Making Sense
of the Stark Law
Compliance for the Medical Practice
Making Sense of the Stark Law
Compliance for the Medical Practice
The information contained in this manual is intended to serve as a general resource and guide. It is not to be
construed as legal advice. Attorneys with knowledge of the Stark Law and other fraud and abuse laws should be
consulted regarding the application of these laws to specific situations.
This manual was prepared by William M. Mandell, Esq. and Dean P. Nicastro, Esq., of the law firm of Pierce &
Mandell, P. C. (Boston, Massachusetts) in conjunction with and under the direction of the Massachusetts Medical
Society’s Department of Health Policy/Health Systems and the Office of the General Counsel.
©2005 Massachusetts Medical Society. All rights reserved.
TABLE OF CONTENTS
Introduction . .
1
Statutory and Regulatory History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Stark Prohibition .�
3
Defined Terms . . . . .�
3
Example Figures: Financial Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Standards of Proof to Demonstrate a Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Compliance with the Anti-Kickback Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Penalties and Sanctions for Violating Stark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Reporting Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
“Whistleblowers” and the Stark Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Stark Law Advisory Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Making Sense of the Exceptions Relevant to Independent Medical Practices . . . . . . . . . . . 22
Individual Physician Compensation Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Compensation to Non-group Practice Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Other Medical Practice/Physician Relationships with DHS Entities. . . . . . . . . . . . . . . . . 35
Other General Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Physician-Hospital Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Indirect Compensation Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Managed Care Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Purchase and Sale of Medical Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Final Comments . . .�
43
Exhibit A: 2005 DHS CPT/HCPCS Code List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Exhibit B: Stark Law MD Compensation Grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
INTRODUCTION
P
hysicians are under increasing scrutiny by federal and state enforcement agencies with regard
to their financial relationships both within and outside their medical practices. This booklet
summarizes the federal statute and regulations that govern the so-called “Stark Law”1 that prohibits
certain physician self-referrals. (For those who want to read the actual text of the law, the statute
appears as Section 1877 of the Social Security Act and is codified at Title 42 of the United States Code
Section 1395nn, and the regulations issued by the Centers for Medicare and Medicaid Services (CMS)
appear at Title 42 of the Code of Federal Regulations, Sections 411.350 et seq.) The Stark statute,
regulations, advisory rulings, and some agency commentary can be found on the CMS website at www.
cms.hhs.gov/medlearn/refphys.asp.
This booklet has been specifically written to address Stark from the perspective of the independent
medical practice. The Stark Law, however, is quite broad in its scope and does regulate many other
providers that have financial relationships with physicians — particularly hospitals. The reader should
note that this booklet is not meant to be an exhaustive treatment of the Stark Law and the concerns of
the medical practice have been emphasized.
It is also important to keep in mind that a physician’s financial relationships can call into question many
other federal and state fraud and abuse laws in addition to the Stark Law. There are several other federal
and state health care fraud and abuse laws that may have a bearing on a Massachusetts physician’s
financial relationships, including the Medicare/Medicaid anti-kickback or illegal remuneration for
referral laws, similar Massachusetts state anti-kickback laws covering both government programs and
private health insurance, Medicare/Medicaid mandatory and permissive exclusion laws, the Federal
False Claims Act, and the Massachusetts False Claims Act. Therefore, the Stark Law must always
be considered in tandem with other fraud and abuse compliance issues, especially the federal and
Massachusetts anti-kickback laws.
In addition to the CMS, many other federal and state agencies have the authority to investigate and
refer for prosecution or prosecute cases involving non-compliant physician financial relationships. The
offices of the U.S. Attorneys, the U.S. Department of Justice, and the Federal Bureau of Investigation
(FBI) have authority to investigate and prosecute alleged violations of federal health care laws. The
Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS)
has as its mission the identification and elimination of fraud, waste, and abuse in HHS programs and
the promotion of efficiency and economy in departmental operations. In Massachusetts, the Medicaid
Fraud Control Unit of the Massachusetts Attorney General’s office is charged with the enforcement of
the state’s fraud and abuse laws.
The Massachusetts Medical Society (MMS) has put together this booklet in an effort to assist physicians
and their medical practices with their ongoing Stark compliance efforts. The information contained
within these pages is not intended to meet individual practice needs, but rather, to serve as a general
reference and educational guide. Physicians and medical practices are encouraged to seek advice from
their own counsel to address specific legal issues that arise in their individual practices.
1
The law, including the statute and regulations, has taken on the name of its sponsor, California Congressman
Fortney “Pete” Stark, but it actually is styled as “Limitation on Certain Physician Referrals.”
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Massachusetts Medical Society
STATUTORY AND REGULATORY HISTORY
T
he first version of the Stark Law (Stark I) was passed by Congress in 1989 and barred physicians
from referring patients or specimens to clinical labs, including physician office labs, with which a
physician or immediate family members had a financial relationship, and also barred such labs from
billing for Medicare-covered tests, unless the relationship came within certain recognized exceptions.
Stark I was based on the premise that physicians order both more laboratory tests and more complex
tests when they stand to benefit financially.
2
Final agency regulations under Stark I were not issued until six years later, in 1995, covering just the
self-referral prohibition for clinical laboratory services (these have now been nullified by the final Stark
II regulations). By then, Congress had already expanded the Stark Law in 1993 to apply to nine other
general categories of designated health services (Stark II) starting in 1995. Proposed Stark II regulations were first issued on January 9, 1998, and set forth a broad agency application of the law. For
instance, in the proposed Stark II regulations, a referring physician could not be compensated based
on personally performed services. After significant opposition to many aspects of the proposed Stark
II regulations were articulated by the health care community through extensive comments, the CMS
decided to issue final Stark II regulations in two major initial phases. Final Stark II Phase I regulations
were issued in January 2001, and went into effect on January 4, 2002. Final Stark II Phase II regulations
were issued in March 2004 and went into effect on July 24, 2004. With the exception of Medicaid managed care plans, the CMS has not yet addressed the application of the Stark Law to Medicaid and other
state health programs in these two phases of the Stark II regulations, and is also considering public
comments on Final Stark II Phase II regulations, so a “Stark II Phase III” set of regulations is expected
to be issued some time in the future.
A major source of confusion and complexity about the Stark Law is that Congress chose to define
prohibited physician financial relationships broadly to include compensation arrangements as well as
ownership interests.
A critical element of the Stark Law is that Congress delegated to the regulatory agency the authority to
expand and create new exceptions to the prohibition. During the process of issuing the Stark regulations over the past decade, the CMS has wrestled with the right balance between certainty, consistent
with the legislative drafters’ intent to provide a “bright line” approach, and the effort to carve out a
variety of exceptions to address concerns raised in the numerous comments from providers and others
in the health care community.
It is interesting to note that prior to the enactment of the Stark Law, the American Medical Association
(AMA) had in effect since 1977 an ethical rule limiting physician ownership in health care facilities to
which the physician refers to situations involving community need, and a general ethical standard that
wherever a physician may have a conflict of interest, he or she should seek alternative arrangements for
the care of his or her patient.2 In 1992, the MMS endorsed the policy of the AMA Council on Ethical and
Judicial Affairs, which was adopted unanimously by the AMA House of Delegates in December 1991 related to physicians’ ownership of facilities. Thus, the Stark Law legislatively proscribes in an extremely
broad fashion what the medical profession had long before considered and crafted as a more balanced approach toward addressing physician conflicts between patient care and financial self-interest.
2
See AMA Policy E-8.032, Conflicts of Interest: Health Ownership by a Physician.
Making Sense of the Stark Law: Compliance for the Medical Practice
THE STARK PROHIBITION
T
he Stark Law prohibits the making of referrals or the billing for payment for certain designated
health services (DHS) covered by Medicare or Medicaid if there is a financial relationship between
the referring physician (or immediate family member of the physician) and an entity receiving payment for the DHS, unless the relationship comes within one of many enumerated exceptions to the
prohibition.
The operative language states that if a physician (or immediate family member) has a financial relationship with a DHS entity, the physician may not make a referral to the entity for the furnishing of any
Medicare- or Medicaid-reimbursable DHS, and the entity may not present or cause to be presented a
Medicare or Medicaid claim or bill to either program or any individual, third-party payor, or other party
for such referred or ordered services.
In order to fully understand the scope and breadth of the Stark Law, several terms defined in the statute
and regulations must be consulted. These are as follows:
• Physician
• Immediate family member
• Financial relationship
• Entity
• Referral
• Designated health services (DHS)
• The exceptions
DEFINED TERMS
T
he starting point in making sense of the Stark Law is to understand those services and items that
it covers.
Designated Health Services
The Stark Law was enacted to only cover a defined set of services and items believed by Congress to be
prone to over-utilization in cases in which the referring physician had a financial relationship with the
entity receiving payment for such services and items.
Initially, between 1992 and 1994, the Stark Law only applied to clinical laboratory services reimbursable by Medicare. Since 1995, the Stark Law covers the following expanded list of so-called designated
health services (DHS) reimbursable under either Medicare or federally funded state health programs:
• Clinical laboratory services
• Occupational and physical therapy services (including speech-language pathology services)
• Radiology services including magnetic resonance imaging, computerized axial tomography
scans, and ultrasound services, even if they are cardiac (e.g. echocardiograms), vascular,
obstetric, gynecological, or ophthalmic and not generally performed by radiologists (but this
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Massachusetts Medical Society
category specifically excludes nuclear medicine procedures,3 radiology procedures integral
to and performed during a nonradiological medical procedure, certain radiology procedures
performed immediately after a nonradiological medical procedure, and x-ray, fluoroscopy, and
ultrasound services that require the insertion of a needle, catheter, tube or probe)
• Radiation therapy services and supplies (not including nuclear medicine procedures)
• Durable medical equipment and supplies
• Parenteral and enteral nutrients, equipment, and supplies
• Prosthetics, orthotics, and prosthetic devices and supplies (not including certain surgically
implanted devices at ambulatory surgical centers (ASCs) and eyeglasses and contact lenses
prescribed after cataract surgery)
• Home health services
• Outpatient prescription drugs
• Inpatient and outpatient hospital services, including services provided under arrangement
4
As is apparent from this list of DHS, Congress and the CMS included both services and items.
Therefore, as used throughout this publication, the reference to “DHS” includes all of the items and
services listed above.
To eliminate confusion about which items and services are prohibited for four of the ten designated
health services categories (clinical laboratory services, physical and occupational therapy, radiology and
certain other imaging services, and radiation therapy services), the CMS has issued a list of CPT/HCPCS
codes to specifically identify the services and items within these categories of DHS that are subject
to the Stark Law. The list is updated periodically and is available on the CMS website, www.cms.hhs.
gov/medlearn/refphys.asp, and in the physician fee schedule rules, published annually in the Federal
Register. The 2005 DHS CPT/HCPCS code list is included in the back of this publication as Exhibit A.
This list also sets forth exclusions from the Stark Law by code for certain preventive screening exams,
immunizations and vaccines, and erythropoietin (EPO) and other dialysis-related drugs.
The CMS did not define the remaining DHS by specific CPT or HCPCS codes, believing the regulations define these six other DHS areas sufficiently. There is, however, continuing uncertainty in many
of these DHS categories. In particular, the application of Stark to office procedures that may involve
administration of prescription medications has been challenging for internal medicine, pulmonology,
and oncology practices.
In the commentary regarding the Stark II Phase II regulations issued in March 2004, the CMS did
acknowledge that the category of outpatient prescription drugs under Stark will include prescription
drugs covered by Medicare under the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (MMA). As the MMA establishes a new Medicare Part D prescription drug benefit effective
January 1, 2006, the CMS has announced its intention to further revise the Stark regulations to address
the application of Stark to the Part D benefit. Physicians should assume that the Stark rules will be applicable to their (and immediate family members’) financial relationships with any entities that render
and bill Part D-covered prescription medications starting in 2006.
