies the compensation that will be provided under the arrangement. The compensation must be set in advance, be consistent with fair market value, and not be determined in a manner that takes into account the volume or value of any referrals or any other business generated by the referring physician. (4) It involves a transaction that is commercially reasonable (taking into account the nature and scope of the transaction) and furthers the legitimate business purposes of the parties. (5) It meets a safe harbor under the anti-kickback statute in [42 C.F.R.] §1001.952, has been approved by the OIG under a favorable advisory opinion issued in accordance with [42 C.F.R. part] 1008, or does not violate the anti-kickback provisions in section 1 128B(b) ofthe Act. (6) The services to be performed under the arrangement do not involve the counseling or promotion ofa business arrangement or other activity that violates a State or Federal law. 130 CMS has stated that this exception may be used even if another exception potentially applies. Thus, as this exception has no term requirement, it has advantages over several other similar exceptions that are otherwise burdened with a term limitation (e.g., the personal services arrangement exception 131 ). /. Non-monetary compensation up to $300.—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 "is not a financial relationship within the meaning of the Stark Law" if all of the following conditions are satisfied: 129. See 42 C.F.R. § 411.357(1) (2002). 130. Id. 131. See 42 C.F.R. §41 1.357(d). 1134 INDIANA LAW REVIEW [Vol. 36:1115 (1) The compensation is not determined in any manner that takes into account the volume or value ofreferrals 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, section 1 128B(b) of the Act. 132 m. Definitions ofthe designatedhealth services.—In the Phase I regulations, CMS defined the first four categories of DHS by using CPT and HCPCS codes attached to the regulations with updates posted on the CMS web site. These categories include: ( 1 ) clinical laboratory services; (2) physical therapy services, occupational therapy services, and speech-language pathology services; (3) radiology and certain other imaging services; and (4) radiation therapy services and supplies. Modifications to the list occurred on November 1, 2001, 133 and April 26, 2002. 134 In commentary to the Phase I regulations, CMS stated that it has included the professional component in each case in which a professional component is included in the code representing a DHS. 135 However, it further stated that "[a]s a practical matter the professional component ofmany services will be excluded from the definition of a referral as services personally performed by the referring physician." 136 The Phase I regulations clarified that DHS "means only DHS payable, in whole or in part, by Medicare." 137 (The Medicaid aspect will be addressed in Phase II.) Further, DHS do not include services that are reimbursed by Medicare as part of a composite rate (e.g., ambulatory surgical center services or skilled nursing facility Part A payments) unless the DHS themselves reflect a composite rate (e.g., inpatient hospital services). 138 However, entities that perform consolidated billing (e.g., SNF Part B) will be deemed to provide DHS. 139 n. Remuneration and the exceptions in section 1877(h)(1)(C) ofthe Act.— On November 22, 2002, CMS published a final rule extending the effective date ofthe last sentence of section 41 1 .354(d)(1). 140 Consequently, the rule reflected 132. Id. §411.357(k). 133. Medicare Program; Revisions to Payment Policies and Five-Year Review of and Adjustments to the Relative Value Units Under the Physician Fee Schedule for Calendar Year 2002, 66 Fed. Reg. 55426, 55311 (Nov. 1, 2001). 134. Medicare Program; Revisions to Payment Policies and Five-Year Review of and Adjustments to the Relative Value Units Under the Physician Fee Schedule for Calendar Year 2002; Correction, 67 Fed. Reg. 20681-87 (Apr. 26, 2002). 135. See 66 Fed. Reg. 856, 924 (Jan. 4, 2001). 136. Id. 137. See 42 C.F.R. § 41 1.351 (2002). 138. Id. 139. See 66 Fed. Reg. 856, 923 (Jan. 4, 2001). 140. Extension of Partial Delay of Effective Date, 67 Fed. Reg. 70322 (Nov. 22, 2002). The last sentence of Sec. 41 1.354(d)(1) reads as follows: 2003] HEALTH CARE LAW 1135 in the last sentence ofsection 4 1 1 .354(d)(1), which would have become effective January 6, 2003, will not become effective until July 7, 2003. 141 Section 411.3 54(d)( 1 ) ofthe Stark Law relates to percentage compensation arrangements for physicians. This extension ofthe one-year delay in the effective date ofthat sentence will give CMS additional time to reconsider the definition of compensation that is "set in advance" as it relates to percentage compensation methodologies in order to avoid unnecessarily disrupting existing contractual arrangements for physician services. 