By: Alan Gassman and Tina Bhatt
The good news and the bad news about the newest Stark Law advisory opinion issue under the Stark Law by the Centers for Medicare & Medicaid Services (“CMS”) (Opinion No. CMS-AO-2021-01 issued June 2021).
Many medical practices and their owners that bill Medicare for medical, diagnostic, and treatment services make use of parent/subsidiary structures in order to help limit liability, permit separation of entities for accounting purposes, and to engage in tax, financing, and associated planning that may be optimized by using one parent company that can own multiple subsidiaries that actually engage in the business of medicine, diagnostic testing, and providing certain treatment, while the parent is generally inactive as the owner of the subsidiaries. The structure will typically be designed so that a liability incurred by a subsidiary would not become a liability of the parent or the other subsidiaries.
These entities and their owners may be very interested in CMS Opinion No. CMS-AO-2021-01 and how it might impact their plans and probabilities of compliance.
General Background
Under the Stark Law, a physician having a direct or indirect financial relationship (whether a compensation arrangement or ownership interest) with a medical practice or other entity is not able to refer patients, directly or indirectly, to such entity unless it qualifies for an exception, such as the in-office ancillary services exception (“IOAS”), such as those to employment and personal services arrangements. All elements of the exception must be met in order to qualify.
This law is so strict that it actually prevents a doctor from referring a patient or recommending a treatment or test to be given by his or her own medical practice entity unless the physician’s financial relationship with her own practice qualifies for an exception, such as IOAS. If the practice is a group practice, rather than a solo practice, it must also meet detailed and rigorous requirements to qualify as a group practice to meet the IOAS’ exception.
Attribution rules apply which prevents a physician from making a referral to an entity with which immediate family member has a financial relationship, and the definition for an immediate family member is extremely broad and basically prevents physicians from establishing relationships where their referrals will be directed to a person who will profit and share the profits with them. An immediate family member includes “a spouse, child (birth or adopted), sibling, parent, stepparent, stepchild, stepbrother or sister, in-law (father, mother, sister brother, son, and daughter), grandparent, grandchild, and the spouse of a grandparent or grandchild.
The federal law defines a Group Practice as the following:
(4) Group Practice
(A) Definition of group practice
The term “group practice” means a group of 2 or more physicians legally organized as a partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan, or similar association-
(i) in which each physician who is a member of the group provides substantially the full range of services which the physician routinely provides, including medical care, consultation, diagnosis, or treatment, through the joint use of shared office space, facilities, equipment and personnel,
(ii) for which substantially all of the services of the physicians who are members of the group are provided through the group and are billed under a billing number assigned to the group and amounts so received are treated as receipts of the group,
(iii) in which the overhead expenses of and the income from the practice are distributed in accordance with methods previously determined,
(iv) except as provided in subparagraph (B)(i), in which no physician who is a member of the group directly or indirectly receives compensation based on the volume or value of referrals by the physicians,
(v) in which members of the group personally conduct no less than 75 percent of the physician-patient encounters of the group practice, and
(vi) which meets such other standards as the Secretary may impose by regulation.
Can Multiple Entities Be Used?
Federal law also provides that a Group Practice “must consist of a single legal entity.” This requirement is further explained by the following language:
In order for the group practice to satisfy the requirement at 42 C.F.R. § 411.352(a) that it is a single legal entity operating primarily for the purpose of being a physician group practice, it must primarily provide services of the type provided by a supplier that is enrolled in Medicare as a clinic/group practice and billed to Medicare in accordance with the claims processing instructions for physician services in the Medicare Claims processing manual (Pub.100-04).
The regulations further state that a “single legal entity may be organized or owned … by another medical practice that is not an operating physician practice” and that a “group practice that is otherwise a single entity may itself own subsidiary entities.” This gives support that a multiple entity structure can be used. The 1995 preamble to the Stark regulations also made specific mention that the OIG “do[es] not believe the statute precludes a single group practice (that is, one single group of physicians) from owning other legal entities for the purpose of providing services to the group practice.”
A subsequent preamble to the regulations, which were rewritten in 2001 under what became known as the Stark 2 Regulations, also cited this language and provides that “the physicians could qualify for the in-office ancillary services exception provided they meet the requirements for supervision, location, and billing.” The second preamble further provides that the billing requirement allows services to be “billed by the referring or supervising physician, the group practice, or an entity wholly owned by the group practice [emphasis added].”
