Rural Healthcare Providers and the Law:
An Issue Brief
Funding for this Issue Brief was provided by the Federal Office
of Rural Health Policy Health Resources and Services Administration,
PHS, US DHHS.
Health care delivery is no longer a cottage industry, and its
providers--clinics, hospitals, doctors and other practitioners--are
struggling to cope with important changes including the displacement
of traditional fee-for-service and indemnity insurance by managed
care and the creation of integrated delivery systems which directly
employ or manage them. These changes have created new organizational
forms and modified relationships between professionals, the institutions
in which they work, and the organizations that pay them. The expansion
of contracting under managed care, cost containment, mergers into
integrated networks and the rise of insurance control of patient
groups is creating uncertainty for professionals and providers.
These changes are occurring within a legal structure that grew
to cope with a "traditional" health care delivery system. At the
time that this issue brief is being completed, February 1996,
there are changes being contemplated to meet the demands of the
new market for health care, but those changes are neither certain
nor considered by a consensus to be necessary. This Issue Brief presents the outlines of the laws that are, at this point in
time, most relevant to rural providers.
Navigating through a new health care marketplace that favors economies
of scale and hard bargaining is hardest for the rural provider,
the group that retains much of the cottage industry character.
Rural providers are following market trends and forming networks
and affiliations and contracting with new payers to survive and
compete. As they do so, they urgently seek some fixed points in
the law by which to chart their course. Yet regulatory law that
governs antitrust, fraud and abuse, and provides safe harbors
has been created for a different set of circumstances than those
which face rural providers as they innovate to remain competitive.
This Issue Brief is designed to offer a current (through 1995) explanation and
description of legal and regulatory provisions that affect rural
providers and their ability to adapt. This should not be considered
a legally authoritative source; instead, the Brief seeks to help rural providers understand when they might face
a legal or regulatory situation where they should seek qualified
Who are rural health care providers?
In general, the US Department of Health and Human Services (DHHS)
defines as rural any geographic area not within a Metropolitan
Statistical Area, as delineated by the Office of Management and
Budget (OMB) and the Census Bureau (42 U.S. Code Sec. 1320ww(2)(D)).
Antitrust law also defines a 'rural area' as any definite geographic
area that is nonmetropolitan according to OMB (CCH Medicare/Medicaid
Guide, paragraph 41677). However, for certain purposes DHHS will
look at rural health facilities more narrowly. For example, Section
1102(b) of the Social Security Act requires the Secretary of DHHS
to issue an impact statement for rural hospitals when altering
reimbursement policies; for Section 1102(b) purposes, a rural
hospital must not only be outside a Metropolitan Statistical Area
(MSA), but must also have fewer than 50 beds.1
DHHS will designate a defined geographic area as a 'shortage area'
when either personal health services or primary medical care manpower
are inadequate. (1994 Medicare Explained, Commerce Clearing House,
How do 'fraud and abuse' rules apply to rural providers?
FRAUD is the misrepresentation of material facts for gain. For example,
submitting false claims in order to obtain payment under the Medicare
or Medicaid systems is fraud in the traditional legal sense. Fraud
is a felony and rural providers have no special defenses to such
charges. In 1992, the Health Care Financing Administration (HCFA)
claimed $45 million in allegedly fraudulent overcharges from some
180,000 physicians. Fraudulent claims against the government are
subject to federal prosecution under the False Claims Act and
are punishable by fines of up to $2,000 per claim and expulsion
from Medicare for up to five years. Both individual practitioners
and facilities can be prosecuted.
ABUSE, in the context of health care, involves the provision of inappropriate,
excessive, harmful, or poor-quality healthcare. Medicare and Medicaid
'fraud and abuse' includes incidents or practices by providers,
practitioners, or suppliers that are inconsistent with accepted
medical or business practice and which result in unnecessary costs,
improper payments, or otherwise fail to meet professional standards.
Section 1128(b) of the Social Security Act declares Medicare/Medicaid
fraud and abuse a felony, punishable by fines and imprisonment.
Fraud and abuse includes kickbacks, bribes, and rebates, defined
as the knowing and willful offer to pay, solicit, or receive remuneration
to induce business that Medicare or state healthcare programs
(Medicaid) will reimburse.
What are the most important Safe Harbors available to Rural Providers?
The US DHHS Office of the Inspector General has set out ten broad
areas, generally known as 'safe harbors,' where providers are
exempt from the anti-kickback statute. The ten protected areas
are as follows: investment interests, space rental, equipment
rental, personal services and management contracts, sale of a
practice, referral services, warranties, discounts, employees,
and group purchasing arrangements. (54 Fed. Reg. 3088, as required
by 42 USC 1320, Medicare and Medicaid Patient and Program Protection
Act of 1987)
Meanwhile, Congress continues to refine the definition of which
practices are acceptable and which are abusive. The Ethics in
Patient Referrals Act of 1989 (often called 'Stark I') prohibits
physicians from making referrals for laboratory services to an
entity in which the physician has an ownership interest or other
financial arrangement from which the physician might realize gain.
