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Understanding Stark Law

Stark Law is among the most complicated areas of health care law. Although most people seem to have a vague understanding of what Stark Law is about, fewer comprehend Stark Law’s details, nuances, and exceptions. It is those exceptions that will often make the decisive difference to determine whether a business arrangement is legal.

Stark Law Explained

Generally, the Stark Law prohibits a physician from making a referral to an entity for the furnishing of designated health services (DHS) for which payment may be made under Medicare if such physician (or the immediate family member of such physician) has a “financial relationship” with the entity furnishing DHS. This DHS entity may not bill Medicare for DHS furnished pursuant to a prohibited referral, unless one of the Stark exceptions applies.

Example: Doctor Smith is a part owner of a toxicology laboratory (i.e. DHS entity). Can he send his toxicology samples to that lab? The answer depends greatly on whether the lab bills Medicare.

What Are Designated Health Services (DHS)?

The Current Procedural Terminology (CPT) code list in combination with 42 CFR Sect. 411.351 defines designated health services in the following categories:

  • Clinical Laboratory Services
  • Physical Therapy Services
  • Outpatient Pathology Services
  • Radiology and Radiology Therapy Services
  • Imaging Services
  • Durable Medical Equipment and Supplies
  • Parenteral and Enteral Nutrients, incl. Equipment and Supplies
  • Prosthetics, Orthotics, and Prosthetic Devices and Supplies
  • Home Health Services
  • Outpatient Prescription Drugs
  • Inpatient and Outpatient Hospital Services

A special problem arises in the context of Ambulatory Surgery Centers (ASC). DHS excludes services that are reimbursed by Medicare as part of a composite rate, which includes ASC services—unless an ASC furnishes and bills for individual DHS such as lab tests or x-rays. Consequently, joint ventures may want to handle their relationships with ASCs and hospitals in the same manner.

Financial Relationship

Under Stark Law, a “financial relationship” can consist of an ownership or investment interest in, or a compensation arrangement with, any DHS entity. Such financial relationships may be either direct or indirect. “Direct” financial relationships exist if remuneration passes between a referring physician and the DHS entity without any intervening persons or entities; in other words, there is no intermediary. By contrast, an “indirect” financial relationship consists of an unbroken chain of an ownership or investment interest or a compensation arrangement between the referring physician and the DHS entity.

Carving Out Federal Payors

It has become popular to carve out federal program plans in physician joint ventures. Nonetheless, it is important to understand that even if a business relationship explicitly excludes Medicare, the joint venture can still be labeled as “federal” and become subject to Stark restrictions due to its connection to a DHS entity.

Example: It is established that hospitals that purchase goods from a joint venture (i.e. physician owned medical device company) are DHS entities even if the physician owned entities explicitly exclude federal program services or goods. Although it is the hospitals that are submitting claims to Medicare, the joint ventures and physician-investors face risks because the federal government could charge them based on the False Claims Act with an underlying Stark Law violation.

To the extent that a joint venture does more than selling or consigning goods, additional review would be necessary to determine whether the joint venture is “performing” DHS. If a joint venture performs DHS, then it would be a so-called unlawful under-arrangement joint venture and prohibited by Stark. To avoid such a scenario and to be on the safe side, it is prudent to evaluate whether a so-called indirect compensation arrangement exists.

Indirect Compensation Arrangement

A variation to the restrictions under Stark Law is referred to as the “Indirect Compensation Arrangement” exception. The Stark regulations define “indirect compensation arrangements” to consist of relationships that meet all three of the following conditions.

Unbroken Chain

There is an unbroken chain of financial relationships between the referring physician (or an immediate family member) and the DHS entity.

Example: A Physician-Investors’ ownership interest in a joint venture, and the compensation arrangement between a particular joint venture and a hospital creates an unbroken chain of financial relationships.

