Stark Law is unique in both law and medicine. It is fundamental to modern healthcare compliance, and no legal or medical professional will admit to not knowing about it.

Except, many of them don’t really know it. It’s commonly confused and misunderstood. Most physicians don’t even know the difference between Stark and the Anti-Kickback Statute, despite both being pillars of healthcare compliance.

The problem? Stark has outlived its usefulness (even if its namesake is alive and kicking). The issues it once addressed have changed, and despite some valiant efforts to keep up with the times, it’s in everybody’s interest to start over.

What is Stark?

The goal of any self-referral prohibition is to ensure that physicians only refer their patients to facilities that provide the best and most convenient care. Doing so prevents the use of costly and unnecessary services and promotes honest competition among healthcare professionals.1AMA Code of Medical Ethics Section 1.1.1. In healthcare, it goes against any physicians’ code of ethics to refer patients for any other purpose, especially for any financial incentive.

In 1988, Congressman Pete Stark sponsored the initial bill, the “Ethics in Patient Referrals Act,” which is now referred to as “Stark I.” Stark I prohibited a physician from referring a Medicare patient to a clinical laboratory if the physician or his/her family member had a financial interest in that laboratory. Subsequent amendments, known as “Stark II,” extended the Stark I provision to Medicaid patients and other services outside of clinical laboratory services, which are referred to as designated health services (DHS).

The Stark Law in its current form (42 U.S.C. §1395nn) prohibits physicians from ordering DHS for Medicare and Medicaid patients from entities with which the physician (or an immediate family member) has a financial relationship. Thus, the Stark Law only applies if: (i) there is a physician referral; (ii) the referral is for designated health services; (iii) the patient is a Medicare and/or Medicaid beneficiary; and (iv) the referring physician, or an immediate family member, has a financial relationship with the entity providing the DHS.

What are Designated Health Services (DHS)?

DHS include the following twelve items: (1) clinical laboratory services; (2) physical therapy services; (3) occupational therapy services; (4) speech language pathology services; (5) radiology and certain other imaging services; (6) radiation therapy services and supplies; (7) durable medical equipment and supplies; (8) parenteral and enteral nutrients, equipment, and supplies; (9) prosthetics, orthotics, and prosthetic devices; (10) home health services and supplies; (11) outpatient prescription drugs; and (12) inpatient and outpatient hospital services.

Why Stark?

Originally, Stark was really meant to address “overutilization.” Overutilization is the primary perverse incentive in any regime where the end consumer (an insured patient) is shielded from the cost of service (i.e., actual prices) but not the number of services performed.

So while the current fee-for-service (FFS) system seems well-suited for pricing a service as varied as healthcare, it also provides a robust perverse incentive for physician-driven overutilization. In an FFS system, a bad actor seeking more fees needs only to perform more services, regardless of their necessity.

Why Not Stark?

The primary prohibition in Stark is against physician self-referral. It is based on an imagined scenario where a primary care physician also owns a separate, independent MRI facility. Then, this physician refers all patients for an MRI — regardless of need or the quality of service provided.

The scenario presumes the majority of private practitioners would make enough from their practices that they would not contemplate investing in the provision of in-office ancillary services — which are generally allowed under a Stark law exception. This is not to be the case. The fact is, in-office ancillary services have become the rule instead of the exception. There are two primary reasons.

1. Reimbursement has failed to keep up with inflation. For practices and practitioners to maintain profitability, they must offer ancillary services. Becoming a licensed physician is a demanding, expensive, and lengthy process. One of the incentives provided to direct qualified and talented individuals into the profession is the high level of compensation offered, and the corresponding quality of life that allows.

However, inflation makes maintaining that quality of life reliant on constant, increased spending, which creates the concurrent need for increasing income. If the reimbursements provided by health insurers fail to keep up with this need, we can and should expect physicians to find alternative ways to supplement their income. What’s more, we should expect that this will come in the form of leveraging their healthcare skills (versus taking up a side hustle as Uber Select drivers).

2. The modern and critical push toward value-based reimbursement and quality-based incentives requires a relationship between providers and practices that is antithetical to the Stark prohibitions. The risk of overutilization, which drove the passage of the Stark Law, is largely eliminated by modern alternative payment models. When physicians are incentivized by efficiency and patient outcomes, and not by the volume of services they provide, their economic self-interest automatically aligns with the global interest to eliminate unnecessary services.2Sen. Orrin Hatch. Why Stark, Why Now? Suggestions to Improve the Stark Law to Encourage Innovative Payment Models. p 2. https://www.finance.senate.gov/imo/media/doc/Stark%20White%20Paper,%20SFC%20Majority%20Staff.pdf

Why Not Stark On Steroids?

