What Legally Counts as a “Referral” Under Stark Law? A Guide for Small Practices (42 CFR § 411.351)

For small practices, understanding the definition of a “referral” under the Stark Law is critical to staying compliant. The Stark Law, codified at 42 U.S.C. § 1395nn and defined further in 42 CFR § 411.351, prohibits physicians from referring Medicare or Medicaid patients for Designated Health Services (DHS) to entities with which they have certain financial relationships, unless a specific exception applies.

While the concept of a referral might seem simple, of sending a patient to another provider, the legal definition is much broader. It encompasses direct, indirect, written, verbal, and even certain administrative actions that connect a patient to DHS services. Small practices, which often rely on informal processes and personal connections, are especially vulnerable to unintentional violations.

This guide breaks down what legally counts as a “referral” under Stark Law, explores practical examples, and provides actionable compliance strategies to protect small practices from costly liability.

Defining “Referral” Under 42 CFR § 411.351

The regulation defines a referral as:

• Any request by a physician for an item or service payable under Medicare Part B, including the request for a consultation and any test or procedure ordered as part of that consultation.

• A request or establishment of a plan of care that includes DHS, such as therapy services.

• Certifications or recertifications of the need for services, like home health care or durable medical equipment.

Importantly, referrals are not limited to written documents or electronic orders. Even verbal requests or implied directions can be considered referrals under the law.

1. Ordering Diagnostic Tests

• A family physician orders a CT scan for a patient at an imaging center. If the physician or their immediate family owns part of the center, this is a referral that triggers Stark Law.

2. Consultation Requests

• A cardiologist refers a patient to an affiliated echocardiography lab, which the cardiologist partially owns. The consultation itself counts as a referral.

3. Establishing Treatment Plans

• A physician sets up a physical therapy treatment plan that directs the patient to a therapy practice in which the physician has a financial stake.

4. Certifications

• Certifying a patient for home health services or recertifying for durable medical equipment (DME) use also counts as a referral if the physician has a financial tie to the supplier.

What Does Not Count as a Referral

Not all physician actions qualify as referrals under Stark Law. 42 CFR § 411.351 clarifies exclusions:

• Personally Performed Services: If the physician personally provides a DHS (for example, directly administering an X-ray in their office), this is not considered a referral.

• Emergency Services: Referrals made during emergencies, where no financial relationship influences the decision, may fall outside Stark’s prohibitions if exceptions apply.

• Indirect Care Coordination: Informal discussions or general patient guidance not tied to a specific DHS entity may not be considered referrals.

A small orthopedic group regularly referred patients to its in-house physical therapy unit, operating under the assumption that the in-office ancillary services exception automatically applied. Because of this belief, leadership never took the time to properly structure or document the underlying physician compensation arrangements. No fair market value analysis was conducted, and no written policies were put in place. While the intent was simply to improve patient access, the lack of formal documentation exposed the practice to significant Stark Law compliance risks.

An audit later revealed that physician bonuses were directly tied to referral volume for physical therapy services. Regulators emphasized that while the exception permits certain designated health services (DHS) to be provided in a group practice, it does not allow compensation formulas that reward the number or value of referrals. Each improperly structured “referral” became a Stark Law violation.

Outcome

• Repayment of over $750,000 in Medicare reimbursements deemed improper.

• Civil monetary penalties were imposed under Stark Law.

• Physicians were required to revise compensation structures and adopt strict safeguards.

• The group entered into a Corporate Integrity Agreement (CIA) with the OIG, mandating annual compliance training and independent monitoring.

Lesson Learned

This example highlights a common misconception: the in-office ancillary exception does not excuse referral-based compensation. For small practices, misunderstanding what legally counts as a referral can trigger massive financial exposure, reputational harm, and long-term government oversight.

Key Risk Areas for Small Practices

1. Informal Referral Practices
   Small practices often rely on informal processes (verbal directions, sticky notes, phone calls) that still qualifies as referrals under Stark.

2. Compensation Structures
   Tying bonuses, productivity payments, or ownership distributions to referral volume is prohibited.

3. Ownership Interests
   Investments in labs, imaging centers, or therapy clinics can turn routine clinical decisions into referrals under Stark.

4. Care Coordination Tools
   Electronic health record (EHR) systems that auto-route patients to physician-owned services may inadvertently generate Stark violations.
   

Although referrals are broadly defined, certain exceptions allow them if conditions are met:

• In-Office Ancillary Services Exception: Permits referrals within the same practice if services are furnished in the same building and properly billed.

• Employment Exception: Allows referrals when physicians are employees, provided compensation is FMV and not tied to referral volume.

• Rural Provider Exception: Permits referrals to entities in rural areas where alternatives may be limited.

Each exception is highly technical and requires careful documentation.

When a Stark-prohibited referral leads to a Medicare or Medicaid claim, it can also trigger liability under the False Claims Act (FCA). The FCA imposes treble damages and per-claim penalties, which can devastate small practices.

For example, if a Stark-violating referral generates hundreds of DHS claims, the resulting FCA liability can easily exceed millions of dollars.

1. Create a Referral Log
   Track all physician referrals for DHS, including verbal and electronic requests.

2. Separate Clinical and Financial Decisions
   Ensure referrals are based on patient need, not ownership interests or financial incentives.

3. Review Compensation Plans
   Remove any link between referral volume and physician pay.

4. Train Staff and Physicians
   Regularly educate the team on Stark Law’s definition of referrals.

5. Engage Legal Counsel for Audits
   Have healthcare counsel review financial relationships and referral patterns annually.

For small practices, the definition of a “referral” under Stark Law (42 CFR § 411.351) is far broader than many realize. Referrals include orders, consultations, treatment plans, certifications, and even informal requests for DHS services. Misinterpreting these rules can expose small practices to devastating liability, especially when tied to financial relationships.

By understanding what counts as a referral, applying exceptions correctly, and maintaining strong compliance programs, small practices can continue to provide quality patient care while avoiding costly penalties.

1. 42 CFR § 411.351 – Definitions, including “referral”. Legal Information Institute. 

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

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