What is the Stark Law?
Enacted in 1989 as a means to combat fraud and abuse in the federal Medicare and Medicaid programs, the federal Stark Law has evolved into a complex regulatory scheme governing fee-for-service physician self-referrals. Designed as an anti-kickback measure to prevent physicians from sending patients away from their practices to obtain services from entities in which the physicians or their family members have an ownership interest or compensation arrangement, the Stark Law prohibits physicians from referring Medicare or Medicaid patients to entities with which the physicians stand to benefit financially . Depending on the specific situation involved, the Stark Law may either bar the physician from referring the patient to the provider or may bar the facility from billing for the referred services altogether. Stark Law violations can result in steep penalties, so it is critical for physicians to understand how their financial relationships with hospitals, imaging centers, laboratories, and other entities can result in Stark Law liability.
Provisions of the Stark Law
Stark Law contains some key provisions. If a physician or an immediate family member of the physician, who is one of those statutorily defined "persons," has a financial relationship with an entity, then that physician may not make a referral to another entity for which the person can make a claim for Medicare or Medicaid payment unless the financial relationship satisfies one or more statutory exceptions. A financial relationship exists if there is any direct or indirect ownership or investment interest, or any compensation arrangement between the referring physician and the entity for which the claim is made. Even if the physician also provides services for other patients, only the patient whose care is the subject of the referral is at issue to determine compliance.
The exceptions include, among others, a statutory exception for in-office Ancillary Services, with numerous restrictions on the provision of those services. In addition, the exceptions include a statutory exception for the sharing of risk and savings between physicians or between a hospital and a physician when conditions are met. Stark Law prohibits the compensation of physicians based on the volume or value of the services provided.
These statutory exceptions also have been changed over time to accommodate changes in the healthcare delivery system as well as the way that healthcare is reimbursed. For example, the statutory exception for employment agreements has been broadened to include independent contractors and the statutory exception for professional courtesies has been broadened to include patient referrals by a hospital to another entity if payment is not made as donations, gifts, or courtesy discounts, etc.
Typical Stark Violations
The most common violation occurs when there is a financial arrangement between a hospital and a referring physician, often occurring in the form of a medical directorship agreement. Under those circumstances, a physician performing administrative or management services could potentially be excluded from participation in federal health care programs due to the anti-kickback statute as well as the Stark Law. The following provide some common examples:
- Referring patients to a facility in which the physician or the physician’s immediate family member owns, leases, or receives compensation from the facility;
- Referring patients to an entity in which the physician is a shareholder, investor, or where the physician receives compensation, unless such physician is a limited partner in a limited partnership or a non-controlling, non-managing shareholder of a corporation;
- Referring patients for designated health services for which the physician may receive a fee referral or any other remuneration from the entity supplying such services; and
- Ordering or certifying without appropriate documentation laboratory services for which the physician or the immediate family member has a financial relationship.
As evidenced by these examples, the most common Stark Law violations involve financial arrangements between hospitals and referring physicians. Common scenarios include:
- Where a hospital does not pay a physician for actual services performed, but pays an above-market hourly or per diem cost per patient amount based on the volume of referred business that the physician generates. These types of arrangements fail the "Fair Market Value Exception" under Stark Law and are prohibited as a result.
- Where a hospital and referring physician enter into a joint venture arrangement for investment purposes, and one or both parties have an aggressive plan and intent to develop and generate referred business for the joint venture, for example, by developing a community-wide referral network among physicians and/or other health care providers for the joint venture. This violates the "Anti-Kickback Safe Harbor" under the Medicare and Medicaid Anti-Kickback statute.
- Where a hospital enters into a "Medical Directorship Agreement" with a physician to perform administrative or management-type services for a facility. In many cases, these arrangements have been audited and excluded from participation in federal health care programs due to Stark Law violations. These relationships often involve excessive fees for services, and/or may be inconsistent with the services that a third party would provide to the hospital.
- Referring patients who are on Medicare to a home health agency in which the physician has an ownership interest. Not only is this an anti-kickback violation, it is also a violation of the Civil Monetary Penalties Statute prohibiting an arrangement that improperly influences referral or arrangements that induce the referral of Medicare patients.
