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Patient Referrals Within a Group Practice: Can You or Can’t You, and How Can You Tell?

Unraveling the complex web of what is and is not a credible referral.

Logic might indicate that the referral of patients for services within a group practice does not violate federal fraud and abuse laws. In fact, logic rarely works in the area of fraud and abuse.

The anti-kickback analysis is fairly straightforward. If an employee makes the referral, it is allowable. If a contractor makes the referral, then the relationship may be problematic, unless the conditions of the “safe harbor” for contractual relations are met. Those requirements are:

1. The agreement between the parties is set forth in writing, for at least one year in duration, specifying the services to be provided.
   
2. A periodic or sporadic arrangement must set forth the specific schedule of services, their length, and the charge for each interval.
   
3. The aggregate compensation paid to the contractor must be set out in advance, consistent with fair market value, and determined in a manner that does not take into account the volume or value of referrals to the group practice.
   

Failure to comply with the safe harbor does not necessarily mean that the arrangement is illegal, but it does mean that it is not protected. The federal government will look at relationships in this “gray area” on a case-by-case basis, to determine whether there is “evil” represented in the relationship. The key avenue of inquiry is whether payment is made for, and based upon, the value of referrals. This could be referrals into the practice, or it could focus upon referrals for services within the practice (e.g., lab services, specialty services, surgery, etc.)

The federal anti-referral law is harder to understand, although final regulations have been issued earlier this year, intended to clarify and firmly establish federal enforcement policies. These rules, known as “Stark II,” operates by defining what a “group practice” is for anti-referral enforcement purposes. Generally, referrals may be allowed within a group practice, but the government was concerned that providers would establish practices that were a "group” in name only, in order to be able to make referrals freely among themselves. Accordingly, the government has refined, in a complicated manner, its definition of a “group practice,” in order to limit the circumstances in which health care practitioners can freely refer among themselves.

It is important to note that Stark II, as currently formulated, does not apply to referral of all services covered by federal programs. Rather, it applies to specified “designated” health services, as follows:

1. Clinical laboratory services
   
2. Physical therapy, occupational therapy, and speech-language pathology services
   
3. Radiology and certain other imaging services
   
4. Radiation therapy services and supplies
   
5. Durable medical equipment and supplies
   
6. Parenteral and enteral nutrients, equipment and supplies
   
7. Prosthetics, orthotics, and prosthetic devices and supplies
   
8. Home health services
   
9. Outpatient prescription drugs
   
10. Inpatient and outpatient hospital services
    

Therefore, we will focus here on defining the “group practice,” in order that practitioners may understand what it takes to refer physician and ancillary services without running afoul of Stark II prohibitions. The key aspects for determining whether a group practice is a "group practice” are as follows.

1. The group must be a single legal entity, and act as one business, with centralized decision-making and consolidated billing and accounting.
   
2. The group must have at least two physicians who are “members,” meaning owners or employees. For this purpose, independent contractors are not “members.” So, for example, a “group” with one owner and three independent contractors is not a “group practice.” The final rule clarifies that leased employees are considered to be “employees” for this purpose.
   
3. Each physician who is a “member” must provide substantially the full range of his or her services through the group. To meet this test, at least 75 percent of the total patient care services of the group’s members must be furnished through the group, and billed through the group. Groups must make a “reasonable, good faith” effort to document compliance with this standard. Additionally, members must personally conduct at least 75 percent of the physician-patient encounters of the group (measured on a per capita basis).
   
4. The overhead expenses of, and income from, the group must be distributed according to methods that are determined before the receipt of payment. The final rules drop a proposed bar on cost-center or location-based distribution of revenues within the group. They also allow prospective adjustments of expense and profit distribution.
   
5. Group members may not receive compensation based on the volume or value of referrals, however productivity bonuses are allowed.
   

Once you’ve qualified as a bona fide “group practice,” you still can’t refer Stark-designated ancillary (non-physician) services within the group unless additional criteria are met. The new rules have made some changes to these requirements. The changes follow:

1. Supervision requirements have been relaxed. Instead of the strict “direct supervision” standard, the Stark analysis now requires meeting the “incident to” standard currently applicable to Medicare coverage and payment policies.
   
2. Ancillary services may be provided in facilities located in the same building where the group’s physicians routinely provide services in additional to the Stark-designated services, but only if the full range of the physician or group’s services are provided there. Locations in part-time use by the group are not eligible for this exception.
   
3. Independent contractors are now allowed to provide the required supervision of ancillary services, so long as they have contracted to treat the group’s patients on premises, and they have assigned their Medicare claims to the group.
   

These, simply, are the rules to be applied to determine if a group is a group – for Stark II purposes. Therefore, if the question is – may a health care practitioner refer patients and services within his or her group practice? The answer is – maybe. On the other hand, if the question is – was Stark II created to send your lawyer’s kids to college? The answer is – for sure.

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Henry E. Schwartz is a partner with Blank Rome Comisky & McCauley LLP in Baltimore, Maryland. He can be reached at 410-659-3962 or schwartz@blankrome.com.