American College of Physicians: Internal Medicine — Doctors for Adults ®


What internists need to know about the new Stark law

Final rules clarify when you can refer a patient for Medicare services and steer clear of anti-kickback problems

From the January ACP-ASIM Observer, copyright 2002 by the American College of Physicians-American Society of Internal Medicine.

By Patrick Hope, Esq.

Nearly three years in the making, the Physician Self-Referral Statute, also known as the Stark law, has taken effect.

The Stark law aims to prevent physicians from profiting when they refer Medicare and Medicaid patients for services. In its most basic form, the Stark law says that physicians may not refer Medicare patients to an entity for a designated health service if they or an immediate family member have some type of financial relationship with that entity.

The law, however, contains numerous exceptions, and the final rule that took effect on Jan. 4 seeks to clarify some of those exceptions. It also defines the circumstances under which entities can submit claims for a service when they do not know—or have no reason to know—the identity of the physician making the referral.

Stark lawThe first part of the Stark law implements general prohibitions against referrals, exceptions to those prohibitions and key definitions. The Centers for Medicare and Medicaid Services (CMS), formerly HCFA, plans to publish the second phase of the law soon. That part of the law is expected to address more exceptions and modify parts of the first phase.

Because the Stark law is very complex, you should consult an attorney when you examine an arrangement that may trigger the Stark law or some other federal statute. With that in mind, here are some of the most significant revisions to the part of the law that could affect your practice.

Definition of referrals

What exactly does the Stark law consider a referral? If you order, certify or recertify a patient for any designated health service from Medicare, or if you make a request that includes the provision of a Medicare designated health service, you've made a referral. In addition, any time you draw up a care plan that includes a service or certifies or recertifies a patient's need for a service, you've made a referral.

Over the years, the final Stark law has significantly changed its definition of physician referrals. In a major change, the law no longer considers services that physicians provide for their own patients a referral. As a result, physicians can be compensated for health services they provide to their patients without violating the anti-kickback provisions of the law.

Indirect compensation

The law prohibits payment for referrals even when reimbursement comes through "indirect compensation arrangements." To identify whether an indirect compensation relationship exists, the Stark law lays out three elements:

  • Unbroken chain. If there is "an unbroken chain of any number of persons or entities that have a financial relationship" with the referring physician and the entity providing the health service, reimbursement is prohibited.
  • Volume or value. If payments made under an arrangement fluctuate based upon the volume or value of referrals you make, the arrangement is prohibited under Stark.
  • Knowledge. Reimbursement is prohibited if entities that receive referrals from physicians have actual "knowledge" that referring physicians are being compensated based upon their volume or value of services. Payments are also prohibited if the entity acts in reckless disregard of that knowledge.

In true Stark fashion, there are exceptions that allow physicians to be reimbursed even when an indirect compensation arrangement exists. Indirect reimbursements are not prohibited, for example, if they meet the following three criteria of the "fair market value" exception:

  • The compensation received by the referring physician is of fair market value and does not take into account the volume or value of referrals.
  • The compensation arrangement is set out in writing, is signed by the parties and specifies the services covered by the arrangement.
  • The compensation arrangement does not violate anti-kickback statutes or other laws.

Knowledge requirement

Under the Stark law's knowledge requirement, an entity may submit a claim for a designated health service that originated from a prohibited referral as long as the entity "did not have actual knowledge of, and did not act in reckless disregard or deliberate ignorance of, the identity of the physician who made the referral."

Group practice definition

CMS significantly improved and clarified the definition of "group practice" largely because physician groups like ACP-ASIM complained that the proposed definition was confusing and inaccurate.

The Stark law now defines a group practice as a group of two or more physicians that is legally organized as a partnership, professional corporation, foundation, not-for-profit corporation, faculty practice plan or similar association in which the following conditions are met:

  • each physician who belongs to the group substantially provides the "full range of services" through the joint use of shared office space, facilities, equipment and personnel;
  • at least 75% of patient care services are provided through the group and billed under the same group number; and
  • the practice's overhead expenses and income are distributed in accordance with the "unified business test."

