Stark Law's Strict Liability Explained: Why Intent Doesn't Matter and How Small Practices Can Stay Protected

For small medical practices, the Stark Law (42 U.S.C. § 1395nn) is one of the most critical but confusing compliance laws to navigate. Unlike the Anti-Kickback Statute (AKS), which requires proof of intent, Stark Law operates under a strict liability standard. That means a practice can face devastating penalties even if it did not intend to violate the law.

This article explains why intent doesn’t matter under Stark Law, explores the financial and legal risks for small practices, and provides step-by-step guidance to build protective compliance strategies.

Understanding Stark Law’s Strict Liability Standard

Stark Law prohibits physicians from making referrals for Designated Health Services (DHS) to entities in which they or their family members have a financial relationship, unless a statutory or regulatory exception applies (42 U.S.C. § 1395nn(a)(1)).

The strict liability standard means:

• No intent is required to prove a violation.

• Even accidental or technical noncompliance can trigger penalties.

• Practices cannot defend themselves by arguing they “didn’t know.”

This approach reflects Congress’s goal of creating a bright-line rule to prevent financial incentives from influencing patient referrals.

In most fraud statutes, prosecutors must prove intent to commit a wrongful act. Stark Law, however, eliminates intent from the equation.

Examples of how this plays out:

• If a lease agreement with a hospital is missing a required element (e.g., written documentation or fair market value), a violation exists automatically.

• If a physician refers patients to an imaging center in which their spouse owns shares, it is a violation, even if referrals were clinically appropriate.

• If a compensation arrangement is slightly above fair market value due to poor documentation, the violation stands regardless of intent.

This makes Stark Law uniquely harsh for small practices that lack robust compliance infrastructure.

The Stakes: Penalties for Stark Law Violations

Violations of Stark Law can lead to significant financial and reputational harm. Key consequences include:

• Denial of payment: Medicare will not pay claims arising from prohibited referrals.

• Refund obligations: Practices must repay any reimbursement received from tainted claims.

• Civil Monetary Penalties (CMPs): Up to $27,894 per service.

• Exclusion from federal programs: Long-term business viability is threatened.

• False Claims Act liability: Submitting claims based on Stark-violating referrals can trigger treble damages and whistleblower lawsuits.

For a small practice, even a few noncompliant referrals can snowball into hundreds of thousands of dollars in liability.

1. Improper Lease Agreements

• Renting space from a hospital below fair market value.

• Month-to-month arrangements without meeting the one-year minimum requirement (42 U.S.C. § 1395nn(e)(1)(A)(iii)).

2. Faulty Compensation Models

• Bonus structures tied to volume or value of referrals (42 U.S.C. § 1395nn(h)(4)(A)(iv)).

• Paying above FMV for services performed by part-time staff.

3. Missing Written Agreements

• Informal, handshake arrangements for lab space or shared services.

4. Overlooked Family Relationships

• Referrals to entities owned by spouses, children, or parents without considering Stark applicability.

5. Failure to Update Contracts

• Expired or outdated agreements that no longer meet exceptions.

A small cardiology practice structured a compensation plan in which its physicians received bonuses directly tied to referrals for in-house imaging services, such as echocardiograms and stress tests. Believing this arrangement was permissible under the in-office ancillary services exception, the group moved forward with confidence. However, during a regulatory review, it was determined that the compensation formula failed to meet Stark Law’s fair market value (FMV) requirements. By tying physician income directly to referral volume, the practice had unintentionally created an impermissible financial incentive for self-referral (42 U.S.C. § 1395nn(a)(1)(A)).

Regulators concluded that the practice’s structure encouraged physicians to order more diagnostic procedures than clinically necessary, raising concerns about both financial integrity and patient care quality. While there was no evidence of malicious intent, Stark Law is a strict liability statute, meaning that even unintentional violations trigger enforcement.

This case highlights that documentation and structural compliance are more important than intent. The in-office ancillary services exception has precise, technical requirements, and any failure to meet them, especially around FMV and compensation design, creates liability. For small practices, the lesson is clear: compensation arrangements must be carefully reviewed, documented, and benchmarked to FMV standards to avoid costly Stark violations.

Outcome

• Repayment of over $1 million in false claims to Medicare.

• Imposition of civil monetary penalties for Stark Law violations.

• Execution of a Corporate Integrity Agreement (CIA) with the Office of Inspector General (OIG), requiring ongoing compliance oversight, training, and independent audits.

Lesson Learned

This case demonstrates that good intentions or internal belief in compliance do not protect against Stark Law liability. The law is highly technical and requires precise documentation, fair market value (FMV) analyses, and careful structuring of any financial relationship tied to designated health services (DHS). Even within a group practice, bonuses must never be calculated based directly on referral volume or value. For small practices, the key takeaway is clear: documentation and structure matter far more than intent.

How to Stay Protected: Building a Stark Compliance Strategy

1. Map All Financial Relationships

• Maintain an updated inventory of all leases, contracts, and compensation arrangements.

2. Test Each Arrangement Against Exceptions

• Ensure agreements meet all elements of Stark exceptions (e.g., office space, equipment rental, personal services).

3. Confirm Fair Market Value

• Use independent appraisals to set rent and compensation levels.

4. Use Written Agreements Always

• Verbal agreements are noncompliant. Put every arrangement in writing.

5. Review Annually

• Conduct yearly audits to ensure agreements remain compliant.

6. Train Staff and Physicians

• Educate everyone involved in contracting and referrals about Stark basics.

• Engage Healthcare Counsel: Attorneys familiar with Stark can identify risks before they become costly.

• Centralize Contracts: Store all agreements in a compliance repository for easy review.

• Avoid Referral-Based Incentives: Build compensation around productivity, not referrals.

• Leverage Compliance Software: Tools can track contract expiration and FMV documentation.

• Conduct Mock Audits: Internal reviews simulate regulator audits and uncover weaknesses.

Because Stark is strict liability, any tainted referral that results in a Medicare claim can also trigger FCA liability.

• FCA penalties include treble damages and per-claim fines.

• Whistleblowers (often staff) can bring qui tam suits.

• DOJ and OIG regularly target Stark violations as FCA cases.

For small practices, this combination makes Stark Law compliance essential to survival.

For small medical practices, Stark Law’s strict liability standard is both unforgiving and unavoidable. Unlike other fraud laws, intent is irrelevant, even well-meaning mistakes can cost practices millions.

By focusing on documentation, fair market value, written contracts, and annual reviews, practices can build strong compliance defenses. The goal is not only to avoid penalties but also to create a culture of compliance where financial arrangements are transparent, justified, and defensible.

In the Stark Law era, compliance is protection, and protection is survival.

Strengthening compliance isn’t just about checking boxes. A compliance platform helps your practice stay ahead by tracking regulatory requirements, running proactive risk assessments, and keeping you audit-ready, proving to patients and regulators that you prioritize accountability.

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

2. 42 CFR § 411.357 – Exceptions to the referral prohibition

3. Physician Self-Referral