Class 10: Self-Referral

Penalties for Violating Self Referral Laws commonly known as “Stark Laws”

  • Denial of payment; Mandatory refund of any payments previously received
  • Civil money penalties of up to $15,000 per prohibited referral
  • Exclusion from the Medicare and Medicaid programs
  • “Circumvention schemes” are punishable by civil money penalties of up to $100,000 per scheme

The laws prohibiting certain physician referrals are commonly called Stark laws after Pete Stark – a Democrat Congressman from California. Originally, in 1989, there was Stark I prohibiting physician referrals to clinical laboratories with which the physician (or an immediate family member) has a financial relationship.

According to the Special Fraud Alert issued by the Office of Inspector General, the reasoning behind this law is because incentive programs can interfere with the physician’s judgment of what is the most appropriate care for a patient. They can inflate costs to the Medicare program by causing physicians to overuse inappropriately the services of a particular hospital. The incentives may result in the delivery of inappropriate care to Medicare and Medicaid recipients by inducing the physician to refer patients to the hospital providing financial incentives rather than to another hospital (or non-acute care facility) offering the best or most appropriate care for that patient. Accordingly, it is illegal for hospitals to provide financial incentives to physicians for their referrals.

In January, 1995, Stark II expanded Stark I by adding 10 “designated health services” to include radiology and other services: (1) physical therapy; (2) occupational therapy; (3) radiology; (4) radiation therapy and supplies; (5) durable medical equipment (“DME)) and DME supplies; (6) prosthetics and orthotic devices; (7) parenteral and enteral nutrients, equipment, and supplies, (8) home health services; (9) outpatient prescription drugs; and (10) inpatient and outpatient hospital services.

Self-Referral type laws are designed to discourage physician ownership of various ancillary treatment centers. Originally these laws were limited to clinical laboratory services but were expanded January 1, 1995 to include radiology and certain other imaging services. The effect on physicians is to discourage physician ownership of various ancillary treatment modalities to which physicians refer Medicare and Medicaid patients for “designated health services”.

Self-Referral type laws are often considered extremely broad legislation. These laws can effect the formula for physician compensation. Under this law referrals are banned if the referring physician has either an ownership interest in or a direct or indirect compensation relationship with the entity to which the physician is referring a patient. Bills submitted in violation of the provision could result in civil monetary penalties or exclusions from Medicare and Medicaid programs.

The effect of self-referral type of laws on managed care organizations is that if the physician component of the integrated health care system employs physicians directly (in those states where employment relationship is permitted) uses a base-plus incentive formula calculated using the income of the physician services entity (such as a multispecialty group practice) then referrals for laboratory, radiology, and other “designated health services” would be precluded in absence of an exception.

It has been said that abuse of Medicare programs billing system by doctors will cost the program $4 billion by the year 2000. This is a reason some recommend privatizing Medicare so as to reduce fraud.

Violations of Stark are considered civil violations. Penalties for violations include denial of payment, mandatory refund of any payments previously received, civil money penalties of up to $15,000 per prohibited referral, and exclusion from the Medicare and Medicaid programs. In addition, so-called “circumvention schemes” are punishable by civil money penalties of up to $100,000 per scheme.

Top of page