Stark Law Violation: Insights Prompted by a Record Penalty

Stark law violation depicted via desk, gavel, cash, and stethoscope.

Late last year, the U.S. Department of Justice (DOJ) announced a False Claims Act (FCA) settlement with a large hospital system. The settlement was noteworthy for two reasons. It was the largest settlement with a healthcare provider ever announced by the DOJ. Community Health Network, Inc. (CHN), settled claims for $345 million that it violated the False Claims Act. It was also based on violations of the Physician Self Referral law (commonly referred to as the Stark Law) that resulted in the submission of false claims to the Medicare program. This action raises a few questions: what was the conduct of the hospital system and the physicians that resulted in the Stark law violations, and how does a Stark law violation morph into a false claim to a government healthcare program, and what were they thinking, anyway?


In this Article …


Stark Law Background

The Stark Law dates back to 1989. The law was introduced by Representative Fortney (Pete) Stark, a California Congressman. Representative Stark was concerned about research that showed when physicians owned a financial interest in clinical laboratory services, they ordered quite a bit more of those services for their patients, compared to physicians who did not have such financial interests. This federal law was amended to cover ten designated health services (DHS), and extended to cover claims to Medicaid programs, in 1993 (Stark II). The regulations implementing the Stark Law were revised in 2016 and again in 2020.

The Stark Law is one of the three major fraud and abuse laws the federal government enforces. The others include the False Claims Act and the federal Anti-kickback statute.

The Stark Law applies to (and forbids) financial relationships between any of the DHS healthcare providers and physicians (or family members) who refer patients to the health service that results in claims to federal healthcare programs like Medicare or Medicaid. The Stark Law and the Stark Regulations contain exceptions that permit financial relationships under some very specific conditions.

Stark Law is a strict liability statute. This means that even if the specific intent of the financial relationship is not to induce patient referrals, the relationship may constitute a violation unless it meets an exception.


What are the Stark Designated Health Services?

The ten DHS include:

  1. Inpatient and outpatient hospital services
  2. Clinical laboratory services
  3. Radiology services and other imaging services
  4. Radiation therapy services and supplies
  5. Physical therapy services, occupational therapy services and speech therapy services
  6. Durable medical equipment
  7. Parenteral and enteral nutrients, equipment, and supplies.
  8. Prosthetics, orthotics, and prosthetic devices and supplies.
  9. Home health services.
  10. Outpatient prescription drugs.


What is a Financial Relationship Under Stark Law?

A physician’s financial relationship (or an immediate family member) with a DHS is defined as an ownership or investment interest in the DHS, or a compensation arrangement between the physician (or an immediate family member) and the designated health services.

An ownership or investment interest may be through equity, debt, or other means and includes an interest in an entity that holds an ownership or investment interest in any entity providing the designated health service.


What are Some of the Exceptions to the Stark Law Prohibition on Financial Relationships?

Since there are many legitimate reasons for financial arrangements between a referring physician and a DHS, there is a long list of exceptions (or safe harbors) that, if properly structured and documented, apply. To name just a few:

  • The in-office ancillary services exception applies to physicians in medical groups offering services such as physical therapy services, clinical laboratory services, or radiology services, where claims for such services are part of Medicare Part B services.
  • Ownership of health care providers’ investment securities listed on national or regional stock exchanges and traded publicly.
  • Bona Fide employment compensation arrangements, where compensation and duties are documented and set in advance. In addition, compensation cannot vary based on the value or volume of physician referrals. And it must also represent fair market value for the physician services provided.
  • Personal Service contracts are another exception to the Stark prohibition on financial arrangements with physicians referring patients to a Designated Health Service. These contracts must document several provisions, including:
    • The arrangement must be set out in writing, signed by the parties, and specify the services covered in the arrangement;
    • The arrangement must cover all of the services to be provided by the physician (or an immediate family member) to the entity.
    • The aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement. Physicians may have more than one contract for services, but a healthcare entity must make sure the total compensation paid is still reasonable. For instance, compensation arrangements may appear to require significantly more time and effort than an individual could reasonably perform in an average year or month. This could still result in Stark violations if total compensation was unreasonable.
    • The term of the arrangement is for at least one year.
    • The compensation to be paid of the term of the arrangement is set in advance, does not exceed the fair market value, and does not take into account the volume or value of any referrals of other business generated between the parties. The regulations promulgated in 2020 contain new exceptions for physician incentive programs.
    • The service payable under the arrangement does not involve counseling, promotion, business arrangement, or other activity that violates any State or Federal law.
  • There are numerous other safe harbors to the Stark Laws outlined in the regulations. They include issues such as rental of office space in medical facilities or equipment rental; physician recruitment or retention, group practice arrangements with a hospital, nonmonetary compensation arrangements, compliance training, and community-wide health information system support.


What are the Penalties for Stark Law Violations?

Penalties for a Stark Law violation come from two main sources. First are penalties related to the value of the claims paid by the government based on referrals from physicians who had defective financial relationships. This penalty requires repayment of the amounts paid for services provided pursuant to the referral.

The second type of penalties are civil monetary penalties of up to $15,000 related to each Stark law violation. Financial relationships may not have been intended to induce patient referrals but that doesn’t matter under the strict liability definition applicable to the Stark Law. There is also the possibility of a penalty of up to $100,000 for every wilful violation of the Stark Law.

Finally, healthcare providers, including physicians, can be barred from future participation in Medicare or Medicaid programs.


How Does the False Claims Act Interact with Stark Law Violations?

Each claim submitted to government payers contains a certification that the submitter complies with all applicable Medicare or Medicaid laws and regulations, including the Stark Law. So if the arrangement with a physician who orders the services listed on the claim is defective, that is it violates the Stark Laws, the claim can be considered a false claim.

Settlements like the one with CHN get very large because of the False Claims Act penalties. For 2024, they range from $13,946 to $27,894 per claim. When a defective financial arrangement is in place for several years, the number of claims can skyrocket, followed closely by the range of civil penalties.

Most of the time, the penalties are assessed against the DHS healthcare provider. But sometimes penalties are also assessed against individual employees of the DHS and even against the participating physician.

And some arrangements that do not run afoul of the False Claims Act, are still arrangements that can be subject to the federal Anti-kickback statute.


Warning Signs Your Financial Arrangements may be out of Compliance with Stark Law

In these large settlement cases, it very seldom turns out the financial arrangement had just one Stark Law violation. In the case of CHN, the DOJ alleged several defects in its dealings with various physicians.

  • CHN asked repeatedly for additional fair market valuations of the proposed compensation from its compensation consultants.
  • CHN did not disclose all of the components of physician compensation it utilized in actual physician payments, to its compensation consultants.
  • CHN created an incentive compensation plan that took into account the value and volume of referrals from physicians.

This plan was developed back in 2008-2009, before the Stark Law revisions that allow for certain types of physician incentive arrangements. But even with regulations that allow for such a financial arrangement, DHS providers must be very careful to comply with the regulations when considering such plans.

There is no doubt hospital administrators are under severe pressure to recruit physicians who are needed in the community and who will refer their patients to the hospital for medical services. When those services involve professional services by the referring physician which the hospital compensates, take extra care to make sure you are avoiding potential violations of the Stark Law! Otherwise, you may find yourself signing a Corporate Integrity Agreement with the Inspector General of the Health and Human Services department, as well as finding funds to repay Medicare and Medicaid, plus paying penalties and fines!

When you need proven expertise and performance

Jim Hook, MPH

Mr. James D. Hook has over 30 years of healthcare executive management and consulting experience in medical groups, hospitals, IPA’s, MSO’s, and other healthcare organizations.