Understanding the Stark Law: Facility Guide and FAQ

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Written by Kerry Larkey, MSN, RN Content Writer, IntelyCare
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Reviewed by Aldo Zilli, Esq. Senior Manager, B2B Content, IntelyCare
A nurse administrator talks to a patient about a physician referral.

Every healthcare organization that receives business from physician referrals is affected by the Stark Law. As your facility sets up processes for referrals — or reexamines contracts that are already in place — it’s critical to examine how some referrals might put your organization at risk. The civil penalties for these violations can be serious and, as a strict liability statute, the law governing physician self-referrals doesn’t require establishing intent.

We’ll give a clear overview of what this law is, how it’s applied, and answer your most frequently asked questions about why the law was enacted, what its elements are, and how violations can impact the physicians and facilities involved.

What Is the Stark Law?

In the 1980s, lawmakers became concerned that if a physician (or their immediate family members stood to profit financially from a referral, they might be tempted to over-prescribe services for their own benefit. These extra referrals — for tests and services that aren’t medically necessary — would increase healthcare costs overall. Thus, legislation was enacted to prevent physicians from “self-referring” services to Medicare and Medicaid beneficiaries.

Section 1877 of the Social Security Act, also known as the “Stark” or Physician Self-Referral Law, prohibits a physician from making referrals for certain designated health services (DHS) payable by Medicare or Medicaid to an entity with which the physician, or one of their immediate family members, has a financial relationship (unless an exception applies). Under the law, the entity to which the referral was made isn’t allowed to file a claim with Medicare or bill for the DHS performed.

The law defines the following items or services as DHS:

  • Clinical laboratory services
  • Physical therapy services
  • Occupational therapy services
  • Outpatient speech-language pathology services
  • Radiology and certain imaging services
  • Radiation therapy services/supplies
  • Durable medical equipment/supplies
  • Parenteral and enteral nutrients, equipment, and supplies
  • Prosthetics, orthotics, and prosthetic devices/supplies
  • Home health services
  • Outpatient prescription drugs
  • Inpatient and outpatient hospital services

What Are the Five Elements of the Stark Law?

This important anti-fraud law is made up of the following five core elements which must be present in order to face liability under the law:

  1. Physician — This includes a doctor of medicine or osteopathy, dentist, podiatrist, optometrist, or chiropractor. Note that the law does not apply to nurse practitioners or other advanced practice nurses.
  2. Referral This refers to the request by a physician for the ordering of any DHS, or the certifying or recertifying of the need for any DHS. This includes the request for a consultation with another physician and any test or procedure ordered by or to be performed by (or under the supervision of) that other physician.
  3. Designated health services (DHS) — Refer to the list above.
  4. Entity Any person or entity that performed services that are billed as DHS and those who billed DHS to Medicare or Medicaid for reimbursing a bill or claim.
  5. Financial relationship An ownership interest, investment interest, or compensation arrangement between the physician (or a physician’s immediate family member) and the entity.

What Are Stark Law Violation Examples?

To give an example, let’s say a physician invests in a freestanding lab diagnostics center and refers their patients, with Medicare, to that lab center for bloodwork. Whether or not they intended to benefit from the referrals, the physician would appear to violate the law. Under the Physician Self-Referral Law, the lab isn’t allowed to bill or process a Medicare claim for the referred services either.

Case Examples:

  • The U.S. was awarded a $237 million judgment against a facility that created contracts with physicians requiring them to make referrals to its new surgery center. In exchange, physicians received large compensation packages that included money received from Medicare.
  • The U.S. reached a $2.83 million settlement with 33 Texas doctors who were alleged to have received thousands of dollars from nine management services organizations in exchange for the doctors ordering laboratory tests from specific facilities.

What Are the Penalties for Violations?

Physician penalties are significant and can result in fines and exclusion from participation in Federal healthcare programs, including Medicare and Medicaid. Claims for DHS that are submitted in violation of the law will be denied payment. Any amount received must be refunded.

Civil monetary penalties can be imposed in the amount of $15,000 per service violation. In addition, a physician or entity that purposefully participated in a scheme to get around the self-referral prohibitions can face monetary penalties of up to $100,000 for each scheme. The failure to make a required report of a potential violation can result in a penalty of up to $10,000 for each day for which reporting is required.

What Are Stark Law Exceptions?

Although there are over 30 exceptions in the law, some are more common than others. For example, a physician may be allowed to:

  • Refer to a physician within the same practice
  • Refer for in-office ancillary services, like labs and radiological tests, if performed within the same location
  • Refer a patient to a family member for DHS in rural areas (as designated by CMS)
  • Refer to pre-paid organizational health services such as health maintenance organizations (HMOs)
  • Refer to academic medical centers (certain stipulations apply to the relationship between provider and academic center)

In the case of extenuating circumstances, broader exceptions — like the COVID-19 blanket waivers — may be issued to avert healthcare access delays during times of emergency.

How Does This Differ From the Anti-Kickback Statute?

These laws are closely related and often pursued together in legal cases. The Anti-Kickback Statute (AKS) makes it a crime to pay for referrals from any provider for any item or service within any federal healthcare program. Forms of payment include cash, expensive gifts like lavish meals and lodging, and exorbitant consultant fees. In addition, you don’t have to be a physician to violate AKS.

AKS Violation Examples:

  • A pharmaceutical company gives a physician $10,000 in exchange for increasing the number of prescriptions for a drug to Medicare beneficiaries.
  • The purchasing manager at a healthcare facility accepts a cruise trip vacation from a vendor in exchange for signing a contract to purchase their IV pumps.

One key difference between the two is that the AKS violations require “willful knowledge” of the intent to violate the statute, whereas violations of the Stark Law don’t require proof of intent to benefit from a self-referral to be held liable.

Another key difference is that Stark penalties are civil, while AKS penalties can be criminal and civil. In other words, AKS penalties are much more harsh and can even include prison time. Also, AKS applies to all federal healthcare programs while the Physician Self-Referral Law only applies to Medicare and Medicaid.

Looking for More Legal and Regulatory Compliance Tips?

We’ve taken a close look at how the Stark Law affects the referral processes at healthcare facilities. If you’re looking for extra resources for ensuring legal and regulatory compliance at your organization, IntelyCare is your trusted source for information. Our newsletter is full of free nursing management insights to support healthcare leaders.

Legal Disclaimer: This article contains general legal information, but it is not intended to constitute professional legal advice for any particular situation and should not be relied on as professional legal advice. Any references to the law may not be current as laws regularly change through updates in legislation, regulation, and case law at the federal and state level. Nothing in this article should be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed to practice in your jurisdiction.