Stark Law

Understanding Stark Law

Stark Law is among the most complicated areas of healthcare 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.

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Dr. Nick Oberheiden
Dr. Nick Oberheiden

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John W. Sellers

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Joanne Fine DeLena

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Joe Brown

Former U.S. Attorney & Former District Attorney

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Amanda Marshall

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Aaron L. Wiley

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Roger Bach
Roger Bach

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Gamal Abdel-Hafiz

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Chris Quick

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Kevin M. Sheridan

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Ray Yuen

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Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

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.

Legality

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


October 2019 Update: CMS Proposes Major Changes to Stark Law Safe Harbors

On October 17, 2019, the Centers for Medicare and Medicaid Services (CMS) proposed major changes to the Stark Law’s safe harbor regulations. In addition to creating several new regulatory exceptions, the proposed changes would affect many, if not all, of the existing Stark Law safe harbors.

Proposed New Stark Law Safe Harbors

CMS’s proposed rulemaking would establish two new exceptions targeting specific types of transactions, and they would implement an entire new category of safe harbors for what CMS calls, “value-based arrangements,” or “VBAs”. The new specific exceptions provide protection against Stark Law liability for:

  • Transactions resulting in aggregate remuneration of no more than $3,500 per year, adjusted annually for inflation; and,
  • Transactions involving the donation of cybersecurity technology and services.

While there are many aspects to CMS’s definition of a value-based arrangement, the primary focus of the analysis is on whether the arrangement is reasonably structured to serve a “value-based purpose.” Under the proposed regulations, value-based purposes include:

  • Coordinating and managing care for a targeted patient population;
  • Improving the quality of care for a targeted patient population;
  • Reducing the costs to Medicare or Medicaid without reducing the quality of care for a targeted patient population; and,
  • Transitioning from volume-based care delivery and payment structures to structures focused on managing the quality and cost of care for a targeted patient population.

Clarifications and Modifications to Existing Stark Law Safe Harbors

In addition to creating these new safe harbors, the proposed rulemaking would modify existing safe harbors by clarifying and revising defined terms used throughout the current regulations. Some of the key proposals include:

  • Clarifying that a referral does not constitute an “item or service” for which remuneration is permissible under any of the Stark Law safe harbors. 
  • Eliminating the requirement for physicians to establish Anti-Kickback Statute compliance in order to also establish Stark Law safe harbor eligibility. 
  • Re-defining the term “commercially reasonable” to include arrangements that do not result in profit.
  • Establishing a new bright-line test for determining when compensation is tied to referrals that examines both the method of calculating a physician’s compensation and whether the actual compensation correlates with the calculation.
  • Revising the definition of “fair market value” to exclude reference to the volume or value of referrals, but clarify that market value should be determined, “based solely on the economics of the subject transaction and . . . not . . . other business the parties may have with one another.”
  • Excluding inpatient hospital services from the definition of “designated health services” in cases where the services do not affect the amount of payment from Medicare under the inpatient prospective payment system (IPPS).
  • Clarifying that an item or service falls within the applicable designated health services definition if it relates to patient care services.
  • Defining non-physician practitioner (NPP) patient care services to include direct patient care services as well as other tasks performed by an NPP that promote patient care. 

The proposed changes will be in the comment period through the end of 2019; and, if approved, will likely take effect sometime in 2020.

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. Healthcare 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

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Our Stark Law Experience

For years, the attorneys at the Oberheiden, P.C. have assisted healthcare 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 healthcare facility, healthcare institutions such as hospitals and pharmacies, as well as healthcare business owners that want to recruit physician investors for their joint venture. All representations are handled by experienced counsel.

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