Fluctuation

The referring physician receives aggregate compensation from the person or entity in the chain with which the physician has a direct financial relationship that varies with, or otherwise reflects, the volume or value of referrals or other business generated by the referring physician for the DHS Entity.

Example: In order for a chain to constitute an “indirect compensation arrangement,” the aggregate compensation received by a joint venture from a customer such as a hospital must vary with, or otherwise reflect, the volume or value of referrals or other business generated by the physician-investor for the customer. Generally speaking, the more the physician-investors order the joint venture’s goods or services, the higher the aggregate compensation the customer will compensate the joint venture. Conversely, the less the physician-investors refer to the customer, the lower the compensation the customer will pay the joint venture.

Knowledge

The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of the fact that the referring physician receives aggregate compensation that varies with, or otherwise reflects, the volume or value of referrals or other business generated by the referring physician for the DHS entity.

If all elements of an indirect compensation arrangement exist, it is necessary to analyze whether a Stark exception applies.

Indirect Compensation Exception

There is an indirect compensation exception to the Stark Law that must be satisfied. If it is not, referrals from the physician-investors to the customer, and the ensuing billings to Medicare by the customer, are prohibited. The Stark exception for indirect compensation arrangements requires all of the following conditions to be satisfied:

Fair Market Value

The compensation received by the joint venture from the customer must be fair market value for services and items actually provided by the joint venture and not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the customer.

Example: Unit-based compensation (including per-unit based compensation) is deemed not to take into account “the volume or value of referrals” if the compensation is fair market value for services or items actually provided and does not vary during the course of the compensation arrangement in any manner that takes into account referrals of DHS.

In Writing

The compensation received by the joint venture from the Customer must be set out in writing, signed by the parties, and specifies the services covered by the arrangement; and

Legality

The compensation arrangement does not violate the Anti-Kickback Statute, or any Federal or State law or regulation governing billing or claims submission.

Reducing the Risk

If you are considering entering into a physician joint venture relationship governed by Stark Law, advice from experienced counsel is strongly recommended. Health care law, and Stark Law in particular, are highly convoluted areas of law— with hefty consequences in case of error or misinterpretation of existing rules. Generally speaking, we recommend the following steps to ensure Stark Law compliance:

  • Obtain legal advice
  • Only use written agreements
  • Price it at fair market value
  • Conduct actual negotiations
  • Request third-party valuation opinion
  • Specify the goods and services negotiated

Our Stark Law Experience

For years, the attorneys at the Oberheiden & McMurrey, LLP have assisted health care industry clients with structuring and operating Stark Law compliant arrangements. Physician joint ventures that we have developed include:

  • Medical Device Companies
  • Pharmacies
  • Compound Pharmacies
  • Sleep Laboratories
  • Anesthesia Joint Ventures
  • Toxicology Laboratories
  • Ambulatory Surgery Centers
  • Hospitals

We also have been retained by clients from across the country to apply our Stark Law knowledge to defend clients against Stark Law investigations conducted by the Office of Inspector General, the Department of Health and Human Services, the Department of Labor, the Department of Defense, and the Department of Justice. In these proceedings, we were able to successfully put all Stark Law accusations to rest. Notably, not one of our valued clients has ended up with civil or criminal liability.

A Team You Can Trust

We offer our Stark Law experience to individual providers, doctors that are considering making an investment or becoming an owner in a health care facility, health care institutions such as hospitals and pharmacies, as well as health care business owners that want to recruit physician investors for their joint venture. All representations are handled by experienced counsel.

Meet Your Stark Law Defense Attorneys

Nick OberheidenDr. Nick Oberheiden is an attorney with significant experience in health care law, especially when it comes to physician joint ventures and Stark Law.

Lynette ByrdLynette S. Byrd is a former federal prosecutor at the U.S. Attorney’s Office for the Northern District of Texas, where she investigated and prosecuted civil and criminal non-compliance issues in the area of Stark Law, Anti-Kickback, and the False Claims Act.

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