Stark Law 101 for Small Practices: A Guide to Navigating Physician Self-Referral Rules (42 U.S.C. § 1395nn)

For small medical practices, the Stark Law, also known as the Physician Self-Referral Law, is one of the most critical compliance frameworks to understand. Found under 42 U.S.C. § 1395nn, it prohibits physicians from referring Medicare or Medicaid patients to entities with which they or their immediate family members have a financial relationship unless an exception applies. Unlike the Anti-Kickback Statute (AKS), Stark Law is a strict liability statute, meaning intent does not matter; even unintentional violations can lead to significant financial and legal consequences. This article serves as a comprehensive guide to help small practices understand the law, avoid pitfalls, and build compliant operational structures.

The Stark Law was enacted in phases, with Stark I (1989) initially targeting physician referrals for clinical laboratory services. Stark II (1993) expanded coverage to additional designated health services (DHS). Today, it prohibits physicians from referring Medicare or Medicaid patients for DHS if the physician (or a close family member) has a financial interest in the entity providing those services, unless a valid exception applies.

Designated Health Services (DHS) Include:

• Clinical laboratory services

• Physical and occupational therapy

• Radiology and imaging services

• Durable medical equipment (DME)

• Home health services

• Outpatient prescription drugs

• Inpatient and outpatient hospital services

For small practices, even common arrangements such as leasing office space, physician compensation models, or lab ownership can fall under Stark scrutiny.

Small practices often operate with limited administrative support, making it easy to overlook compliance with complex rules. However, Stark Law violations can result in:

• Denial of Medicare claims for prohibited referrals.

• Refund obligations for amounts received from improper claims.

• Civil monetary penalties (CMPs) up to $15,000 per service.

• Exclusion from federal healthcare programs.

• Liability under the False Claims Act (FCA) when Stark violations result in false billing.

Even small oversights like failing to update a physician’s contract or charging below-market rent can trigger violations.

1. Improper Compensation Arrangements

Small practices frequently compensate physicians based on revenue generated from referrals within the practice. If structured improperly, these payments may violate Stark.

2. Space and Equipment Leases

Shared office or equipment arrangements must meet fair market value standards. Discounts, “free use,” or inconsistent documentation may be considered inducements for referrals.

3. Physician-Owned Ancillary Services

Labs, imaging centers, or therapy units owned by referring physicians can create direct Stark conflicts if exceptions are not satisfied.

4. Family Member Referrals

If a physician refers patients to a facility owned by an immediate family member, this can create exposure under the law.

Key Exceptions Small Practices Can Use

Fortunately, Stark Law has numerous exceptions that small practices can leverage to remain compliant. To qualify, arrangements must be carefully documented and consistently followed.

Common Exceptions:

• In-Office Ancillary Services Exception
  Allows small practices to provide DHS like imaging or lab tests in-office, if performed by the practice and billed directly by it.

• Fair Market Value Exception
  Permits compensation arrangements if payments reflect fair market value, are commercially reasonable, and unrelated to referral volume.

• Rental of Office Space and Equipment Exception
  Applies if leases are written, signed, at least one year long, and payments reflect fair market value.

• Physician Recruitment Exception
  Helps rural or underserved practices recruit new physicians, provided recruitment terms do not condition referrals.

A small cardiology practice implemented a compensation structure in which its physicians earned bonuses directly tied to the number of referrals for in-house imaging services, such as echocardiograms and stress tests. The physicians believed they were operating within the in-office ancillary services exception to the Stark Law, which allows group practices to provide certain designated health services (DHS) within their practice without violating referral restrictions.

However, regulators determined that the practice’s bonus formula violated Stark’s core requirement that physician compensation must not be based on the volume or value of referrals for DHS reimbursable under Medicare. While the exception does permit group practices to provide DHS in-office, it does not authorize compensation models that create financial incentives for unnecessary referrals.

The practice’s misunderstanding led to serious legal exposure, including repayment of over $1 million in false claims, civil monetary penalties, and the imposition of a Corporate Integrity Agreement (CIA) with the Office of Inspector General.

However, regulators found that the bonus formula failed to meet Stark Law’s fair market value and volume/value of referrals standards. By linking physician compensation directly to the number of imaging referrals, the practice created a financial incentive that violated Stark’s strict prohibition against self-referrals where Medicare billing is involved.

Outcome

• Repayment: Over $1 million in false claims reimbursed to Medicare.

• Civil Monetary Penalties: Significant fines assessed.

• Corporate Integrity Agreement (CIA): The practice was required to implement ongoing compliance measures, including annual training, compensation audits, and reporting obligations with the OIG.

Lesson Learned

Good intentions or misinterpretation of exceptions do not shield providers from liability under Stark Law. Documentation, structure, and fair market value compliance matter more than intent. Small practices must carefully review all physician compensation models to ensure they do not directly or indirectly tie payments to the volume or value of referrals.

Building a Stark Law Compliance Program for Your Practice

1. Conduct a Stark Risk Assessment

Evaluate all financial relationships, including leases, joint ventures, and physician compensation structures.

2. Standardize Written Agreements

Ensure every lease, service arrangement, and physician contract is written, signed, and updated annually.

3. Perform Fair Market Value (FMV) Reviews

Engage third-party valuation experts when structuring physician compensation or lease rates.

4. Train Staff and Physicians

Educate your workforce on prohibited referrals and safe harbors.

5. Implement Monitoring and Auditing

Regularly review claims, financial arrangements, and referral patterns to ensure compliance.

Best Practices for Stark Law Compliance

• Avoid volume-based compensation: Never tie physician bonuses directly to DHS referrals.

• Document everything: Keep detailed records of contracts, FMV reports, and board approvals.

• Use compliance checklists: Regularly review whether arrangements meet exceptions.

• Seek legal review: Involve healthcare counsel for complex arrangements.

Understanding the differences helps practices design compliance programs that address both statutes simultaneously.

• Inventory all physician financial relationships

• Review all leases for FMV compliance

• Ensure in-office ancillary services meet Stark exception criteria

• Audit physician compensation models annually

• Document all compliance decisions and valuations

• Train staff on Stark Law basics
  

For small practices, Stark Law compliance is not optional, it is foundational to protect revenue, reputation, and participation in federal healthcare programs. The law’s strict liability nature makes it unforgiving, but with proactive steps to risk assessments, fair market value documentation, proper use of exceptions, and ongoing monitoring small practices can operate confidently within the law. By aligning compliance efforts with Stark Law requirements, small practices not only safeguard against penalties but also strengthen trust with patients and payers.

Maintaining compliance is an ongoing process. By adopting a HIPAA regulatory solution, your practice can track obligations in real time, complete risk assessments with confidence, and stay audit-ready, demonstrating proactive risk management and reinforcing trust with payers and patients.

1. 42 U.S.C. § 1395nn – Physician Self-Referral Law (Stark Law). Legal Information Institute.

2. Centers for Medicare & Medicaid Services (CMS) – Physician Self-Referral. 

3. Office of Inspector General (OIG) – Stark Law Guidance.