Non-compliance with Stark Law Costs Big

On August 14, 2014, the U.S. Department of Justice reported a $1.3 million settlement between New York Heart Center, a New York cardiology group practice, and the United States government to resolve allegations that the practice violated the Physician Self-Referral (Stark) Law and the False Claims Act by "knowingly compensating its physicians in a manner that violated federal law."

The unique nature of services furnished by health care professionals and the possible conflicts of interest arising from financial arrangements between providers has resulted in laws and regulations that differ dramatically from other industries, like the Stark Law. The law was intended to ensure that a physician’s medical judgment is not compromised by improper financial incentives that encourage internal referrals of certain services known as Designated Health Services for Medicare patients.

A solo physician or a physician group practice is permitted under the Stark Law to furnish ancillary services, such as advanced imaging and other services ancillary to physician medical services, provided it meets rigorous requirements concerning the operation of the practice and, in the case of a bona fide group practice, the way in which its physicians are paid. The In-Office Ancillary Services exception includes specific conditions applicable to the types of services and individuals who furnish them, the location of the services, and billing. A physician group that does not meet the requirements of the Stark group practice definition, which govern the type of entity, number of physicians, range of services, and other requirements, is unable to make use of the IOAS exception and is thus generally prohibited from receiving DHS referrals from its physicians.

The Stark Law strictly prohibits physician compensation to be based directly or indirectly on the volume or value of a group’s internal physician referrals of DHS for Medicare patients that are not personally performed by the ordering physician. Among several strict requirements of the group practice definition, the group practice is restricted in its distribution of income and expenses, profits, and productivity bonuses. The law requires that overhead and income of the group be distributed in accordance with methods that are in place prior to the receipt of payment for the service giving rise to the expense or producing the income.

A physician in the group practice may receive a share of the overall profits of the group, provided that the share is not based on the volume or value of the physician’s referrals of DHS. Overall profits means the group's entire profits derived from DHS payable by Medicare or Medicaid or any component of the group consisting of at least five physicians. Overall profit shares can be distributed using one of the following methods:

  • Per capita division of the overall profits
  • Distribution of DHS revenues based on the group’s revenues attributable to services that are not DHS payable by federal or private payors
  • Distribution of DHS revenues if the group’s DHS revenues are less than five percent of the group's total revenues and no physician's allocated portion of those revenues is more than five percent of the physician's total compensation from the group

Further, a group physician may be paid a productivity bonus based on personally performed services or incident to services, or both, if the bonus is not directly related to the volume or value of the physician’s referrals of DHS.

The USDOJ press release reports that NYHC was alleged to have compensated each physician partner between September 2007 to August 2008 under a formula that based physician compensation on the volume or value of that physician’s referrals of nuclear and CT scans. In the shadow of these allegations against the backdrop of the Stark Law’s strict liability and rigorous compliance requirements, physicians and practice administrators in a group practice setting should be ever mindful of methods used to distribute practice income, overhead, and profits, particularly those related to DHS, and always seek guidance from competent health care legal counsel. Accurate financial accounting in the income distribution formula is also essential to avoid miscalculations that could result in inadvertent Stark violations.


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Topics: Hospital Valuation

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