On July 2, the Centers for Medicare & Medicaid Services (CMS) issued proposed rules changes to the Stark Law — the legislation governing physician self-referral for Medicare and Medicaid patients. If passed, the rules — which would go into effect next year — would add a new layer of restrictions to the way imaging services may be billed by referring physicians.

At issue is an increasingly common practice whereby a physician or group of physicians enters into a structured business arrangement with a radiology center or so-called independent diagnostic testing facility (IDTF) to which they in turn refer patients for testing.

According to some industry experts these arrangements — which include “block leasing” structures and pay-per-click deals — often fall into a legal gray area and are at the very least ethically questionable. Those openly critical of the practice say it poses an obvious conflict of interest and treads a fine line between a legitimate business deal and a method for doctors to receive payment for referrals.

In block leasing, a doctor rents exclusive time blocks from the IDTF for a set price and independently bills patients and their insurers; in per-click leasing, as the name suggests, the physician rents a machine on a per-use basis whenever it’s needed. In both cases, the potential exists for a physician to profit directly from the testing of his or her own patients.

Under the current Stark Law, physicians are only permitted to generate income from imaging performed on equipment within their own offices under the supervision of a staff physician, or, in the case of off-premises diagnostic centers, where they share a financial risk and/or provide a hands-on service.

Doctors like these structured lease deals because they offer a way for them to realize some capital from diagnostic services, which research shows make up the bulk of medical service revenue.

While most of the deals are not presently outlawed, it is illegal for a doctor to benefit financially solely for referring patients; opponents of physician/IDTF leasing arrangements say that’s precisely what the practice amounts to.

“Under such conditions, the objective of MRI or CT becomes less about solving diagnostic problems and more about making money,” writes James Brice, senior editor of Diagnostic Imaging in the magazine’s May 2007 issue.

More than 30 states have passed laws limiting such arrangements, but until now, what little media attention the physician leasing issue has gotten has been relegated to radiology trade publications and white papers published by interested law firms. However, recent events have raised concerns over the potential for abuse and have launched the issue onto the front pages of the popular press.

Physician lease deals fell under scrutiny earlier this year when it came to light that some doctors were using lease arrangements to hide illegal payoffs for referrals to radiology centers, violating state anti-kickback statutes. In one high-profile case in Illinois, 21 MRI centers were named in a lawsuit alleging the defendants had paid physicians for referrals and masked the activity behind legitimate equipment leasing arrangements.

The blowback from the case added momentum to an ongoing push by both state and federal legislators to close the loopholes in the guidelines for leasing equipment by physicians who could potentially profit from its use.

According to court documents, the Illinois case involved physicians receiving monetary compensation for referring patients for MRIs, CT scans and similar tests based on prearranged agreements with specific radiology centers. In most cases, the agreements were structured to resemble per-click leases, but Lisa Madigan, the Illinois’ attorney general, says the so-called leases were nothing more than kickbacks since in most cases the physicians did nothing “hands-on” beyond referring the patients for testing.

“Making payments to doctors for referral of patients is illegal no matter how those payments are disguised,” Madigan concluded in a January 2007 statement.

Since such deals are still quasi-legal under Stark, Illinois is pursuing state charges against the centers. In addition to the Illinois case, state prosecutors in at least two other states — Florida and Massachusetts — are now looking into physician lease deals.

For equipment leasing companies, the questionable legality of some of the structures presents a potential pitfall, particularly for those unversed in the legal intricacies of Stark.

Peter Myhre, CEO of MarCap, a finance company that specializes in medical equipment, says his company tries to protect itself through significant due diligence and staying away from questionable transactions.

“A number of the changes that are now being proposed are in areas that we have not been financing anyway because we considered them in legal gray areas,” says Myhre. “If it’s too far in a gray area, we won’t do the transaction.”

In spite of that, Myhre says his company recently found out that it had unwittingly financed one of the MRI centers named in the Illinois suit.

“We’ve got an account on our books that is part of the lawsuit in Illinois. We didn’t know that customer was engaging in those types of transactions so we were surprised,” Myhre says. “We would not have done a deal in which we were aware that the lessee was doing that [per-click] business; the problem is that we can’t control exactly what a lessee does.”

Myhre says the imaging center in question has since changed the way it does business and has discontinued its per-click arrangement. But he’s quick to point out that without clearly defined regulations, it’s easy to cross the invisible line, which distinguishes whether a transaction is legal or not.

“This isn’t Norvergence fraud — it’s nothing like that… these are business people who are working in the gray areas and they’re going too far to the right of the law in structuring the transactions,” Myhre says.