- Receiving gifts, above and beyond reasonable compensation, from a hospital from a physician for referring patients to them. Not only could this be considered to have the improper intent to induce referrals, it can also lead to a violation of the Anti-Kickback statute, including the "Personal Services and Management Contracts safe harbor" exemption, along with potential violations of the Stark Law.
These are just some of the common examples that we have seen in the physician/hospital health care arena.
Stark Law Examples
The following are some examples of cases when the Department of Justice and the HHS-OIG found violations of the Stark Law:
US ex rel. McClaskey v. Chan, Schottland & Soffel LLC – A qui tam action was brought against a medical service company, a hospital, an ambulatory surgery center, and multiple physicians because of a financial relationship that existed between the ASC (and the hospital) and the physicians. The physician’s compensation from the ASC was found to be in excess of what the fair market value was, and this relationship violated the Stark law, the court decided this was a violation of the Stark law and that penalties were appropriate.
US v. Baystate Medical Center – A qui tam suit was filed in this case, and the facts are as follows: the health system and the entity named were engaged in a compensation arrangement that violated the Stark Law, so they knew, or should have known about the violation, and then would have violated Section 3730(b) because they both involved a false claim and resulted in damages to the United States. The wrongdoing: co-defendants paid physicians to do administrative work that did not involve any real work, that helped healthcare providers unnecessarily bill Medicare for services that were unnecessary. As a result, the defendants agreed to pay back $1.1 million to resolve criminal charges and civil liability because of this wrongdoing.
US v. Marathon Inspectors, Inc. – US district court for the Middle District of Tennessee held that the defendant violated Section 1128(a)(6) of the Social Security Act, because the defendant paid kickbacks to certified public accountants in exchange for referrals of annual inspection of retails food sales and vending establishments by the local health department. HCFA, now known as CMS, was told of this situation by the Office of Inspector general and the following day the defendant terminated their contract with the health departments. The reason for the termination was to avoid any further referrals of business from those Health department.
US ex rel Munoz v. Bergen Brunswig Corp. – The relator who brought this qui tam lawsuit, was employed as a pharmacy sales representative for the defendant. He alleged that the defendant induced prescribers to write prescriptions for medically unnecessary lab tests, which the defendant submitted to the Medicare program. The defendant engaged in this conduct in order to meet sales quotas and to receive financial benefits in the form of bonuses and trips. Medicare excluded all amounts claimed, sought to be recovered, from the defendant and the defendant was liable to repay triple damages plus penalties for submitting false claims.
US ex rel. Simpson v. Bayer Corp. – The plaintiff relator alleged that the defendant engaged in illegal off-label marketing. The plaintiff was a company employee and said that the defendant knowingly caused false claims to be submitted to Medicare for the off-label uses promoted by the company. The defendant was alleged to have promoted 13 drugs, all of which were in violation of the law. The defendant ultimately settled with the government and agreed to pay out $14.6 million to resolve allegations that it had caused false claims to be submitted for off-label use.
US ex rel Garrison v. Lincare Holdings, Inc. – The plaintiff was a former employee of the defendant. She brought claims under the False Claims Act alleging that the defendant violated the Stark law by offering contracts to physicians to act as customer service representatives at clinics and billing companies. These services included marketing services to beneficiaries and to doctors.
Stark Law and Compliance
Healthcare providers can take a variety of steps to help ensure compliance with Stark Law. For example: Put an effective compliance plan in place. Such a plan may help protect a provider against liability under Stark Law. A plan should be put in place after an assessment of the organization’s exposure to legal liability based on existing relationships with physicians, the strength of such relationships, and the resources available to devote to ongoing compliance. Train employees and contractors on Stark Law. Training is an important element in safeguarding against liability under Stark Law. Healthcare organizations should implement training for employees regarding the law’s basic tenets. Organizations should also have a plan in place for notifying and training clients and other independent contractors about Stark Law. Review compensation and all transactions with physicians. Providers could reduce their risk of violating Stark Law through regular examination of physician-related compensation, leases , and other transactions. For example, a health system may periodically review its employment contracts with physicians and compensation arrangements with contractors in order to determine if such agreements comply with Stark Law requirements. If violations are discovered, the provider may want to look into revising the agreements in order to comply with the law. Implement a reliable auditing procedure. Regular audits are essential for detecting non-compliance with Stark Law. Audits should not only include new and existing compensation and contractual relationships with referring physicians, but also cover all financial relationships between a provider and physicians. An audit should further focus on the compensation paid to physicians, and whether such compensation bears a reasonable relationship to fair market value. Seek advice of legal counsel. Providers should seek guidance of legal counsel, when necessary, regarding compliance with Stark Law. Counsel may be able to help providers with any needed remediation.
