Stark Statute

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The “Stark Statute” prohibits a hospital (or other entity providing healthcare items or services) from submitting Medicare claims for payment based on patient referrals from physicians having an improper “financial relationship” (as defined in the statute) with the hospital. Providers, like hospitals and SNF’s should not submit claims for items or services referred by physicians who have improper financial relationships with the providers of the items or services. In enacting the statute, Congress found that improper financial relationships between physicians and entities to which they refer patients can compromise the physician’s professional judgment as to whether an item or service is medically necessary, safe, effective, and of good quality. Congress relied on various academic studies consistently showing that physicians who had financial relationships with medical service providers used more of those providers’ services than similarly situated physicians who did not have such relationships. The statute was designated specifically to reduce the loss suffered by the Medicare Program due to such increased questionable utilization of services.

Congress enacted the Stark Law in three parts, commonly known as Stark I, Stark II, and more recently Stark III (collectively referred to as the “Stark Statute”). Enacted in 1989, Stark I applied to referrals of Medicare patients for clinical laboratory services made on or after January 1, 1992 by physicians with a prohibited financial relationship with the clinical lab provider. In 1993, Congress amended the Stark Statute (Stark II) to cover referrals for ten additional designated health services. As of January 1, 1995, Stark II applied to patient referrals by physicians with a prohibited financial relationship for the following ten additional “designated health services”: (1) inpatient and outpatient hospital services; (2) physical therapy; (3) occupational therapy; (4) radiology; (5) radiation therapy (services and supplies); (6) durable medical equipment and supplies; (7) parenteral and enteral nutrients, equipment and supplies; (8) prosthetics, orthotics and prosthetic devices and supplies; (9) outpatient prescription drugs; and (10) home health services. See 42 U.S.C. § 395nn(h)(6).

The Stark Statute broadly defines prohibited financial relationships to include any “compensation” paid directly or indirectly to a referring physician. The statute’s exceptions then identify specific transactions that will not trigger its referral and billing prohibitions.

Referrals made pursuant to bona fide employment relationship may be considered proper under the Stark Statute, but only if the amount of the remuneration under the employment is consistent with the fair market value of the services, and is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.

Compensation paid to a referring physician serving as a consultant to a physician or practice group may fall within an exception to the statute but only if a written contract specifies the services covered, covers all the services to be provided by the physician, and the aggregate of such services is reasonable and necessary for the legitimate business purposes of the paying physician or practice and is consistent with fair market value for services actually rendered, not taking into account the volume or value of the referrals or other business generated between the parties. Thus, compensation paid to a physician (directly or indirectly) under a medical directorship that exceeds fair market value, or for which no actual services were required, triggers the referral and payment prohibitions of Stark II with respect to designated health services referred by that physician.

Similarly, office space leased to a referring physician may be considered proper under the Stark Statute, but only if the rent over the term of the lease is consistent with fair market value and is not determined in a way that takes into account the volume or value of referrals or other business generated between the parties. Thus, rents paid (directly or indirectly) by a referring physician to a physician or practice group that receives referrals that are below fair market value trigger the referral and payment prohibitions of Stark II with respect to designated health services ordered, referred or arranged for by that physician. Likewise, payments made to a referring physician for lease of equipment owned by the physician or practice group may be considered proper under Stark, but only if the amount paid by the physician or practice group for lease of the equipment is consistent with fair market value and is not determined in a way that takes into account the volume or value of referrals or other business generated between the parties.

Violations of Stark may subject the physician and the billing entity to exclusion from participation in federal health care programs and various financial penalties, including (a) a civil money penalty of $15,000 for each service included in a claim for which the entity knew or should have known the payment should not be made under section 1395nn(g)(1); and (b) an assessment of three times the amount claimed for a service rendered pursuant to a referral the entity knows or should have known was prohibited. See 42 U.S.C. §§ 1395nn(g)(3), 1320a-7a(a).

Although hospitals encourage internal compliance reporting, Stark violations are often not rectified after the compliance department has been provided with the information. We have seen cases where employees are ignored, reprimanded, or even fired for voicing their concerns.

Not all Stark violations are appropriate for bringing a qui tam/False Claims Act case. In the right context, and with the right evidence, a great case may be viable.

In sum, Stark prohibits physician or practice groups from billing Medicare for certain designated services referred by a physician with whom the recipient of the referrals has a financial relationship of any type not falling within specific statutory exemptions. Violations of the Stark Statute may be the basis of a qui tam False Claims Act lawsuit brought by a whistleblower.

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