3
CMS has announced that it plans to expand the definition of “radiology and certain other imaging services” and
“radiation therapy services and supplies” sometime in 2005 to include diagnostic and therapeutic nuclear medicine
services and supplies.
Making Sense of the Stark Law: Compliance for the Medical Practice
The question of whether some medical services and procedures are DHS and thus covered by Stark has
already been the subject of litigation in federal court. In 2002, a federal district court ruled on a lawsuit
filed by the American Lithotripsy Society and Urology Society of America that lithotripsy is not a DHS
and did not fall under the definition of inpatient or outpatient services under Stark. Subsequently, in the
final Stark II regulations, the CMS confirmed that it does not consider lithotripsy an inpatient or outpatient service anymore. The CMS did note, however, that contractual relationships between hospitals and
physicians regarding lithotripsy constitute a “financial relationship” under Stark, and thus must comply with an exception if the physician will refer Medicare patients to the hospital for any other DHS.
DHS covered by Stark may include the professional as well as the technical or facility component of the
fee, depending on the type of service and how it is paid by Medicare. For instance, radiology and other
imaging services are defined by the CMS to include both the professional and technical components of
covered tests or procedures. Comparatively, the CMS defines inpatient and outpatient hospital services
under Stark to exclude professional services performed by physicians or other professionals if Medicare
reimburses the physician’s services independently and not as part of the hospital service. Yet physical
and occupational therapy, which are paid as a professional fee, are defined as a Stark-covered DHS.
And, in many instances, Stark-covered DHS constitutes a physician’s professional fee, such as certain
outpatient prescription drugs administered in a medical office, or those DHS performed by someone
under the supervision of a physician and billed as “incident to”4 that physician’s services.
Also, many common diagnostic procedures, such as pulmonary function tests, EKGs and ECGs, are not
DHS subject to Stark when rendered within the medical practice setting, but would be subject to Stark
when rendered in the outpatient or inpatient hospital setting as outpatient or inpatient hospital services
are included in the definition of Stark DHS.
Any DHS paid by Medicare as part of a composite payment under a separate benefit that is not included
on the DHS list — for example, end-stage renal disease, hospice care, or physical therapy services billed
and paid as skilled-nursing facility (SNF) services — are not subject to the Stark prohibitions. However,
any DHS that is payable itself as a composite rate (e.g., any service provided as a home health service or
inpatient and outpatient hospital service) is subject to the Stark Law.
Overall, each physician and group practice should undertake a complete review of all services, procedures, and items they order and/or render to determine if Stark applies to them. Such an analysis is very
important — especially when establishing new relationships with other physicians and parties that may
be ordering or rendering Stark-covered services or items. Many of the national specialty societies have
been quite helpful in identifying which services and procedures within their specialties may be covered
under Stark.
Physician
Physician means 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. Thus, the Stark Law can apply to
services orderedby other licensed practitioners, not just medical doctors.
4
The term “incident to” is itself a Medicare term of art defined by the Medicare regulations and Medicare manuals.
The applicable definition depends on whether the services “incident to” are hospital outpatient services or services
furnished by a physician. For hospital outpatient services, “incident to” services are those furnished by a hospital
(or those under arrangement with a hospital) pursuant to a physician’s order and under physician supervision. For
physician’s services, “incident to” services are those rendered without charge or included in the physician’s bill.
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Massachusetts Medical Society
Immediate Family Member
Immediate family member or member of a physician’s immediate family means husband or wife; birth
or adoptive parent, child, or sibling; stepparent, stepchild, stepbrother, or stepsister; father-in-law,
mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent or grandchild; or spouse of a grandparent or grandchild.
The inclusion of immediate family member under the Stark Law was intended to close any loopholes through which a DHS entity could have a prohibited financial relationship with a referring
physician’s family member. A major practical problem, however, is created for those physicians who
have other physicians in the family practicing in the same community, or for those physicians who
have family members who own or work for DHS entities, including group practices. Needless to say,
such multi-physician family and family office staff situations must be carefully reviewed to avoid any
Stark problems.
Financial Relationships
6
Any financial relationship between a referring physician and a DHS entity implicates the Stark Law,
even if the relationship is wholly unrelated to the DHS payable by Medicare or Medicaid. For instance, if a primary care physician is paid by a group practice to be the medical director of a skilled
nursing facility, but also orders tests from the group in-office clinical lab for his or her patients, the
medical director relationship, as well as the physician’s other ownership interests and compensation arrangements would be subject to Stark.
A financial relationship is defined as a direct or indirect ownership or investment interest in an
entity through equity, debt, or other means, or a direct or indirect compensation arrangement
involving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, between
a physician (or immediate family member) and an entity. Any financial relationship between
the referring physician and the DHS entity is covered by Stark, even if it is wholly unrelated to a
Medicare/Medicaid DHS, if the referring physician will make referrals of Medicare/Medicaid DHS
to the DHS entity.
A financial relationship may be direct or indirect.
A direct financial relationship exists if remuneration passes between the referring physician (or immediate family member) and the DHS entity without any intervening persons or entities.
An indirect financial relationship exists if one or more persons or entities are interposed between the
referring physician and the DHS entity. The Stark regulations set out the following tests, including a
knowledge element, to determine if an indirect relationship is subject to Stark.
An indirect ownership/investment interest exists if both of the following are true:
• There is an unbroken chain of one or more parties having ownership/investment interests
between the referring physician (or an immediate family member) and a DHS entity.
• The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance
of, the fact that the referring physician (or an immediate family member) has some ownership/
investment interest through the intermediaries in the DHS entity (even if it is not the specific
terms or composition of the relationships).
Making Sense of the Stark Law: Compliance for the Medical Practice
An indirect compensation arrangement exists if all of the following are true:
• There is an unbroken chain of one or more parties having financial relationships between the
referring physician (or an immediate family member) and a DHS entity.
• The referring physician (or immediate family member) receives aggregate compensation from
the party in the chain with which the physician (or immediate family member) has a direct financial relationship that varies with or reflects the volume/value of referrals or other business
generated for the DHS entity (including any time- or unit-based compensation that may be
otherwise allowed under other Stark exceptions).
• The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of,
the fact that the referring physician’s (or immediate family member’s) compensation so varies
or reflects the volume or value of the physician’s DHS referrals or other business generated.
As the original language in the Stark statute enacted by Congress encompassed both direct and indirect
relationships, the CMS has attempted to devise definitions that strike a balance between a clear “bright
line” rule and one that is flexible and excuses certain unknown violations. This complicated approach
taken by CMS with regard to indirect financial relationships reflects this tension. Indirect compensation
arrangements are defined broadly to include arrangements that are otherwise permissible, but exclude
those for which the DHS entity did not have sufficient knowledge of the referring physician’s indirect
ownership or compensation arrangements with the DHS entity (see the section entitled “Standards
of Proof to Demonstrate a Violation”). A relationship that comes within the indirect compensation
arrangement definition may still be permissible if it meets the indirect compensation arrangement
exception (see the section entitled “Indirect Compensation Arrangements”). Indirect ownership or
investment interests would have to come within one of the general or ownership/investment interest
exceptions in order for the referring physician to refer DHS to the indirectly owned DHS entity.
For the purposes of determining if there is an indirect financial relationship subject to Stark, a wholly
owned professional corporation (PC) and its sole physician owner are considered the same party in the
chain. Thus, the relationship of a DHS entity with a PC does not create an indirect relationship with the
PC’s sole physician owner. But group practices and their physician owners are not considered to be the
same party in a chain of financial relationships, and thus can be subject to potential indirect relationships. Therefore, a professional corporation that contracts with a hospital to provide echocardiogram
interpretations would not constitute an indirect compensation relationship with a single shareholder
physician who refers DHS to the hospital, but would potentially create indirect compensation relationships with the PC’s referring physicians if the PC was a group practice, depending on whether the group
practice’s referring physicians received aggregate compensation that varies (or otherwise takes into account) the volume or value of DHS referrals or other business generated for the hospital.
Common ownership by a referring physician and a DHS entity of another party [e.g., physician and hospital co-ownership of a physician-hospital organization (PHO)] by itself, however, does not establish an
indirect ownership relationship (but it could create an indirect compensation arrangement).
The CMS has also clarified that stock options or convertible securities that originally are received or purchased for money or in return for a capital contribution will be considered ownership or investment interests. Comparatively, if they are received as compensation for services, they will be considered compensation until the time they are exercised, at which time they become an ownership or investment interest.
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Examples of direct and indirect ownership/investment interests and direct and indirect compensation
arrangements are illustrated in Figures 1 through 6 on this and the following pages.
Figure 1: Example of Direct Ownership or Investment Interest
A
B
Referrals
Referring
Physician
Equity
Ownership
Physical
Therapy
Business
(DHS Entity)
8
FINANCIAL ARRANGEMENT
A has an equity interest in B
through direct ownership or
shares of stock (if stock, B’s
stock is not publicly traded).
A refers to B.
Making Sense of the Stark Law: Compliance for the Medical Practice
Figure 2: Example of Indirect Ownership or Investment Interest
A
Referring
Physician
Re
fe
rra
ls
Co
-o
w
ne
B
r
9
Imaging
Equipment
Leasing
Company
FINANCIAL ARRANGEMENT
A is a direct co-owner of B.
B has extended a capital
loan to C. A refers to C.
Ca
Lo pit
an al
C
Ambulatory
Service
Center
(DHS Entity)
Massachusetts Medical Society
Figure 3: Example of Indirect Ownership or Investment Interest
A
B
Referring
Physician
Group
Practice
Employment
Relationship
Investment
10
f
Re
er
ra
ls
FINANCIAL ARRANGEMENT
A is employed by B. B owns
non-publicly traded shares of
stock in C. A refers to C.
C
MRI Center
(DHS Entity)
Making Sense of the Stark Law: Compliance for the Medical Practice
Figure 4: Example of Direct Compensation Agreement
A
B
Referrals
Referring
Physician
Independent
Contractor
Relationship
Clinical Lab
(DHS Entity)
11
FINANCIAL ARRANGEMENT
A serves as part-time director of B
under an independent contractor
relationship. A refers to B.
Massachusetts Medical Society
Figure 5: Example of Indirect Compensation Arrangement
A
Referring
Physician
Re N
ve et
nu
es
12
Re
fe
rra
ls
B
Group
Practice
FINANCIAL ARRANGEMENT
A, as a co-owner of B, receives
a share of B’s net revenues.
B leases office space to C for
a rental amount based on the
volume of business generated
by B for C. A refers to C. C has
knowledge of A’s sharing in
B’s net revenues.
O
Le ffi
as ce
e
C
Hospital
(DHS Entity)
Making Sense of the Stark Law: Compliance for the Medical Practice
Figure 6: Example of Indirect Compensation Arrangement
Referrals
A
C
Referring
Physician
Hospital
(DHS Entity)
Co
-o
w
ne
r
B
Imaging
Equipment
Leasing
Company
l
itan
p
Ca Loa
FINANCIAL ARRANGEMENT
A is a co-owner of B. C contracts with B to lease imaging equipment
to C. C has made a capital loan to B. A shares in B’s net revenues in an
amount that varies with the volume of imaging business generated by A
for C. A refers to C. C has knowledge of A’s sharing in B’s net revenues.