142 CMS expects a future final rule with comment period, entitled "Medicare Program: Physicians' Referrals to Health Care Entities With Which They Have Financial Relationships" (Phase II), to further address this issue prior to the July 7, 2003 effective date. 143 CMS received numerous comments regarding the Phase I regulations indicating that hospitals, academic medical centers, medical foundations and other health care entities commonly pay physicians for their professional services using a formula that takes into account a percentage of a fluctuating or indeterminate measure (for example, revenues billed or collected for physician \ 144 services). Several commentators pointed out that this aspect of the [Phase I regulations], which is applicable to academic medical centers and medical foundations (among others), is inconsistent with the compensation methods permitted under the statute for many physician group practices and employed physicians (that is, neither section 1877(h)(4)(B)(i) of the Act nor section 1877(e)(2) of the Act contains the "set in advance" requirement). 145 Recognizing that hospitals, academic medical centers, medical foundations and other health care entities would have to restructure or renegotiate thousands of physician contracts to comply with the language in section 411.354(d)(1) regarding percentage compensation arrangements, CMS has prescribed this one- year delay of the effective date in order to reconsider the definition of compensation that is "set in advance" as it relates to percentage compensation Percentage compensation arrangements do not constitute compensation that is "set in advance" in which the percentage compensation is based on fluctuating or indeterminate measures or in which the arrangement results in the seller receiving different payment amounts for the same service from the same purchaser. 141. Section 4 1 1 .354(d)( 1 ) was promulgated in the final rule entitled "Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities With Which They Have Financial Relationships," published in the Federal Register on January 4, 2001 (66 Fed. Reg. 856). A one- year delay ofthe effective date ofthe last sentence in § 41 1.354(d)(1) was published in the Federal Register on December 3, 200 1 (66 Fed. Reg. 60 1 54). This final rule further delays the effective date until July 7, 2003. 142. 67 Fed. Reg. at 70323. 143. Id. 144. See id. 145. Id. 1136 INDIANA LAW REVIEW [Vol. 36:1115 methodologies 146 C. Federal Fraud andAbuse Anti-Kickback Statute: Ambulance Replenishing Safe Harbor On December 4, 200 1 , the Department ofHealth and Human Services Office of Inspector General ("OIG") issued a final rule 147 establishing a safe harbor exception to the Fraud and Abuse Anti-Kickback Statute 148 for ambulance restocking arrangements ("Safe Harbor"). The Safe Harbor, which became effective January 3, 2002, protects certain arrangements involving hospitals or other receiving facilities 149 that replenish drugs and medical supplies (including linens) used by ambulance providers 150 (and first responders) when transporting patients to such hospitals or receiving facilities. The Safe Harbor does not protect arrangements for the general stocking ofthe ambulance inventories, but only the gifting or transfer of drugs and supplies that replace comparable drugs and supplies that are administered by the ambulance provider to a patient before the patient is delivered to the receiving facility. The OIG's stated goal is to provide "safe harbor protection for the vast majority of ambulance restocking arrangements that further the important mission of ensuring that pre-hospital emergency medical services are timely, effective and efficient." 151 Ambulance restocking arrangements implicate the Anti-Kickback Statute because the receiving facility provides something of value to the ambulance provider, who is a potential referral source of federal healthcare business. 152 However, properly structured restocking arrangements can be lawful and allow for ambulances to be ready for emergency use at all times. 153 146. Id. 147. Ambulance Replenishing Safe Harbor Under the Anti-Kickback Statute, 66 Fed. Reg. 62979 (Dec. 4, 2001) (codified at 42 C.F.R. §1001.952(v)). 148. 42 U.S.C. §§1320a-7b(b) (1994 & Supp. II 1996). 149. References to "receiving facilities" in the Safe Harbor include hospitals, urgent care clinics or community health clinics that provide emergency services. See 42 C.F.R. § 1001 .952(v). 1 50. Unless otherwise specified, the term "ambulance providers" as used in this article and the Safe Harbor refers to independent ambulance suppliers and hospital-based providers, including under-arrangements providers. See id. 151. Ambulance Replenishing Safe Harbor Under the Anti-Kickback Statute, 66 Fed. Reg. at 62980. 