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Stark reality: The latest self-referral regs


Let Rep. Pete Stark's intent, and this article, guide you in structuring your practice to keep within those confusing laws.


Stark reality: The latest self-referral regs

Jump to:
Choose article section...What constitutes a violation?Some clarificationsWhat's a designated health service?The money connectionWill doctors go to jail?More to come

Let Rep. Pete Stark's intent, and this article, guide you in structuring your practice to keep within those confusing laws.

By Michael Pretzer

The self-referrals laws known as Stark I and II—after Rep. Pete Stark (D-CA)—have been on the books since 1989 and 1993. The laws make it illegal to refer Medicare and Medicaid patients to entities in which you have a financial interest. But they also establish numerous exceptions that allow you to refer patients without reprisal. To escape a Stark violation, you must understand the exceptions that apply to your practice and structure the practice accordingly.

Until now, enforcement of the Stark laws has been lax—partly because the Centers for Medicare & Medicaid Services (CMS, formerly HCFA) didn't issue definitive regulations for Stark II until this year. The regs take effect Jan. 4, 2002, and "increased enforcement is likely to follow," say health care lawyers in Faegre & Benson's Denver office. Best be on your toes.

What constitutes a violation?

At its most basic, explains the Medical Group Management Association, a Stark violation occurs when:

• You refer a patient to a health care entity with which you or a member of your immediate family have a financial interest.

• The referral is for one or more designated health services (DHS) that are covered by Medicare or Medicaid.

• The referral is made in a situation where no exception to Stark applies (see "Taking exception").

Some clarifications

"In practical terms, a physician makes a referral under the Stark laws whenever he requests a procedure, test, service, or supply that is part of a designated health service," says MGMA. The only exception is when you do all the work yourself (self-referral in the truest sense). Note the word


. If the work involves a nonprofessional—a lab technician, say—the exception won't apply.

Referrals by physicians, dentists, chiropractors, and others enumerated by Medicare payment rules are subject to Stark. So are those of nurse practitioners, physician assistants, and other midlevel providers who work for a physician or group practice when the referrals are under a physician's control.

Entities subject to Stark include individuals and organizations that provide health services and that qualify for Medicare or Medicaid payment.

Stark applies only to Medicare and Medicaid patients—although some physicians and medical associations fear that Congress will someday expand self-referral law to the private sector. For now, however, the easiest way to elude Stark may be to avoid treating Medicare and Medicaid patients, though that's not what Rep. Stark and his colleagues had in mind when they passed the legislation.

What's a designated health service?

The first Stark law applied to lab services only. The second added 10 other types of services. Whatever the type, the service has to be covered by Medicare or Medicaid before it comes within Stark's jurisdiction.

Over the years, physicians complained that the CMS description of a designated health service bordered on the incomprehensible. The final rule uses CPT and HCPCS codes to help you understand the types of services that are at risk under Stark. CMS says it will update the list of codes and services each year when it publishes the physician Medicare fee schedule.

• Clinical lab services. Includes the 80000-series CPT codes (except certain blood collection codes) and some HCPCS level 2 codes.

• Physical therapy, occupational therapy, and speech-language pathology services. Includes the 97000 series and certain other CPT codes; some HCPCS level 2 codes, such as those for evaluation in physical therapy, are also included.

• Radiology and other imaging services. Includes X-rays, ultrasound, CT scans, and MRIs. But not nuclear medicine.

• Radiation therapy. Includes some 70000-series CPT codes and other radiation services. Again, nuclear medicine is ruled out.

• Durable medical equipment and supplies. Services are those identified in the Durable Medical Equipment, Prosthetics/Orthotics, and Supplies (DMEPOS) fee schedule. Also includes HCPCS code E1399, a catchall for DME items not on the fee schedule.

• Prosthetics, orthotics, and prosthetic devices and supplies. Includes items enumerated in the DMEPOS fee schedule, and all HCPCS level 2 codes for these services that are covered by Medicare.

• Home health services. Generally, services provided by a home health agency certified by Medicare.

• Outpatient prescription drugs. Includes drugs covered by Medicare Part B, such as oncology drugs, and some drugs administered by an allergist. Some vaccinations, immunizations, and preventive screening tests are beyond Stark's reach.

• Inpatient hospital services. Includes those covered by Medicare (listed in the Medicare payment and coverage rules).

