Stark Law
Federal law (42 U.S.C. 1395nn), formally called the Physician Self-Referral Law, that prohibits a physician from referring Medicare or Medicaid patients to an entity providing designated health services (DHS) if the physician or an immediate family member has a financial relationship with that entity, unless an exception applies. It is a strict liability statute, meaning intent does not matter. If the referral and financial relationship exist without a qualifying exception, the law is violated regardless of whether anyone intended misconduct.
Why this matters for your clinic
Stark Law is relevant to clinic owners because it directly governs compensation arrangements between physicians and entities that provide designated health services. If your practice employs physicians and also provides services like physical therapy, laboratory, imaging, or durable medical equipment, the structure of the financial relationships between the employed physicians and those ancillary services must meet a Stark exception.
The consequences of a Stark violation are severe: claims submitted in violation of Stark are not payable by Medicare or Medicaid, and providers who submit those claims face civil monetary penalties and potential exclusion from federal health programs. CMS self-disclosure protocols are available for voluntary disclosure of inadvertent violations, which generally result in reduced penalties.
Common Stark exceptions that clinic owners use include the in-office ancillary services exception (which allows physicians in a group practice to refer to ancillary services provided within the same group), the employment exception (for bona fide employment relationships at fair market value compensation), and the personal services exception. Each exception has specific structural requirements.
What good looks like
CMS has published a significant final rule updating Stark Law regulations (effective January 19, 2021), including new value-based care exceptions and fair market value guidance. HHS OIG publishes guidance on the Stark Law and anti-kickback statute relationship. The American Health Lawyers Association and healthcare law firms publish regular analysis of Stark compliance requirements.
Example
A physician-owned multi-specialty group adds an in-house physical therapy department. Employed physicians refer patients to the in-house PT. This arrangement is potentially subject to Stark because PT is a designated health service. The practice can rely on the in-office ancillary services exception if the group qualifies as a group practice under Stark definitions and the PT services are provided in the same office space or a centralized building. If the structure does not satisfy the exception's technical requirements, the physician referrals to in-house PT are Stark violations.
From Sorso
Stark Law compliance is a legal issue, not an accounting issue, and we refer clients to healthcare counsel for structuring questions. What matters to us financially is ensuring that compensation arrangements are documented at fair market value, which is both a Stark exception requirement and a best practice for financial transparency.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
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