The Physician Self-Referral Prohibition (“Stark Laws”)

The attorneys at DiRuzzo & Company reviews potential transactions, proposed ownership arrangements, employment/independent contractor agreements, financial incentive programs, and referral systems for compliance with the Federal Stark Laws. We obtain advisory opinions from the of Centers for Medicare & Medicaid Services, provide written opinion letters on potential transactions, and advice on how to structure transaction to ensure compliance with federal and state law.

The Social Security Act contains prohibitions intended to prevent physicians from profiting from their own referrals. 42 U.S.C. § 1395nn; 42 C.F.R. § 411.353 et seq. These provisions, also known as the Stark Laws, prohibit referrals for specifically designated services, prohibit billing for those services, and prohibit Medicare from paying for such services, when the referring physician has a financial relationship with the entity providing the service and that relationship does not fall within one of the several specified statutory or regulatory exceptions. 42 U.S.C. § 1395nn(a) & (g). The statute defines a prohibited “financial relationship” to include both ownership or investment interests in the billing entity and compensation arrangements with the entity. 42 U.S.C. § 1395nn(a)(2). Violation of the statute subjects the referring physician and the entity that bills for the referred service to administrative penalties. It also renders the claim for the unlawfully-referred service subject to denial of payment. 42 U.S.C. § 1395nn(g).

The Stark law is a strict liability civil statute. and there are substantial sanctions for violation of the Stark Act. A person who collects any amounts billed in violation of the Stark Act must promptly refund those payments. Stark imposes a civil money penalty of up to $15,000 on any person who submits a bill that such person knows or should know is improper. 42 U.S.C. § 1395nn(g)(3). Any physician or entity who enters a scheme or arrangement which the physician or entity knows or should know has a principal purpose of assuring referrals by the physician to the entity in violation of the Stark Act is subject to a civil money penalty of up to $100,000, 42 U.S.C. § 1395nn(g)(4), and may be excluded from participation in the Medicare program, 42 U.S.C. § 1320a-7. Failure to report information relating to physicians who are interested investors subjects the entity to a civil money penalty of up to $10,000 for each day for which reporting should have been made. 42 U.S.C. § 1395nn(g)(5).

The statutory exceptions to the definition of prohibited financial relationships encompass nearly every form of non-abusive relationship between a physician and an entity receiving a referral. 42 U.S.C. §§ 1395nn(b), (c), (d) & (e). Most of the exceptions parallel regulatory safe harbors and statutory exceptions to the Federal Anti-Kickback Statute. For example, some types of physician investments in certain entities, including hospitals, and personal service agreements that meet the indicia of bona fide compensation, fall within exceptions and do not trigger the referral ban. If the parties satisfy the exceptions’ criteria, referrals and resulting claims are not prohibited. Generally, the critical elements of these Stark exceptions are that payments must: (1) be made pursuant to the terms of a written agreement or instrument, (2) represent fair market value for services or property delivered by the physician, and (3) be calculated or established without regard to the value or volume of referrals from the physician to the entity.

As a result of Centers for Medicare & Medicaid Services’ (“CMS”) failure to promulgate final Stark regulations for several years after the Stark Act became effective, Congress directed CMS to issue Advisory Opinions on Stark Act questions in the same manner that U.S. Department of Health and Human Services Office of the Inspector General (“OIG”) was directed to issue Advisory Opinions under the Anti-Kickback Statute. 42 U.S.C. § 1395nn(g)(6). The process for obtaining such Advisory Opinions was quite similar to the process for obtaining Advisory Opinions from OIG. Additionally, Section 6409(b) of the Affordable Care Act granted the Secretary of HHS the authority to reduce the amount due and owing for all violations of the Stark Law.