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Massachusetts Medical Society
Entity
An entity (i.e., the party that is billing Medicare or Medicaid for the DHS) can be either a person or
organization and is defined by the Stark Law to include any of the following entities to which payment
is made directly or upon assignment on the patient’s behalf; or to which the right to payment has been
reassigned as permitted under Medicare Program rules:
• A physician’s solo practice
• A practice of multiple physicians
• Any other person, sole proprietorship, public or private agency or trust, corporation, partnership, limited liability company, foundation, nonprofit corporation, or unincorporated
association that furnishes one or more services categorically included under the scope of the
Stark Law
An entity, however, does not include the referring physician himself or herself, but does include his or
her medical practice. This means that a physician in solo practice, whether practicing as a sole proprietor or through a professional corporation or professional limited liability company, could be subject to
the Stark Law to the extent the physician refers DHS to his or her own practice and does not personally
perform or render the DHS.
14
The fact that a physician in solo practice could be subject to the Stark Law is perhaps one of the most
misunderstood aspects of the law. Many physicians over the years have been led to believe that the
Stark self-referral prohibition only applies to physicians’ relationships to group practices or hospitals
and other providers. This is not accurate. Qualifying as a “group practice” under Stark allows physicians practicing together and providing DHS the most leeway in how they can compensate themselves.
But the scope of the law’s prohibition does reach the solo practitioner, whether incorporated or not,
who orders and bills for any service or item defined as a Stark DHS that he or she does not personally
perform. If the solo physician personally performs the Stark-covered item or service, he or she may bill
Medicare or a state health program without violating the Stark Law. If the solo physician has such ordered item or service performed by a member of his or her staff under supervision, the Stark Law could
be violated unless an exception applies.
Another important exclusion under Stark is that the self-referral prohibition does not apply to a physician’s practice when purchased diagnostic tests are billed to Medicare in accordance with Medicare
Program rules.
Referral
The Stark Law permits physicians from referring patients to themselves. A referral to one’s self is not
a referral if the referring physician personally performs the service. A referral to one’s own medical
practice, however, is a referral. “Referral” is defined very broadly to include services performed by the
referring physician’s employees, coworkers, or independent contractors. All such requests to others for
items or services are prohibited referrals unless they are excluded by definition or fall under an exception. A “referral” includes any of the following:
• A request, order, or certification of medical necessity by a physician for an item or service that
is reimbursable under Medicare or a state health program
Making Sense of the Stark Law: Compliance for the Medical Practice
• A request by a physician for a consultation with another physician, including tests or
procedures ordered by or to be performed by (or under the supervision of ) the consultant
physician
• A request for or establishment of a plan of care by a physician
A referral to a physician’s wholly owned professional corporation is not a referral if the referring physician personally performs the service. A referral by a physician to his or her own medical practice, regardless of its type of organization, however, is a referral that could violate Stark if some other physician
or individual personally performs the referred service.
“Referral” is also defined to include services performed or items rendered by the referring physician’s
employees, independent contractors, or fellow group practice physicians and other professionals.
Thus, the Stark Law applies to the ordering of covered services or items to be performed or rendered
by the referring physician’s employees (including “incident to” services billed as part of the physician’s
fee), independent contractors, or group practice members.
If a physician personally performs the services, there is no referral, regardless of whether the physician
bills the programs directly or another entity bills pursuant to an assignment. Thus, there is no potential
Stark violation and no need to try to come within one of the Stark exceptions where there is only a DHS
that has been personally performed by the referring physician. However, technical components associated with a physician’s personally performed services are referrals to which the Stark Law applies. Thus,
if a physician referred and then performed the professional component of an inpatient hospital service
payable by Medicare, the physician would still have made a referral to the hospital since it would be
separately billing Medicare for the “Part A” or facility or technical component.
A physician’s prohibited financial relationship with an outside DHS entity (e.g., a home health agency)
is not imputed to the physician’s entire group practice. The Stark Law, however, applies to situations
in which another person or entity who is controlled or whose referrals are directed by a physician, such
as a nurse practitioner, makes the referral. That physician would be viewed as the referring physician.
A referral made by someone else in a physician’s group, including a non-physician, may be imputed to
that physician if he or she directs the referral or otherwise controls the person making the referral.
Consultation is defined to mean a professional service furnished to a patient in which the physician’s
opinion or advice regarding evaluation and/or management of a specific medical problem is requested
by another physician; the request and need for consultation are documented in the patient’s medical
record; and the consulting physician prepares a written report of his or her findings, which is provided
to the requesting physician.
Accounting for the unique aspects of ordering tests in pathology, radiology, and radiation oncology,
the Stark Law does not prohibit requests by (i) a pathologist for clinical diagnostic laboratory tests
and pathological examination, (ii) a radiologist for diagnostic radiology services, or (iii) a radiation
oncologist for radiation therapy (including necessary and integral ancillary services requested, and
appropriately supervised, such as CT, MRI, and ultrasound), provided that the request results from
a consultation initiated by another physician and the tests or services are furnished by (or under the
supervision of ) the requesting specialist or another pathologist, radiologist, or radiation oncologist in
the same group practice. The CMS declined to extend this protection to cardiologists who request and
interpret echocardiograms, seeing cardiologists as distinct from these other specialists, and classifying
echocardiograms no differently than any other DHS test.
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Massachusetts Medical Society
The Exceptions
In the event there is a financial relationship between an entity that bills for DHS and a physician who
makes referrals (or any immediate family member of such physician), the Stark Law prohibits referrals
from the physician to the entity, and prohibits the entity from billing Medicare or Medicaid for those
referred services, unless the financial relationship falls squarely within one of the so-called Stark Law
exceptions. The exceptions determine the permissibility of health care financial relationships under
Stark.
The exceptions are divided into three categories:
1. General exceptions that apply to both ownership/investment interests and compensation
arrangements
2. Exceptions that apply only to ownership/investment interests
3. Exceptions that apply only to compensation arrangements
Within these categories there are exceptions that originally were crafted by Congress and appeared in
the Stark statute, with others added by the CMS in the Stark regulations under its statutory authority to
add additional exceptions as it deems advisable. The additional regulatory exceptions all require adherence to the federal anti-kickback law as a condition for satisfying the Stark exception.
16
The exceptions are listed on page 17 by category (those with an asterisk were added by the CMS and
require anti-kickback compliance as a condition).
Any ownership or investment interest of a physician — including the ownership in a solo or group practice that provides DHS — that meets a general exception (e.g., in-office ancillary services) or an ownership exception (e.g., a rural clinical lab) also does not have to meet any of the compensation exceptions
with respect to profit distributions, dividends, or interest payments on secured obligations.
Making Sense of the Stark Law: Compliance for the Medical Practice
Table 1: Permissible Health Care Financial Relationships under Stark
General
Ownership
Compensation
Physician Services
Publicly Traded Securities
Office Space Rental
In-Office Ancillary Services
Mutual Funds
Equipment Rental
Services Furnished Prepaid Plan
Enrollees
Rural Providers
Bona Fide Employment
Academic Medical Centers*
Entire (Non-specialty) Hospital
Personal Services Arrangement
(Including Managed Care
Incentive Plans)
Implants Furnished by an ASC*
MD Recruitment
MD Recruitment Through
Practice*
EPO and Other Dialysis-Related
Drugs*
Isolated Transactions
Preventive Screening Tests,
Immunizations, and Vaccines*
Non-DHS Hospital Remuneration
Eyeglasses and Contact Lenses
Following Cataract Surgery*
Pre-1990 Group-Hospital
Arrangements
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Intra-family Rural Referrals*
Temporary Noncompliance*
Payments by an MD
MD Charitable Donations*
Non-monetary Compensation*
Fair Market Value Compensation*
Medical Staff Incidental Benefits*
Risk Sharing Arrangements*
Compliance Training
Indirect Compensation
Arrangements*
Referral Services
(Anti-kickback Safe Harbor)
OB MedMal Insurance
(Anti-kickback Safe Harbor)
Professional Courtesy*
Retention Payments in
Underserved Areas*
Community-Wide Information
Systems*
* Added by the CMS and require anti-kickback compliance as a condition.
Massachusetts Medical Society
STANDARDS OF PROOF TO DEMONSTRATE A VIOLATION
O
riginally, the Stark Law was intended to establish a “bright line” test for compliance; the very
existence of a prohibited financial relationship, even if indirect, violated the law unless the
relationship met all of the requirements under an applicable exception, or the financially interested
physician did not make any Medicare or Medicaid referrals. The exceptions were originally intended by
the drafters of the Stark Law to be clear and discernable, as to be unlike the health care community’s
difficult experience with the anti-kickback laws (see the section entitled “Compliance With the Antikickback Laws”). The “bright line” originally intended by Congress, however, has become somewhat
“fuzzy” as a result of many features in the final Stark regulations added by the CMS.
The CMS added a knowledge element in order to prove that a physician’s indirect financial relationship with a DHS entity has violated Stark. A DHS entity that has an indirect financial relationship with
a referring physician that does not come within a Stark exception would not be prohibited from being
paid for DHS if it did not have actual knowledge of, and did not act in reckless disregard or deliberate
ignorance of, either the ownership/investment interest through the intermediaries in the DHS entity or
the existence of any aggregate compensation to the referring physician that varies with the level of DHS
referrals made to the DHS entity.
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If any direct physician financial relationship does not fully comply with all of the requirements of at least
one Stark exception, the law is violated — regardless of the knowledge or intent of the DHS entity — unless
the DHS entity could show that it did not have actual knowledge of, and did not act in reckless disregard
or deliberate ignorance of, the identity of the referring physician, and the claim otherwise complies with all
applicable federal and state laws, rules, and regulations. This knowledge standard was intended to protect
DHS entities against arbitrary payment denials for minor financial relationships with referring physicians
who are not known to the DHS entity.
Under this knowledge (actual knowledge or reckless disregard or deliberate ignorance) standard, the
CMS has explained that the DHS entity does not have a duty to inquire about relationships with referring physicians unless facts and circumstances exist such that a failure to follow up with an inquiry
would constitute deliberate ignorance or reckless disregard. In other words, did the DHS entity have
some reason to suspect the existence of a prohibited arrangement, and should it have taken reasonable
steps to find out? The level of inquiry according to the government and the applicable cases interpreting
this language, of course, depends on the circumstances. At the very least it can be said that if medical
practices and other DHS entities are deficient about keeping or deliberately fail to keep track of their
physician financial relationships, they will be deemed to have sufficient knowledge to have violated the
Stark Law.
Medical practices generally have direct financial relationships with their physicians and know the identity of all referring physicians. Thus, in most cases, it would be difficult for smaller medical practices to
avoid Stark liability under this knowledge standard that goes beyond just actual knowledge and requires
some level of inquiry about any longer-term financial relationship with a physician who may be in a
position to refer to a practice.
The knowledge standard required to assess civil money penalties against referring physicians and DHS
entities is comparable to the knowledge found in the federal False Claims Act (i.e., did the accused actually know or act with reckless disregard or deliberate ignorance about the prohibited relationship?).
In no event, however, does ignorance of the law itself provide a defense against an alleged violation.
Making Sense of the Stark Law: Compliance for the Medical Practice
There is now also a grace period of up to 90 days that can be used once every three years for certain temporary lapses in compliance due to reasons beyond the control of the DHS entity if the parties were in
compliance with an exception for at least 180 consecutive days prior to the lapse and they expeditiously
take steps to rectify the noncompliance.
COMPLIANCE WITH THE ANTI-KICKBACK LAWS
W
hile a comprehensive treatment of the anti-kickback laws is beyond the scope of this publication,
it is essential for all physicians and their staffs to fully understand the regulatory interplay and
differences between the Stark and anti-kickback laws.
