Stark law sets high hurdle for imaging services restructuring

August 25, 1993

Self-referring physicians surrendered to the inevitable this monthafter Congress passed legislation outlawing self-referral forimaging services within the Medicare and Medicaid systems. Thelegislation is sure to throw the imaging center industry

Self-referring physicians surrendered to the inevitable this monthafter Congress passed legislation outlawing self-referral forimaging services within the Medicare and Medicaid systems. Thelegislation is sure to throw the imaging center industry intoturmoil as physicians scramble to unload their investments beforethe law's January 1995 divestiture date.

Prospects of an imaging center fire sale are dimmed, however,by the law's stringent divestiture requirements and a paucityof center chains with the cash to pull off acquisitions.

The self-referral ban was part of the Omnibus Budget ReconciliationAct of 1993, which became law with President Clinton's signatureon Aug. 10. It was amended into the budget package by Rep. PeteStark (D-CA), who has long opposed physician referrals to entitiesin which they have investment interests.

Stark authored a 1989 ban on referrals to clinical laboratoriesfor procedures paid for by Medicare (SCAN 12/13/89). The legislationpassed this month applies the clinical lab ban to a wide rangeof health services, including diagnostic radiology, physical therapy,radiation therapy and home health services.

Stark initially tried his hand at an all-payer ban (SCAN 6/16/93).That initiative was foiled by a Congressional rule that makesit difficult to use budget legislation as a vehicle for substantiallegislative change in non-budget-related matters.

Despite his victory, Stark is not finished with his effortto completely ban physician self-referral. The representativeis also sponsoring HR 345, a freestanding bill that would implementan all-payer ban on self-referral. An all-payer ban will probablybe included in health-care reform legislation to be consideredby Congress later this year.

A Medicare and Medicaid ban could have almost the same impactas an all-payer ban, however. Few imaging centers will be willingto drop the substantial revenue stream brought in by Medicarepatients in exchange for the ability to self-refer, accordingto Gary I. Fields, an attorney with Proskauer Rose Goetz and Mendelsohnof New York City.

"Very few providers are going to ignore this law and say,`We're not going to do any Medicare work and therefore we're exempt,'"Fields said. "I think those days are really numbered."

The Stark legislation in general is stricter than the Departmentof Health and Human Services' safe harbor criteria, which outlinephysician investments that are not in violation of Medicare anti-fraudand abuse guidelines. Those safe harbor regulations that are notsuperseded by the Stark law are still in effect, however. Pickingthrough the jumble of laws and regulations can be a mine fieldfor imaging center providers.

"Safe harbors cover certain things that the Stark legislationdoesn't, such as ownership by hospitals of imaging ventures,"Fields said. "When you're doing a transaction in the post-Starkera, you have to be careful to make sure you're complying withboth Stark and safe harbors."

Penalties for violating the law are strict. Physicians canbe fined up to $15,000 for each service provided in violationof the law. There is a penalty of up to $10,000 a day for notmeeting requirements to report ownership arrangements to HHS ina timely fashion. In addition, any health-care provider who attemptsto circumvent the law by entering into illegal schemes such ascross-referral arrangements can be penalized up to $100,000 foreach arrangement.

The law provides exemptions for certain referrals. Those exemptionsinclude:

  • In-office ancillary services furnished personally byreferring physicians or their employees. This exemption includesservices provided by group practices with multiple office locations;

  • Services delivered by rural providers where substantiallyall the recipients of services live in a rural area; and

  • Referrals to large, publicly held companies. Providerswho own stock in such companies may refer if the firm has stockholders'equity in excess of $75 million.

The last exemption is similar in concept to the safe harborsthreshold that allows stockholding physicians to send patientsto companies with $50 million in undepreciated net tangible assets.But the Stark threshold is so high that apparently only one imagingcenter company, Health Images of Atlanta, meets the criteria.

Health Images had $80 million in stockholders' equity at theend of last year, according to the company's 1992 annual report.The next largest imaging center company, Nashville-based ImageAmerica,has stockholders' equity of $60 million, according to the company.

In addition, there is no grandfathering clause for existingdivestiture arrangements. Physicians who were complying with safeharbors by trading their interest in an imaging center for stockin a large public company may find that they don't conform tothe Stark law if that company does not meet the $75 million threshold.

"If doctors on Dec. 31, 1994, are holding stock in a companythat does not meet the threshold, those doctors will have to stopreferring or divest," Fields said. "There is no protection."

This could throw some completed deals into turmoil and forceeven more consolidation in the industry, according to Fields.

"It could put real stress on public companies that haveused stock to buy local ventures," Fields said. "A lotof companies formed to use stock to grow are not going to be ableto do it unless they merge into a large company."

While the Stark law sets the playing field for en masse acquisitionand consolidation of imaging centers, the depressed nature ofthe industry could slow things down considerably. It's enoughto give a physician-owner a serious case of divestiture blues.

Help could come from outside the industry, from either hospitalsor related health-care companies. But don't expect a white knightto suddenly appear on the horizon, according to Terrance M. Gill,president of United Healthcare of Del Mar, CA.

"A new buyer doesn't want to come into a weak business,"Gill said. "The economics in this business have done nothingbut erode confidence."

Gill believes that the industry will see center companies mergingand acquiring each other to reach the $75 million threshold setby Stark. Health Images and ImageAmerica are already discussingsuch a merger (SCAN 7/14/93). ImageAmerica has said it is alsohaving discussions with other companies.

In any event, the Stark law has created an environment ripefor acquisitions, and that environment will attract buyers regardlessof the industry's short-term woes.

"Any time there's an opportunity there is someone whowill come up to the plate and take it," Gill said. "It'sa good business, people have done well in the past and will dowell in the future."