    To meet the "unified business test," a group must be organized and operated as a single integrated business enterprise. Essential elements include:
    • centralized decision-making by a body representing the practice that maintains control over the group's assets and liabilities;
    • consolidated billing, accounting and financial reporting; and
    • centralized utilization review.

In-office ancillary services exception

The Stark law allows physicians to refer ancillary services covered by Medicare to other physicians in their same practice under certain circumstances, even though a financial relationship may exist.

To meet the "in-office ancillary services" exception, the group must satisfy three requirements: physician supervision of the in-office ancillary service, the location of the service and billing for the service.

  • Physician supervision. CMS has said that Congress never intended to require that physicians be physically present when ancillary services are performed. Instead, legislators wanted to establish a link between the referring physician and the individual performing the ancillary service. The goal was to keep physicians from profiting from the referral of services not directly related to their practice.

    Consequently, physicians can now meet the "direct supervision" requirement by complying with applicable Medicare and Medicaid payment or coverage rules. The Stark law now also says that supervising physicians need not be a formal member of the group, but simply a physician in the "group practice." (Owners of the group practice, along with employees and independent contractors, all qualify.)
  • Location. Because it has eased the direct supervision requirement, CMS is interpreting Stark's location standards more strictly. In-office ancillary services generally must be provided in the "same building" or in a "centralized building" where other off-site designated health services are also provided. The Stark law defines a "building" as a structure or combination of structures that share a single street address assigned by the U.S. Postal Service.

    More significantly, new provisions of the Stark law require you as the referring physician to provide "substantial" services unrelated to the service being billed in the same building where the service in question is offered. The law is designed to keep physicians from referring ancillary services to a location where they have no presence.

    The good news is that the "same-building" requirement has been modified in two ways. First, CMS has backed off its previous position and is now permitting shared facilities under certain constraints. Second, the space in the building where the designated health service is provided need not be adjacent to the space where other services are provided.
  • Billing. To be reimbursed for ancillary services under the Stark law, one of the following must actually submit the bill:
    • the physician performing or supervising the service;
    • the physician's group practice;
    • with respect to services performed or supervised by the supervising physician, the group practice if the physician belongs to the group practice; or
    • an entity that is wholly owned by the referring or supervising physician's group practice.

    The term "wholly owned" does not include joint ventures between group practices and individual group practice physicians or include other providers or investors that do not qualify as wholly owned entities. The billing number used must be assigned to the group. Groups may have or bill under more than one billing number, subject to any applicable Medicare restrictions.

Profit shares and productivity bonuses

Final regulations in the Stark law also clarify how physicians can be compensated without violating anti-kickback provisions. Because CMS does not consider a service you provide yourself a referral, you may be compensated based upon your productivity for those services without violating the law.

Members of a group practice can receive profits from designated health services, as long as physicians are not rewarded for the volume or value of their referrals for Medicare services.

There are several ways to distribute reimbursements from designated Medicare health services without violating the Stark law. You can divide the money equally among physicians in a group. You can take a formula you use to divide revenues from an HMO or other non-Medicare payer and apply that same formula to revenues that include Medicare services. You can also distribute revenues involving designated Medicare services any way you want, as long as those revenues equal less than 5% of the group's total revenues, and as long as no single physician receives more than 5% of the total pool of compensation being distributed.

The issue becomes more difficult when dealing with bonuses or incentive systems that could be viewed as giving physicians an incentive to generate more referrals. If you want to base physician pay on productivity without violating the Stark law, you can create a productivity bonus based upon the physician's total patient encounters (at least 75%) or relative value units.

Other Stark rules for distributing productivity bonuses for designated Medicare services mirror the regulations for distributing general pay. You can base a productivity bonus on the formula you use to allocate physician compensation from non-Medicare payers. If you do create a productivity bonus based on revenues from Medicare services, those revenues must equal less than 5% of the group's total revenues, and no single physician can receive more than 5% of that compensation.

Patrick Hope is Legislative Counsel in the College's Washington office. He can be reached at 202-261-4541 or


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