safe harbor

August 13, 2020

Posted on by hortyspringer

QUESTION:          Are you aware of anything new on the Proposed Stark Rules and Anti-Kickback Safe Harbors?  If they are adopted now, is there anything that could affect those rules from going into effect?

 

ANSWER:           The answer to both of your questions is yes.

You are referring to the proposed regulations to the Stark Law and the proposed safe harbor regulations to the Medicare Anti-Kickback Statute that were proposed on October 17, 2019.  The notice and comment period for these rules ended on December 31, 2019 (click the links below to read our comments on these rules).

Comments on Proposed Safe Harbor Regulations (File Code OIG-0936-AA10P)

Comments on Proposed Regulations to the Physician Self-Referral Law (File Code CMS-1720-P)

Supplement to Comments on Proposed Regulations to the Physician Self-Referral Law (File Code CMS-1720-P)

While the rules have not been published in final form, according to a July 21, 2020 posting by the Office of Management and Budget, those regulations are under review by OMB and it is our understanding that these rules remain a high priority for CMS.

The proposed rules provide practical, realistic guidance for compliance with both the Stark law and the Medicare Anti-Kickback Statute.  It is our hope that both sets of regulations are published in final form in much the same form as proposed.

But here is where life gets complicated.  Due to a provision in a little known law called the Congressional Review Act (“CRA”) and the upcoming Presidential, House and Senate elections, publication of those rules in final form at this late date in the Trump administration may not be enough for them to remain in effect.

The CRA was enacted in 1996.  The provision in the CRA to keep an eye on is the section of the CRA that applies to regulations that are published within 60 legislative days of the end of a presidential term (which has long passed).

The CRA requires regulatory agencies to submit their rules, regulations, and guidance documents to Congress before they can officially take effect.  Congress has 60 legislative days to review a rule.  If Congress does nothing, then the rule takes effect.  However, if a simple majority in the House and the Senate (filibuster rules do not apply) do not like the rule/regulation/guidance, they can issue a “resolution of disapproval.”  Once the “resolution of disapproval has passed, unless it is vetoed by the President, the rule/regulation/guidance document is dead.

It is important to note that as a practical matter, the CRA will only be relevant if there is a change in the President, the Democrats hold the House and the Democrats flip the senate.  If that does not occur, then it will be virtually impossible to get the votes necessary for the CRA to apply.

Prior to the Trump Administration, the CRA was only used once.  However, after President Trump was elected and the Republicans held a majority in the House and Senate, the CRA was used 14 times to invalidate Obama/Biden Administration enacted rules.  It will be interesting to see if the Democrats will do the same if they are given the chance and whether the Stark rules and/or the Safe Harbor regulations will be a victim of the CRA.

September 28, 2017

Posted on by hortyspringer

QUESTION:        It has been several years since we have negotiated a new exclusive agreement.  I seem to recall that the IRS had rules that required a pretty specific term and termination provision.  I also understand there has been a change in those rules that have eliminated those requirements but now require the hospital to monitor how much the exclusive provider can charge our patients for their professional services.  Is this accurate?

 

ANSWER:             Yes, tax-exempt hospitals should be aware that Revenue Procedure (Rev. Proc.) 2017-13 has superseded and replaced the old IRS rules that specified a specific term and termination provision.  Rev. Proc. 2017-13 also added a new rule that requires the hospital to exercise a certain amount of control over the professional fees that are charged by the exclusive provider.  Even if Rev. Proc. 2017-13 does not apply to your hospital, you are well advised to follow it.

First, what old rules no longer apply?  IRS Revenue Procedure (Rev. Proc.) 97-13 used to require tax-exempt hospitals to satisfy a safe harbor in the Rev. Proc. that was based on the term of the exclusive agreement and the manner in which the exclusive agreement could be terminated.