Congress later expanded the limitations on self-referral in the
Comprehensive Physician Ownership and Self Referral Act (called
Stark II). New Stark I regulations, most of which took effect
September 13, 1995, also apply to Stark II. Stark II final rules
are expected in late 1995 or early 1996. Stark II proposes to
limit physicians' interests in the following:
- clinical laboratory services (prohibited since Jan. 1, 1992)
- physical therapy
- occupational therapy
- radiology and diagnostics
- radiation therapy
- durable medical equipment
- parenteral/enteral nutrients and supplies
- prosthetics and orthotics
- home health care
- outpatient prescriptions
- inpatient or outpatient hospital services
Moreover, under Stark II, the Department of Justice (DOJ) or the
Inspector General of the DHHS need not prove intent to induce
referrals for gain on the part of the provider in question. Like
fraud, claims for improper referrals are also subject to the penalties
provided by the False Claims Act (see above). Settlement agreements
with the DOJ or the Inspector General of the DHHS usually demand
repayment of the claims in question plus a penalty of three to
four times that amount.
Physician investment in medical services is not completely prohibited,
however. Safe Harbors protect legitimate investments in large, publicly traded corporations,
and in small entities, typically joint ventures, where safeguards
minimize any financial influence on a physician's decisions about
patient referral. Safe harbor requirements for small entities
are commonly described as 60-40 rules. Investors in a position
to generate business (i.e., physicians who could make referrals)
may hold no more than 40% of each class of interest during the
previous fiscal year or 12-month period. Furthermore, no more
than 40% of the entity's gross revenue in the prior fiscal year
or 12-month period can arise from interested investors. However,
financial relationships which do not fit squarely within the safe
harbors are prohibited.
What additional legal protections exist for rural providers?
The 1993 Omnibus Budget Reconciliation Act (OBRA) created an exception
to the general rules concerning physicians' interests in ancillary
health care services. The 60-40 ownership provisions will not
apply to designated health services in rural areas (and Puerto Rico), provided that substantially all of those services
are furnished to residents of the rural area.2 (Social Security Act Section 1877(d)) DHHS has proposed eliminating
the 60-40 investor and the 60-40 revenue rules for entities in
rural areas, as defined by OMB and the Census Bureau. DHHS is
now accepting comments on the definition of 'rural' and may adopt
that of 42 CFR 412.62(f)(1)(ii).
The other six standards for safe harbors will not be modified (Secs. 1001.952(a)(2)(ii - v, vii, viii).
The proposed modification of the 60-40 rules will permit an entity
to make a bona fide offer of the investment interest to any person
or entity without regard to whether the prospective investor is
in a position to make referrals, furnish goods or services, or
otherwise generate business for the investment. In place of the
60-40 requirements, at least 85% of the dollar value of the business
in the prior year must arise from services provided to rural residents.
(58 Fed. Reg. 49008)
How does Antitrust law apply to rural providers?
The Antitrust Division of the DOJ and the Federal Trade Commission
(FTC) have issued a Joint Statement of Enforcement Policy and
Analytical Principles relating to antitrust in the health care
industry. The Statement creates nine 'safety zones,' paralleling
the fraud and abuse safe harbors, designed to provide antitrust
guidance to the health care industry as providers contemplate
mergers, joint ventures, and other affiliations, in anticipation
of health care reform. The following is a brief summary of some
of the key provisions in the Statement:3
- Mergers. Most mergers between two general acute-care hospitals, where
one hospital has fewer than 100 licensed beds and a three-year
average daily inpatient census of fewer than 40 patients, will
fall within this safety zone, unless the small hospital is less
than five years old.
- Joint Ventures Involving High Technology or Other Expensive Health
Care Equipment . Generally, no challenge will be made if the joint venture includes
only the number of hospitals whose participation is necessary
to own or operate the equipment, or both.
- Joint Ventures Involving Specialized Clinical or Other Expensive
Health Care Services . The Agencies have never challenged an integrated joint venture
among hospitals to provide a specialized clinical or other expensive
health care service, and they did not create a safety zone for
these types of ventures.
- Collective Provision of Non-Fee-Related Information . The Agencies generally will not challenge provider efforts to
supply purchasers with outcome data or to jointly develop practice
- Fee-Related Information . To qualify for this safety zone, a non-competitor third party
must be responsible for managing the collection of information
that will be given to purchasers. If information is shared among
or available to competing providers, it must be more than three
months old. Furthermore, if information is available to the providers
furnishing data, at least five providers must report these data,
and no individual provider's data may represent more than 25%
of any statistic. Recipients must not be able to identify prices
charged by any individual provider.