• Outpatient hospital services. Again, includes those covered by Medicare.

• Parenteral and enteral nutrients and PEN-associated equipment and supplies. Those defined by HCPCS level 2 codes.

The money connection

The financial arrangements that trigger Stark regs include ownership and investment. For example, if you refer a patient to an organization in which you hold stock or to which you've made a loan, Stark is in play.

Direct or indirect compensation arrangements also bring on Stark. "Common examples [of direct compensation] include a medical director contract between a physician and a hospital, and space and equipment rental arrangements," explains MGMA.

A financial arrangement is considered indirect when three conditions are present: (1) The arrangement involves an unbroken financial link between a physician and a DHS organization, (2) the amount of remuneration rises and falls with the volume or value of the referrals, and (3) the DHS organization knows or has reason to know of the relationship.

Most of the exceptions that allow a physician to circumvent Stark define financial arrangements that are acceptable under the law. Unfortunately, evaluating a practice's arrangements in light of Stark is as difficult as it is essential. "The indirect compensation section, for example, is extremely confusing," says Neil B. Caesar, president of the Health Law Center in Greenville, SC. "The official language goes on for three pages and contains some of the longest sentences you'll ever see."

Will doctors go to jail?

No. Stark violators—physicians who make illegal referrals or DHS providers that bill Medicare for services initiated by an illegal referral—must return any reimbursements. They may have to pay up to $15,000 in penalties for each illegal claim. And they may be barred from Medicare and Medicaid. But they won't get thrown in the slammer.

Ignorance or naivete is not a defense against Stark. "The Stark law is sometimes referred to as a 'strict liability' law," explains MGMA. "Penalties can be imposed regardless of the physician's knowledge, intent, or state of mind. Compliance is mandatory."

Unfortunately, your worries don't end with Stark compliance. It's possible to be right with Stark and yet violate federal anti-kickback or state self-referral laws. And vice versa. "In certain instances, financial relationships that are permitted by [Stark] might merit prosecution under the anti-kickback statute," warns CMS.

More to come

Even though CMS has published the "final rule" on Stark, the agency continued to take comments from the medical community and others until last month. CMS isn't likely to make big changes to the regs, but it may do some tweaking after it reviews the latest round of criticism.

The regs CMS issued earlier this year were dubbed Phase I. Phase I represents the bulk, but not all, of the Stark rules. Phase II, to be published at an unspecified date, will cover issues specific to Medicaid and reporting requirements—and perhaps the tweaks to Phase I. When that happens, look for "The last guide you need" to federal self-referral regulations.

The author is the former Washington Editor of Medical Economics.

Taking exception

The importance of understanding the exceptions to the financial arrangements allowed in Stark can't be overstated. According to the Medical Group Management Association, a referral arrangement that requires a Stark exception "can arise in many common situations, including (1) referral of a Medicare patient to a laboratory or physical therapy service that's owned and operated by the physician's medical group, (2) referral of a Medicare patient to a local hospital from which the physician's practice rents office space, and (3) referral to a home health agency for which the physician provides, and is compensated for, medical director services."

For most groups, the in-office ancillary services exception is the most valuable. But to qualify, a group has to jump through hoops and agree to certain restrictions.

• The exception applies to all designated health services except the furnishing of (1) most durable medical equipment and (2) parenteral and enteral nutrients and related equipment and supplies.

• The DHS must be performed by the referring physician or another member of the group, or by someone supervised by the referring physician or another member of the group. The tricky part is knowing who Stark regards as a group member.

Physician owners, full- and part-time physician employees, locum tenens physicians, and physicians on call are considered to be group members when it comes to providing DHSs. Under some circumstances, independent contractor physicians count as members. (There has to be a formal contract that complies with Medicare rules, for example, and the contractor's pay can't be based on the volume or value of referrals.)

Note that "general" supervision is sufficient under Stark's final regs. In the proposed regs, the supervising physician had to be in the same room as the person providing a DHS.

• In general, the DHS must be performed in the building where the referring physician or another member in his group practices, or in one or more centralized buildings used by the group to provide DHSs. Solo as well as group practices can share DHS facilities located in the building where they have their offices, but solo practices cannot share facilities in a centralized location elsewhere. A group or a solo practice may not provide DHSs in a centralized building shared with other physicians. A group may not provide durable medical equipment in a centralized location.