The Influence of Stark Law on Healthcare
Stark Law imposes particular challenges for healthcare providers and medical practices. It continues to evolve with time as regulations and implementation lag behind the law itself. What is made clearer by the new regulations is that physicians and health care professionals have a responsibility to be more aware of the limitations of permissible referrals to a physician’s entity or provider that contains a financial relationship with the referring physician or health care professional.
Liability exists for a physician who makes a referral for designated health services (DHS) and has a financial relationship with the entity providing the DHS. The Medicare program may impose a fine of three (3) times the amount claimed for each service in addition to an amount equal to up to twice the amount of the payment made for each service. Medically unnecessary services may also be excluded and must be paid back to the Medicare program.
The exception to Stark Law and the one that is most often relied upon is Stark Law’s in-office ancillary services exception. This permits a physician to refer a patient for many kinds of diagnostic tests, such as X-ray and laboratory tests, if the physician’s group practice provides such services and satisfies certain conditions. These conditions include, but are not limited to, the following:
To qualify for the in-office ancillary services exception, the physician practice must be a "group practice" within the definition in the federal regulations. This requires that the practice be a single legal entity, that the individual physicians themselves must perform a substantial portion of their professional services through the group practice, that the group practice be located in a single building, and that the majority of the group practice’s total compensation must come from services provided through the group practice.
To qualify for the in-office ancillary services exception, the space where the DHS are furnished must be leased in writing under a rental arrangement. The rent must not be based on the volume or value of referrals or other business generated; and it must be fair market value; it must be the same percentage rental charge on both DHS and non-DHS revenues and it must not exceed the safe-harbor guidelines for rental payments in the anti-kickback statute.
Notwithstanding the Stark Law prohibition against referral for certain services where there is a financial relationship between a physician and the physician’s entities, o suffers appreciable deterrence and uncertainty as to damage awards and liability where financial relationships genuinely further the interests of the patients.
Recent Developments in Stark Law
In recent years, the ongoing debate over the Stark Law has sparked discussion of potential reform. Regulatory guidance is increasingly likely to be the focus of such reform. The Stark Law background has set the stage for a new wave of healthcare policy on the horizon.
The Centers for Medicare and Medicaid Services (CMS) proposed changes that attempt to modernize the industry’s thinking on the Stark law. In a pathbreaking move, CMS signaled its support for value-based compensation arrangements. It will use forthcoming posts as opportunities to provide more detailed comments on the proposed changes. "CMS proposes to revise… [the] definition of fair market value… to permit the use of commercial reasonableness to help determine whether the compensation arrangement is consistent with industry standards," according to an analysis by Epstein Becker Green. The commentary states further, "CMS requests comment on whether there are situations in which fair market value does not equal commercial reasonableness for purposes of complying with the Stark Law." CMS also indicated its possible interest in relaxing restrictions on legally sanctioned referrals. Only those who directly participate in the care of a patient during a specified time period may participate in a value-based arrangement with the referring provider, because the referring provider must have "meaningful involvement" in the project. These proposals may be viewed as CMS recognizing the retail impact of Stark Law on such commonplace practices in the healthcare industry by defining exceptions that otherwise fall within the ambit of the law.
Conclusion: Complying with the Stark Law
In this post we have examined what constitutes "financial relationships" under the Stark laws, several situations in which a healthcare provider can avoid liability for Stark violations, the penalties for violating the Stark laws, some examples of Stark law violations, and how a healthcare provider can ensure that it isn’t inadvertently violating the Stark laws. We have also examined some enforcement actions against healthcare providers who have been found to be in violation of the Stark laws , including a violation involving a physician’s failure to acknowledge conflicts of interest involving patients who were referred to him. There is no question that compliance with the Stark laws is complicated and that it is imposes burdensome obligations on healthcare providers. However, the potential penalties for a Stark violation can be very significant. Accordingly, healthcare providers should do everything possible to ensure that they are complying with the Stark laws.
