Senate Bill 517 (Enrolled)

Contact: Office of Policy and Legislative Affairs

Agency: Licensing and Regulatory Affairs

Analysis

Topic: Physician Referral
Sponsor: Senator Hammerstrom
Date Introduced: May 30, 2001
Date Ordered Enrolled: May 16, 2002
Date of Analysis: May 20, 2002

Position: The Department of Consumer and Industry Services supports the bill.

Background: In 1988 a physician asked the Board of Medicine to issue a declaratory ruling of whether referring a patient to a facility in which the physician was a limited partner constituted "directing or requiring" in violation of Section 16221(1)(e)(iv). The Board rules that this was a violation of the Public Health Code. The ruling was appealed to the courts. The Oakland County Circuit Court reversed the Board's ruling. The Court of Appeals reversed the circuit court ruling and remanded for specific reasoning. The trial court again reversed the Board's ruling. In 1995, on appeal, after remand to the Court of Appeals, the Court of Appeals reinstated the Board's original ruling. The Court found that directing "means guiding, managing, regulating or controlling by advice, instructions, orders or commands and does not exclude referring. The emphasis is on the steps necessary to accomplish a purpose." The court continued that this construction supported the statutory purpose of attacking the problem of over utilization of health services. In March 1997 the Michigan Supreme Court denied leave to appeal, thereby ending the long saga of the Indenbaum case.

During the same time period, the federal Omnibus Budget Reconciliation Act of 1989 (commonly known as Stark I) was passed and took effect in January 1992. Generally, this legislation prohibits a physician from referring specimens for clinical laboratory testing reimbursable by Medicare to any entity with which the physician or an immediate family member has a financial interest.

In January 1995 the Omnibus Budget Reconciliation Act of 1990 (commonly known as Stark II) took effect. This legislation expanded the ban on physician self-referrals for clinical laboratory services found in Stark I to encompass additional services and referrals of Medicaid and Medicare patients. Stark II also contains numerous exceptions, or "safe harbors", to the self-referral bans. In addition to affecting physicians, it also affects relationships between hospitals and physicians.

Both Stark I and Stark II are intended to curb fraud and abuse in health care systems arising from physicians utilizing services and facilities in which they, or their immediate family members, have an interest.

There have been legislative efforts to balance the conflicting restrictions of Indenbaum and the two Stark laws since 1997. These efforts were unsuccessful until this year because of disagreements between physicians and hospitals.

Bill Content: The bill strikes the phrase "directing and requiring" that drove the Indenbaum decision. In its place the Legislature added two items to the list of practices that constitute unprofessional conduct:

· A requirement by a licensee other than a physician that an individual purchase or secure a drug, device, treatment, procedure, or service from another person, place, facility, or business in which the licensee has a financial interest.
· A referral by a physician for a designated health service that violates the applicable federal laws.

The House inserted language that requires the department to take official notice of any revisions to the Stark laws or regulations and make a determination whether the revision pertains to physician referral for designated health services and continues to protect the public from inappropriate referrals. If the department determines that the revision does both of those things, the department may promulgate rules to incorporate the revision by reference. The revision must be incorporated without changes.

Another House amendment stated that a physician who makes referrals pursuant to the Stark laws or rules must accept a reasonable proportion of Medicaid patients and accept payment from Medicaid or Medicare as payment in full for a treatment, procedure, or service for which the physician referred the patient and in which the physician has a financial interest. The provision does not operate, however, if the surgical procedure is not reimbursed at a minimum of the appropriate Medicaid or Medicare outpatient fee schedule, including the combined technical and professional components. This means that this provision does not apply at this time, because Medicaid does not currently reimburse the facility portion of the bills for services provided in ambulatory surgical clinics.

A final House amendment requires the Department of Consumer and Industry Services to do three annual reports of the effect of the amendments on access to care for uninsured and Medicaid patients.

Arguments For: The bill resolves a problem that has simmered for almost 15 years. Virtually everyone affected, including physicians and the department, agreed that the finding in Indenbaum that the phrase "directing and requiring" included "referring" was problematic. However, everyone also understood that whether the department agreed with Indenbaum or not we would enforce it when we received a case. Fortunately, the department has not received a case. Reportedly, there are cases out there, but attorneys have been watching developments in the legislative arena. The bill will simplify regulation in this portion of the Public Health Code for the department. The department has been extremely concerned that the interplay between Indenbaum and Stark would result in the department applying different requirements depending on how the patient's bills were paid. It would have been extremely expensive and difficult to try a case in this area because the department would have had to secure the services of accountants to augment its investigation.

Arguments Against: This is an extremely complex area of law. The hospitals are very concerned that the bill undermines their financial position by allowing physicians to refer patients to surgical clinics in which they have an interest. The hospitals are concerned that physician-run surgical clinics will skim off the cream and leave the hospitals with a greater proportion of uninsured patients or others who have lesser means to pay the cost of treatment. The issue is complicated by the fact that there are hospitals that have their own surgical clinics and would indeed benefit directly from the revised physician referral provisions. The House inserted several amendments intended to address the concerns of the hospitals.

The bill codifies Stark in its current form. This is problematic in that the Stark law has been amended several times already, and there are reportedly new rules expected later this year. The Legislature attempted to address this problem by requiring the department to take official notice of future changes in the Stark law or regulations and permitting the department to adopt these changes by reference. If adopted, the department would merely mirror the federal changes. The Governor's Legal Division has expressed concern that the delegation in the bill is improper. The issue is whether the Legislature has provided a proper framework to guide the department, as determined in People v Turman. The bill provides that the department must determine whether or not future revisions pertain to referral by physicians for designated health services and continues to protect the public from inappropriate physician referrals. The bill also defines "designated health service". By doing these things it can be argued that the bill meets the Turman test and that the bill provides an appropriate framework to guide department decisions.

Supporters/Opponents: Supporters of the bill include the Michigan State Medical Society, the Michigan Osteopathic Association, and the Michigan Orthopedic Society.

The Michigan Health and Hospital Association opposed the bill. However, the House adopted several amendments that substantially improved the bills from the hospital perspective. The Michigan Physical Therapy Association opposed the bill in the House. The addition of language applying to licensees other than physicians should have addressed their concern.

Fiscal Information: If the department receives cases in this area, the bill will reduce the costs associated with investigating and prosecuting such cases. There will be a small cost associated with the three annual studies required by the bill. The department will probably turn to the Department of Community Health for assistance in securing data for the report.

Administrative Rules Impact: No changes in the department's rules are anticipated as a result of the bill.