The CMS and state-level anti-kickback authorities including the Massachusetts Attorney General’s
Office have made it clear that satisfaction of the Stark Law does not automatically result in immunity
under other fraud and abuse laws, including the federal and state anti-kickback statutes. These statutes
prohibit any individual or entity from knowingly and willfully soliciting, receiving, offering, or paying any form of remuneration (“in cash or in kind”) in order to induce the referral of an individual for
the furnishing, or arranging for the furnishing of, any item or service payable under the Medicare or
Medicaid programs, or, as is the case in Massachusetts, under any private health plan or insurer. Any
party accused of violating the anti-kickback laws can be subject to civil money penalties, criminal prosecution, and/or exclusion from the Medicare and Medicaid programs.
Thus the anti-kickback laws are broader in scope than the Stark physician self-referral prohibition.
The federal anti-kickback statute does set forth numerous safe harbors (including those for employment, independent contractors, and group practices) that are similar but not identical to their counterpart Stark exceptions. For example, the anti-kickback safe harbor for independent contractor physicians
would only protect contracted services for which the aggregate annual remuneration is set in advance
(e.g., $5,000 per month), while the Stark exception counterpart (the personal services arrangement
exception) comparatively requires that there be an objectively verifiable compensation formula set in
advance, but not the aggregate compensation (e.g., 45% of collections from the physician’s personally
performed services).
The CMS, however, in two instances did add anti-kickback safe harbors as Stark exceptions (referral
services and obstetrical medical malpractice insurance).
Any physician financial relationship that is subject to the Stark Law will also be subject to the anti-kickback
laws, thus the effort to confirm the regulatory compliance of a physician’s financial relationship should
not end with Stark. The relationship must also be considered under the anti-kickback laws.
Unlike the Stark Law, which in most situations requires strict adherence to an exception to avoid the
prohibition and possible sanctions, the failure to come within an anti-kickback safe harbor does not
render a physician’s financial relationship per se illegal. At the same time, the federal anti-kickback
statute has been interpreted by the federal courts in an extremely broad fashion, so that the government need only prove that a single, and not just the primary, purpose of the remuneration to a physician, even if only offered or solicited but never tendered, is to induce referrals. Also, the anti-kickback
laws require the government to prove that an accused party intended to violate the law. Thus, there is
a greater amount of “grey area” under the anti-kickback laws with regard to compliance. Because of
this uncertainty, Congress has required the OIG to issue anti-kickback advisory rulings in response to
requests from private parties.
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Massachusetts Medical Society
Also, all of the Stark exceptions that have an asterisk (see the “Exception List,” page 17) that do not
appear in the original Stark statute require that the financial relationship not violate the federal antikickback laws in order to meet the applicable Stark exception. For example, one of the conditions to
meet the Stark fair market value compensation exception, which can protect physician compensation
arrangements that do not come within any of the other Stark exceptions, is that the compensation arrangement not violate the federal anti-kickback laws. In the Stark II regulations, the CMS explained
that to fulfill this condition, the parties would have to show that the particular arrangement meets one
of the following criteria:
• Qualifies as an anti-kickback safe harbor
• Has been specifically approved by the OIG in a favorable anti-kickback advisory opinion
• Does not violate the federal anti-kickback law
This leaves huge uncertainty in terms of Stark compliance for any such physician financial relationship
that does not meet an anti-kickback safe harbor, unless the parties go to the time and expense of seeking an OIG anti-kickback advisory ruling. It is hard to describe these CMS-added Stark exceptions as
providing a “bright line” test for physicians and related entities.
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While compliance with Stark does not automatically cause a physician’s relationship to be compliant
with the anti-kickback laws, it is likely to bring the relationship closer to being within a safer zone under the anti-kickback statute if it does not fall within any of the anti-kickback safe harbors.
PENALTIES AND SANCTIONS FOR VIOLATING STARK
T
he Stark Law is violated when a referring physician who has a prohibited direct or indirect financial
relationship with a DHS entity refers a Medicare- or Medicaid-covered DHS to the DHS entity or
when the DHS entity submits claims for payment for such a DHS.
Stark provides for two basic types of sanctions: nonpayment/refund of claims imposed on the DHS
entity, and civil money penalties for knowing violations imposed on both the DHS entity and referring
physician.
Specifically, a violation of the Stark Law can result in the following:
• Denial of Medicare or Medicaid payment to the DHS entity for the referred DHS services or
items
• Required refund from the DHS entity within 60 days of any amounts billed and collected for
the referred DHS services or items
• Imposition of a civil money penalty (CMP) on any referring physician or DHS entity for each
bill or claim that the physician or DHS entity knows or should know is for referred services for
which payment may not be made (The OIG may impose up to $15,000 in CMPs per wrongful
claim and per missed refund, or an assessment of up to triple the amount claimed for each
service that was the basis for the CMP.)
• Imposition of a CMP of up to $100,000 on any referring physician or DHS entity for each arrangement or scheme the physician/entity knows or should know has a principal purpose of
assuring referrals that, if directly made, would violate the Stark Law prohibitions
Making Sense of the Stark Law: Compliance for the Medical Practice
• A five-year exclusion from the Medicare and Medicaid programs for any provider that submits
a claim or bill that the provider knows or should know is improper
The main sanctions of the Stark Law, denial of payment and required refund, can only be imposed
upon the DHS entity and not the referring physician. Although only DHS entities are liable for this
most immediate and easily implemented Stark sanction in the form of payment denials and refunds by
the Medicare and Medicaid programs, physicians as owners of medical practices are at great risk under
Stark. A Stark violation arises from the failure of a financial relationship between a DHS entity and a
referring physician to come within a Stark exception. Many medical practices are DHS entities and the
required refund of any DHS payments made to a medical practice could easily add up to a substantial
amount if the Stark violation existed over the course of multiple months or years.
For example, a group practice that fails to compensate its physicians consistently with the Stark requirements for group practices and provides in-office radiology services could be required to refund
all Medicare and Medicaid payments for the radiology services, and the group practice itself, as well as
each referring physician, could be subject to CMPs of up to $15,000 per refunded claim.
Referring physicians as well as DHS entities can be assessed a CMP of up to $15,000 per violation (i.e.,
a separate CMP per prohibited DHS referral, per prohibited claim for DHS payment, and per missed
required refund). Both the referring physician and DHS entity can also be assessed a CMP of up to
$100,000 per arrangement that is intended to circumvent the Stark prohibition. In order to assess
CMPs, the government would have to prove that the referring physician or DHS entity had knowledge
or should have knowledge of the Stark violation.
REPORTING OBLIGATIONS
U
nder the final Stark II regulations, there are no affirmative periodic reporting obligations concerning
an entity’s ownership and compensation arrangements. Instead, DHS entities must submit certain
required information only if they are requested to do so by either the CMS or the OIG. The information
that can be required to be disclosed includes: the names and unique physician identification numbers of
all physicians who (or whose immediate family members) have an ownership or investment interest in
or compensation arrangement with the entity, and with respect to each such physician, the nature of the
financial relationship, as evidenced by documentation, routinely maintained by the entity in the course
of its business. DHS entities can also be required to produce documentation supporting compliance
with certain Stark exceptions, including group practice eligibility and temporary compliance lapses.
If a request for documents is made, the DHS entity must respond within the time period specified in
the request, which will be at least 30 days. Failure to meet Stark Law reporting obligations subjects
a provider to a civil money penalty of up to $10,000 for each day of noncompliance, and possible
Medicare Program exclusion.
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Massachusetts Medical Society
“WHISTLEBLOWERS” AND THE STARK LAW
B
oth federal and Massachusetts False Claims Acts prohibit the submission of false claims for thirdparty payment, and provide for the recovery of multiple damages plus significant civil penalties
per false claim. Under these laws, there are “whistleblower” or so-called qui tam provisions that enable
private parties to initiate a legal action against the alleged wrongdoer and recover a sizable percentage
of any settlement or judgments in the case.
The anti-kickback and Stark Laws are increasingly being used as underlying allegations in federal False
Claims Act cases. For example, a $6.5 million penalty was paid in a Stark-related qui tam federal False
Claims Act case settled in 2003 against a group of Rapid City, South Dakota oncologists and a local hospital that arose from allegations of a below-fair-market-value office rental arrangement. Also, a Boston
multi-specialty group recently settled a federal False Claims Act qui tam lawsuit by paying $230,000,
including approximately $41,400 to one of its former physician partners who was the whistleblower,
based on alleged Stark Law violations arising from the group’s compensation system. The group had
paid physician members a percentage of the income derived from lab tests that the member physicians
ordered from the group’s lab.
According to CMS, violations of the Stark Law may be pursued under the federal False Claims Act. The
OIG and United States Department of Justice also share this view.
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The theory underlining the use of an anti-kickback or Stark violation as a precursor to a federal False
Claims Act (FCA) action accepted by many federal courts is one of implied or express false certification
(i.e., regulatory compliance is a condition of payment and the filing of a claim for payment by a party
allegedly in violation of either the anti-kickback or Stark laws constitutes a false implied or explicit
certification of such compliance). Some qui tam/FCA court decisions have even held that actions under
the federal FCA do not require that the government suffer actual damages in order to state a claim and
impose civil penalties.
Thus, Stark compliance is essential — not only to protect against the risk of government program action to enforce Stark that could result in payment denial and recoupment, civil penalties, and program
exclusion, but also to protect against the possibility of an aggrieved former employee, physician coowner, or other party with inside knowledge, filing a whistleblower action for alleged violations of the
Stark Law.
STARK LAW ADVISORY OPINIONS
T
he CMS is required to issue advisory opinions interpreting the Stark Law upon request. In particular,
the CMS is required to issue written advisory opinions discussing whether a physician’s referrals
relating to certain DHS (other than clinical laboratory services) are prohibited under the Stark Law. The
purpose of the advisory opinion process is to provide meaningful advice on how the Stark Law applies
to specific factual situations. A CMS Stark advisory opinion is binding only on the individuals or entities
that request it and no third party is bound by, nor may it legally rely on, an issued advisory opinion.
These advisory opinions, however, are publicly released on the CMS website and are instructive on how
the agency is interpreting and enforcing the Stark Law.
To date, the CMS has only issued a handful of such advisory opinions and most address the issue of
ownership in specialty hospitals. These can be found at www.cms.hhs.gov/physicians/aop.
Making Sense of the Stark Law: Compliance for the Medical Practice
MAKING SENSE OF THE EXCEPTIONS RELEVANT
TO INDEPENDENT MEDICAL PRACTICES
N
otwithstanding the popular misconception, referrals made within a medical practice are potentially
subject to both the Stark and anti-kickback laws.
For the physician in solo or group practice, the threshold consideration under Stark is to first determine
whether the practice is rendering and billing for any DHS that is not personally performed by the
referring physician. If the solo or group medical practice is doing so, then it is a DHS entity prohibited
from billing Medicare and Medicaid for any DHS referred by any physicians with a financial relationship
(i.e., all physicians who own the practice and/or receive any form of compensation from the practice),
unless those physicians’ relationships come within one of the Stark exceptions.
Any DHS personally performed or provided by the referring physician is not defined as a “referral”
under the Stark Law. However, any DHS performed or provided by any person other than the referring
physician, including, but not limited to, the referring physician’s employees, independent contractors,
or other physicians in the same medical practice, are subject to the Stark prohibitions. In addition, the
financial relationship between the referring physician and the practice billing Medicare and Medicaid
must fall within one of the enumerated Stark exceptions in order to avoid a Stark violation. This is true
even in the case where Medicare permits the services rendered by the other person to be billed under the
physician’s billing number as “incident to” the referring physician’s services.
As discussed above, unlike the anti-kickback statute safe harbors, failure to strictly comply with all the
requirements of a Stark exception leaves the parties in violation of the law.
For any medical practices subject to Stark, the Physician Services and In-office Ancillary Services exceptions are the most preferable. If all the requirements are met, they cover all of the physicians within a
group practice and permit more flexibility in how the practice can permissibly compensate its physicians. These exceptions work differently for solo and group practices.
