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Stark Law Compliance and Defense

Stark Law/ The Prohibition Against “Physician Self-Referral,” 42 U.S.C.§ 1395nn.

Stark Law is based upon AMA Code of Medical Ethics Opinion 8.0321, which prohibits a doctor from referring patients to an outside provider, where the doctor owns an interest in the provider, without full disclosure of the conflict. Stark Law is based on this concept with several differences, (1) the definition of “ownership” has been expanded to mean “any financial relationship,” (2) the rule only applies to Designated Health Services (DHS’s), (3) the rule applies to physicians and close family members, (4) there is no provision for compliance by full disclosure to the patient.

Stark Law dates to 1989, when Congressman Pete Stark sponsored a special rule prohibiting certain Medicare referrals, which only applied to physicians. and only to certain specific items of expense termed, “Designated Health Services ,” or DHS’s. Stark Law compliance is one of the pre-conditions to submission of a bill for payment to Medicare. The government takes the position, a physician is required to certify that he has read, understood, and complied with Stark Law as a condition to admission to the program.

The law does not completely ban all referrals to all entities with whom a physician has a relationship. Instead, Stark Law contains a number of confusing Safe Harbors. If a physician has not strictly complied with Stark Law, (and the Safe Harbor provisions,) all bills submitted may be deemed False Claims under the Act, and subject to an $11,000 penalty for each bill submitted. It does not matter that the patient in fact, needed the treatment, and no fraud was involved. The violation itself, or the “false certification” of compliance, makes the claim potentially “False.”

The idea behind Stark Law was that physicians would have less of an incentive to over-prescribe tests for Medicare patients, if they did not have an ownership interest in an outside facility which performed the Designated Health Services. Stark Law at first glance, prohibits all self-referrals of Medicare patients for DHS’s– but then allows a number of arrangements by virtue of “Safe Harbor” regulations. The Safe Harbor rules are so complex and confusing, one would suspect any certification by a physician to the effect that he “understands” them and is “in compliance.”

In order to understand both sides of the Stark Law debate, we must take a look back to the beginning of Medicare in 1965. Over the course of the 20 th century, American physicians, through the AMA, tried mightily to fend off not only the government, but also corporate intrusion– which they termed, the “corporate practice of medicine.” The AMA was against both Medicare and anyone other than a physician, meaning corporations, earning a living from the practice of medicine.

What the AMA primarily objected to was “for anyone else, such as an investor, to make a return from a physician’s labor.” See, Starr, Paul The Social Transformation of American Medicine (New York: Basic Books, 1982.) So the AMA decided to erase capitalism from the picture. It did so by backing political candidates who would outlaw, state-by-state, the ownership of clinics and hospitals by non-physician, private investors. If medicine required capital beyond that which doctors could provide, it would have to be contributed gratis by the community, (instead of investors looking for a profit.) Id.

If the AMA were to have any credibility against critics who charged the AMA’s lofty ideals were “financially convenient,” physicians would need to practice what they preached. And so the AMA adopted rules prohibiting their own membership from earing passive income from financial investment of capital. This was accomplished by AMA Rule 8.03, which declared it an “unethical conflict of interest” for a physician to earn a profit from the referral of a patient to an outside clinic. which the physician also owned.

When Medicare passed congress in 1965, it did so only with the promise to physicians that their autonomy would be preserved, they would be paid on a fee-for-service basis, and the government would not come between treatment decisions and the patient. Physicians happily accepted this trade-off, but only for so long as everyone played by the rules. But in the 70's and 80's, the walls which held corporate interests at bay was finally breached, for no greater reason than the fact that Medicare made it too lucrative to keep Wall Street out of the delivery of medicine. Corporate clinics began popping up everywhere, which siphoned off Medicare dollars, which led to reductions in the fee schedule paid to physicians.

Physicians began to respond (rightly or wrongly,) by taking the position that because the goal posts had been moved, they should be free to disregard their own rules– with impunity. Practically overnight, it seemed, every physician also owned a diagnostics laboratory or clinic. In order to stem the tide, (and the turf war,) of newly developing physician owned clinics and testing facilities, Congressman Stark sponsored the eponymous Stark Law, which is a near verbatim recitation of AMA Ethics Rule 8.032.

But the excuse that Stark Law was “necessary to counter physician greed” is itself, a little too convenient, and doesn’t exactly square with the facts. The truth is, any time more dollars become available in a capitalistic market, every one tries to grab as much as they can. The physicians, for their part feel betrayed: If Medicare kept its promise, and physicians were well paid in full for treating a patient, physicians should not need passive income from the prescription of ancillary services.

In 1965, Medicare paid 80% of the usual and customary “fee for service” charged by a physician. Today, Medicare pays barely 20% of this rate, but physicians alone are prohibited by Stark Law, from opening outside clinics. Many physicians, who cannot operate at this level, are forced to sell their practices to large groups simply to survive.

For physicians and the government this has all become a sort of “devil’s bargain.” The influx of corporations earning huge fees from testing facilities led directly budget shortfalls and the government’s broken promises to pay a reasonable rate to doctors. Doctors, in turn, began looking for new ways to replace lost income they no longer earn from hands-on treatment. What we are left with is a system in which each side accuses the other of all manner of bad behavior.

One ultimate truth remains: “The one with the gold, (in this case the government,) makes the rules.” And make rules, they did. with a vengeance. So many, in fact, the Fourth Circuit has described the regulations surrounding Medicaid reimbursement, as “One of the most impenetrable texts within human experience.” See, Rehab’h Ass’n of Va. v. Kozlowski. 42 F.3d 1444, 1450 (4th Cir. 1994.) See, Baumann, et al. , Healthcare Fraud and Abuse, p. 200, ABA Health Law Section Press, 2002.

Unlike the AKS, the Stark Act is a strict liability statute, which applies only to physicians and only to referrals for one of 11 Designated Health Services where the physician, or a close family member has a financial relationship. Stark Law has safe harbors found in the main statute and as constantly tinkered with by the OIG and HHS in 42 C.F.R. § 411.351, et seq. and a various assortment of bulletins and advisories.

Stark law, prohibits physicians from referring patients to receive designated health services payable by Medicare or Medicaid from entities with which the physician or an immediate family member has a financial relationship, unless an exception applies. Financial relationships include both ownership/investment interests and compensation arrangements. For example, if you invest in an imaging center, the Stark law requires the resulting financial relationship to fit within an exception or you may not refer patients to the facility and the entity may not bill for the referred imaging services.

Designated health services are:

clinical laboratory services;

physical therapy, occupational therapy, and outpatient speech-language pathology services;

radiology and certain other imaging services;

radiation therapy services and supplies;

DME and supplies;

parenteral and enteral nutrients, equipment, and supplies;

prosthetics, orthotics, and prosthetic devices and supplies;

home health services;

outpatient prescription drugs; and

inpatient and outpatient hospital services.

Stark Law compliance is a complex and highly specialized area of law. While the government agencies in charge of administering Medicare do a remarkable job of implementing rules for nearly every conceivable circumstance, the result is something akin to tax law, “in reverse.”

Martin Merritt is a Stark Law attorney, practicing in Dallas, Texas. If you would like to schedule a free consultation, please contact us .

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