The Medical Imaging Windfall
Medical imaging has long been viewed as high-profit segment of the healthcare industry. Typically, an MRI owner charges a doctor as little as $250 to $300 for a test, but a physician can be reimbursed as much as $1,000 by insurance companies, creating a substantial profit incentive.

In testimony before Congress last year, Herb Kuhn, director of the Department of Health & Human Services Center for Medicare Management, put the costs into perspective. According to his statement, from 2000-2005, Medicare spending for imaging services paid under the physician fee schedule more than doubled from $6.6 billion to $13.7 billion, an average annual growth rate of 15.7%. By contrast, the annual average growth rate of all physician fee schedule services was only 9.6%.

By extension, imaging equipment makes up a huge chunk of the market for medical equipment leasing. “If you look at the entire healthcare leasing market, diagnostic imaging represents about 50% of the products that are leased,” says Alan Frankel, a principal with The Alta Group, a leading international consulting firm. “I would guess last year that represented probably somewhere between $1.3 billion–$1.5 billion out of a total of $3 billion.”

With such a large amount of money changing hands, it’s only natural that physicians would try to find a way to get their own piece of the pie. “There are physicians within the service area of an imaging center that say, ‘you know what, we’d like to make some money from these referrals we’re making so let’s do this contract with an imaging service center so we can make some money,’” explains MarCap’s Myhre.

The American Medical Association has considered most forms of physician self-referral unethical since the early 1990s, around the time the federal government stepped in to end the practice.

In 1989, an HHS study concluded that physicians who owned or invested in independent clinical laboratories referred Medicare patients for 45% more laboratory services than did physicians who did not have such financial interests. This led the government to ban most forms of physician self-referral with a provision in the Omnibus Budget Reconciliation Act of 1989. The provision, sponsored by California congressman Pete Stark, eventually became known as the Stark Law.

Under the Stark Law — which went fully into effect on Jan. 1, 1995 — it is illegal for healthcare providers to compensate doctors for referrals or for a physician to refer a patient to a medical facility in which he/she has a financial interest through “ownership, investment or structured compensation arrangement.”

But the law included exemptions to the ban in order to accommodate legitimate business arrangements, including most dealing with radiology services.

And this is where things get tricky. Much of the original Stark Law deals with mandating exactly how physicians may be compensated by hospitals and radiology centers without blurring the line into the realm of “kickbacks.”

For a while, things seemed to be working so well that in 2002 the government enacted Phase I of Stark II, which gave hospitals and health systems greater flexibility in structuring compensation arrangements with physicians and physician-owned entities.

Then in 2005, CMS added “radiology and certain other imaging services” to its list of services regulated by Stark II. Those changes took effect on January 1, 2007.

Physicians and their attorneys quickly made Swiss cheese out of Stark II, giving rise to the complex revenue sharing structures now being debated. In preparation for this article, I counted some ten major law firms currently advising doctors and radiology centers on the intricacies of the law before giving up.

Enter Stark III
As the Chicago case illustrates, doctors and their counterparts in IDTFs are finding “creative” new arrangements from which to profit from imaging services — arrangements that toe the line of legality.

The new CMS proposals under Stark III would help define the line better by doing away with many of these exemptions, creating new restrictions for physicians and IDTFs.

While full-time block leasing will still be permitted under the new rules, the revisions would do away with other forms of block leasing as well as the so-called “per-click” equipment rental arrangements.

Alta Group’s Frankel says he’s concerned the reforms may go too far and further whittle away imaging’s revenue potential — already significantly undermined by the 2005 Deficit Reduction Act.

“The danger is how much this is going to affect these legitimate methods,” Frankel says. “Stark III exacerbates an already tough situation created by the Deficit Reduction Act of 2005, which placed significant reductions in reimbursements for physicians in the outpatient imaging space. One of the areas that was looked at as a way to help mitigate the impact was block leasing.”

Frankel adds that he worries about the third-party lessors and banks that may have bought medical-related leasing paper without fully understanding the implications of Stark. “My question is how much do those people understand what happened on January 1, 2007,” he says. “The game really changed and potentially they could have deals that they bought that were performing leases that could become problematic.”

As for the proposed Stark III, Frankel says there are too many questions that have yet to be answered.

For example, he asks: “If you have an entity that has problems how easily can it be restructured so that you eliminate that problem? Are there going to be penalties if that structure existed prior to these revisions? Is there going to be a window to try and solve the problem?”

It’s not clear how soon those questions might be answered, but CMS gave interested parties until August 31 to comment. The new rules are scheduled to go into effect on January 1, 2008.