Initially passed by Congress in 1989 and named after its sponsor Congressman Fortney “Pete” Stark, the Federal physician self-referral prohibition, commonly referred to as the “Stark Law”, is arguably the most complex and convoluted law affecting health care providers. Starting in 1989 and continuing through Phase I regulations (2001), Phase II regulations (2004), Phase III regulations (2007), and countless additional regulations issued in 2008, 2015, 2016, 2018, 2020, 2022 and most recently in 2023, the Centers for Medicare and Medicaid Services (“CMS”) has expanded and “clarified” the Stark Law. These regulations were accompanied by thousands of pages of CMS commentary to help explain the application of the law. Needless to say, it is easy for a health care provider to accidentally run afoul of the Stark Law prohibition. So, what is a health care provider to do when faced with a Stark Law problem? Before we answer that question, it is important to discuss the purpose of the Stark Law and its restrictions.

The Stark Law is based on the premise that if physicians are permitted to make “self-referrals” for financial gain the result will be overutilization, medically unnecessary services and, ultimately, more cost to the Medicare program. While it is debatable whether the Stark Law accomplishes its intended legislative intent, compliance is nonetheless required. 

The Stark Law prohibits a physician from making referrals for certain designated health services (“DHS”) payable by Medicare to an entity with which the physician (or an immediate family member) has a financial relationship, unless an exception applies and all of its requirements are satisfied. A “physician” for purposes of the Stark Law is defined as a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry or a chiropractor. Financial relationships include ownership and investment interests as well as compensation arrangements. Finally, DHS include: clinical laboratory services;  physical therapy, occupational therapy and outpatient speech-language pathology services; radiology and certain other imaging services; radiation therapy services and supplies; durable medical equipment and supplies; 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. The Stark Law is a strict-liability statute, which means proof of intent to violate the law is not required. If an arrangement implicates the Stark Law prohibition it must satisfy all elements of an applicable Stark Law exception to be compliant.

Following are a few examples of arrangements that implicate the Stark Law:

A physician practice offers the following DHS to its patients: MRIs, clinical laboratory services and physical therapy. For two years the practice compensates several of its physician employees and owners in a manner that directly takes into account each physician’s referrals for DHS paid by Medicare.

Dr. X serves as the medical director of a home health agency (“HHA”) and is paid a sum above the fair market value for his services. Dr. X refers Medicare patients to the HHA for home health services.

A hospital leases space to a physician practice and forgets to increase the rent based on the annual rent escalators in the lease agreement. The physicians working at the practice refer Medicare patients to the hospital for inpatient and outpatient hospital services.

There are three potential options to consider if a health care provider identifies an arrangement that implicates the Stark Law and a Stark Law exception cannot be satisfied:

Option 1: Do Nothing.

Some health care providers faced with a Stark Law issue decide to “fix” the non-compliant arrangement going forward and not address past non-compliance. Unless the issue can be cured in accordance with the Stark Law (see Option 2 below), this option carries with it significant risk and is not recommended in any circumstance. If the Stark Law is violated, whether intentionally or unintentionally, penalties include: denial of payment for the DHS and fines of up to $15,000 for each prohibited referral plus additional civil penalties. Further, a claim submitted in violation of the Stark Law is also a false or fraudulent claim under the Federal False Claims Act (“FCA”), resulting in a potential fine of up to three times the value of the claim plus additional penalties. Take for example an arrangement that violates the Stark Law and resulted in the submission of 800 improper DHS claims to Medicare. The potential penalties under the Stark Law (not counting the return of payment to the Medicare program and any FCA penalties) could rise to $12,000,000 ($15,000 x 800). Further, whistleblower lawsuits can be filed against a health care provider on the basis of a Stark Law violation. For example, in March of this year, a physician and his diagnostic facilities in Houston, Texas agreed to pay $1,800,000 to settle a whistleblower lawsuit alleging violations of the Stark Law and FCA. 

Option 2:
Fix the Problem, if Possible

  While the parties to an impermissible Stark Law arrangement cannot “turn back the clock” and cure noncompliance retroactively, there are a few limited circumstances where a cure is possible. For example, many Stark Law exceptions, including those for equipment and space leases and personal service arrangements, require that the arrangement is set out in writing, signed by the parties and that the payment between the parties is “set in advance.” CMS has clarified that the writing and set in advance requirements may be satisfied with a collection of contemporaneous documents evidencing the course of conduct, stating that “informal communications via email or text, internal notes to file, similar payments between the parties from prior arrangements, generally applicable fee schedules, or other documents recording similar payments to or from other similarly situated physicians for similar items or services, may be sufficient to establish that the amount of or a formula for calculating the compensation was set in advance before the furnishing of items or services.” Further, CMS has clarified that failure to obtain signatures on an agreement that otherwise satisfies a Stark Law exception would not result in noncompliance if the parties obtained missing signatures within 90-days immediately following the start of the compensation arrangement; provided, however, that the compensation arrangement has not been modified between the start of the arrangement and the date of signature.

Option 3:
Self-Disclose to CMS

Since 2010, health care providers who discover a Stark Law violation can “self-disclose” the issue to CMS. Any self-disclosure must be carefully considered since a self-disclosure is intended to facilitate the resolution of matters that, in the disclosing party’s reasonable assessment, are actual or potential violations of the Stark Law. That is, if a health care provider self-discloses it is informing CMS that it violated the Stark Law and is agreeable to a monetary resolution.

The self-disclosure process requires the submission to CMS of a significant amount of information, typically involves the assistance of an attorney and accountant and historically takes several years to resolve. However, the benefit of a self-disclosure is the ability of the disclosing party to significantly reduce its financial exposure for a Stark Law violation. Take for example the scenario referenced above where a physician practice offers DHS to its patients and for two years compensates several of its physician employees and owners in a manner that directly takes into account their referrals for DHS paid by Medicare. Such arrangement will not satisfy a Stark Law exception. CMS takes the position that all DHS claims submitted to Medicare by the physician practice during the “period of non-compliance” (the two years in our example) are improper, even if only some of the physicians were paid based on their DHS referrals. If the physician practice in our example submitted a total of 800 DHS claims to Medicare during the period of non-compliance and received a total of $500,000 in Medicare reimbursement for such claims, CMS historically (absent criminal or intentional misconduct or other aggravating factors) has settled the self-disclosure between two percent and 10 percent of the Medicare DHS reimbursement amount, or in this case, between $10,000 and $50,000. Compare this to the potential Stark Law penalties of $12,000,000 for the 800 improper claims.

Over the past few years we have seen an increase in government enforcement actions and whistleblower lawsuits involving alleged violations of the Stark Law, including the use of the FCA as a tool to pursue greater penalties. If a health care provider identifies a Stark Law issue it should immediately stop the non-compliant activity and quickly assess the options available for resolution.