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Overview of Issue


The “Stark Law” is the common industry name utilized in referring to the Federal prohibition against physician self-referrals of Medicare patients.  See 42 U.S.C. § 1395nn.  Named for the chief congressional sponsor of the first major federal legislation on the issue, Representative Fortney (Pete) Stark (D-Cal), the Stark law addresses the inherent conflicts of interest that exist when a physician stands to gain financially from making patient care referrals.  Enacted in two distinct parts and the subject of numerous implementing regulations, the Stark law broadly prohibits physicians from making referrals to an entity for the furnishing of “designated health services” (DHS) payable by Medicare, if the physician (or an immediate family member of the physician) has a financial relationship with the entity.1

1The referral prohibition contained in the Stark law applies only to the referral of patients for statutorily defined “Designated Health Services.”  Currently, Designated Health Services are defined as: clinical laboratory services; physical therapy services; occupational therapy services; radiology services, including ultrasound, MRI and CT scans; radiation therapy services; durable medical equipment; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services.  42 U.S.C. § 1395(h)(6); see also § 1395nn.

Correspondingly, in addition to prohibiting the physician’s action in making the referral, the Stark Law prohibits any provider from submitting claims for payment to Medicare for services provided as the result of a prohibited referral.  42 U.S.C. § 1395nn.  The prohibition contained in the Stark Law is broad and sweeping in application.  However, numerous statutorily defined exceptions exist, permitting certain narrowly defined financial arrangements between providers, within carefully regulated parameters.

The ban on physician self-referrals that is contained in the Stark law is broad and sweeping.  It is, however, subject to numerous exceptions.  See 42 U.S.C. 1395nn(b) – 1395nn(e).  The exceptions, in turn, are subject to significant regulatory interpretation and qualifying criteria.  The exceptions are listed below, along with citations to corresponding authority, which must be fully reviewed before any exception can be deemed applicable to a particular set of facts and circumstances.

