AMARILLO, TX – The federal Stark physician self-referral law prohibits a physician from making a referral to an entity for the provision of Medicare-covered designated health services (“DHS”) if the referring physician (or an immediate family member of the physician) has a financial relationship with that entity. 42 U.S.C. 1395nn(a)(1)(a). DHS include durable medical equipment and supplies and laboratory services, but does not include overnight polysomnographic testing. 42 U.S.C. 1395nn(h)(6); 42 C.F.R. 411.351.

A financial relationship, for purposes of the Stark law, includes the physician’s or immediate family member’s ownership or investment interest in the entity or a compensation arrangement between the physician or immediate family member and the entity. 42 U.S.C. 1395nn(a)(2).

Despite this general prohibition on referrals, several exceptions exist that permit a physician to make referrals for the provision of DHS to an entity in which the physician has an ownership or investment interest. 42 U.S.C. 1395nn(d). These exceptions include the rural provider exception, which applies to referrals made by physicians with an ownership or investment interest in an entity, but only to those referrals for “designated health services furnished in a rural area…if…substantially all of the designated health services furnished by the entity are furnished to individuals residing in such a rural area…” 42 U.S.C. 1395nn(d)(2); see also 42 C.F.R. 411.356(c)(1).

“Substantially all” has been defined to mean “not less than seventy-five percent” of the DHS provided to residents. 42 C.F.R. 411.356(c)(1). A rural area is defined as an area that is not an urban area. 42 U.S.C. 1395ww(d)(2)(D)(ii); 42 C.F.R. 411.351. An urban area is defined as any area designated as a Metropolitan Statistical Area (“MSA”) or New England County Metropolitan Area by the Office of Management and Budget, in addition to several specifically identified New England counties. 42 U.S.C. 412.62(f)(1)(ii).

Thus, a physician with an ownership or investment interest in an entity providing DHS may make referrals to that entity for DHS furnished in a rural area to individuals residing in a rural area, provided substantially all of the DHS furnished by the entity are furnished to individuals residing in a rural area.

There is no definition or guidance on the meaning of “furnished” as used in the rural provider exception. However, based on the language of the statute, the intent of the rural provider exception, and the comments made by CMS discussing the rural provider exception, it is clear that a company is not required to be physically located in a rural area to meet the requirements of the rural provider exception.

The original Stark I law’s rural provider exception applied only to clinical laboratories physically located in rural areas that met certain requirements (Stark I applied to referrals for clinical laboratory services only; the other DHS were added by Stark II). 60 Fed. Reg. 41914, 41980 (Aug. 14, 1995); codified at 42 C.F.R. Part 411. However, Stark II removed the requirement that the provider be physically located in a rural area as a prerequisite to meeting the rural provider exception.

In the preamble to the 1998 Proposed Rules, with respect to the removal of the requirement that the provider be physically located in a rural area, HCFA (now CMS) stated that “[w]e would change the requirement that a rural entity be located in a rural area to instead except referrals for designated health services furnished in a rural area by an entity that furnishes substantially all of its designated health services to individuals residing in a rural area.” 63 Fed. Reg. 1659, 1667 (proposed Jan. 9, 1998); codified at 42 C.F.R. Parts 411, 424, 435, and 455 (“1998 Proposed Rule”).

In discussing the original language of the exception, which applied only to clinical laboratory services if the laboratory furnishing the services was physically located in a rural area, HCFA stated that “we believe Congress included this exception in order to benefit Medicare beneficiaries who live in rural areas where laboratories may not be available without the financial support of local physicians.” Id.

Thus, even when the exception was limited only to laboratories physically located in rural areas, the intent of the regulation was to ensure that residents of rural areas had access to medical services. HCFA went on to explain that the additional requirement of the laboratory being physically located in a rural area was intended “[t]o prevent situations in which physicians who own an urban laboratory set up a storefront or “shell” laboratory with a rural address in order to use the rural exception. In this scenario, the urban owner could make referrals to the rural laboratory, which would in turn refer the tests to the physician’s urban laboratory. Alternatively, urban laboratories with physician owners could set up rural laboratories for the purpose of performing tests referred by the physician owners for their urban patients.” Id.

In the comments to the 2004 Interim Final Rule, CMS stated that “[w]e believe the Congress enacted the rural provider exception to ensure adequate access to DHS for residents in rural areas that might otherwise have difficulty attracting a sufficient number of providers and suppliers.” Interim Final Rule 69 Fed. Reg. 16054, 16083 (March 26, 2004); codified at 42 C.F.R. Part 411, 424 (“2004 Interim Final Rule”).

Ultimately, it is clear that the intent of the regulations, as stated in both the 1998 Proposed Rules and the 2004 Interim Rule, is to ensure that individuals living in rural areas have access to medical services, and the preamble to the 1998 Proposed Rule indicates an intent to remove the requirement that the provider be physically located in a rural area.

In conclusion, based on the statutory language and the intent of the regulations, what is important is that the DHS are furnished in a rural area and are provided to residents of rural areas. Although the rural provider exception does not require the DME supplier to be physically located in a rural area, the supplier must furnish the DHS in a rural area and at least 75% of the DHS must be provided to patients located in rural areas in order to meet the rural provider exception to the Stark law.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].

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