152. See id. 153. Id. While the OIG issued a non-favorable advisory opinion regarding an ambulance restocking arrangement in 1997 (OIG Advisory Opinion No. 97-6 (October 8, 1997)), it explained that the particular arrangement that was the subject of that advisory opinion presented an "unusual set of facts." Id. The OIG has since issued several favorable opinions approving restocking arrangements that it believed were more representative oftypical restocking arrangements. Id. ; see OIG Advisory Opinions Nos. 98-7 (1998); 98-13 (1998); 98-14 (1998); and 00-09 (2000). In the comments to the final rule, the OIG indicated that some hospitals have used the unfavorable 97-6 opinion as a pretext for the hospitals' decisions to terminate, or decline to participate in, restocking 2003] HEALTH CARE LAW 1137 The Safe Harbor protects three categories of replenishing: general restocking, fair market value restocking, and government-mandated restocking. 154 An arrangement needs only to satisfy the conditions of one of these categories to be protected by the Safe Harbor. 155 In furtherance of the goal to enhance emergency services, the ambulance that is replenished must be used to provide an average of three emergency ambulance services per week, as measured over a reasonable period oftime, to qualify for Safe Harbor protection. 156 In addition, the regulation includes two sets of conditions: one set that is generally applicable to all three restocking categories, 157 and another set that includes conditions that are specific to each of these categories. 158 Therefore, to qualify for the Safe Harbor protection, a restocking arrangement must meet all of the conditions set forth in the first set ofconditions and all ofthe conditions applying to any one category in the second set of conditions. 159 The general conditions that are applicable to all restocking arrangements include the following: appropriate billing of federal health care programs (e.g., no duplicate billing and billing must be consistent with all applicable program payment and coverage rules and regulations); documentation of the restocking, which is maintained for a period of five years (the pre-hospital trip sheet or patient encounter form may be sufficient to satisfy this requirement); the restocking arrangement must not be conditioned on, or otherwise take into account, the volume or value ofany referrals or other business generated between the parties for which payment may be made in whole or in part by a federal health care program; and such replenishing arrangement must otherwise comply with all other applicable laws. 160 1. General Replenishing.—The Safe Harbor for general replenishing requires the receiving facility to replenish medical supplies or drugs on an equal basis for all ambulance providers that bring patients to the receiving facility in any one ofthe following categories: 1 ) all ambulance providers; 2) all non-profit and governmental providers; or 3) all non-charging providers, which are typically arrangements in order to avoid the negative publicity related to such decisions. Ambulance Replenishing Safe Harbor Under the Anti-Kickback Statute, 66 Fed. Reg. at 62982. 1 54. Id. at 6298 1 (codified at C.F.R. § 1 00 1 .952(v)(3)). 155. Id 156. See id. at 62983. Although replenishing ambulance providers that do not provide emergency services ofthis frequency is outside the scope of this Safe Harbor, it does not mean that such arrangements are per se illegal. Rather, such arrangements must be analyzed for compliance with the Anti-Kickback Statute on a case-by-case basis. Id. 157. 42 C.F.R. §1001.952(v)(2). 158. Id. §1001.952(v)(3). 1 59. See Ambulance Replenishing Safe Harbor Under the Anti-Kickback Statute, 66 Fed. Reg. at 62981. 160. Id. at 62981. Other applicable laws include, for example, the Prescription Drug Marketing Act of 1987 ("PDMA"), Pub. L. No. 100-293, 102 Stat. 95 (1988), which governs the resale of prescription drugs. Therefore, the resale of drugs does not fall within the scope of this Safe Harbor. 1138 INDIANA LAW REVIEW [Vol. 36:1 115 volunteers and municipal providers. 161 A receiving facility may offer replenishing to one or more ofthe categories and may offer different replenishing arrangements to different categories, so long as the replenishing is conducted uniformly within each category. 162 Further, the replenishing arrangement must be conducted in an open and public manner. 163 2. Fair Market Value Replenishing.—In addition to the general conditions, this category requires the ambulance provider to pay the receiving facility fair market value, based on an arms-length transaction, for replenished medical supplies, and, if payment is not made at the same time as the replenishing ofthe medical supplies, the receiving facility and the ambulance provider must make commercially reasonable payment arrangements in advance. 164 3. GovernmentMandatedReplenishing.