July 23, 2008Client Alert

Stark Advisory Opinion on Rural Provider Exception Issued

The Centers for Medicare and Medicaid Services ("CMS") issued its second advisory opinion of the year on June 8, 2008. A group of physicians sought an opinion as to whether their ownership in a diagnostic center would fall within the rural provider exception to Section 1877 of the Social Security Act (the "Stark Law"). After applying the facts, as represented by the physicians in their letter, CMS decided the exception applied. However, CMS was sure to point out that the requirements for the exception are constant, and the green light would change if any requisite element failed in the future.

General Stark Prohibitions and Exceptions

The Stark Law generally prohibits a physician from referring Medicare or Medicaid patients to a facility to receive designated health services ("DHS") in which that physician, or an immediate family member, has a financial relationship unless a specific exception applies. The financial relationship could be an investment or ownership interest or a compensation arrangement.
One of the exceptions to the general prohibitions of the Stark Law is the so-called "rural provider" exception. This exception applies to physicians having an ownership or investment interest in a DHS facility, but not to compensation arrangements. The exception has two key requirements: (1) the DHS are facilitated in a rural area; and, (2) substantially all (75% or more) of the DHS furnished by the facility are to individuals residing in a rural area.

A rural area under the Stark Law is defined to be any area not listed as a Metropolitan Statistical Area ("MSA") by the Office of Management and Budget ("OMB"). The OMB updates the list of areas it classifies as an MSA every year. An MSA has at least one urbanized area with a population of 50,000 or more, as well as surrounding territory with a high degree of social interaction and commuting. Although an MSA is named by its principal city, the entire county containing that city is designated an MSA. Thus, a DHS facility located in what appears to be a traditionally rural area could still fail the rural provider exception because of a city at the other end of the county. As of the latest report, approximately 83 percent of the U.S. population lived in an MSA.

Application to the Diagnostic Center

The Advisory Opinion responded to a group of physicians with ownership interests in a limited liability company that owns a diagnostic center. The facility offers a variety of services, including consultations on a walk-in, urgent care basis, as well as laboratory and radiology services. The group certified that the facility furnished all of its DHS in an area not in an MSA, but rather in the category below - a Micropolitan Statistical Area (defined similarly to a MSA, but with a population between 10,000 and 50,000). Further, the physicians certified that at least 75 percent of the DHS provided by the facility have been, and will continue to be, furnished to individuals residing outside of an MSA. With the two elements currently met, CMS concluded the arrangement met the criteria for the rural provider exception.

As mentioned above, CMS made clear the elements for the exception are ongoing. Constantly satisfying these requirements is largely outside of anyone's control. Therefore, any physician contemplating entering into an arrangement based on the Stark Law's rural provider exception must carefully analyze the situation and its variables. Particularly, one should: (1) confirm the county within which the facility would furnish its DHS is not an MSA; (2) determine where the Medicare and Medicaid patients receiving the DHS from the facility would reside, and whether 75 percent of those DHS would be furnished to patients residing in non-MSA areas; and (3) analyze the population trends for both the facility's county and the potential patients' counties, and calculate the risk that any such area would become an MSA in the future.

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