May 2019, Volume XXXIiI, No 2

Medicine and the Law

“Stark” legislation and regulation

Updating the updates

n June 20, 2018, the Centers for Medicare & Medicaid Services (CMS) announced that there will be what CMS called a “Regulatory Sprint” to revamp the Physician Self-Referral Law (commonly referred to as the “Stark Law,” named for its original sponsor, California Congressman Pete Stark). CMS is seeking recommendations and input from the public on how to address any undue impact and burden of the Stark Law on care coordination and delivery of value-based care. Under the current administration, CMS leadership has made it clear that one of its top priorities is to scale back regulations where the government is overstepping its grounds and unduly burdening providers—in some cases leading to significant potential liability for providers.

This article will illustrate how the Stark Law has developed over time; discuss the application of Stark under the current regulations, as well as some of the practical challenges encountered by providers today; and speculate on some of the courses CMS may take on this issue.

A “brief” history of Stark

It is beyond the scope of this article to discuss every exception, definition, or test applicable to a Stark Law analysis of what may be considered an improper physician self-referral, but a brief summary will illustrate its history.

Initial purpose. The Stark Law is a set of federal laws that prohibit physician self-referral to an entity with which the physician (or an immediate family member) has a financial relationship. At the time of enactment, Congress reasoned that a bright-line rule would help physicians self-regulate and avoid fraud and abuse issues. Despite this initial intent, the law has been expanded and modified over the years through various pieces of legislation, resulting in a complex and convoluted framework of laws that involve very few bright lines. Further complicating the issue is that there is no “intent” requirement for the Stark Law (e.g., no demonstration that the provider had knowledge of wrongdoing). Even unknowing providers with no malicious intentions could be in violation of the Stark Law and subject to massive monetary fines for technical violations.

Stark I. The first iteration of the Stark Law (Stark I), which passed as part of the Omnibus Budget Reconciliation Act of 1990, prohibited a physician from referring a Medicare patient to an entity for clinical laboratory services if the physician or the physician’s immediate family member had a financial relationship with the entity. The statute provided for several exceptions to the prohibition, with some applying to ownership arrangements and some applying to compensation arrangements (or both).

The depth and breadth of these regulations ... are a far cry from the “bright lines” that Congress intended.

Stark II, Phase 1. Shortly after passing Stark I, Congress agreed that the limitation of Stark to clinical laboratory services was too narrow. This led to the passage of “Stark II,” as part of the Omnibus Budget Reconciliation Act of 1993, which expanded Stark to cover Designated Health Services (DHS) and expanded coverage to Medicaid programs. The 10 categories of DHS included in the rule are: 1) clinical laboratory services, 2) physical therapy, occupational therapy, and speech-language pathology services, 3) radiology and certain other imaging services, 4) radiation therapy services and supplies, 5) durable medical equipment and supplies, 6) parenteral and enteral nutrients, equipment, and supplies, 7) prosthetics, orthotics, and prosthetic devices and supplies, 8) home health services, 9) outpatient prescription drugs, and 10) inpatient and outpatient hospital services. There were also several definitions that were added and revised in this iteration of the law.

Stark II, Phase 2. On March 26, 2004, CMS published Phase 2 of Stark II (Phase 2), intending to define prohibitions narrowly and the exceptions broadly. Some important provisions of Phase 2 are: 1) the creation of the holdover exception for lease arrangements, 2) the allowance for termination of agreements prior to one year (provided no new agreements may be entered into within that year), 3) the exclusive use of space or equipment by lessee requirement for leases, 4) clarification on the regulations related to productivity bonuses for physicians, and 5) clarification that the “set in advance” requirement for compensation arrangements allows payment based on percentages of collections.

Stark II, Phase 3. On September 5, 2007, CMS published the Phase 3 Final Rule on Stark (Phase 3). In this iteration of the rule, CMS: 1) indicated that fair market value can be determined using any commercially reasonable methodology that is appropriate under the circumstances, 2) extended the holdover exception from leases to personal service arrangements, and 3) indicated that physicians “stand in the shoes” of their group practices, thus requiring a direct exception to the Stark Law in situations where an indirect compensation arrangement exception would have previously sufficed.

Stark modifications under the Hospital Inpatient Prospective Payment System (IPPS). There were significant changes to the Stark Law affecting its application to hospitals that were part of the 2009 IPPS Final Rule. First, the “stand in the shoes” requirement of Phase 3 was eliminated for physicians that were not owners in the group practice. Second, CMS revisited the percentage-based compensation discussion from Phase 2 and restricted the use of percentage-based compensation in the fair market value, indirect compensation, and office and equipment lease exceptions under the Stark Law. Third, CMS prohibited per-click lease arrangements (unit-based compensation in arrangements for the rental of office space or equipment). Fourth, CMS added a grace period under certain circumstances for obtaining signatures in order to meet an exception’s technical requirements. Finally, CMS provided guidance for calculating the period of disallowance for Stark Law penalties.

Stark Waivers under the MSSP (Medicare Shared Savings Program), ACO (Accountable Care Organizations) Program, and BPCI (Bundled Payments for Care Improvement) Program. Section 1115A(d)(1) of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain fraud and abuse laws (including the Stark Law) for certain service delivery models developed by the Center for Medicare and Medicaid Innovation (CMMI). The extent of the waivers and conditions vary, but currently there are waivers for 11 different programs (see

2016 Medicare Physician Fee Schedule Final Rule (“2016 Final Rule”). The 2016 Final Rule included multiple provisions impacting Stark. In a significant turn of events, CMS indicated that the Stark Law writing exception can be met through a collection of documents, noting examples of documents that together could form the basis for a contract. Even though this added new options for providers seeking to fit prior arrangements into an exception, the issue has been litigated and courts have held that the documents must contain clear indication of agreement. Additionally, CMS expanded the grace period for signatures to 90 days (inadvertent or not). CMS also clarified that as long as a contract lasts one year, it doesn’t matter that the term in contract isn’t for one year. CMS provided detailed guidance on timeshare leases and CMS also indicated that holdover leases could continue indefinitely, as long as certain conditions are met.