—This category protects replenishing arrangements that are undertaken in accordance with a state or local statute, ordinance, regulation or binding protocol that requires hospitals or receiving facilities in the area subject to such requirement to replenish ambulances that deliver patients to the hospital with drugs or medical supplies (including linens) that are used during the transport of that patient. 165 Since the Safe Harbor became effective, the OIG has issued two favorable advisory opinions interpreting the applicability ofthe Safe Harbor to replenishing arrangements, finding that both arrangements satisfied the criteria for "general replenishing" under the Safe Harbor. 166 III. TAXATION 1. St. David's Health Care System, Inc. v. United States.—Tax-exempt hospitals gained some potential flexibility in the area ofjoint ventures with for- profit entities with St. David's Health Care System, Inc. v. United States} 61 In that case, St. David's Health Care System ("St. David's"), an entity exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), 168 sued the Internal Revenue Service ("IRS") for a refund of federal income taxes paid after the IRS revoked its tax-exempt status. 169 The IRS had made the revocation alleging that St. David's had failed the operational test for Section 501(c)(3) status, after it had entered into a joint venture limited partnership with a for-profit subsidiary of HCA ("HCA"), a 161. 42C.F.R. §1001.952(v)(3)(i). 162. Id. 1 63 . See id. § 1 00 1 .952(v)(3)(i)(A)(3)(B)( 1 )(i) and (ii) for the conditions that must be satisfied to qualify as conducting the replenishing arrangement in an "open and public manner." 164. Id. §1001.952(v)(3)(ii)(B). 165. Id. §1001.952(v)(3)(iii). 166. OIG Advisory Opinion Nos. 02-2 & 02-3 (Apr. 4, 2002). 167. 2002 WL 1335230 (W.D. Tex. June 7, 2002). 168. I.R.C. § 501(c)(3) (2002). 1 69. St. David 's Health Care Sys. , 2002 WL 1 335230 at * 1 . 2003] HEALTH CARE LAW 1 1 39 national for-profit health care system. 170 Pursuant to the terms ofthe partnership, St. David's had ownership interests in the partnership totaling 45.9% at the time of the court's decision. 171 The partnership was governed by a Board of Governors, in which representation was evenly split between St. David's and HCA. 172 Decisions by the Board of Governors were implemented by a management entity, which was obligated to ensure that the partnership was operated consistent with the community benefit standard of Section 501 (c)(3) of the Code. 173 On summary judgment, the court reversed the determination by the Internal Revenue Service to revoke St. David's tax-exempt status and ordered the refunding of taxes paid by St. David's since the revocation. 174 The court agreed with the IRS that the operational test was at issue, 175 but disagreed with the IRS' contentions that St. David's was not controlled by a community board and that HCA received an impermissible private benefit. 176 The court found, "[A]s a matter of law, the presence of a community board is a point in favor of exemption, but is not an absolute requirement for exemption." 177 The court went on to say that, even if a community board was a requirement for exemption, St. David's met that requirement with the structure of its Board of Governors. 178 The court offered a broader definition of the community board standard than that urged by the IRS, stating, "The purpose of the community board is to ensure that the community's interests are given precedence over any private interests. Thus, if a board is structured to ensure such protection, it is clearly a community board." 179 The court also found that there was no impermissible private benefit that accrued to HCA. Citing the recent Redlands case, the court emphasized that private benefit hinges on whether the joint venture has an "obligation to put 170. Id. 171. Id. 172. Id. at*5. 173. See Linda S. Moroney & Joseph C. Mandarino, The St. David 's Decision: BreathingLife into Joint Ventures?, HEALTH Law. NEWS, at 9 (Oct. 2002) (citing facts not referenced by the court's decision, but by a Technical Advice Memorandum issued by the Internal Revenue Service). 174. St. David's Health Care System, 2002 WL 1335230 at *8. 175. Id. at*5. 176. A/at*8. 177. Id.2X*5. 1 78. Id. at *7. The court noted that four factors favored a finding that the partnership Board is a community board: (1) the partnership contract requires that all hospitals owned by the partnership operate in accord with the community benefit standard; (2) St. David's has the unilateral right to dissolve the partnership should the hospital fail to meet that standard; (3) the chairman of the Board is appointed by St. David's, giving St. David's control over the agenda ofthe Board; and (4) the day-to-day operations of the partnership are disproportionately impacted by St. David's because of its power to unilaterally remove the partnership's Chief Executive Officer. Id. 179. /