The general state of practice in this area is that medical groups form one parent company that may be owned by one or more of the physicians (as well as private equity firms) who work in the practice, and then have each separate office and separate diagnostic and treatment operation, such as clinical laboratories, radiation oncology facilities, and diagnostic imaging facilities operated under separate subsidiary companies for liability insulation purposes.
Many healthcare lawyers representing large medical practice organizations have advised their clients that the safest route to the use of this subsidiary arrangement is to bill Medicare and any other federal programs under the tax identification number and name of the parent company, while allowing the medical providers and staff to be employed by the subsidiary companies, and having patients acknowledge or be practically situated such that each separate practice location, diagnostic or treatment entity is separate and apart from the parent entity so that the patient does not receive treatment from the parent entity, even though the parent entity bills Medicare or other federal payers for the service on behalf of the subsidiary.
These arrangements have tended to work well from a liability insulation and operational segregation standpoint, in that doctors and other professionals in a particular office can manage the medical practice and finances of that office and be paid in a manner consistent with the Stark Law and Medicare Anti-Kickback rules. Plaintiff lawyers, to the knowledge of the author, have not attempted to pierce a subsidiary entity to cause its parent entity to be responsible for malpractice liability where the patient’s relationship has been with the subsidiary, notwithstanding that the parent company may have billed Medicare for the services of the subsidiary.
But will the design and structure of this parent and subsidiary organization be permitted under the Stark Law to allow the subsidiary entities to operate independently of the parent in order to shield the parent and the other subsidiaries from liability?
For example, it seems clear from the language of the regulation that a subsidiary can own and operate a diagnostic center if the services are billed in the name of and under the taxpayer identification number of the parent. As a preview of the discussion below, the new CMS Opinion states that parents/subsidiary arrangements can be in compliance with the Stark law, if the subsidiary bills for its services are in its own name and under its own Taxpayer Identification Number, but does not indicate whether one or more of the following facts in this situation were necessary in order to reach the conclusion that the arrangement was permissible:
(1) any professional services are provided by employees of the parent, and
(2) the subsidiary’s income and expenses are considered to be income and expenses of the parent.
The Opinion does not explain why the two above-referenced circumstances existed in this situation, or whether one or both of them is required or even a factor in determining whether the arrangement is permissible.
It is therefore not clear as to whether the subsidiary can operate independently of the parent, use its own taxpayer identification number, and hire any professional employees from third parties so that the parent and other subsidiaries would not become liable for obligations of the subsidiary.
CMS Opinion No. CMS-AO-2021-01 Enters the Stage
CMS Opinion No. CMS-AO-2021-01, involves a medical practitioner who apparently had a Stark compliant medical practice and two other medical practice or business entities engaged in activities that were apparently subject to the Stark Law.
While the Opinion does not indicate what the two non-practice entities did, this may have been a situation where a doctor owned a medical practice and separately had medical businesses, such as home healthcare and a blood lab that the owner doctor was not able to refer patients to.
The doctor owner applied to the CMS for advice as to whether he or she could transfer the ownership of the two non-practice medical entities so that they would be owned by the medical practice as a parent company, and the CMS indicated that this would be permissible, but made two assertions that cause concern. Further, the CMS actually limited, rather than expanded, the structures and comfort levels with respect to these arrangements.
The good news is that the subsidiaries will be permitted to “remain enrolled in Medicare under tax identification numbers assigned to the Subsidiaries, and use billing numbers assigned to them as participating suppliers to bill Medicare for items and services, including designated health services, furnished to beneficiaries.”
This may enable entities owned under parent companies to bill Medicare and other carriers under the subsidiaries tax identification number and Medicare number, which would make it less likely that plaintiffs would seek to hold a parent company responsible for malpractice or other liabilities of the subsidiary company.
On the other hand, the applicant to this Advisory Opinion informed the CMS that the “healthcare services furnished to [the] Group Practice patients would be furnished or supervised by clinical personnel that are employed or contracted by Requestor [the parent company] and designated to work at” the offices of the medical practice parent company and the two subsidiary companies.
The reason for this requirement may have been at the insistence of the CMS personnel who wrote the Opinion. Perhaps they were concerned that the 75% test would not be met unless 75% or more of the physicians’ services were rendered by physicians who own or are employed by the Group Practice. This 75% rule serves to deter forming groups with a large number of part-time physicians who primarily work in other practices.
