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Ownership Arrangements Only

Publicly traded companies exception

The Stark law and final rule provide a number of exceptions that are applicable to ownership and/or compensation arrangements that a physician or immediate family member of a physician may have with certain organizations that are publicly traded, including stock or mutual funds in such companies. These exceptions are generally limited in their scope and application. The phase III final rule made no substantive changes to these exceptions. Specific exceptions are provided for ownership interests in a designated health service entity via:

Publicly traded securities exception
42 CFR § 411.356(a)) builds on the statutory language to exclude from an ownership or investment interest that is subject to the Stark law, ownership of certain investment securities (including shares or bonds, debentures, notes, or other debt instruments) that, at the time of the referral could be purchased on the open market and meet certain other requirements as follows:
  • The investment securities are listed for trading on the New York Stock Exchange, the American Stock Exchange, or any regional exchange in which quotations are published on a daily basis, or foreign securities listed on a recognized foreign, national, or regional exchange in which quotations are published on a daily basis;
  • Traded under an automated interdealer quotation system operated by the National Association of Securities Dealers; or
  • Listed for trading on an electronic stock market or over-the-counter quotation system in which quotations are published on a daily basis and trades are standardized and publicly transparent.
Additionally, the securities must be in a corporation that had stockholder equity exceeding $75 million at the end of the corporation's most recent fiscal year or on average during the previous 3 fiscal years. “Stockholder equity” is the difference in value between a corporation's total assets and total liabilities.

Mutual funds exception
Under 42 CFR § 411.356(b), CMS also makes an exception to the referral prohibition related to ownership/investment interests in:
  • Ownership of shares in a regulated investment company, if the company had, at the end of its most recent fiscal year, or on average during the previous three fiscal years, total assets exceeding $75 million.
  • A regulated investment company is defined in section 851(a) of the Internal Revenue Code.

Ownership/investment interests in rural providers exception

The Stark law and 42 CFR § 411.356(c)(1) provide general exceptions for ownership/investment interests in certain entities, including rural providers. The exception applies to ownership/investment interests in a rural provider, in the case of referrals for designated health services (DHS) furnished in a rural area by the provider.
  • The rule defines a rural provider as an entity that furnishes substantially all (not less than 75 percent) of the designated health services that it furnishes residents of a rural area.
  • Rural areas are areas other than those defined as "urban areas" under 42 CFR 412.62(f)(1)(ii) (which generally defines an urban area as a metropolitan statistical area or New England county metropolitan area consisting of certain counties in New England).
Because the exception is solely applicable to ownership arrangements, if a physician or family member has a compensation arrangement with a DHS entity in a rural area, that compensation arrangement would need to comply with the requirements of an exception applicable to compensation arrangements. 
The Phase III Final Rule made no substantive changes to either the rural provider exception or the definition of what constitutes a “rural area” for purposes of the exception.  In phase III, the Centers for Medicare & Medicaid Services (CMS) provided useful commentary to clarify that a location is rural if it is not located in a metropolitan statistical area (MSA). CMS further clarified that a “micropolitain statistical area” is not a MSA and is therefore in a rural area. 
Note that even in the case of rural areas, to qualify for the ownership in rural provider exception, a rural provider must also furnish substantially all (not less than 75 percent) of the designated health services it furnishes to residents of a rural area. Accordingly, even though an entity may be physically located in a rural area, the particular rural provider may, or may not, meet this independent criteria to permit ownership interests in the provider to qualify under this exception.

Hospital ownership exception

The Stark law provides three exceptions that are applicable to hospital ownership by a physician or immediate family member of the physician. One exception applies solely to ownership of a hospital in Puerto Rico. Another exception applies to ownership of a hospital in a rural area. The last exception has greater application, as it provides an exception for ownership interests in a “whole hospital” not located in Puerto Rico or rural areas.
The exceptions only apply to direct or indirect ownership interests in hospitals. To the extent that a physician or an immediate family member has a separate compensation arrangement with a hospital (such as through a service arrangement, employment arrangement or the like), then that compensation arrangements must meet a separate exception to the law to permit physician referrals to the hospital.

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