Penalties for non-compliance. Some of the penalties for violating the Stark Law include: 1) denial of payments and/or refund of payments received, 2) fines of up to $15,000 for each service provided, 3) three times the amount of the improper payment received from Medicare, 4) exclusion from participation in health care programs, and 5) civil penalties of up to $100,000 for each circumvention scheme.

In addition, under the False Claims Act, providers face exposure for private causes of action for Stark Law violations, providing significant monetary incentives for employees or competitors to prosecute violations.

The depth and breadth of these regulations ... are a far cry from the “bright lines” that Congress intended.

Analysis under the current regulatory framework

The Stark Law prohibits a physician from making referrals for DHS to any entity with which the physician has a financial relationship, unless the arrangement qualifies for an exception. If a provider is ever in a position to receive referrals of DHS, it is important that there be a process put into place to ensure Stark compliance. Below is a very high-level framework for such a process:

First, to determine whether Stark applies, we need to ask:

  1. Does the arrangement involve a “physician”?
  2. Does the “physician” or an “immediately family member” of the physician have a “financial relationship” with the “entity furnishing DHS”?
  3. Is there a “referral” of “DHS”?

Each of the words in quotations has a specific definition or test as to whether it applies for Stark purposes.

Second, if the Stark Law does apply, the next question is whether the arrangement fits squarely into an exception. There are numerous exceptions to the Stark Law, and a Stark analysis will focus on the tests specific to the particular exception that might be applicable to the arrangement. Some commonly relied upon exceptions are for: 1) bona fide employment, 2) personal services, 3) leases, 4) medical staff incidental benefits, and 5) non-monetary compensation.

Third, if the arrangement satisfies the technical requirements of an exception, will it stand up to scrutiny of: 1) fair market value, 2) commercial reasonableness, and 3) no relation to volume or value of referrals. Usually when we see large verdicts or settlements, it is not because of a technical violation, but rather because the arrangement has an issue in this area. In one instance (United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc.), parties eventually settled for more than $72 million after a $237 million judgment.

In the case of health care institutions that require their employed physicians to refer to onsite facilities, the referral requirement will not be a Stark violation if the physicians meet the bona fide employee exception under the Stark Law and the referral requirement is in writing and subject to: 1) patient choice, 2) third-party payer determination of provider, and 3) the physician’s judgment regarding the patient’s best medical interests. See 42 C.F.R. § 411.354(d)(4). Further, the required referrals must relate to the physician’s services that are covered in the arrangement, and the referral requirement must be “reasonably necessary to effectuate the legitimate business purposes” of the arrangement. If the arrangement is structured appropriately, it can be Stark-compliant—but, like everything else with Stark, there is a lot to consider.

The depth and breadth of these regulations can be difficult for even the most experienced lawyers to navigate and are a far cry from the “bright lines” that Congress intended for providers to use to self-regulate when the law was initially enacted.

How can we fix it?

One option that has been considered is to follow the model used for the MSSP program and other CMMI programs and extend waivers for fraud and abuse laws to participation in commercial programs involving providers taking financial risk or participating in clinical integration networks.

The aforementioned waivers were extended in the MSSP and CMMI programs because those programs discourage overutilization. Extending these waivers to commercial arrangements that also discourage overutilization would further CMS’ goals of reducing regulatory burdens on providers and incentivizing the movement toward value-based care.

There need to be some guidelines as to which commercial arrangements should qualify for the waivers. Fortunately, there is already a body of law that analyzes this issue. The Federal Trade Commission (FTC) and the Department of Justice issued guidance back in 1996, evaluating clinical integration and financial integration amongst providers as part of the analysis of whether such arrangements violate the Sherman Antitrust Act of 1890 (see

The same criteria used by the FTC in determining whether an arrangement is allowable under antitrust law would apply in determining whether the arrangement is appropriate for receiving a waiver of the fraud and abuse laws. As many commercial arrangements involving financial integration and clinical integration already require analysis to ensure compliance with antitrust law, requiring the same analysis for determination of whether the arrangement should qualify for fraud and abuse waivers would have a minimal burden on providers.

Antonio “Tony” Fricano, JD, is special counsel at Gray Plant Mooty and specializes in health care regulatory law. He was previously associate general counsel and the MSSP ACO compliance officer for the largest health system in Illinois, based out of Chicago. Mr. Fricano has reviewed and advised on hundreds of potential Stark violations and has experience working through the disclosure process with CMS and the U.S. Department of Health and Human Services’ Office of Inspector General. He was a member of the Loyola Law Journal and a Fellow in the Institute for Consumer Law and Antitrust Studies. 


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Antonio “Tony” Fricano, JD, is special counsel at Gray Plant Mooty and specializes in health care regulatory law. He was previously associate general counsel and the MSSP ACO compliance officer for the largest health system in Illinois, based out of Chicago. Mr. Fricano has reviewed and advised on hundreds of potential Stark violations and has experience working through the disclosure process with CMS and the U.S. Department of Health and Human Services’ Office of Inspector General. He was a member of the Loyola Law Journal and a Fellow in the Institute for Consumer Law and Antitrust Studies.