In 2018, the Centers for Medicare and Medicaid Services (CMS) solicited input on potential amendments to the Stark Law. CMS has indicated that the amendments are intended to help CMS move toward its goal of enhancing coordinated care and transitioning from volume- to value-based payment systems.

By the end of last summer, almost 400 stakeholders, including various physician and hospital associations, provided feedback.3Hahn-Saperstein, Marcy. Possible Changes to Stark Law in 2019. March 28, 2019. Akerman LLP – Health Law Rx. https://www.jdsupra.com/legalnews/possible-changes-to-stark-law-in-2019-33063/ CMS Administrator Seema Verma has since made multiple public appearances and issued statements that indicate that changes are forthcoming in 2019. They are expected to be “the most significant changes to the Stark Law since its inception.”4Id.

Unfortunately, CMS compliance architecture represents some of the greatest legal complexity in any industry. As a result, dozens of cottage consulting industries have been birthed and many professional specialties have been replaced with numerous sub-specialties.

I have personally devoted a substantial portion of my own career to helping practices and practitioners circumvent Stark Law when it doesn’t make sense. In fact, my exclusive interaction with the Stark Law has been navigating around it. Even so, there seems there is only one sensible solution to Stark Law: Kill it.

Kill Stark Law.

Repealing a law with as much enforcement history as Stark is not taken lightly. However, the primary concern with a repeal of any law always is the potential for lawlessness will follow. I submit that there would not be lawlessness, even if we assume the worst.

For example, let’s assume that all physicians will suddenly refer, with impunity, to practices in which they have a financial interest. Physicians presently undertaking these referrals by using work-arounds could then do so without the need to engage with additional legal entities, complicated service agreements, and/or complex accounting requirements. This will reduce their cost of service and, consequently, increase their “bottom line.” Physicians who have previously avoided these referrals (or avoided investing in practices to which they could refer) will have to undertake the analysis of whether these referrals will further their reimbursement opportunities with Medicare and/or Medicaid, particularly with respect to any shared savings programs in which they participate. Neither scenario provides a compelling case.

Right now, the primary penalty for non-compliance with Stark (the “big bad,” as we call it) is exclusion from Medicare/Medicaid. This certainly hurts physicians, but it often hurts their patients and communities more.

Physicians opting out of these programs is already problematic. Exclusion of physicians whose primary crime may not even be intentional (Stark is a strict liability statute, which means no proof of intent is required for conviction), as it is often committed in response to declining reimbursement, also leaves us with fewer doctors.

Therefore, the potential for stricter interpretations of Stark Law is more likely to increase costs and leave us with fewer doctors than it is to address the original intent of the law. It would make more sense to kill it before it kills healthcare, especially in areas that are already underserved.

The way we see it, physicians rarely have much of a voice in healthcare legal reform, and it’s time to change that. Our physicians make up a constituency that none of us can afford to lose. Besides, in a post-Stark world, anti-kickback statutes at the state and federal levels already address the real “big bad” in private practices.

Much like its eponymous congressman, Stark served us well in the past. However, the time has come for it to be retired rather than continually amended. Further amendments only move it further away from its original intent and prop up the circumvention industry –— an industry which would be better tasked to solve more pressing problems for physicians, medical practices, and service providers.

IDEAL Business Partners works with clients in the fast-paced arenas of fintech, healthcare, dental, cannabis, and business law. We lift up business.

References   [ + ]

1. AMA Code of Medical Ethics Section 1.1.1.
2. Sen. Orrin Hatch. Why Stark, Why Now? Suggestions to Improve the Stark Law to Encourage Innovative Payment Models. p 2. https://www.finance.senate.gov/imo/media/doc/Stark%20White%20Paper,%20SFC%20Majority%20Staff.pdf
3. Hahn-Saperstein, Marcy. Possible Changes to Stark Law in 2019. March 28, 2019. Akerman LLP – Health Law Rx. https://www.jdsupra.com/legalnews/possible-changes-to-stark-law-in-2019-33063/
4. Id.

Reader Interactions