• Billing must be done by the physician performing or supervising the DHS. Or by the physician's group, using the billing number assigned to the group. Or by an entity that's wholly owned by the physician or the physician's group. Or by an independent billing company on behalf of the physician or his group.

• A multiphysician practice must satisfy certain criteria to establish itself as a bona fide group practice (see "Are you in a group?"). Among the other exceptions, the "fair market value" exception may have the broadest applicability. Compensation from an entity to a physician or group practice for items or services will not trigger Stark, provided the compensation is based on fair market value. Of course, there are other requirements that have to be met: For instance, the relationship has to be spelled out in writing, and the compensation may not be based on the volume or value of referrals. (Note that a group doesn't have to meet the Stark definition of a group to qualify for the fair market value exemption.) "The exception will eventually be very useful," promises Greenville, SC, health lawyer Neil Caesar. "But initially it will raise a lot of questions. People will have to see what does and doesn't work."

Are you in a group?

To qualify for Stark's in-office ancillary exception—the one that MGMA says most groups will invoke so they can "provide laboratory, radiology, outpatient prescription drugs, and other DHSs without violating the law"—a medical practice must satisfy the government's definition of group.

Stark says a group is two or more physicians working together as a partnership, for-profit or not-for-profit corporation, foundation, or other organization that's recognized by state law. The criteria a group must meet include:

• Each doctor must provide most of the services of a typical physician (consultation, diagnosis, treatment, et al.) in shared office space and jointly using equipment and personnel.

• Each doctor must provide at least 75 percent of his services through the group. (Exceptions to this rule include a group in an area with a shortage of physicians.)

• The group's physicians must conduct at least 75 percent of the group's patient encounters.

• The method of distributing practice expenses and physician payments must be predetermined.

• The group must operate as a unified business, with centralized governance and utilization review and the use of standard financial management practices.

• The group's physicians can't receive compensation based directly on the volume or value of designated health service referrals. Profit-sharing that has an indirect relationship may be okay in some circumstances, however. For example, dividing the profits from DHSs on a per-capita basis is allowed. So is giving productivity bonuses based on non-DHSs. Furthermore, any distribution method is legit if the take from DHSs represents less than 5 percent of the group's revenue.


CMS (the Centers for Medicare & Medicaid Services, formerly HCFA) says the Stark regs "should not have a significant effect on most physicians. Since we have interpreted the exceptions in this final rule more broadly than we did in the proposed rule, physicians should find it easier to comply with the law."

The self-referral regs are "a largely positive development," concede attorneys at Foley & Lardner, a firm specializing in health care law. But they note that the law on which the regs are based is "broad, complex, and has an unwieldy reach." In addition, the final rule "introduces a few new ambiguities and other oddities."

Yes, Stark has a lot of nuance and detail. "And it's the details that can kill you," warns Robert J. Saner, a partner at Powers Pyles Sutter & Verville in Washington, DC. "A physician who tries to understand Stark by himself is making a big mistake. He has to get outside help from a lawyer or consultant."

"Every group needs to have its arrangements reassessed right away," adds Neil B. Caesar, president of the Health Law Center in Greenville, SC. "Even if you start today, changes won't be completed for months."

For doctors who want to become more familiar with Stark regulations, there are several useful Web sites, though none is an adequate substitute for good legal counsel.

For masochists, there's www.hcfa.gov(orwww.cms.gov ). To read the actual regulations, a dense 100-plus pages in the Federal Register, go to www.hcfa.gov/regs/physicianreferral/default.htm. To read about the regs in a more accessible, frequently-asked-questions format, go to www.hcfa.gov/medlearn/faqphys.htm.

For those wanting analysis and advice in plain English, there's www.starkcompliance.com. The subscription site was set up by the Medical Group Management Association to help physicians and others understand Stark. It will be updated when the remaining regs or other changes are issued. (MGMA, which has been at the forefront of self-referral issues in Washington for many years, was instrumental in the preparation of this guide.)

For additional readable information on Stark, there's amga.org. The American Medical Group Association's position on self-referral, and an assessment by Foley & Lardner is at www.amga.org/amga2000/publicpolicy/physicianownership_priorities.htm.

For a brief history and comments by the father of it all, there's www.house.gov/stark .


Michael Pretzer. Stark reality: The latest self-referral regs. Medical Economics 2001;17:64.

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