Alternatively, a medical practice with two or more physicians that does provide and bill for Medicare
or Medicaid DHS but does not qualify as a group practice under Stark can have distinct compensation
arrangements (but not ownership relationships) with individual physicians under the bona fide employment, personal services arrangement, fair-market-value, or academic medical center exceptions.
These are the same exceptions that apply to compensation arrangements with hospitals and other DHS
entities.
Rendering DHS Within a Solo Practice
Because of the emphasis the Stark Law puts on group practices, a further popular misconception exists
that the Stark prohibitions have no potential application to physicians in solo practice. In fact, Stark
does apply to a physician in solo practice if he or she provides and bills for Medicare or Medicaid DHS
items or services that are furnished in any manner by other individuals within the practice. For instance,
a solo practice physician that employs a technician to render X-rays to Medicare and Medicaid patients is
subject to the Stark Law. Most solo practices with a single office location can easily satisfy the in-office
ancillary services exception if the physician supervises his staff in conformance with applicable Medicare
Part B rules on supervision (see the section entitled “In-Office Ancillary Services Exception”).
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Shared Office Arrangements
Under the in-office ancillary exception, separate physician practices in the same building may share
and bill separately for ancillary services if each of the individual physician practices involved separately
meets the supervision, location, and billing requirements of this exception. Therefore, independent
physician practices may share clinical laboratory or other DHS resources, including personnel, without
violating Stark as long as they meet all of the following criteria:
• Each physician practice independently meets the supervision requirements for the particular
ancillary services when they are performing the services.
• The ancillary service and the physicians’ offices are located in the same building, and each rendering practice can independently meet the other elements of the location test of the in-office
ancillary services exception.
• Each physician practice independently bills for the ancillary services furnished to its own patients as allowed under the Stark in-office ancillary service exception.
• All other applicable Stark exceptions are met (e.g., equipment and space leases), all applicable
Medicare billing rules are satisfied, and the arrangement does not violate the anti-kickback
statute.
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Rendering DHS Within a Group Practice
The in-office ancillary services exception is the most valuable for medical practices, but it is only
available to either solo practices or practices with multiple physicians that satisfy all of the requirements
under the Stark definition of a “group practice.”
Definition of Group Practice
Notwithstanding the more liberal provisions on incentive compensation for employed and contracted
physicians issued by the CMS in the final Stark II Phase II regulations, the Stark exceptions available
through group practices continue to permit more leeway in the distribution of revenue to all physicians
within the group practice.
Meeting the definition of a “group practice” under Stark is not only preferable under the Stark Law, but
will also serve to help protect a medical practice under the anti-kickback statute as the group practice safe
harbor under this law requires that a practice meet the Stark group practice definition.
In order for a medical group to qualify as a “group practice” under Stark, the practice must meet all of
the requirements described below.
Single Legal Entity
The group must be organized as a single legal entity of any kind, authorized under state law and operated primarily for the purposes of being a physician group practice.
The entity may be organized by physicians, individual physician professional corporations, health care
facilities, or other persons or entities. The single legal entity may be organized or owned (in whole or
in part) by another entity that was a medical practice, provided that such a parent organization is not an
operating physician practice.
Making Sense of the Stark Law: Compliance for the Medical Practice
The Stark regulations prohibit affiliations of physicians formed substantially to share profits from referrals, or separate group practices under common ownership or control through a physician practice
management company, hospital, health system, or other entity or organization. However, a group practice that is otherwise a single legal entity may itself own subsidiary entities. A group practice operating
in more than one state will be considered to be a single legal entity notwithstanding that it is composed
of multiple legal entities, provided that the states are contiguous, the ownership is identical, and the
multiple organizational structures are legally necessary.
Two or More Physician Members
The group must have at least two or more physician “members” — meaning physicians who are owners, employees, or locum tenens/on-call physicians. Independent contractor physicians are not defined
as members of a group practice, and thus do not count in considering whether there are two or more
physician “members of the group” (independent contractor physicians, however, are allowed to serve as
the supervising physician for purposes of meeting the in-office ancillary services exception).
Thus, a professional corporation that has one shareholder physician who contracts with multiple physicians as independent contractors would not qualify as a group practice under Stark
Range of Care
Each physician member must provide substantially the full range of his or her routinely provided services through the joint use of shared office space, facilities, equipment, and personnel.
Services Furnished by Group Practice Members
Substantially all of the patient care services of the physicians who are members of the group (i.e., owners, employees, or locum tenens/on-call physicians, but not independent contractors) must be provided
through the group and must be billed under a billing number assigned to the group, and amounts so
received must be treated as receipts of the group. The CMS has deemed “substantially all” to mean “at
least 75 percent of the total patient care services of the group practice members.” Satisfaction of this requirement will be determined by the total patient care time group member physicians spend rendering
patient care services, measured by any reasonable means (e.g., time cards). Temporary grace periods for
satisfaction of this condition are available for new practices, relocating physicians, and those in health
professional shortage areas. Thus, significant outside activities by a practice’s physician owners and
employees could result in a disqualification as a group practice under Stark.
Distribution of Expenses and Income
Overhead expenses and income must be distributed in accordance with methods that are determined
before the receipt of payment for the services giving rise to the overhead expense or producing the
income. A group practice, however, is not precluded from adjusting its compensation methodology
prospectively, subject to restrictions on the distribution of revenue from Medicare and Medicaid DHS
under the special rules for profit shares and productivity bonuses (see the section entitled “Group
Practice Compensation”).
Unified Business/Decision-Making
The group practice must be a unified business with at least centralized decision-making by a body representative of the group practice that maintains effective control over the group’s assets and liabilities,
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Massachusetts Medical Society
including, but not limited to, budgets, compensation, and salaries; consolidated billing; accounting;
and financial reporting.
Compensation
Compensation to group practice physicians cannot be based on the volume or value of Medicare or
Medicaid DHS referrals, but such DHS revenues can be included in overall profit-share payments or
productivity bonuses based on services personally performed, including “incident to” services. The
regulations provide for certain means to distribute overall profit shares and pay productivity bonuses
among group practice physicians that are deemed not to relate directly to the volume or value of DHS
referrals (see the section entitled “Group Practice Compensation”).
Physician-Patient Encounters
Physician members of the group practice (i.e., owners, employees, or locum tenens/on-call physicians,
but not independent contractors) must personally conduct at least 75 percent of the physician-patient
encounters of the group.
Any medical practice that comes within the Stark group practice definition and meets one of the exceptions applicable to group practices will satisfy several of the conditions for an anti-kickback safe harbor
for a physician’s investment interests in a group practice.
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Physician Services Exception
Referrals of physician services are an exception when they are furnished personally or supervised by
another physician in the same group practice as the referring physician. ‘‘Physician services’’ are defined under this Stark exception to include ‘‘incident to’’ services, but only those that are considered
physician services under Medicare Part B. All other types of ‘‘incident to’’ services (e.g., diagnostic tests
or physical therapy) are outside the scope of the physician services Stark exception, and would have to
qualify under the in-office ancillary services or another exception.
This exception is of limited application as it only affords protection within a group practice for referrals
of the narrow class of physician services that are included in the definitions of DHS. The main type of
DHS that can be protected under this exception is in the area of radiology. For instance, this exception
would protect the billing to Medicare of a radiologist’s fee for reading a CT scan referred by a primary
care physician in the same group practice, provided that the radiologist personally performed or properly supervised the test.
In-Office Ancillary Services Exception
This exception is perhaps the most important and useful exception for solo and group medical practices.
It applies to almost all DHS rendered by a solo or group practice. It does not, however, with the exception of infusion pumps, apply to durable medical equipment (DME) , or parenteral and enteral nutrition
(PEN) equipment and supplies. Thus, referring physicians, including those who treat patients in their
private homes, as well as those physicians’ medical practices, cannot provide most DME and PEN items
to Medicare and Medicaid patients under the in-office ancillary service exception.
Referrals of in-office ancillary services to a medical practice are an exception of the Stark prohibitions
when each of the following three tests are met by the solo practice or by a multiple physician practice
that meets all of the conditions of a “group practice” under Stark:
Making Sense of the Stark Law: Compliance for the Medical Practice
1. Who rendered the service?
• The service was furnished personally by one of the following:
— The referring physician
— A physician who is a member of the same group practice as the referring physician
— Individuals supervised by a physician (including independently contracted physicians)
in the same group practice under the level of supervision required under theapplicable
Medicare payment or coverage rules (The interplay of the Medicare coverage andpayment
rules with Stark, in the area of supervision, can present a measure of uncertainty, so it is
advisable that supervision arrangements be carefully reviewed for legal compliance when
contemplating reliance on the in-office ancillary services exception.)
2. Where was the service rendered?
• The service was furnished under one of the following circumstances:
— In the same building in which the group practice has an office open to patients for medical services at least 35 hours per week, and the referring physician or one or more group
member physicians practices regularly and provides physician services at least 30 hours
per week, including some physician services unrelated to the furnishing of DHS (interpretations and reads of tests do not count as non-DHS physician services)
— In the same building in which the patient receiving the test usually receives physician services from the referring physician or another group member physician and that is owned
or rented by their group as an office normally open to the group’s patients for medical services at least eight hours per week, and in which the referring physician regularly practices
medicine and furnishes physician services to patients at least six hours per week, including some physician services that are unrelated to reimbursable DHS
— In the same building in which the referring physician is present (not necessarily in the
same space or part of the building) and orders the tests during a patient visit or the referring physician or other group member physician is present while the test is furnished
during occupancy of the premises that the referring physician or his or her group practice
owns or rents as an office that is normally open to the physician’s or group’s patients for
medical services at least eight hours per week, and in which the referring physician or one
or more group member physicians regularly practices medicine and furnish physician services at least six hours per week, including some physician services that are unrelated to
reimbursable DHS
— In a centralized building used on a full-time basis by the group practice for the provision of
some or all of the group’s clinical laboratory services, or for the provision of some or all of
the group’s other categories of DHS (other than clinical lab services; that is, a centralized
facility cannot combine a clinical laboratory and any other category of DHS)
Under this exception, solo and group medical practices can refer patients to their practices for the provision of clinical laboratory services, imaging or physical therapy, among other DHS, provided that the
non-physicians furnishing the services or items are supervised under applicable Medicare rules, and
the services are rendered either in the same building in which the referring physician or group has a
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defined presence and routinely treats patients and practices medicine, or in a centralized location for
the DHS.
There are also special rules that permit the application of this exception to services rendered to patients
in their homes.
3. How was the service billed?
• The service was billed by one of the following:
— The physician performing or supervising the services
— The group practice of which the performing/supervising physician is a member (or for
which the supervising physician is an independent contractor while furnishing patient care
services for the group practice) under a billing number assigned to the group practice
— An entity that is wholly owned by the performing/supervising physician or such physician’s
group practice, under the entity’s own billing number or under a billing number assigned
to the physician or group practice
— An independent third-party billing company acting as an agent of the physician, group
practice, or entity under a billing number assigned to the physician, group practice, or
entity, under a Medicare-compliant billing arrangement
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The Stark Law does not prohibit medical practices from accepting outside referrals for any DHS from
non-practice physicians who do not have a financial relationship with the group practice. The practice accepting such outside referrals, however, may not bill Medicare or Medicaid for such services
as in-office ancillary services under the group’s billing number, and it would be subject to applicable
federal and state reimbursement, licensure, certification, and other requirements as an independent
provider of DHS.
Group Practice Compensation
The Stark Law strictly regulates internal group practice compensation if a practice qualifies as a group
practice under Stark and it provides and receives payment for any Medicare or Medicaid DHS.
