Direct supervision
9/14/99 letter to the Office of Representative Pete Stark

September 14, 1999

Ms. Anne Montgomery
Legislative Assistant
Office of the Honorable Pete Stark
239 Cannon House Office Building
Washington, D.C. 20515-0513

Dear Ms. Montgomery:

Thank you very much for meeting with me on September 3rd. During our meeting, you asked for (1) my clients' reaction to Congressman Stark's proposal for a change in the direct supervision standard, (2) the citations to the Stark II proposal that have created uncertainty about whether physician-owned outsourced entities are lawful under the Stark Law, and (3) HCFA's final rule detailing the various levels of supervision for different diagnostic tests.

Although we are very appreciative of Congressman Stark's efforts to address the problems we perceive in the direct supervision standard, we believe that Congressman Stark's proposal will actually have disastrous unintended consequences, if enacted. Indeed, as we read the proposed language, it would effectively prevent all in-office ancillary services performed by a non-physician employee of a physician practice, regardless of the supervision provided.

As currently drafted, Section 1877(b)(2)(A)(I) of the Social Security Act provides that the in-office ancillary services exception applies when such services are performed:

personally by the referring physician, personally by a physician who is a member of the same group practice as the referring physician, or personally by individuals who are directly supervised by the physician or by another physician in the group practice.

Congressman Stark's proposal is to change the existing language to read:

personally by the referring physician, personally by a physician who is a member of the same group practice as the referring physician, or personally by individuals who assume full and direct legal responsibility for the services or items or both, that are provided and who provide those services.

The clause, which begins "who," modifies its antecedent, "individuals." Accordingly, individuals other than the referring physician or another member of the referring physician's group (i.e., another physician) would not be able to perform an in-office ancillary service unless they took "full and direct legal responsibility" for the service.

My clients' members include literally thousands of technologists and sonographers who provide ultrasound services in physician offices as employees of those practices. As employees of the practice, these technologists and sonographers are not able to claim "full and direct legal responsibility" for the service performed. Their employers share the legal responsibility for the services. As employees, the technologists' and sonographers' responsibility is not direct.

Accordingly, the unintended effect of Congressman Stark's proposal would be to make unlawful the provision of services by literally thousands of employed technologists and sonographers across the country. Employed lab technicians, physical therapists, and thousands of other employees of physician practices would find themselves in the same position.

The section of the Stark II regulatory proposal that I mentioned is found at pages 1706 and 1707 of the Friday, January 9, 1998 Federal Register (Vol. 63, No. 6). I have marked the most relevant section which reads:

For example, a physician who is a member of a group practice might work in a hospital as a staff physician and refer patients to the group's own outside laboratory in which the physician has an ownership interest. The laboratory, in turn, furnishes services to hospital patients under arrangements. The hospital will therefore be billing Medicare for laboratory services furnished by the physician's own laboratory. In this case, the physician is in a position to influence how many services the laboratory will be able to "sell" to the hospital. Thus, the physician should be prohibited from making these referrals, unless one of the exceptions applies.

HCFA's language here threatens to eliminate physician-owned outsourced entities just as the hospital outpatient prospective payment system and other reimbursement changes make it essential that such entities that have a clinical expertise and perspective be available to provide services efficiently. This kind of outsourced entity creates two financial relationships: a compensation arrangement between the entity and the hospital (which can be protected under the personal services exception) and an investment interest by the physician in the entity (for which no exception will apply).
HCFA's concerns about over-utilization are completely without foundation, because the physician-owners' orders, if any, cannot affect compensation. This is because the relationship between the entity and the hospital must comply with the personal services exception, which requires that the funds paid by the hospital to the entity must be set in advance, reflect fair market value, and not vary with the volume or value of designated health service referrals involving the parties.

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Please call me at your convenience if I can supply you with any additional information.

Very truly yours,
William A. Sarraille