Legal and Regulatory Compliance

Stark Law Compliance Relies on the Basics

November 15, 2017 3:13 pm

There are more than two dozen exceptions that range from compensation agreements to rental of space and equipment.


Although well-intentioned, the Ethics in Patient Referrals Act (the Stark Law) has been causing confusion among healthcare providers for more than a quarter century. Passed in 1989 to address overutilization of “designated health services,” the statute has spawned a mare’s nest of regulations, exceptions, and exceptions-to-exceptions.

See related sidebar: Designated Health Services under the Stark Law

The law has been criticized by many, and even its original sponsor, former Congressman Pete Stark, has been quoted as saying it should be repealed. But it remains on the books and continues to be the basis of fraud cases.

Stark prohibits physicians from referring patients to entities with which they have financial relationships, and if a referral is barred, the entity to which the patient was referred may not bill for its services; doing so would be actionable under the False Claims Act. To compound matters, Stark is a strict-liability statute—“intent” is irrelevant—and it prohibits all financial relationships unless an exception applies. There are more than two dozen exceptions—such as for compensation agreements or rental of space and equipment—and thus healthcare finance executives, compliance officers, and legal counsel must pay scrupulous attention to the details when considering any transaction with physicians.

Paramount among the details is the requirement in most of the exceptions that the arrangement be in writing, signed by the parties, and contain the specific terms of the deal. This may sound straightforward, but some providers continue to fumble the basics, as evidenced by two cases within the last year.

A case from Alabama involved the relationship between a physician group and a clinical laboratory. To qualify for the “fair market compensation” exception, the arrangement needed to be in writing and signed by both parties. As evidence of its agreement, the defense presented a document signed by a Dr. Irwin and another individual, whose signature was not identified. Furthermore, there was a blank space where the name of the professional corporation should have been followed by “P.C.” Thus it read that the contract was between “[the lab] and _________ P.C. for the services of [a certain physician].”

In denying the defendant’s motion for summary judgment, the trial court judge held that the lab “had provided no evidence that the signature on the contract belongs to an individual who has the authority to bind the P.C., and has therefore failed to show that ‘[t]he arrangement is in writing signed by the parties,’ as required by [the Stark regulations].”

A similarly perplexing case arose in Pennsylvania where a hospital had allegedly entered into sham directorship arrangements with independent cardiologists in the hope of inducing referrals for services. The hospital had six medical directorships that expired without being formally extended but for which they continued to make the regular payments for services. Eventually, the agreements were extended through properly executed addendums.

The issue thus became whether sufficient documentation existed to show the parties’ course of conduct during the time between the expiration of the agreements and the execution of the addendums.

The hospital presented a collection of documents—invoices, checks, e-mails, letters, and even a draft directorship agreement—that it argued proved that the original directorship contracts were still in effect. The court concluded that when viewed together, the original agreements, the addenda, and the intervening materials could lead a reasonable jury to conclude that the writing requirement was satisfied. Thus, a motion by the plaintiff for summary judgment was denied.

A different conclusion was reached regarding two other directorships, however. The terms of those directorships were never memorialized in any signed contract, and the collection of contemporaneous documents by which the hospital attempted to defend itself did not satisfy the court. “No reasonable jury could find that [either arrangement] was set forth in writing for purposes of the … exceptions to the Stark act,” the opinion states. The whistleblower plaintiff was awarded summary judgment on those two counts of the compliant.

These types of cases demonstrate poor contract management and a failure of leadership to emphasize compliance with the fraud laws. “Yes, Stark is complicated,” says Thomas N. Hutchinson of Krieg DeVault in Indianapolis, Ind. “But following basic contract management protocols can help avoid missteps and additional complexity.”

Hutchinson suggests that best practices should include “calendaring renewal dates, confirming proper party names with the relevant secretary of state website, performing fair market value verifications, and limiting who has authority to enter into such agreements.”

Another best practice is the use of a detailed checklist for physician contracting, such as one developed by Robert A. Wade of Barnes & Thornburg, South Bend, Ind. Wade finds it perplexing that after nearly 30 years’ experience, much litigation, and a plethora of legal and management advice in the literature and at professional conferences, any hospital would have to cobble together a defense when the documentation should have been created at the outset.

See related tool: Physician Contract Checklist

Wade says the Centers for Medicare & Medicaid Services sometimes does look to multiple documents to represent the “written arrangement,” but this is not recommended. “If they have not already done so, hospitals and health systems would be well advised to implement a detailed process for physician contracting,” he says.

In sum, Stark Law compliance is difficult and complicated, but it is easier to accomplish than to defend a case after a whistleblower files suit.

References and resource:

Interviewed for this article:

Thomas N. Hutchinson is a partner, Krieg DeVault, Indianapolis, Ind.

Robert A Wade is a partner, Barnes & Thornburg, South Bend, Ind.


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