The Stark Law permits group practices to divide revenues among their physicians in ways that are very
different and more advantageous than are permitted for other DHS entities with their employed and
contracted referring physicians. The policy underlying this disparate treatment between group practices
and hospital/other DHS entity compensation arrangements with physicians under Stark is that physicians dividing up revenue from their own joint practice are not receiving the level of substantial income
that is generated by DHS referrals to hospital or other DHS entities.
Group practices receive favored treatment with respect to physician compensation under Stark in the
following ways:
• They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) directly (e.g., with a percentage of collections) based on
Medicare and Medicaid DHS personally performed by the referring physician.
• They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) with a productivity bonus based on Medicare and Medicaid
Making Sense of the Stark Law: Compliance for the Medical Practice
DHS performed by others “incident to” the referring physician’s personally performed services, provided that the share of the bonus is not determined in a manner that is directly related
to the volume or value of Medicare or Medicaid DHS referrals by the physician.
• They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) with a share of overall profits of the group, provided that
the share of profit is not determined in a manner that is directly related to the volume or value
of Medicare or Medicaid DHS referrals by the physician.
• They are permitted to compensate all group physicians (regardless of status as owner, employee, or independent contractor) directly based on any non-DHS referrals by the referring
physicians (although such compensation directly based on the volume or value of any private
pay referrals or non-DHS Medicare or Medicaid referrals could implicate various federal or
state fraud and abuse statutes, including the anti-kickback statutes).
Group practice physician compensation also is advantageous because it is neither subject to the fairmarket-value limits under the other Stark physician compensation exceptions, nor subject to the “set
in advance” requirement applicable to all other Stark physician compensation exceptions, except for
bona fide employment relationships. This is to permit group practices from engaging in profit sharing
and productivity bonuses.
The Stark II regulations set out special group practice compensation rules permitting Medicare and
Medicaid DHS revenues to be paid indirectly to group practice physicians through overall shares of
profit or productivity bonuses.
A productivity bonus, including Medicare and Medicaid DHS performed by others “incident to” the
referring physician’s personally performed services, is permissible if it is calculated in a reasonable and
verifiable manner that is not directly related to the volume or value of DHS referrals by any referring
physician to the group practice.
Any of the following bonus methodologies is permitted:
• The bonus is based on the physician’s total patient encounters, or relative value units (RVUs).
• The bonus is based on the allocation of the physician’s compensation attributable to services
that are not DHS.
• Revenues derived from DHS are less than five percent of the group practice’s total revenue, and
the allocated portion of those revenues to each physician in the group practice constitutes five
percent or less of his or her total compensation from the group practice.
A share of the group practice’s overall profits is permissible if it is divided in a reasonable and verifiable
manner that is not directly related to the volume or value of DHS referrals by any referring physician to
the group practice.
Any of the following profit distribution methodologies is permissible:
• The group’s profits are divided per capita (e.g., per physician in the group).
• Revenues derived from DHS are distributed based on the distribution of the group’s revenues
attributed to services that are not DHS.
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• Revenues derived from DHS constitute less than five percent of the group practice’s total
revenue and the allocated portion of those revenues to each physician in the group practice
constitutes five percent or less of his or her total compensation from the group practice.
The Stark rules also permit profit allocations to be divided within a component of the group practice
that consists of at least five physicians.
Supporting documentation verifying the method used to calculate the profit share or productivity bonus
and the resulting amount of compensation must be made available to the government upon request. A
reproduction of a physician compensation grid issued by the CMS in the final Stark II Phase II rules is
included as Exhibit B in the back of this publication.
INDIVIDUAL PHYSICIAN COMPENSATION RELATIONSHIPS
R
eferring physicians can have compensation arrangements with DHS entities, including medical
practices that do not meet the Stark “group practice” requirements, under the exceptions
for employment, personal services, or fair-market-value arrangements. Under Stark II, CMS has
established fairly uniform rules on permissible compensation under these exceptions, as well as the
academic medical center exception.
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Under these exceptions, referring physicians can be compensated in any of the following ways — as
long as the overall compensation is not in excess of fair market value:
• On an aggregate basis
• On a per-unit-of-service or per-time basis
• With a percentage of revenues or collections for personally performed services
• With a productivity bonus on any personally performed services
• With incentives tied to utilization as part of a physician incentive plan related to health plan
enrollees
There are additional, unique conditions within each of these exceptions that also must be satisfied to
utilize these permissible forms of compensation as explained below.
Bona Fide Employment Relationship Exception
Under this exception, any amount paid by a DHS entity/employer to a referring physician with
a bona fide employment relationship for the provision of services is permitted if all of the following
are true:
• It is for identifiable services.
• The amount of remuneration is consistent with fair market value and not determined in a manner that takes into account the volume or value of referrals.
• The remuneration is provided pursuant to a commercially reasonable agreement, even if no
referrals were made to the employer.
Making Sense of the Stark Law: Compliance for the Medical Practice
In addition to the payment of a productivity bonus or percentage compensation based on services performed personally by the physician/employee, a bona fide employee of any DHS entity could also be
paid directly based on any non-DHS referrals by the employee (although such compensation directly
based on the volume or value of any private pay referrals or non-DHS Medicare or Medicaid referrals
could implicate various federal or state fraud and abuse statutes, including the anti-kickback statutes).
Stark references the common law rules as applied under the Internal Revenue Code in determining
whether a physician is an “employee.”
Personal Service Arrangements Exception
Any remuneration paid to a referring physician by a DHS entity under an arrangement for personal
services is permitted if all of the following criteria are met:
• The arrangement is set out in writing, signed by the parties, specifies the services covered by
the arrangement, and is for a term of at least one year.
• The arrangement covers all of the services to be provided to the DHS entity.
• The aggregate services contracted do not exceed those that are reasonable and necessary for
the legitimate business purposes of the arrangement.
• The compensation to be paid over the term is set in advance in the initial agreement in sufficient detail so that it can be objectively verified, does not exceed fair market value, and is not
determined in a manner that takes into account the volume or value of any referrals or other
business generated between the parties.
• The services to be performed under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.
A key liberalization of this exception under the final Stark II regulations is that the physician or immediate family member can furnish services, as well as related items (such as supplies), to the DHS entity
through the services of employees or locum tenens physicians, but not independent contractors. Thus,
this exception now can comprehensively cover hospital service contracts with medical groups to cover
various hospital divisions, such as the emergency room.
Under this exception, terminations with or without cause are allowed if the parties enter into no further contract for services within the first year of the original term. The arrangement can also consist
of multiple contracts if each meets the requirements under the exception, and if the contracts either
incorporate each other by reference, or if there is a historical master list of contracts that is maintained
and updated centrally and is available to the government upon request.
The payment of a productivity bonus based on services performed personally by the contracted physician as well as payments based on a unit of service or time are also permitted.
Under the final Stark II regulations, the CMS also created two ways to be automatically deemed in compliance with this exception’s requirement for fair-market-value compensation for hourly payments for
a physician’s personal services (i.e., those provided by the physician personally and not by others under
his or her direction or control). Such payments are deemed to be fair market value if they are established
using either of the following two methodologies:
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• The hourly rate is less than or equal to the average hourly rate for emergency room physician
services in the relevant physician market, provided there are at least three hospitals providing
emergency room services in the market.
• The hourly rate is determined by averaging the 50th percentile national compensation level
for physicians within the same specialty (or if the specialty is not identified in the survey,
for general practice) in surveys conducted by at least four of the following groups and dividing by 2,000 hours: Sullivan, Cotter & Associates; Hay Group; Hospital and Healthcare
Compensation Services; Medical Group Management Association; ECS Watson Wyatt; and
William M. Mercer.
Physician compensation that does not meet either of these deemed compliant methodologies may still
be demonstrated to be consistent with the fair-market-value requirement through other means.
Fair-Market-Value Compensation Exception
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Under the final Stark II regulations, the CMS added a fair-market-value compensation exception. This
is a useful compensation exception for arrangements that do not fall within any of the other exceptions
to the Stark prohibitions. This exception allows compensation resulting from an arrangement between
a DHS entity and a referring physician, immediate family member, or group of physicians (regardless
of whether or not the group meets the definition of group practice) if the arrangement meets the following conditions:
• The arrangement is in writing, is signed by the parties, and covers only identifiable items or
services, all of which are specified in the agreement.
• The writing specifies the time frame for the arrangement, which can be for any period of time
and may contain a termination clause, provided the parties enter into only one arrangement for
the same items or services during the course of a year. An arrangement made for less than one
year may be renewed any number of times if the terms of the arrangement and the compensation for the same items or services do not change.
• The writing specifies the compensation that will be provided under the arrangement. The compensation must be set in advance, consistent with fair market value, and not determined in a
manner that takes into account the volume or value of referrals or other business generated by
the referring physician.
• The arrangement would be commercially reasonable (taking into account the nature and scope
of the transaction) and furthers the legitimate business purposes of the parties.
• The arrangement does not violate the anti-kickback statute or any federal or state law or regulation governing billing or claims submission.
• The services to be performed under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates a state or federal law.
If the physician’s compensation is paid as an employee of the DHS entity, a written agreement would
not be required.
Making Sense of the Stark Law: Compliance for the Medical Practice
The payment of a productivity bonus or percentage compensation based on services performed personally by the contracted physician as well as payments based on a unit of service or time are also
permitted.
CMS did include a comment in the final Stark II regulations that would seem to suggest that a referring
physician could be paid for his or her supervisory services by a DHS entity under this exception.
Physician Payments Exception
Payments by a physician (or immediate family member) to a laboratory in exchange for the provision
of clinical laboratory services or to an entity as compensation for other items or services are excepted if
the items or services are furnished at a price that is consistent with fair market value, and are not items
or services covered by another exception (e.g., equipment lease).
COMPENSATION TO NON-GROUP PRACTICE PHYSICIANS
A
ll compensation to referring physicians who are not owners of their medical practices must be fair
market value. Fair market value is defined as “the value in arm’s length transactions, consistent
with the general market value.” ‘General market value’ is defined as the price that an asset would bring
as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise
in a position to generate business for the other party, or the compensation that would be included in a
service agreement as the result of bona fide bargaining between well-informed parties to the agreement
who are not otherwise in a position to generate business for the other party, on the date of acquisition
of the asset or at the time of the service agreement.
There are several common standards imposed under the personal services, employment, academic
medical centers (AMC) services, and fair market value compensation exceptions — namely that the
compensation is “set in advance” and “is not determined in a manner that takes into account the
volume or value of DHS referrals or (except for employed physicians) other business generated by the
referring physician.”
Under the final Stark II regulations, the CMS liberalized the meanings of these standards to permit
incentive compensation as well as “percentage-based,” “per click,” and “time-based” compensation
under these exceptions, provided that the compensation is tied only to the services personally furnished
by the physician. Unlike the overall profit distributions permitted by Stark within a group practice, such
incentive compensation paid to employed or contracted physicians cannot include any measure of DHS
services or items rendered by others, including “incident to” services.
Any form of compensation, including productivity bonuses and percentage-based compensation, is
considered to be ‘‘set in advance’’ under Stark if the aggregate compensation, a time-based or perunit-of-service-based (whether per-use or per-service) amount, or a specific formula for calculating the
compensation, is set in an agreement between the parties before the furnishing of the items or services
for which the compensation is to be paid; the formula for determining the compensation is set forth in
sufficient detail so that it can be objectively verified, and the formula is not changed or modified during
the course of the agreement in any manner that reflects the volume or value of referrals or other business generated by the referring physician.