  • General Exceptions: Physician services 42 U.S.C. § 1395nn(b)(1); 42 C.F.R. Subpart J, § 411.355(a).  In-office ancillary services 42 U.S.C. § 1395nn(b)(2); 42 C.F.R. Subpart J, § 411.355(b).  Pre-paid plans 42 U.S.C. § 1395nn(b)(3); Intra-family rural referrals 42 C.F.R. Subpart J, § 411.355(j).  Academic medical centers 42 C.F.R. Subpart J, § 411.355(e).  Implants furnished by an ASC 42 C.F.R. Subpart J, § 411.355(f).  EPO/dialysis-related drugs furnished/ordered by ESRD facility 42 C.F.R. Subpart J, § 411.355(g).  Preventive screening tests, immunizations and vaccines 42 C.F.R. Subpart J, § 411.355(h).  Eyeglasses and contact lenses following cataract surgery 42 C.F.R. Subpart J, § 411.355(i).
  • Permitted Ownership and Investment interests: Hospital ownership exception (commonly referred to as the “whole hospital exception”) 42 C.F.R. Subpart J, § 411.356(c)(3); 69 Fed. Reg. 16084-85; Publicly traded securities exception 42 U.S.C. § 1395nn(c)(1); 42 C.F.R. Subpart J, § 411.356(a).  Regulated investment company exception 42 U.S.C. § 1395nn(c)(2); 42 C.F.R. Subpart J, § 411.356(b).  Rural provider exception 42 U.S.C. § 1395nn(d)(2); 42 C.F.R. Subpart J, § 411.356(c)(1); 69 Fed. Reg. 16082; CMS AO 98-001; CMS AO 98-002.  Hospitals in Puerto Rico 42 U.S.C. § 1395nn(d)(1); 42 C.F.R. Subpart J, § 411.356(c)(2); Ownership or Investment Interests in Retirement Plans 42 C.F.R. Subpart J, § 411.351(3)(i); 73 Fed. Reg. 48737-38.
  • Permitted Compensation Arrangements: Rental of Office Space 42 U.S.C. § 1395nn(e)(1)(A); 42 C.F.R. Subpart J, § 411.357(a).  Rental of Equipment 42 U.S.C. § 1395nn(e)(1)(B); 42 C.F.R. Subpart J, § 411.357(b).  Bona fide employment relationships 42 U.S.C. § 1395nn(e)(2); 42 C.F.R. Subpart J, § 411.357(c).  Personal service arrangements 42 U.S.C. § 1395nn(e)(3); See also 42 C.F.R. Subpart J, § 411.357(d).  Physician recruitment 42 U.S.C. § 1395nn(e)(5); 42 C.F.R. Subpart J, § 411.357(e).  Retention payments in underserved areas 42 C.F.R. Subpart J, § 411.357(t).  Isolated transactions 42 U.S.C. § 1395nn(e)(6); 42 C.F.R. Subpart J, § 411.357(f).  Unrelated remuneration 42 U.S.C. § 1395nn(e)(4); 42 C.F.R. Subpart J, § 411.357(g).  Group practice arrangements with hospitals 42 U.S.C. § 1395nn(e)(7); 42 C.F.R. Subpart J, § 411.357(h).  Payments by a physician 42 U.S.C. § 1395nn(e)(8); 42 C.F.R. Subpart J, § 411.357(i).  Charitable donations by a physician 42 C.F.R. Subpart J, § 411.357(j).  Nonmonetary compensation up to $300, 42 C.F.R. Subpart J, § 411.357(k).  Fair market value compensation 42 C.F.R. Subpart J, § 411.357(l).  Medical staff incidental benefits 42 C.F.R. Subpart J, § 411.357(m).  Risk sharing arrangements 42 C.F.R. Subpart J, § 411.357(n).  Compliance training 42 C.F.R. Subpart J, § 411.357(o).  Indirect compensation arrangements 42 C.F.R. Subpart J, § 411.357(p)(1). Referral services 42 C.F.R. Subpart J, § 411.357(q).  Obstetrical malpractice insurance subsidies 42 C.F.R. Subpart J, § 411.357(r); 73 Fed. Reg. 48733 (Aug. 19, 2008); Professional courtesy 42 C.F.R. Subpart J, § 411.357(s).  Community-wide health information systems 42 C.F.R. Subpart J, § 411.357(u).  Electronic prescribing items and services 42 C.F.R. Subpart J, § 411.357(v).  Electronic health records items and services 42 C.F.R. Subpart J, § 411.357(w).
  • Innocent Entity Exceptions: Stark is a strict liability statute, meaning that if a prohibited referral is made and the prohibited claim submitted to Medicare for reimbursement, sanctions will apply, without the necessity of proving a party’s intent. There are only two narrow exceptions to this strict liability provision of the Stark law: DHS entity’s lack of knowledge of the identity of the referring physician, 42 C.F.R. Subpart J, § 411.353 (e); and the DHS entity’s temporary and unavoidable period of non-compliance, 42 C.F.R. Subpart J, § 411.355(f).

Unless an exception applies, the Stark law prohibitions disallow claims to Medicare for DHS if the referral originated from a physician who has a “financial relationship” with the entity providing the service.  42 U.S.C. § 1395nn(a)(1).  Financial relationship under Stark is defined as “a direct or indirect ownership or investment interest” or “a direct or indirect compensation arrangement, and includes not only the physician’s personal financial relationships, but also the financial interests and relationships of the physician’s immediate family members.  42 U.S.C. § 1395nn(a)(2); see also 42 C.F.R. Subpart J, § 411.354(a)(1) (defining “financial relationship”).

Policy


Critics of physician self-referral arrangements argue that allowing a physician to hold a financial interest in an entity to which he refers encourages over-utilization of healthcare services which, in turn, drives up health care costs.  The policy behind the Stark law and other self-referral legislation efforts on the state and federal levels revolve around ensuring that the judgment of a referring physician is not clouded by his own personal (or his family member's) financial incentives.  During the 1980s, with the new prospective payment system as a backdrop, the healthcare industry in the United States began to see a shift from inpatient to outpatient locations for many health care services.  This shift spawned a proliferation of physician investments in free-standing healthcare facilities, and brought the long-standing debate over physician self-referrals to the forefront.  A nationwide debate ensued, involving the media, the medical community and healthcare policy makers, regarding the propriety of physicians realizing financial gains from their healthcare treatment decisions and referrals.2

2See, e.g., Relman, A.S., The New Medical Industrial Complex, New Engl. J. Med. 320:1275-1278 (1980); Waldholz, M. and Bogdonich, W. Hospitals that Need Patients Pay Bounties for Doctors’ Referrals, Wall St J., (March 1, 1989); Bognoich, W. and Waldhotz, M., Doctor-Owned Labs Earn Lavish profits in a Captive Market, Wall St. J. (February 27, 1989).

