On March 26, 2004, the Centers for Medicare and Medicaid Services ("CMS") published an interim final rule with comment period ("Phase II" or "Phase II Rule") primarily designed to implement certain provisions of the "Stark II" physician self-referral statute ("Stark Law") that were not addressed in the Phase I final rule published on January 4, 2001 ("Phase I" or "Phase I Rule"). CMS will accept comments on the Phase II Rule until June 24, 2004. This regulation will become effective July 26, 2004.

In Phase II, CMS reiterates two of its key regulatory objectives articulated during the Phase I rulemaking process. CMS states that it has endeavored (i) "to reduce the burden and prescriptive nature of the rule while applying the statute and maintaining the integrity of the regulatory framework," and (ii) to provide "bright line" guidance regarding financial arrangements between referring physicians and health care providers wherever possible. In addition, in the interest of "expediting publication" of the Phase II rules, CMS postponed the issuance of regulations applying the Stark Law to services furnished under the Medicaid program (with the exception of the provision for Medicaid managed care plans).

The Phase II Rule provides a welcome degree of additional flexibility in a number of respects (i.e., through new regulatory exceptions and modified interpretations) that should facilitate Stark compliance for a variety of common contracting arrangements. Phase II also attempts to clarify many of the ambiguities identified in public comments following issuance of the Phase I Rule. At the same time, however, substantial "gray areas" remain as a result of certain interpretations and standards adopted in this Rule, or left unaddressed, that essentially undercut CMS’s "bright line" guidance goal. Further, while the Phase II Rule substantially reduces provider reporting requirements and attempts to create more flexible options for group practices in meeting the "same building" requirement of the in-office ancillary services exception, even these less rigid standards will likely entail substantial administrative burdens on providers seeking to document their Stark compliance status. Representatives of CMS and the Department of Health and Human Services’ Office of Inspector General ("OIG") have previously indicated that the government’s Stark Law enforcement efforts are likely to accelerate after the Phase II regulations are in place. With the effective date in July 2004 soon approaching, and increasing judicial acceptance of qui tam (whistleblowers) cases based on Stark Law violations, the need for careful Stark Law compliance has never been greater. Accordingly, this memorandum highlights those sections of the Phase II Rule that we believe will be of greatest interest to our clients.