Stark II, Phase III – CMS Issues New Stark Regulations

Stark II, Phase III – CMS Issues New Stark Regulations

By Wayne A. Kinkade

On September 5, 2007, the Centers for Medicare and Medicaid Services (“CMS”) completed Phase III of the rulemaking process under the federal physician self-referral prohibition commonly known as the “Stark law.” The new regulations are effective on December 4, 2007.

The Stark “self-referral prohibition” was originally enacted in 1989 to prohibit physicians from referring patients for laboratory services to entities in which they had a financial interest (known as “Stark I”). On January 1, 1995, the “Stark II” amendments expanded the restrictions to include additional healthcare services that were considered particularly susceptible to over-utilization.

Unless an exception applies, Stark II prohibits physicians from referring Medicare beneficiaries to entities with which they (or a family member) have a financial relationship for certain Designated Health Services (“DHS”). DHS include: clinical laboratory services; physical therapy; occupational therapy; radiology; radiation therapy and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics; home health; outpatient prescriptions; and inpatient and outpatient hospitalization.

Following the adoption of Stark II, two sets of regulations were published to interpret and modify the restrictions on self-referral (known as “Stark II, Phase I” and “Stark II, Phase II”). Essentially, the result was to create general exceptions to ownership, investment interests and compensation arrangements. The newly published “Phase III” regulations reflect efforts by CMS to further interpret and modify the previously adopted exceptions.

The following are highlights of selected changes under Phase III.


When a lease is amended, it must continue to comply with the lease exception requirements, namely (i) set in advance; (ii) at fair market value; (iii) not take into account the volume or value of referrals or other business generated; and (iv) of a term of at least one year. CMS cautions that a change of rental charges may jeopardize compliance with the “set in advance” requirement. As a result, if the parties wish to change the rent (or rent calculation), the parties must terminate the lease and enter into a new lease – but only after the first year of the original lease term.

Regarding office sharing, Phase III clarifies that providers may not rely on the fair market value exception for space or equipment leases, but must satisfy the applicable lease exception. The space and equipment lease exceptions both contain a requirement that the tenant have exclusive use of the space or equipment when the space or equipment is being leased. Although common areas may be shared if the rent is prorated, exam rooms may not be shared.


Phase III modifies the regulation of Personal Services Arrangements to allow a “holdover” for an expired agreement for up to six months following expiration. This concept is similar to holdover provisions permitted for office and equipment leases.


Phase III includes new provisions addressing compensation arrangements where a group practice is directly linked to the physician in a chain of financial relationships between the referring physician and a DHS entity. As clarified, a physician will be deemed to “stand in the shoes” of the physician organization in which the physician has a direct financial relationship. When a physician stands in the shoes of his or her physician organization, the physician will be deemed to have the same compensation arrangement as the physician organization has with the DHS entity. The result is that compensation arrangements between a hospital and a physician group will be considered direct compensation relationships between the hospital and each physician in the group.


Phase III contains numerous changes to the physician recruitment exception. This exception is designed to permit remuneration provided by a hospital to a physician to induce a physician to relocate to an area served by the hospital. The changes modify the prohibition against “additional practice restrictions” to prohibit “practice restrictions that unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital.”

For hospitals and recruits in rural areas, the following amendments apply:

  1. The “geographic area served by the hospital” into which a physician must relocate is now defined as the contiguous zip codes from which the recruiting hospital draws 90% of its inpatients.
  2. A physician can relocate his or her medical practice outside of the “geographic area served by the hospital” if the hospital obtains an advisory opinion confirming the demonstrated need.
  3. Related to income guarantee calculations, groups in a rural or health professional shortage area may replace a physician and allocate the costs attributed by the recruited physician based on either:
  4. a. the actual additional incremental cost; or
  5. b. the lower of per capita allocation; or 20 percent of the practice’s aggregate costs.
  6. The restriction now applies to rural health clinics.
  7. Contains new exceptions for certain government employed physicians.


Prior rules established an exception to protect non-monetary compensation provided to physicians up to $300 (plus inflation). Phase III changes the exception to: (i) permit physicians to repay excess compensation within the same year to preserve compliance; and (ii) allows entities to provide one medical staff appreciation for the entire medical staff (such as a party) per year without the $300 limit.

Under this new provision, an entity may avoid a Stark violation by having the physicians repay excess amounts within the earlier of: (i) the end of the calendar year in which the excess non-monetary compensation was received or (ii) 180 days from the date the excess compensation was received. An entity may only use this provision once every three years with respect to the same physicians.


The compliance training exception has been modified to allow hospitals to provide compliance training to physicians and have the program provide CME credit to physicians so long as the primary purpose of the training is compliance.


Phase III modifies the professional courtesy exception by deleting the requirement that an entity notify an insurer when the courtesy involves a whole or partial waiver of any co-insurance obligation. However, CMS cautioned that such notifications are advisable and may well be required by some insurers.

This article should be used as a general summary of the selected issues. The actual regulation is approximately 87 pages of comments and discussion involving multiple other sections of Stark. If you have particular Stark questions, please call a member of our Corporate Practice Group so we can properly analyze the application of the regulations to your practice.