- Provider Participation in Exchanges of Price and Cost Information . This safety zone is identical to the one governing providers
that supply fee-related information to third parties.
- Joint Purchasing Arrangements Among Health Care Providers . The Agencies generally will not challenge joint purchase arrangements
if: (1) the purchases account for less than 35% of the total sales
of the product/service in the relevant market; and (2) the cost
of the products/services being purchased accounts for less than
20% of each participant's total revenues.
- Physician Joint Ventures . The Agencies will not generally challenge a non-exclusive physician
network comprising 30% or fewer of the physicians in each physician
specialty who practice in a relevant geographic market. The venture
must create a 'substantial financial risk' for its participants.
- Multi-Provider Networks . The Agencies do not have sufficient experience in evaluating
multi-provider networks at this time to create a safety zone.
In analyzing a multi-provider network for antitrust violations,
the Agencies will consider the geographic and service markets
in question, the competitive effects of the network upon health
care providers in those markets, the impact of selective contracting
by the network and any efficiencies created by the network.
Rural health care systems may face additional difficulties in
expanding into previously unserved communities, since DOJ/FTC
look at the percentage of physicians an entity controls as evidence
of its market power. Antitrust law considers a 'relevant market'
to be a group of products and producers to whom geographically
similarly situated consumers would turn if one producer's product
became significantly more expensive, scarce, or the quality declined.
On the other hand, rural hospitals enjoy some exemptions to help
them attract physicians to their localities. A rural hospital
may offer a physician benefits such as income guarantees provided
that he/she is relocating to start a practice in a new geographic
area, or must have just completed an internship or residency.
Payments to obtain referrals from physicians already practicing
at another hospital in the area are forbidden. Congress is considering
establishing seven standards for physician recruiting safe harbors
for rural hospitals, medical service shortage areas, and hospitals
with a large medically underserved population. The proposed requirements
are the following:
- Agreements between the hospital and the practitioner must be in
- The new practice must be at least 100 miles from the old one,
and at least 85% of the revenue from the new practice must arise
from treatment of new patients;
- Benefits may be awarded for no more than three years, unless the
hospital is in a shortage area;
- The entity providing the benefits cannot condition them on volume
- The physician cannot be restricted from being on staff at other
- Adjustments of benefits based on volume of business generated
are prohibited; and
- The physician must treat Medicare and Medicaid patients.
A proposed IRS Revenue Ruling, which was available for comment
by the healthcare industry until July 3, 1995, set forth five
situations involving physician recruiting.4 According to this proposal, there are three important criteria
to follow when determining the appropriateness of a hospital's
physician recruitment incentives. First, the hospital must demonstrate
objective evidence of a need for the physician's services. Second,
the recruiting activities must bear a reasonable relationship
to promoting and protecting the health of the community. And finally,
the agreement must meet certain standards of formality, such as
being properly documented and negotiated at arm's length. These
three criteria are set out more fully below.
(1) Objective Evidence Demonstrating a Need for the Physician's Services
Examples of the type of objective evidence demonstrating a need
for the physician's services may include, but are not limited
to, the following:
- The hospital is in an area designated by the US Public Health
Service as a Health Professional Shortage Area (HPSA); or
- The hospital is in an economically depressed area and has conducted
a community needs assessment that indicates a shortage of the
type of physician service being recruited; or
- The hospital has determined that it needs additional physicians
of the type being recruited to provide adequate coverage and to
ensure a high quality of medical care.
(2) Recruiting Activities Bearing a Reasonable Relationship to Promoting
and Protecting the Health of the Community
These activities may include, but are not limited to, the following:
- payment of a bonus;
- guarantee of a mortgage;
- reimbursement of malpractice insurance;
- provision of subsidized office space for a limited time;
- provision of start-up financial assistance;
- payment of moving expenses;
- reimbursement of malpractice "tail" coverage; or
- provision of a reasonable private practice income guarantee.
(3) Other Factors to Be Included in a Proper Physician Recruitment
The following factors should all be included in a proper agreement
- proper documentation;
- commercially reasonable terms;
- negotiated at arm's length; and
- approval by hospital's board of directors or its designees.
