The Scope of the Stark Law’s Prohibitions

In our previous post, we examined the origins and rationale underlying the Stark Law’s prohibition against physician self-referral.  In this post, we look at exactly what the Stark Law prohibits.

The Stark Law in its current form and its associated regulations prohibit a physician from referring any Medicare or Medicaid patients to any entity for the provision of any Designated Health Services if the physician (or an immediate family member) has a direct or indirect financial relationship with that entity.[i]

A complete list of Designated Health Services is set forth in the statute, but it is interpreted broadly and encompasses all services such as lab work, physical therapy and rehabilitation, imaging services, and outpatient procedures.[ii]  Therefore, if a doctor or his immediate family member owns any interest in a facility that provides any of the designated health services, the doctor cannot refer any Medicare patients to that facility.

Example 1:  To understand the basic Stark Law prohibitions, assume an orthopedic surgeon owns a minority interest in an imaging center that offers MRI and CT scans.  A Medicare patient sees him, complaining of severe knee pain subsequent to a fall.  The surgeon suspects a torn ACL, but cannot definitively diagnose him without an MRI.  Even though the MRI may be medically necessary, the doctor cannot refer the patient to the imaging center in which he has an ownership interest without violating Stark.

Similarly, what constitutes a “direct or indirect” financial relationship is defined broadly to include any ownership or investment interest in the entity or compensation arrangement with the entity.[iii]  This is interpreted to mean any interest of any kind, including equity, debt or contractual.

Example 2: Taking the above example a step further, assume that the orthopedic surgeon did not own an interest in the imaging center, but had provided a loan to a friend to start the imaging center.  There would be a contractual relationship and a debtor/creditor relationship between the orthopedic surgeon and the owner of the imaging center, and the doctor still would be prohibited from referring his Medicare patients there.

In addition to the rules on self-referrals, the Phase III regulations also imposed limits on less direct forms of compensation that CMS saw as potential avenues for abuse.  These included physician compensation agreements (for example, providing bonuses to doctors based on the volume of referrals) and office leasing arrangements (for example, leasing office space within a hospital or affiliated entity at below-market rates in order to induce referrals).

Example 3: Suppose a hospital wants to offer specialized cardiology care and imaging services, with the idea that some of the cardiology patients will need to be hospitalized.  The hospital contracts with a cardiology group to sublease some unused office space in the hospital to set up a cardiac care center.  To offer an incentive to the cardiology group, the hospital leases the space at a below-market rate.  Even if the hospital does not pay any kind of referral fee for patients, this is still a financial relationship, and any referrals of Medicare patients form the cardiology group to the hospital violate Stark.

In order to ensure compliance with these new rules, CMS began closely examining contracts between physicians and hospitals, and imposed a number of onerous requirements.  For example, in order to comply with the leasing requirement, a doctor is required to show that the lease agreement is in writing, that it is used solely by the lessee, that it is for at least one year, that the rate paid is fair market value and that the rate is set in advance.  If a lease does not comply with these requirements, it is a violation of the Stark law, subject to the penalties discussed below.

Although these are the general parameters of services included within the scope of the Stark Law, there are a number of exceptions to these general rules, which we will discuss in our next blog post in this series.  However, if you have specific questions about the application of the Stark Law to particular circumstances in your practice, make sure to consult with a healthcare attorney who is knowledgeable about the application of these rules to your situation.

[i] 42 U.S.C. § 13955nn(a).

[ii] 42 U.S.C. § 1395nn(h)(6) contains a full list of Designated Health Services, which include clinical laboratory services, physical and occupational therapy services, radiology services, home health services, durable medical equipment and prosthetics and orthotics.

[iii] 42 U.S.C § 1395nn(a)(2).