Legal and Regulatory Compliance

Auditing for Stark Law Compliance

May 8, 2017 4:40 pm

The stringent nature of the law is exemplified by several well-publicized court cases.

Beginning with the first Stark Law passed in 1989, federal fraud statutes have discouraged overuse of healthcare services by prohibiting physician self-referrals. That is, physicians are prohibited from referring Medicare patients for the following designated health services to entities with which they have a finan­cial relationship, unless a Stark exception applies.

  • Clinical laboratory services
  • Physical therapy
  • Occupational therapy
  • Outpatient speech-language pathology
  • Radiology and certain other imaging
  • Radiation therapy and supplies
  • Durable medical equipment and supplies
  • Parenteral and enteral nutrients, equipment, and supplies
  • Prosthetics, orthotics, and prosthetic devices and supplies
  • Home health services
  • Outpatient prescription drugs
  • Inpatient and outpatient hospital services

The statute also prohibits the provider to which the referral was made from billing for the requested services.

Understanding Stark Law Pitfalls

The Stark Law is a strict liability statute—if a prohibited referral was made, liability is automatic regardless of intent to break the law—and the penalties can be severe. The stringent nature of the law is exemplified by several well-publicized recent cases.

For example, an employee at Halifax Hos­pital Medical Center in Florida filed a lawsuit alleging that the pooled bonuses being paid to certain oncologists were illegal under the Stark Law. Even though Halifax had relied on the advice of competent legal counsel and consultants when the arrangements were structured, a settlement in the amount of $85 million resulted.

Numerous other cases involving the Stark Law and its complex exceptions echo this case. Attorneys, national consulting firms, and even former high-ranking government officials advise that a contract is acceptable only to be second-guessed by others who say that red flags should have been heeded. The concurring judge in a 4th Circuit U.S. Court of Appeals decision in 2015 (U.S. ex rel. Drakeford v. Tuomey) summarized the conundrum:

I write separately to emphasize the troubling picture this case paints: An impenetrably complex set of laws and regulations that will result in a likely death sen­tence for a community hospital in an already medically underserved area. … It seems as if, even for well-intentioned healthcare providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure.

Even the author of the original Stark Law, former congressman Pete Stark, seems to agree. He was quoted in August of 2013 as saying the law should be repealed (Carlson, J., “ Pete Stark: Repeal the Stark Law,”Modern Healthcare, Aug. 2, 2013).

Identifying Stark Law Strategies

Given the complexities of the Stark Law and the serious consequences of noncompliance, how should a well-intentioned healthcare provider go about structuring proper relationships with physicians in this age of focusing on quality rather than volume? The experts stress involving legal, compliance, and other expertise on the front end of the process rather than auditing for problems later.

A health system compliance officer said recently, “We have long had a robust review process for every contract with a physician. It is reviewed prior to execution by a team of four consisting of someone from tax, legal, risk management, and compliance.”

She explained that their team looks at fair market value (FMV), commercial reasonableness, and whether there are any hints that contracts take into account the volume or value of referrals physicians will make. This multi-state health system uses only certain companies to assess the value of physician contracts so that all of their facilities nationwide are using the same standards. Furthermore, only the top executives at the system office can request valuations. “This prevents individual facilities from shopping for a favorable opinion,” the compliance officer says. And she adds, “In one case we settled, the problem was not the contract itself but the fact that it was not implemented strictly in accordance with its terms.”

Joseph N. Wolfe, a partner with Hall, Render, Killian, Heath & Lyman, applauds that hospital system for its diligence and understands how implementation and audit problems can occur.

“The Stark Law’s legal requirements are extremely complex and are often misunderstood, even by experienced management teams and auditors. Before implementing and auditing physician contracts there should be training on the technical requirements of Stark and its exceptions and on the key compliance issues of FMV, commercial reasonableness, and volume or value of referrals,” he says.

Wolfe stresses that the training should include not only auditors and persons involved in implementing the agreements, but senior management too. “Without experienced healthcare counsel and effective training, the leadership might approve contracts based on erroneous assumptions about what Stark requires. That kind of contracting process seriously increases the risk.”

He adds that auditors also need to have an overall view of Stark’s provisions lest they waste time on irrelevant minutiae. “For example, you could have auditors spending time worrying about tallying up the value of nonmonetary compensation paid to employed physicians to see if it exceeds Stark’s $398 threshold, even though it likely would fall under the physician employment exception and wouldn’t need to be tracked at all. You need to make sure your audit process lines up with how you would ultimately defend the arrangement.”

In another example, a physician’s contract had expired but the hospitals’ accounts payable department continued with his automatic payments for several months even though he was no longer performing any services. “This can happen easily if there is no system in place to check whether the contract is still in effect and the physician is actually performing the duties specified,” Wolfe says. He adds that regular audits of contract terms and performance are essential to full compliance.

See related tool: Stark Audit Steps

The health system underscores Wolfe’s emphasis on ongoing compliance education by adding a position at the system level for privacy and compliance education. The health system sees this as an investment in preventive medicine for its physician contracts.

Collaboration and Training are Keys to Compliance

A collaborative effort between hospital legal, compliance, tax, and risk management leaders can help providers negotiate the stringent nature of the Stark Law. Coupling such collaboration with education for auditors and senior leaders can help hospitals avoid legal actions and implement efficient physician contract implementation.

J. Stuart Showalter, JD, MFS, is a contributing editor for HFMA.

Interviewed for this article:

Joseph N. Wolfe is a partner, Hall, Render, Killian, Heath & Lyman, PC, Milwaukee, and a member of HFMA’s Wisconsin Chapter.


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