Some states have attempted to shield health care providers from
federal antitrust action for collaborative activities by enacting
Health Care Cooperative Acts (HCAs).6These laws attempt to bring sharing arrangements among facilities
and providers within the scope of state action immunity to antitrust
law if the parties can show the public benefit of their joint
Wyoming, for example, enacted on July 1, 1995 legislation titled
"Health Care Cooperative Arrangements for Antitrust Exceptions,"
which exempts collaborative health care arrangements from antitrust
law by imposing active state regulation and supervision over such
arrangements. The Wyoming legislation requires certain background
material and empowers the director of the Department of Health
to accept applications only when it is determined that "the arrangement
is more likely to result in a better overall promotion of the
quality of health care, access to health care, a lower cost for
health care and the increased availability of a comprehensive
health care system." Any application that improves certain criteria
at the expense of other criteria will be accepted only if it is
clear that the improvements will outweigh the negative impacts.7
What are the malpractice standards for rural health care providers?
The type of physician most often sued for medical malpractice
is aged 41-45, in full-time solo practice, board-certified and
US-educated; these types of physicians are more likely to serve
a rural community than an urban one. Physicians practicing OB-Gyn,
general internal medicine, general surgery, orthopedic surgery,
and general and family practice are most commonly sued. Primary
care gatekeepers are often responsible for many aspects of care
which may lead to a suit, such as prescription of medication,
consultations, diagnostic evaluations, and the administration
of anesthesia. This also describes a physician who is more likely
to serve a rural community than an urban one. Nevertheless, prevailing
wisdom has been that rural physicians are less likely to be sued
than their urban counterparts. However, two studies have found
that geographic factors (urban vs. rural) do not seem to have
an impact on physicians' malpractice claim experience.8
The proportions of OB-Gyns and of surgeons who have had at least
one claim filed against them are 57% and 53% respectively. Birth
outcomes, breast cancer, displaced discs, acute myocardial infarction,
lung cancer, femoral fracture, appendicitis, and cataracts bring
the highest numbers of claims. The highest damage awards tend
to occur in cases involving neurology, pediatrics, colon and rectal
surgery, OB-Gyn, and pathology.
Traditionally, tort law afforded rural practitioners some additional
protection from liability through the locality rule, which used
a community-based standard of care to determine negligence. However,
most courts have now abandoned the traditional doctrine in favor
of national standards for medical decisionmaking, declaring the
older rule irrelevant to contemporary practice, especially for
physicians who are board-certified, e.g., Morrison v. Macnamara, 407 A.2d 555 at 565, D.C. Ct. App. 1979 (holding that the standard
of care as to board-certified physicians, hospitals, medical laboratories,
and other health care providers is to be measured by the national
standard). In response to standardization of medical treatment,
some states (e.g., Maine, Florida, Vermont, and Minnesota) are
developing practice guidelines that physicians can use as evidence
in their defense in malpractice cases.
In implementing the Medicare and Medicaid Patient and Program
Protection Act of 1987 (Public Law 100-93), DHHS ruled that allegations
of medical malpractice will continue to be evaluated by peer review
organizations (PROs). (57 Fed. Reg. 3298) However, HCFA has defined
PRO areas as states (49 Fed Reg. 7202), seemingly eliminating
the community-based standard of care which might not demand the
same things from rural as from urban practitioners. DHHS has commented
that while standards will continue to be established on the state or national level,
a facility's technical equipment and level of expertise will be considered
in the review of malpractice claims. Whether or when the patient
in question should have been transferred to a more specialized
facility will be one of the factors PROs will take into account.
Furthermore, in designated shortage areas, hospitals will be allowed
to pay for malpractice insurance for obstetricians or certified
nurse-midwives without being in violation of antitrust laws.
1. See 42 U.S. Code Sec. 1395ww(d)(5)(D)(iii) for the definition
of 'sole community hospital,' and
Sec. 1861(aa)(2) of the Social Security Act for the definition
of 'rural health clinic'.
2. 'Substantially all' has been defined to mean that at least
75 percent of the individuals to whom services are furnished reside
in a rural area. 60 Fed. Reg. 41914.
3. See Department of Justice press release, Sept. 27, 1994.
4. Source: "Tax Consequences of Physician Recruitment Incentives
Provided by Hospitals Described in Section 501(c)(3) of the Internal
Revenue Code," Internal Revenue Bulletin, April 3, 1995.
5. Size, Tim. "Antitrust and Certificates of Public Advantage,"
Rural Wisconsin Health Cooperative, June 1995.
6. Teevans, James W. and Daniel M. Campion. "State Action Immunity:
Immunizing Health Care Cooperative Agreements." Washington, DC:
Alpha Center, 1995.
7. "Rural Providers Risk Antitrust Scrutiny: State Legislation
Sets Up Supervision of Cooperative
Arrangements," Integrated Health Care Delivery Systems, Vol. 2, No. 12, August 1995.
8. Sloan et al., "Medical Malpractice Experiences of Physicians--Predictable
or Haphazard?" Journal of the American Medical Association, December 15, 1989; Rolph et al., "Malpractice Claims Data as
Improvement Tool," Journal of the American Medical Association, October 16, 1991.