By 1989, the Office of the Inspector General had issued a Report to Congress providing statistical evidence of the impact physician financial interest played on patient care and healthcare costs.  Office of the Inspector General, U.S. Dep’t of Health and Human Services, Financial Arrangements Between Physicians and Health Care Businesses, OAI 12-88-01410 (May, 1989).  Specifically, the Report reflected as a “major finding” that “patients of referring physicians who own or invest in independent clinical laboratories received 45 percent more clinical laboratory services” than the general population of Medicare patients, resulting in $28 million of additional charges to the Medicare program in 1987 alone.  Id. at iii.

Representative Stark was the principal sponsor of the anti self-referral legislation introduced in 1988 and ultimately passed into law in 1989 as the Ethics in Patient Referrals Act (now commonly known as Stark I).  When enacted in 1989, the Stark law applied only to physician referrals for clinical laboratory services.  However, Congress continued its review of the industry, and of the impact of self-referrals in other physician ownership arrangements.  In the early 1990s, several well-publicized studies addressed the disparity of referral patterns between physicians that held a financial interest in the entities to which they referred, as compared to the referral patterns of those physicians that did not hold such financial interests.3

3See, e.g., Fla. Health Care Cost Containment Bd., Joint Ventures Among Health Care Providers in Florida , Vol. 2 (Sept. 1991).  The Florida legislature responded by enacting the state’s first anti self-referral legislation, the Florida Patient Self-Referral Act of 1992.  See Fla. Stat. Ann. § 456.653.

Each of the studies showed a dramatic increase in utilization for physicians that held a financial interest in the patient’s referral.  Specifically, the Florida study reflected that physician-owned facilities averaged twice the volume of procedures to that of facilities not owned by physicians; 27% more home health visits per patient; 39% more visits per patient.  On April 20, 1993, the United States General Accounting Office provided testimony to the Subcommittee on Health, of the House of Representatives Ways and Means Committee.  U.S. Gen. Acct. Office, Physicians Who Invest in Imaging Centers Refer More Patients for More Costly Services, GAO/T-HRD-93-14 April 20, 1993.

The April 20th testimony reflected “further evidence that physician investment in medical facilities is associated with more frequent patient referrals to those facilities and higher health care costs,” id. at 3, and precipitated the enactment of Stark II in 1993, which expanded the Stark I prohibition beyond clinical laboratory services, and made certain provisions of the prohibition applicable to Medicaid.

Authority


References to the Stark law as either “Stark I” or “Stark II” are now simply historical and descriptive of the enactment process.  The two statutes have been fully integrated, and are embodied in Section 1877 of the Social Security Act (42 U.S.C. § 1395nn). 

The Stark law has been the subject of several phases of regulatory rule making.  The final implementing and interpreting regulations are found at 42 C.F.R. Subpart J § 411.350-.361.  Relevant preamble language, proposed rules, industry comments and responses can all be found in the relevant Federal Register publications which precipitated publication of the final rules in the C.F.R.4 

4See 60 Fed Reg. 41914 (Aug. 14 1995) (Final regulations implementing Stark I) (due to similarity between Stark I and Stark II prohibitions, and lack of implementing regulations for Stark II, heavily analyzed by industry as indicative of direction for rulemaking and interpretations of the prohibition contained in Stark II); 66 Fed. Reg. 856 (Jan. 1, 2001) (Phase I of regulations interpreting and implementing the general prohibition under Stark II, as well as the exceptions applicable to ownership and compensation); 69 Fed. Reg. 16054 (March 26, 2004) (Phase II of Stark II regulations, clarifying and expanding certain exceptions to ownership, investment interests and compensation arrangements as well as addressing reporting requirements); 70 Fed. Reg. 4194 (January 28, 2005) (revising the definition of “outpatient prescription drugs” to include outpatient drugs covered under the new Part D Medicare benefit); 70 Fed. Reg. 70116 (November 21, 2005) (adding nuclear medicine services and supplies as DHS); 71 Fed. Reg. 45140 (August 8, 2006) (promulgating new exceptions for electronic prescribing and electronic health records technology and training); 72 Fed. Reg. 51013 (Sept. 5, 2007) (Phase III of the regulations interpreting and implementing Stark II, closed the rule making process, with CMS indicating that “Phases I, II and III of this rule making are intended to be read together as a unified whole.”).