Unit-based compensation (including time-based or per-unit-of-service-based compensation) will
be deemed not to take into account ‘‘the volume or value of referrals’’ or ‘‘other business generated
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between the parties’’ if the compensation is fair market value for services or items actually provided, and
does not vary during the course of the compensation agreement in any manner that takes into account
referrals of DHS or referrals or other business generated by the referring physician, including private
pay health care business (except for services personally performed by the referring physician, which will
not be considered ‘‘other business generated’’ by the referring physician).
Even if a compensation arrangement does not violate the Stark Law, it still must be analyzed for compliance under both federal and state anti-kickback laws, as well as other state laws that may regulate physician financial interests. Such incentive-based or volume variable compensation may not pass muster
under these other types of fraud and abuse laws (see the discussion of anti-kickback safe harbors under
“Compliance With the Anti-kickback Laws”.)
The CMS also liberalized the Stark exceptions to allow for physician contract terms that direct the physician’s clinical activity. A physician’s compensation from a bona fide employer or under a managed care
or other contract may be conditioned on the physician’s referrals to a particular provider, practitioner,
or supplier, as long as the compensation arrangement meets the following criteria:
• Is set in advance for the term of the agreement
• Is consistent with fair market value for services performed (i.e., the payment does not take into
account the volume or value of anticipated or required referrals)
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• Otherwise complies with an applicable exception
• The requirement to make referrals to a particular provider, practitioner, or supplier is set forth
in a written agreement signed by the parties.
• The requirement to make referrals to a particular provider, practitioner, or supplier does not
apply if the patient expresses a preference for a different provider, practitioner, or supplier; the
patient’s insurer determines the provider, practitioner, or supplier; or the referral is not in the
patient’s best medical interest in the physician’s judgment.
• The required referrals relate solely to the physician’s services covered by the scope of the
employment or the contract, and the referral requirement is reasonably necessary to effectuate
the legitimate business purposes of the compensation relationship.
• In no event may the physician be required to make referrals that relate to services that are not
provided by the physician under the scope of his or her employment or contract.
Thus, under Stark, a restrictive covenant in a physician employment contract may be permissible, unless the physician was also covered by a physician recruitment arrangement. See the discussion of the
Stark physician recruitment exception under the section entitled “Physician-Hospital Relationships,”
but note that certain restrictive covenants are unenforceable under Massachusetts law.
Making Sense of the Stark Law: Compliance for the Medical Practice
OTHER MEDICAL PRACTICE/PHYSICIAN RELATIONSHIPS WITH DHS ENTITIES
Rental of Office Space Exception
Payments made by a lessee to a lessor for the use of premises are excepted if the following criteria
are met:
• There is a written, executed lease with a term of at least one year.
• The lease specifies the premises covered.
• The lease would be commercially reasonable even if there were no referrals made between
the parties.
• The space rented does not exceed that which is reasonable and necessary for the legitimate
business purpose of the lease and used exclusively by the lessee when being used by the lessee,
except that the lessee may make pro rata common areas expense payments.
• Rental charges over the term are set in advance, consistent with fair market value, and are not
determined in a manner that accounts for the volume or value of any referrals or other business
generated between the parties.
With respect to leases, fair market value is “the value of rental property for general commercial purposes (not taking into account its intended use).” Space rentals may not be adjusted to reflect additional
value attributable to the parties’ proximity if the lessor is a potential source of referrals to the lessee.
Relevant factors in determining fair market value for purposes of Stark and anti-kickback compliance
include not only the rental rate, but also the length and scope of the negotiations; the space, amenities,
and additional rental costs included in the rental rate; and termination and exclusivity rights.
Rental of Equipment Exception
Payments made by a lessee to a lessor for the use of equipment are excepted if the following criteria
are met:
• There is a written, executed lease with a term of one year.
• The equipment rented does not exceed that which is reasonable and necessary for the
legitimate business purpose of the lease and is used exclusively by the lessee when being used
by the lessee.
• The rental charges over the term are set in advance, consistent with fair market value, and are
not determined in a manner that takes into account the volume or value of any referrals or
other business generated between the parties.
• The lease would be commercially reasonable even if no referrals were made between parties.
As to both space and equipment leases, the following rules apply:
• “Per service” or “per click” rental payments are permitted if all other conditions of the
exception are met (but note that such payments do not meet the applicable anti-kickback safe
harbors, which require the aggregate amount of rent to be stated in the lease or contract).
• “Termination with or without cause” clauses are allowed if the parties enter into no further
leases within the first year of the original lease term.
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• “Month-to-month holdovers” are allowed for up to six months if there are no changes in the
terms and conditions.
• Subleases are permitted as long as the rented space or equipment is not shared during the
same rental period.
OTHER GENERAL EXCEPTIONS
There are other Stark exceptions that apply to unique situations that protect both physician ownership/
investment interest in and compensation with the following DHS entities:
Implants Provided in Ambulatory Surgical Centers
Implants furnished in an ambulatory surgical center (ASC), such as cochlear implants, intraocular
lenses, and other implanted prosthetics or DME, fall within an exception if the implant is implanted by
the referring physician or a member of the physician’s group practice in a Medicare-certified ASC; the
implant is implanted during a surgical procedure payable by Medicare as an ASC procedure; and the
arrangement does not violate the anti-kickback statute or other laws or regulations governing billing
or claims submission.
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ESRD Drugs
EPO and other dialysis drugs furnished in an end-stage renal disease (ESRD) that are listed by their CPT
and HCPCS codes are excepted if the arrangement does not violate the anti-kickback statute or other
laws or regulations governing billing or claims submission.
Preventive Tests and Immunizations
Medicare-covered preventive screening tests, immunizations, and vaccines listed by their CPT and
HCPCS codes are excepted if the arrangement does not violate the anti-kickback statute or other laws
or regulations governing billing or claims submission.
Eyeglasses/Contact Lenses
Medicare covered eyeglasses and contact lenses, when given following cataract surgery, are excepted if
the arrangement does not violate the anti-kickback statute or other laws or regulations governing billing or claims submission.
Intra-family Rural Referrals
This exception protects referrals from a referring physician to his or her immediate family member or
to an DHS entity with which an immediate family member has a financial relationship if the patient
referred resides in a rural area (as defined under Medicare regulations) and no other person or entity is
available to furnish the services in a timely manner in light of the patient’s condition within 25 miles of
the patient’s residence or at the patient’s home, and the arrangement does not violate the anti-kickback
statute or other laws or regulations governing billing or claims submission. The referring physician
Making Sense of the Stark Law: Compliance for the Medical Practice
or immediate family member must make reasonable inquiries as to the availability of other persons or
entities to furnish the DHS within 25 miles of the patient’s residence.
PHYSICIAN-HOSPITAL RELATIONSHIPS
Exceptions to Ownership Arrangement Prohibitions
The Stark Law was originally drafted to provide very narrow exceptions to the prohibition of ownership or investment interests in hospitals and other non-group practice DHS entities. There are exceptions for rural providers, hospitals in Puerto Rico, and publicly traded securities and mutual funds.
Another original Stark ownership arrangement exception for whole hospital ownership has undergone
extensive scrutiny, as it has been utilized as a means for physicians to own and operate specialty hospitals. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 amended the whole
hospital and rural provider exceptions by imposing an 18-month moratorium, effective through June
7, 2005, on specialty hospitals, and thus prevents them from being eligible for a Stark exception unless
they are grandfathered as having been in operation or under development as of November 18, 2003.
This moratorium expired on June 8, 2005, but the CMS announced its intention not to issue new specialty hospital provider agreements, pending its review of its procedures for enrolling specialty hospitals in Medicare. This review is to be completed by January 2006. In the meantime, legislation has been
filed in Congress (with a June 8, 2005 effective date, if enacted) to prohibit physicians from referring
Medicare and Medicaid patients to new specialty hospitals in which they have an ownership interest.
A “specialty hospital” is defined as a hospital that is primarily or exclusively engaged in the care and
treatment of one of the following: (i) patients with a cardiac condition, (ii) patients with an orthopedic
condition, (iii) patients receiving a surgical procedure, or (iv) patients receiving any other specialized
category of services that HHS designates as being inconsistent with the purpose of permitting physician
ownership and investment interests in a hospital.
The effect of this moratorium is to prohibit such specialty hospitals from seeking Medicare or Medicaid
reimbursement for services or items referred by any physician owners.
Academic Medical Center Services Exception
This exception, added by the CMS in the regulations, applies to both ownership/investment interests
and compensation arrangements. It is intended to address the unique physician relationships found
within the academic medical center (AMC) setting related to research, teaching, and other administrative tasks. An AMC is defined as an accredited medical school or accredited academic hospital that
sponsors four or more approved programs, one or more faculty practice plans affiliated with the medical school, the affiliated hospital(s), or the accredited academic hospital, or one or more affiliated hospitals if the majority of the medical staff members consists of physicians who are faculty members, and
a majority of all hospital admissions, not counting those of residents and non-physician professionals,
are made by faculty members.
AMCs may bill for Medicare and Medicaid DHS referred by academic physicians who have (or whose
immediate family members have) a compensation arrangement or ownership interest with the AMC,
provided that the following criteria are met:
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The referring physician is a bona fide full-time or substantial part-time employee of a component of the
AMC licensed in the state, with a bona fide faculty appointment at an affiliated medical school or one or
more educational programs at an accredited academic hospital.
The referring physician provides substantial academic or clinical teaching services (or a combination)
for compensation, and there is a reasonable and consistent method for calculating the physician’s academic and clinical teaching services (a physician who performs such services at least 20 percent of his
or her professional time or for at least eight hours per week is deemed to meet this requirement).
The total compensation paid to the referring physician from all AMC components is set in advance,
does not exceed fair market value, and does not take into account volume or value of referrals or other
business generated by the referring physician within the AMC.
Transfers of funds between AMC components directly or indirectly support the missions of teaching,
indigent care, research, or community service; the relationships between AMC components are in
written form and adopted by governing bodies, or if there is only one AMC entity, transferred funds
are reflected in its financial reports; and all grants paid to the referring physician for research are used
solely to support bona fide research or teaching and are consistent with the terms and conditions of
the grant.
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The referring physician’s compensation arrangement does not violate the anti-kickback statute or any
other federal or state law governing billing or claims.
As with the other non-group practice physician compensation exceptions, AMCs may pay their referring
academic physicians on a percentage basis of services personally performed. Payments based on a unit
of service or time are also permitted.
Physician Recruitment Exception
This exception covers various forms of remuneration provided by a hospital to induce a physician to
relocate to the geographic area served by the hospital in order to be a member of the medical staff of the
hospital. Relocation is defined as moving the physician’s practice at least 25 miles or, in the alternative,
as deriving at least 75 percent of revenues in the new practice from new patients. Residents and physicians who have been in practice one year or less are not subject to the “relocation” requirement and may
be recruited locally, provided that the recruited resident or new physician establishes his or her medical
practice in the geographic area served by the hospital, and the recruitment package satisfies the other
applicable physician recruitment exception standards below.
Remuneration paid directly to a physician to recruit him or her to relocate his or her medical practice to
the geographic area served by the hospital in order to become a member of its medical staff is excepted
from the Stark prohibitions if the following requirements are met:
• The arrangement is set out in writing and signed by both parties.
• The arrangement is not conditioned on the physician’s referral of patients to the hospital.
• The hospital does not determine (directly or indirectly) the amount of the remuneration to the
physician based on the volume or value of any actual or anticipated referrals by the physician
or other business generated between the parties.
• The physician is allowed to establish staff privileges at any other hospital and to refer business
to any other entities (except as referrals may be restricted under a separate employment or
Making Sense of the Stark Law: Compliance for the Medical Practice
services contract that complies with the permissible scope of physician restrictions under
Stark (see the section entitled “Compensation to Non-group Physicians”).
