Ownership, Investments, and Compensation: A Guide to Stark Law's Financial Relationship Rules for Small Practices (42 CFR § 411.354)

For small practices, financial relationships with physicians and other healthcare providers are part of daily operations. From ownership stakes in diagnostic centers to compensation arrangements with physicians, these relationships can help expand services and improve patient care. However, under Stark Law (42 U.S.C. § 1395nn) and its implementing regulation at 42 CFR § 411.354, these arrangements are strictly regulated.

The Stark Law prohibits physicians from referring Medicare or Medicaid patients for Designated Health Services (DHS) to an entity with which they (or their immediate family members) have a financial relationship, unless a regulatory exception applies. A financial relationship can include ownership, investment interests, or compensation arrangements, and failure to structure them correctly can expose small practices to claim denials, refunds, civil monetary penalties, and even False Claims Act liability.

This guide provides a detailed breakdown of Stark Law’s financial relationship rules, the risks for small practices, and practical compliance strategies to prevent liability.

Under 42 CFR § 411.354, a financial relationship exists if a physician or their immediate family member has either:

1. An ownership or investment interest in a DHS entity; or

2. A compensation arrangement with a DHS entity.

This definition is intentionally broad, covering both direct and indirect relationships. For small practices, this means that arrangements as simple as leasing office space to a physician-owned lab, or paying physicians productivity bonuses, may fall under Stark Law.

Types of Financial Relationships:

• Ownership/Investment Interests: Shares, partnership stakes, or debt interests in an entity providing DHS.

• Compensation Arrangements: Payments or benefits for services, leases, employment, or any exchange of value between physicians and DHS entities.

Even indirect financial relationships, where the connection runs through another entity, are covered.

Examples:

• A group of primary care physicians investing in an imaging center.

• A small cardiology practice with ownership stakes in a local hospital outpatient facility.

• A physician lending money to a lab that provides DHS.

Compliance Challenges:

• Self-referrals: Physicians may be incentivized to send patients to facilities in which they have an ownership interest.

• Fair Market Value (FMV): Investments must reflect FMV and cannot be tied to the volume or value of referrals.

Stark Law Exceptions That May Apply:

• Rural Provider Exception: Permits ownership in entities serving rural populations.

• Whole Hospital Exception: Allows physician ownership if they refer patients to the entire hospital rather than a specific department.

Compensation arrangements are common in small practices and include employment contracts, leases, service agreements, and bonuses.

Key Risks:

• Paying physicians based on the volume or value of referrals.

• Leases for office space or equipment not at FMV.

• “Per-click” or “per-test” payment arrangements that indirectly incentivize referrals.

Examples of Compensation Relationships:

• Employment of a physician with a bonus structure tied to in-house imaging referrals.

• Leasing medical office space from a physician-owned entity.

• Providing free or below-market services, such as billing or administrative support.

Stark Law Exceptions That Apply:

• Employment Exception: Permits employment if compensation is FMV and not tied to referrals.

• Personal Services Arrangements Exception: Requires a written agreement of at least one year, with compensation set in advance.

• Rental of Office Space/Equipment Exception: Written leases must be FMV, for at least one year, and exclusive to defined premises/equipment.

A small orthopedic practice implemented a compensation system in which physicians received bonuses directly tied to the number of referrals they made to the practice’s in-house physical therapy unit. Leadership believed the arrangement was protected under the in-office ancillary services exception to the Stark Law, reasoning that because the services were provided within the same practice, the bonus formula was permissible.

However, regulators later determined that the compensation structure violated Stark Law’s fair market value and volume/value of referrals requirements. By directly linking physician pay to referral numbers, the practice created an improper financial incentive that encouraged self-referrals, a prohibited arrangement regardless of intent. The investigation underscored that even when services are provided internally, every technical element of a Stark Law exception must be met, including fair market value compensation, commercially reasonable terms, and a structure that does not reward referral volume.

However, an OIG investigation revealed that the bonus structure was explicitly based on referral volume for designated health services (DHS), a direct violation of Stark’s prohibition against compensation tied to referrals. The investigators emphasized that while the in-office ancillary services exception is narrow and specific, it does not allow physician bonuses calculated on the number of DHS referrals even if the services are internal to the practice.

Consequences

• Repayment of more than $500,000 in Medicare reimbursements that were determined to be false claims.

• Assessment of civil monetary penalties under Stark Law.

• Requirement to enter into a compliance agreement with the OIG, including revising physician compensation policies, conducting annual training, and implementing ongoing compliance monitoring.

Lesson Learned

This case underscores a critical compliance principle: compensation tied to DHS referrals is impermissible unless every technical requirement of an exception is strictly met. Small practices, in particular, must carefully structure physician incentives, document fair market value, and ensure that no financial rewards are linked to referral volume or revenue.

A Stark Law violation can also trigger liability under the False Claims Act (FCA) if claims for DHS are submitted to Medicare or Medicaid. Under the FCA, small practices face treble damages and per-claim penalties.

For example, if a Stark-violating compensation arrangement generates hundreds of DHS claims, the resulting FCA penalties can bankrupt a small practice.

1. Create an Inventory of Financial Relationships
   Track all ownership, investment, and compensation arrangements involving physicians.

2. Conduct FMV Analyses
   Ensure that ownership returns, leases, and compensation agreements are consistent with FMV.

3. Use Written Agreements
   Always document contracts for employment, leases, or services.

4. Avoid Linking Compensation to Referrals
   Base compensation on work performed, not referrals.

5. Conduct Annual Reviews
   Reassess all financial arrangements at least once a year to ensure compliance.

6. Train Physicians and Staff
   Educate your workforce about Stark Law restrictions and reporting responsibilities.

For small practices, Stark Law’s financial relationship rules under 42 CFR § 411.354 can feel overwhelming, but compliance is essential to avoiding catastrophic penalties. Whether the issue is ownership, investment, or compensation, every arrangement must be structured carefully, supported with documentation, and reviewed regularly.

By applying Stark Law exceptions correctly, conducting FMV analyses, and training staff, small practices can safely navigate financial relationships while continuing to provide high-quality patient care.

To safeguard your practice, adopt a compliance management system. These tools consolidate regulatory obligations, provide ongoing risk monitoring, and ensure you’re always prepared for audits while demonstrating your proactive approach to compliance.

1. 42 CFR § 411.354 – Financial Relationships. Legal Information Institute. 

2. Centers for Medicare & Medicaid Services (CMS) – Stark Law Guidance.

3. Office of Inspector General (OIG) – Compliance Guidance.