Agency Guidance


Significant agency guidance related to the Stark law and its interpretation and application can be found in the rulemaking publications.  See id.  Additionally, § 1877(g)(6) of the Social Security Act does require that CMS issue certain written advisory opinions to assist the industry with analysis of Stark law questions and provide meaningful guidance to the industry on how the Act applies to specific factual circumstances.  To date, 22 advisory opinions have been issued.  Fifteen of those advisory opinions relate to the subject of the whole hospital exception to Stark, and the application of the 18-month specialty hospital moratorium which was in effect from December 8, 2003, through June 7, 2005. 

The other seven Advisory Opinions relate to application of the Stark law prohibition to specific factual circumstances related to Ambulatory Surgical Centers (CMS AO 98-001), In-office Ancillary Services (CMS AO 98-002), Ownership/Investment Interest (CMS AO 2005 08-01), Recruitment (CMS AO 2006-01; CMS AO 2007-01), Hospital-provided Software (CMS AO 2008-01), and the application of the Rural Hospital Exception (CMS AO 2008-02).  The CMS website, currently located at http://www.cms.hhs.gov, provides links and educational materials regarding the Stark Law, including frequently asked questions, links to the advisory opinions issued to date, links to the text of § 1877 and links to all promulgated rules affecting the implementation and interpretation of the Stark law.

Sanctions


Failure to comply with the Stark anti-referral prohibition can include denial of payment, mandatory refunds, civil monetary penalties and/or exclusion from participation in the Medicare program.  Additionally, alleged Stark violations are frequently the basis for cases filed under the False Claims Act, codified at 31 U.S.C. § 3729 et seq.  The False Claims Act authorizes private citizens to sue on behalf of the Federal government, and offers a percentage of the ultimate recovery to such citizens for their “whistleblower” efforts.  Damage awards under the False Claims Act can be staggering, including up to $11,000 per false claim,5 treble damages, and recovery of all attorney fees.6 

5The “per claim” penalty will issue on each and every referral that grows out of the prohibited relationship, which, in the case of a physician and an entity to which he regularly refers patients, could mean hundreds, or even thousands of false claims that will be subject to False Claims Act penalties, in addition to the Stark penalties of payment denials, refunded claims on each and every referral, and, perhaps the most significant, exclusion from the Medicare program.
6See United States v. Rogan, 459 F. Supp. 2d 692 (N.D. Il. 2006) (awarding damages of $64.2 million in a False Claims Act lawsuit against Peter Rogan, the former owner and CEO of Edgewater Medical Center based on a finding of false claims to Medicare for services to patients referred by physicians with whom Edgewater had prohibited financial relationships that violated the Stark and Anti-Kickback laws).  The Rogan judgment was upheld on appeal.  United States v. Rogan, 517 F.3d 449 (7th Cir. 2008).

Future Direction


The final rulemaking process implementing and interpreting the Stark law is complete.  However, the industry will likely continue to see updates and revisions to the Stark law in the annual physician fee schedule update, which CMS has historically used as a platform to further update and revise the Stark regulations.  On the forefront, industry professionals expect to see final action from CMS on the issue of physician ownership in specialty hospitals, which was historically permitted under the whole hospital exception to Stark.  Specialty hospitals have been under fire in recent years, and a moratorium was in place from December 8, 2003, through June 7, 2005, which narrowed the scope of the whole hospital exception to exclude specialty hospitals unless they fell into the grandfathering provision as having been in operation or under development as of November 18, 2003.  Also anticipated are restrictions on use of the in-office ancillary services exception. 

Conclusion


The Stark law is a complex and intricate area of Federal statutory and regulatory law that significantly impacts physicians and health care providers, and defines the scope of permissible financial relationships between and among health care providers who rely upon the Medicare program for payment for services rendered. 

Acknowledgement


AHLA would like to thank Wendi Rogaliner of the Rogaliner Law Offices, PC for drafting this article and Radha Bachman of Buchanan Ingersoll & Rooney PC and Summer Martin of McKenna Long & Aldridge LLP for their editorial assistance.