Remuneration provided by a hospital to a physician either indirectly, through payments made to another physician or physician practice, or directly, to a physician who joins a physician practice, must
also meet the following additional conditions:
• The written recruitment agreement is also signed by the party to whom the payments are
directly made.
• Except for actual costs incurred by the physician or physician practice in recruiting the new
physician, the remuneration is passed directly through to or remains with the recruited
physician.
• In the case of an income guarantee made by the hospital to a recruited physician who joins a
physician or physician practice, the costs allocated by the physician or physician practice to the
recruited physician do not exceed the actual additional incremental costs attributable to the
recruited physician.
• Records of the actual costs and the passed-through amounts are maintained for a period of at
least five years and made available to HHS upon request.
• The remuneration from the hospital under the arrangement is not determined in a manner
that takes into account (directly or indirectly) the volume or value of any actual or anticipated
referrals by the recruited physician or the physician practice (or any physician affiliated with
the physician practice) receiving the direct payments from the hospital.
• The physician or physician practice does not impose additional practice restrictions on the
recruited physician other than conditions related to quality of care.
• The arrangement does not violate the anti-kickback statute or any federal or state law or
regulation governing billing or claims submission.
This exception also applies to recruitment packages offered by federally qualified health centers
(FQHCs). Physician retention payments are not permitted, except for physicians in federally designated
health professional shortage areas.
Professional Courtesy Exception
In the final Stark II regulations, CMS added a new exception covering professional courtesy, which
is defined as free or discounted health care services or items furnished by a DHS entity, including a
hospital or a group practice, to a physician or a member of the physician’s immediate family or office
staff. This common but in recent times increasingly questioned practice has typically included waiving
co-pay and deductible amounts. Under this Stark exception, the professional courtesy must be offered
to all physicians on the DHS entity’s bona fide medical staff or in the DHS entity’s local community
(without regard to the volume or value of referrals or other business generated between the parties).
Importantly, the entity’s professional courtesy policy must be documented in writing and adopted by
the entity’s governing body. The health care items and services included in the policy must be of a type
routinely provided by the entity. Professional courtesy cannot be offered to any physician, immediate
family member, or member of the office staff who is a federal health care program beneficiary, unless
there is a good-faith showing of financial need. If any waiver of co-pay or deductibles is involved, the
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insurer must be informed in writing of the discount. Finally, the arrangement cannot violate the antikickback statute or any federal or state law or regulation governing billing or claims submission.
Health Information Networks Exception
Another new exception added by CMS in the final Stark II regulations is one for information technology
items and services (including both hardware and software) provided by a DHS entity to a physician to
participate in a community-wide health information system. The health information system must be
available to all providers, practitioners, and residents of the community who desire to participate, and
must be one that allows community providers and practitioners to access and share electronic health
care records. The exception covers only information technology items and services that are necessary
to enable the physician to participate in the health information system, and the physician must principally use the items and services as part of the community-wide health information system. The items
and services involved may not be provided in any manner that takes into account the volume or value of
referrals or other business generated by the physician (e.g., the exception would not apply if items and
services are only offered to referral sources). As with all the exceptions created by CMS regulation, this
exception does not cover any arrangement that violates the federal anti-kickback law or that involves
claims submission and billing that violates applicable federal and state laws and regulations.
Additional Compensation Exceptions for Hospital-Physician Relationships
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There is also an exception for remuneration provided by a hospital to a physician that is unrelated to the
provision of DHS. The final Stark II regulations clarify that this exception is available only if remuneration is wholly unrelated to the provision of DHS. This statutory exception has been interpreted quite
narrowly by the CMS, which views any item, service, or cost that could be allocated in whole or in part
to Medicare or Medicaid under applicable cost reporting principles as related to the provision of DHS.
Remuneration is also considered related to DHS if it is furnished in a selective manner to medical staff
or other physicians who are in a position to make or influence referrals.
Physicians can accept unsolicited non-monetary compensation in the form of items and services, but
not cash or cash equivalents, if the benefits do not total more than $300 per year and provided that they
are donated without regard to the volume or value of referrals and are in compliance with anti-kickback
and other applicable laws. This $300 limit is subject to annual CPI adjustments, but cannot qualify
for the 90-day grace period for temporary non-compliance. Certain low-value (i.e., less than $25 per
occurrence, subject to annual CPI adjustments) medical staff incidental benefits between a hospital and
its medical staff members are permissible, as well as compliance training. These exceptions, however,
have left many lingering questions regarding the permissible extent of hospital-sponsored or -provided
CME programs for its medical staff. The AMA has requested that the CMS develop an explicit exception
within the Stark regulations that would permit physician compensation without financial limitation in
the form of CME,offered for the purpose of ensuring quality patient care.
Unsolicited charitable donations made by physicians or immediate family members to hospitals and
other DHS entities that are Section 501(c)(3) organizations are allowed if donated without regard to the
volume or value of referrals and are otherwise in compliance with anti-kickback and other billing laws.
Referral services and obstetrical malpractice insurance subsidies that meet the applicable anti-kickback
safe harbor standards are also excepted from Stark.
Making Sense of the Stark Law: Compliance for the Medical Practice
INDIRECT COMPENSATION ARRANGEMENTS
A
s discussed above, indirect compensation arrangements are defined very broadly. However, the
CMS created a specific exception intended to conceptually follow the exceptions applicable to
direct compensation arrangements.
Any indirect compensation arrangement (as defined under the section entitled “Financial Relationships”)
between a referring physician (or immediate family member) and a DHS entity would not preclude the
referral or billing of Medicare and Medicaid DHS services if the arrangement meets all of the following
requirements of the indirect compensation arrangement exception:
• The compensation received by the referring physician (or immediate family member) is fair
market value and not determined in any manner that takes into account the value or volume
of referrals or other business generated (with time/unit-based payments permitted if the other
two requirements noted immediately below are satisfied).
• The arrangement is set forth in a signed written contract specifying the services covered (which
is not required for bona fide commercially reasonable employment relationships for identifiable
services).
• There is no violation of the anti-kickback statute or any other laws governing billing or claims
submission.
MANAGED CARE RELATIONSHIPS
T
he Stark prohibition, which is triggered by any type of compensation arrangement with a DHS
entity, is broad enough to encompass common managed care type physician arrangements that
include financial incentives to decrease utilization, lower costs, or improve quality. Therefore, whenever
a physician or related practice has such a contract with a managed care plan or contracting entity that
provides and bills for Medicare or Medicaid DHS, the financial relationship between the physician and
the managed care entity is subject to Stark.
There are two exceptions designed to specifically cover managed care entities.
Prepaid Plans Exception
This exception protects referrals of DHS furnished to enrollees of Medicare and Medicaid managed
care plans.
Risk-Sharing Arrangement Exceptions
Contracted physicians, under the personal services arrangement exception, and group practice, employee, and AMC physicians, under the CMS-added risk-sharing arrangements exception, are not precluded from referring DHS to entities that also pay the physician, directly or through a subcontractor,
under a managed care risk-sharing arrangement.
These exceptions apply broadly to risk-sharing payments made to physicians by managed care organizations (MCOs), including IPAs, PHOs, and other contracting provider networks, as well as other
downstream provider contracting organizations.
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PURCHASE AND SALE OF MEDICAL PRACTICES
Isolated Transactions Exception
This exception for compensation arrangements applies to one-time sales of medical practice assets or
equity, or other isolated transactions. The exception applies if the following criteria are met:
• The amount of remuneration is consistent with fair market value and not determined in a
manner that takes into account the volume or value of referrals by the referring physician or
other business generated between the parties.
• The remuneration is provided pursuant to an agreement that would be commercially
reasonable even if the physician made no referrals.
• Any additional transactions between the parties beyond six months after the practice sale are
prohibited, except for transactions that are specifically excepted by other Stark exceptions (e.g.,
selling physicians become bona fide employees of the purchaser) and except for commercially
reasonable post-closing adjustments (e.g., an indemnification hold-back) that do not take into
account (directly or indirectly) the volume or value of referrals or other business generated by
the referring physician.
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The final Stark II regulations define “isolated transaction” to permit installment payments to a seller by
a buyer as long as the total aggregate payment is set before the first payment is made and does not vary
to reflect referrals. The outstanding balance must also be guaranteed or secured to assure payment.
Post-closing adjustments that are commercially reasonable and not dependent on referrals or other
business generated by the parties will be permitted if they are made within six months of the date of
the transaction.
FINAL COMMENTS
S
ince 1995, the Stark Law as it applies to all ten categories of DHS (Stark II) has been in effect. Not
until 2004, however, have physicians and the health care community been provided with a final
set of agency regulations implementing this Law. Many of the changes and additions to the Stark II
regulations made by the CMS are intended to ease the burden of compliance with this physician selfreferral prohibition, and in many cases this has been effectively accomplished. In doing so, however,
the Stark Law has become much more complex and harder to follow. Many of the originally intended
bright lines are no more. With increasing financial burdens on the federal government to fund the
Medicare and Medicaid programs expected to continue long into the future, the prospect of significant
legislative repeal or curtailment of the Stark Law is highly unlikely.
With the issuance of final Stark II regulations, and the expected issuance of final rules on the
application of the law to the non-managed care Medicaid Program, scrutiny of physician relationships
with medical practices, hospitals, and other providers that render DHS services and items by carriers,
enforcement agencies, and private whistleblowers is expected to dramatically increase. Therefore, all
medical practices should incorporate the Stark Law into their on-going internal compliance efforts.
Prudent steps in this regard should include identification of all physician financial relationships that
come within the scope of Stark, and confirmation of the application of a Stark exception. Paramount
among this internal compliance exercise for group practices that render DHS to Medicare and Medicaid
patients is a review of each requirement for Stark “group practice” qualification; confirmation that all
Making Sense of the Stark Law: Compliance for the Medical Practice
referred DHS comes within a group practice exception, and a review and evaluation of current physician
compensation methodologies for Stark compliance. Existing documents and contracts should also
be periodically reviewed for Stark compliance, as both the group practice and non-group practice
exceptions in many instances require the creation and retention of supporting documentation (or
written contracts or leases) to satisfy their conditions.
Finally, in any instance where there is uncertainty under Stark as to the permissibility of any physician
financial relationship or internal medical practice financial arrangement, legal counsel should be
consulted, and consideration may need to be given to the potential benefits of seeking a Stark advisory
opinion.
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Exhibit A:
66900-66915 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations
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EXHIBIT B:
Stark Law MD Compensation Grid
From the Stark II, Phase II Interim Final Rule
March 26, 2004, 69 Federal Register at 16067-68
Group
Practice
Physicians
Bona Fide
Employment
Personal
Fair Market
Service
Value
Arrangements
Academic
Medical
Centers
Must compensation
be fair market value?
no
yes
yes
yes
yes
Must compensation
be set in advance?
no
no
yes
yes
yes
Scope of volume
or value restriction
DHS referrals
DHS referrals
DHS referrals
or other
business
DHS referrals
or other
business
DHS referrals
or others
business
Scope of productivity
bonuses allowed
personally
performed
services and
incident to,
plus indirect
personally
performed
services
personally
performed
services
personally
performed
services
personally
performed
services
Are overall profit
shares allowed?
yes
no
no
no
no
Written agreement
required?
no
no
yes, minimum
one year term
yes (except for
employment),
no minimum
term
yes, written
agreement(s)
or other
document(s)
Physician incentive
plan (PIP) exception
for services to
plan enrollees?
no, but
risk sharing
arrangement
exception
may apply
no, but
risk sharing
arrangement
exception
may apply
yes, and
risk sharing
arrangement
exception
may also apply
no, but
risk sharing
arrangement
exception
may apply
no, but
risk sharing
arrangement
exception
may apply
TERMS OF
EXCEPTION
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