The safe harbor that applied to most exclusive agreements limited the term of the agreement to three years and required that the exclusive agreement must be able to be terminated without cause or penalty after two years.  The IRS first modified Rev. Proc. 97-13 in 2014 and then in 2016, and more recently in 2017, has superseded and replaced Rev. Proc. 97-13 with Rev. Proc. 2017-13.

Rev. Proc. 2017-13 applies to exclusive agreements that are entered into after January 17, 2017.  Rev. Proc. 2017-13 has completely superseded Rev. Proc. 97-13 and no longer requires the term and termination provisions that had been set forth in Rev. Proc. 97-13.  However, among the new requirements imposed on tax-exempt hospitals by Rev. Proc. 2017-13 is that the hospital must either approve the rates charged by the exclusive provider, or at least require that the exclusive provider “charge rates that are reasonable and customary as specifically determined by or negotiated with, an independent third party (such as a medical insurance company).”  In order to further the hospital’s charitable mission, the exclusive provider should also agree to provide the professional services that are subject to the exclusive agreement to all hospital patients regardless of insurance status or ability to pay and agree that when billing for their professional services, the exclusive provider will follow the hospital’s charity care policy.

In addition, it is vital to a hospital’s ability to execute an agreement with any third-party reimbursement program, that an exclusive agreement provide the hospital with the ability to require the exclusive provider to be bound to any third-party reimbursement program that the hospital directs.  Given the current market conditions in which most hospitals must operate, being able to provide the hospital’s services to the patients of any third-party reimbursement program is an important pro-competitive element relating to the cost, quality and accessibility of services that justify granting an exclusive franchise to one group of individuals who provide a vital, hospital-based service.  We recommend that hospitals include this term in all exclusive agreements, regardless of whether Rev. Proc. 2017-13 applies to the hospital.

That is not to say that there are no legal restrictions on the term of a hospital-physician exclusive agreement.  All exclusive agreements have both pro-competitive and anti-competitive aspects and will be lawful so long as the pro-competitive aspects outweigh the anti-competitive ones.  The term is an important factor in this pro-competitive analysis.

The FTC has long taken the position that three years is a reasonable term for an exclusive agreement.  We continue to recommend that hospitals follow this advice and that for antitrust and for a number of practical reasons, the term of an exclusive agreement should be limited to three years, and should never exceed five years.

While no longer required by the IRS, the ability of either party to terminate the exclusive agreement at any time without cause is a very good idea.  A termination without cause provision allows either party to terminate the exclusive agreement when the agreement is no longer in that party’s best interest.  A no-cause termination clause also allows both parties the time needed for a smooth transition from one exclusive provider to the next.

What about a “for-cause” termination provision?  In our experience, it is extremely difficult to define cause to terminate an exclusive agreement.  This is true even if the exclusive agreement includes specific performance standards (which are often difficult to negotiate).  If a party is in material breach of an exclusive agreement, you do not want that party to continue to be present providing an important hospital service.  Therefore, the cure period in a for-cause termination provision is usually very short (30-45 days).  However, such a short period of time presents several practical problems.  First, you don’t know if the party in material breach will cure that breach until after the cure period has ended.  More importantly, a short cure period also does not allow a sufficient period of time to locate a new exclusive provider let alone provide that new exclusive provider with the time needed to obtain billing numbers.

Of greater concern is the practical reality that terminating an exclusive agreement “for cause” seldom allows for a smooth transition from one exclusive provider to the next.  A for-cause termination can also result in a legal challenge if a party disagrees that cause exists to terminate the exclusive agreement.  Whether a party had legal cause to terminate the exclusive agreement is an issue of fact that will require years of litigation and a jury to resolve.  Years of litigation, an uncertain result, and a messy transition from one exclusive provider to the next is not what a hospital bargains for when it enters into an exclusive agreement.

For more information on the latest legal issues affecting hospital-physician contracts, join Dan and Henry in Austin, Texas on March 1-3 at our Physician-Hospital Contracts Clinic.