The In-Office Ancillary Services Exception: A Small Practice Owner's Guide to Profiting from Referrals Legally Under Stark Law (42 § 411.355(b))

For small practice owners, the Stark Law can feel like a regulatory minefield. The law prohibits physicians from referring Medicare or Medicaid patients for Designated Health Services (DHS) to entities in which they have a financial interest, unless an exception applies. However, one of the most critical and widely used exceptions the In-Office Ancillary Services (IOAS) Exception, codified at 42 CFR § 411.355(b) allows practices to provide certain services directly in their offices without triggering Stark violations.

When structured correctly, this exception empowers small practices to retain revenue streams from services like imaging, lab work, and physical therapy, while also enhancing convenience and quality of care for patients. But when structured incorrectly, it can lead to devastating liability, including repayment of claims, civil monetary penalties, and even False Claims Act exposure.

This article provides a comprehensive guide for small practice owners on how to leverage the IOAS exception legally, covering definitions, requirements, risks, and best practices.

Understanding the In-Office Ancillary Services Exception

The IOAS exception is designed to support patient convenience and care coordination. It allows a physician to refer patients for DHS within their own group practice, so long as specific statutory and regulatory conditions are satisfied.

Key elements of the exception include:

• Who Provides the Services: The services must be furnished personally by the referring physician, another physician in the same group, or individuals directly supervised by the physician or group.

• Where Services Are Provided: Services must be provided in the same building or centralized building used by the practice for physician services.

• Billing Requirements: Services must be billed by the physician, the group practice, or an entity wholly owned by the group.

Why the IOAS Exception Matters for Small Practices

Without this exception, even simple in-office referrals such as ordering an X-ray or lab test could trigger Stark violations if the practice has ownership or compensation arrangements tied to those services.

The IOAS exception helps small practices:

• Enhance Patient Care: Patients benefit from one-stop access to services.

• Increase Revenue: Practices can capture reimbursement for DHS provided in-house.

• Improve Efficiency: Coordination of diagnostics and treatment improves timeliness of care.

The exception applies to Designated Health Services, including but not limited to:

• Clinical laboratory services

• Imaging services (MRI, CT, ultrasound, X-ray)

• Outpatient prescription drugs

• Physical and occupational therapy

• Durable medical equipment (DME)

Each service type comes with unique supervision and billing requirements that must be followed to maintain compliance.

To qualify for the IOAS exception, small practices must meet three categories of requirements:

1. Supervision Standards

• The referring physician or another group physician must provide direct or personal supervision as defined by CMS.

2. Location Standards

• Services must be furnished in the same building or centralized building where the practice provides patient care.

3. Billing Standards

• The practice or its wholly owned entity must submit the bill for the DHS directly to Medicare or Medicaid.

Failure to meet any one of these standards invalidates the use of the exception.

A small cardiology group invested in installing an in-office imaging center, believing this would improve efficiency, enhance patient care, and generate additional revenue for the practice. To bill Medicare for these services, the group relied on the In-Office Ancillary Services (IOAS) exception, which allows certain designated health services (DHS) to be provided within a group practice setting without violating the Stark Law.

At first, the arrangement seemed compliant because the imaging services were furnished entirely in-office, and patients benefited from the convenience of same-day testing. However, during a compliance review, CMS determined that the group’s compensation plan created a serious violation. Physician bonuses were tied directly to the number of referrals made for imaging services, creating a compensation formula that rewarded volume and value of referrals. Under Stark’s strict liability framework, such arrangements are prohibited, even when services otherwise qualify for an exception.

Outcome

• Over $1.5 million in repayments to Medicare for claims deemed improper.

• Imposition of civil monetary penalties for noncompliant financial arrangements.

• A mandatory Corporate Integrity Agreement (CIA) requiring independent audits, annual training, and strict monitoring of physician compensation structures.

Lesson Learned

This case demonstrates that compliance with the technical requirements of the In-Office Ancillary Services (IOAS) exception is not sufficient on its own. Practices must go further by ensuring that all compensation arrangements are structured at fair market value and are not linked in any way to the volume or value of referrals. Regulators view such ties as clear violations of Stark Law, regardless of patient convenience or the practice’s intent. For small practices in particular, conducting regular legal reviews and independent fair market value assessments of physician compensation plans is essential to avoid costly penalties and long-term liability.

Common Pitfalls for Small Practices

• Improper Supervision: Allowing ancillary staff to perform DHS without the required physician oversight.

• Wrong Location: Providing services in offsite facilities that do not qualify as the “same building.”

• Compensation Tied to Volume: Structuring bonuses or ownership payouts based on the number of in-office referrals.

• Billing Errors: Using third-party billing entities not owned by the practice.

When services fail to meet the IOAS exception requirements, any related claims submitted to Medicare may be considered false claims. Under the False Claims Act, penalties include:

• Treble damages (triple the amount of overpayment)

• Per-claim penalties ranging from $13,946 to $27,894 (adjusted for inflation)

• Whistleblower lawsuits initiated by current or former employees

For small practices, even a handful of false claims can escalate into financial devastation.

1. Perform Internal Audits
   Review whether all DHS referrals meet IOAS requirements.

2. Engage Legal Counsel
   Consult with healthcare attorneys when structuring compensation or ownership arrangements.

3. Separate Clinical Decisions from Financial Interests
   Emphasize that referrals are based solely on patient need, not revenue potential.

4. Implement Training Programs
   Educate staff and physicians on the IOAS rules and Stark Law basics.

5. Maintain Robust Documentation
   Keep clear, accessible records of compliance efforts, supervision, and billing practices.

For added assurance, invest in a compliance management tool. These solutions centralize regulatory tracking, provide continuous risk evaluation, and ensure your practice is prepared for audits by addressing weak points before they escalate, reflecting a proactive commitment to compliance.

The In-Office Ancillary Services Exception (§ 411.355(b)) is a vital tool for small practices to legally profit from referrals while improving patient care. However, this exception is tightly regulated and requires careful adherence to supervision, location, and billing standards.

When used correctly, the IOAS exception supports both clinical efficiency and financial stability. But when misapplied, it exposes practices to devastating Stark Law and False Claims Act liability.

By proactively understanding the rules, applying compliance safeguards, and seeking expert legal counsel, small practices can thrive while staying compliant.

1. 42 CFR § 411.355 – Exceptions to the referral prohibition related to compensation arrangements.

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

3. Office of Inspector General (OIG) – Compliance Program Guidance for Individual and Small Group Physician Practices.