What Is the Stark Law? A Complete Guide for Healthcare Providers and Businesses
In most industries, sending referrals is standard practice — but in healthcare, especially when Medicare or Medicaid is involved, referrals are closely regulated. The Stark Law, along with the Anti-Kickback Statute, governs how and when physicians can refer patients, especially if the referring provider or their family has a financial relationship with the referred entity.
If you’re a physician, medical group, healthcare startup, or medical spa operator, understanding the Stark Law is crucial to protecting your business from hefty penalties, regulatory audits, and even criminal charges.
What Is the Stark Law?
Passed by Congress in 1989, prohibits physicians from referring Medicare patients to entities with which they (or their immediate family members) have a financial relationship, unless a specific exception applies. This law is designed to prevent financial incentives from influencing medical decision-making, which could lead to unnecessary procedures, inflated healthcare costs, or unfair competition.
Even if a violation is unintentional, the Stark Law is a strict liability statute, meaning providers can be penalized even without proof of intent to defraud.
Key Components of the Stark Law
The Law prohibits:
- Physician Referrals to entities providing Designated Health Services (DHS) if a financial relationship exists, unless an exception applies.
- Billing Medicare for those referred services. Even third-party billing is not allowed.
- Circumvention schemes or indirect arrangements meant to evade the law.
What Are Designated Health Services (DHS)?
DHS are healthcare services that the Stark Law specifically applies to, including:
- Clinical laboratory services
- Physical and occupational therapy
- Speech-language pathology services
- Radiology and imaging services
- Radiation therapy and supplies
- Durable medical equipment (DME)
- Prosthetics, orthotics, and related supplies
- Home health services
- Outpatient prescription drugs
- Inpatient and outpatient hospital services
- Parenteral and enteral nutrients, equipment, and supplies
These services are commonly billed under Medicare, making them heavily regulated under the Stark Law.
Who Is Considered a “Family Member”?
The Stark Law broadly defines “immediate family members” to include:
- Spouse
- Parents
- Children and stepchildren
- Siblings and stepsiblings
- In-laws
- Grandparents and grandchildren
If any of these individuals have an ownership or financial interest in a referred provider, a Stark Law violation may occur unless an exception applies.
Types of Financial Relationships That Trigger the Stark Law
A financial relationship under the Stark Law can be:
- Ownership or investment interests
- Compensation arrangements, such as bonuses, leases, or service payments
Even indirect relationships (e.g., referrals through a management company or affiliate) can trigger scrutiny under the Stark Law.
Penalties for Violating the Stark Law
Violations of the Stark Law can result in:
- Denial of payment from Medicare
- Refunding all payments received from improper referrals
- Civil fines of up to $15,000 per service
- Penalties of up to $100,000 per circumvention scheme
- Exclusion from federal healthcare programs
- Additional liability under the False Claims Act
Stark Law Exceptions
There are multiple exceptions to the Stark Law, allowing certain referrals or financial arrangements if specific rules are followed. These fall into three categories:
1. Exceptions for Ownership or Investment Interests
- Publicly traded securities
- Mutual funds
- Investments in rural providers
2. Exceptions for Compensation Arrangements
- Rental of office space or equipment
- Personal service agreements (e.g., independent contractors)
- Bona fide employment
- Fair market value compensation
- Nonmonetary compensation
- Medical staff incidental benefits
- Recruitment incentives
- Charitable donations
- Compliance training
- Timeshare arrangements
- Professional courtesy
- Retention bonuses in underserved areas
3. Combined Exceptions for Ownership and Compensation
- In-office ancillary services
- Academic medical centers
- Preventive services
- Implants by ambulatory surgery centers
- Dialysis-related prescription drugs
- Rural intra-family referrals
Each exception has strict documentation, structure, and duration requirements. For example, most must be in writing, signed by both parties, and last at least one year.
The Stark Law vs. the Anti-Kickback Statute
While both laws address financial conflicts in healthcare, they are legally distinct:
| Feature | Stark Law | Anti-Kickback Statute |
|---|---|---|
| Type of Law | Civil | Criminal |
| Intent Required? | No (strict liability) | Yes (willful intent required) |
| Applies to | Physicians and Medicare services | All providers and federal programs |
| Penalties | Civil fines, repayment | Jail time, exclusion, civil fines |
Still, many deals that violate the Stark Law may also trigger Anti-Kickback and False Claims Act investigations.
Anti-Kickback Statute Overview
The Anti-Kickback Statute (AKS) prohibits offering, soliciting, or receiving anything of value in exchange for referrals of services covered by federal healthcare programs. It’s broader than the Stark Law, applies to all providers, and includes criminal penalties.
Examples of AKS violations:
- Giving gifts to physicians for sending patients
- Offering excessive discounts or “free” services
- Paying commissions for Medicare patient referrals
To comply, providers must follow Safe Harbor rules, which protect certain business arrangements if strict conditions are met.
Common Stark Law Compliance Mistakes
- Paying bonuses based on referral volume
- Using unsigned or expired contracts
- Failing to document fair market value
- Overlooking indirect financial relationships
- Assuming verbal agreements are sufficient
- Using third-party billing for prohibited referrals
These mistakes are often unintentional — but still actionable under Stark.
How to Stay Compliant with the Stark Law
To avoid Stark Law violations:
- Review all contracts and financial relationships regularly
- Ensure agreements are documented and current
- Confirm all referrals meet an applicable exception
- Conduct internal compliance audits
- Consult a healthcare attorney for deal reviews
Whether you’re structuring physician compensation, building an MSO, or expanding into ancillary services, always assess Stark Law risk before finalizing agreements.
Conclusion: Why the Stark Law Matters
The Stark Law is one of the most important healthcare regulations governing physician referrals and financial relationships. While its goal is to protect patients and taxpayers, its complexity can create pitfalls for providers and businesses alike.
If you’re entering into any compensation or ownership relationship involving designated health services, consult a qualified healthcare attorney. Proper legal structuring, documentation, and monitoring are your best defenses against costly violations.
Contact one of our attorneys at Dike Law Group and schedule a meeting so we can discuss at dorismeet.com.