Healthcare Lawyer Lester Perling states that it is unclear whether the facts that were certified for the Opinion were material to the opinion reached by CMS or extraneous, although he notes that CMS stated the Opinion is “[b]ased on the facts certified by the Requestor,” thereby indicating that the outcome might have been different had these facts not been as stated. Medical practices act their own risk if they use subsidiaries but do not act consistently with the facts stated in the Opinion. That being said, by its own terms the Opinion applies to and can be relied upon only the Requestor. It is inevitable, however, that a whistleblower under the False Claims Act will rely on the Opinion to file a claim against a medical practice that is structured inconsistently with the Opinion, despite CMS’ statement at the end of the Opinion.
The Opinion also indicated that “all revenues and expenses of the Subsidiaries would be treated as revenues and expenses of [the] Group Practice.” This “all revenues and expenses” arrangement is not mentioned, let alone required, under the Stark regulations, and may cause structuring that will expose parent companies and brother/sister subsidiaries to the liabilities of a subsidiary.
In other words, if all of the entities are considered to be one economic unit under state law because of this “all revenues and expenses” arrangement, then a medical doctor, osteopath, or nurse practitioner employed by a parent company who commits malpractice while working for a subsidiary company may cause the parent company to be responsible for the malpractice liability resulting therefrom. To put it another way, if a parent entity considers the subsidiary entities operations to be part of the parent company’s operations, then liability or the obligations of the subsidiary company could become responsibilities of the parent company.
Therefore, the biggest question resulting from review of this Opinion, is whether the parent is required to hire the doctors and other providers, and whether the parent and subsidiaries are required to consider that the revenue and expenses of the subsidiaries should be treated as revenues and expenses of the parent company.
One way to look at this Opinion is that it is safest to bill under the parent company’s name in order to tilt the arrangement towards being considered to be “one Group Practice” while having the subsidiary entities employ the healthcare providers for liability limitation purposes.
On the other hand, this Opinion reemphasizes the ability of conventional medical practice entities to own, and operate subsidiary entities that perform diagnostic ancillary services such as radiology, occupational and physical therapy, and other medical businesses and ventures that can accept referrals from physicians working for the parent entity and shield the parent entity from liabilities of the operation of such subsidiaries, particularly when medical doctors and osteopaths are not required to render services, or would have a really low malpractice risk while doing so.
It is also noteworthy that when a doctor provides services at an ambulatory surgical center the surgery center is typically not responsible for the malpractice liability of the doctor, but is typically responsible only for liability incurred as a result of nursing staff, negligence, or other negligence separate and apart from physician malpractice in many states. Further, ambulatory surgical center services are not considered designated health services under the Stark Law.
It would have been much more helpful if the structure that was subject to this Opinion had permitted the medical providers to be employed by one of the subsidiaries of the parent company so that all of the subsidiaries of the parent company would not be subject to loss in the event that a malpractice creditor would receive a judgment against the parent company.
The fact that the physicians in the practice under the Opinion will be employed by the parent company does not necessarily mean that all physicians providing services for the subsidiaries must be employed by the practice.
For example, under the above referenced “75% rule,” up to 25% of patient encounters in a given Group Practice may be hired from outside sources as independent contractors. An example of this would be when a diagnostic testing facility would hire an independent radiologist group to provide reading and associated radiology services for a subsidiary entity that would bill under its tax payer identification number.
A large primary care or multi-specialty group adding or working with an imaging operation may prefer to have an established radiology group provide radiologists to the facility under an independent contractor agreement so that the parent company of the group should be insulated from the malpractice liability of the radiologists.
It is noteworthy that the CMS ends the Opinion with a statement that “individuals and entities other than the parties to the arrangement may rely on this Advisory Opinion as an illustration of the application of the physician self-referral law and regulations to the specific facts and circumstances described in the Advisory Opinion,” but that the “the Advisory Opinion may not be introduced into evidence in any matter involving an entity or individual that is not” the actual parent company and subsidiaries involved, and that “this Advisory opinion will not bind or obligate any agency other than the U.S. Department of Health and Human Services,” which includes Medicare.
These limitations means that the scope of the Opinion is actually quite narrow. The only instances outside of this case where this Opinion can be completely relied upon are instances where the arrangement is determined by CMS to be “indistinguishable in all its material aspects” as stated in 42 C.F.R. Sect. 411.387(b). Therefore, it is critical to realize that physicians seeking to make use of this Opinion may not rely on it if the arrangement differs from the one in this case.