Distribution of DHS Income for Physicians: Avoid ‘Stark’ Consequences

When designing a compensation methodology for physician practices, there are many different formulas that can be applied. Regardless of the approach taken, there are limited ways in which ancillary income may be paid to physicians when it relates to items and services which have been defined as “designated health services”(DHS) under Stark Law. DHS are offered in many medical practices today and include such items and services as laboratory testing, MRIs, X-ray, physical therapy and DME. A full list of the CPT codes which are considered DHS is provided by CMS.

For those who are not familiar with Stark, it generally prohibits the referral of federal patients for DHS to an entity with which the referring physician has a financial relationship, unless an exception applies. A referral by the physician within his or her own medical practice is considered a self-referral (since the physician has either a financial or ownership interest with the practice where he or she works). Consequently, to self-refer DHS, an exception to the Stark Law must be satisfied. The most common exception used by practices is the “In-Office Ancillary Services Exception,” which generally requires all DHS services to be billed under the practice’s billing number, at the practice’s physical location, and to be supervised by the referring physician or a member of the group. However, this exception can only be used by medical practices which are “group practices” under Stark. This definition requires, in part, that the group be a single legal entity, have centralized decision making, and that the physicians in the group spend not less than a collective average of 75 percent of their time personally providing services through the group practice. To assure that you are meeting the group practice definition and the exception, you should consult with legal counsel.

A group practice that meets the above requirements is limited in how it can distribute DHS income and needs to be aware of such restrictions in its compensation program. There are some basic rules of which groups should be aware:

1. Physicians in a group practice may not be paid directly based on the volume or value of DHS services they generate. This means that if you compensate your physicians each time they merely send a patient for a laboratory test, MRI or other DHS, you are not in compliance with Stark.

2. Physicians in a group practice may be credited with personally-performed services. However, it should be noted that few DHS are personally performed by physicians in a busy group practice. But for a few exceptions, unless your physicians are operating the equipment themselves, they are not personally performing the service and cannot be credited with the DHS income under Stark.

3. Most DHS may not be billed incident-to, including X-ray tests, laboratory tests and diagnostic tests. This means that being in the office suite while a nurse performs an echo test on a patient does not allow the physician supervising the test to be credited with personal performance of the test for Stark purposes. Some DHS that can be billed incident-to and credited to the physician under Stark include certain drug infusions and physical therapy (if a physician is present). It should be noted that meeting incident-to requirements is still required for billing and supervision of the same tests, so it is important to be familiar with all Medicare and Stark requirements.

4. A group practice may pay a physician in the group a share of the group’s overall profits from DHS as long as it is not based on volume or value of referrals. A common approach used by groups is sharing DHS equally among all physicians. Other methods include distribution of profit based on non-DHS productivity, overall patient encounters, RVUs, or other methods that do not reflect volume or value of referrals for DHS.

It’s important to consult with a healthcare lawyer to make sure the methodology being applied to DHS income in your practice is compliant. Additionally, practices can explore whether non-federal income from ancillary services may be handled differently, though it does pose administrative challenges and may impact state law. Finally, be sure to follow the approach designed by legal counsel. A plan that’s compliant on paper only is worthless.

Find out more about Ericka Adler and our other Practice Notes bloggers.