Stark Law Basics: Meeting the “Big 3” Standards
Before entering into a business arrangement involving physician referrals, ensure it complies with the Stark Law. Understanding its core requirements can help you avoid costly violations.
The Stark Law, also called the Physician Self-Referral Law (PSL), prohibits physicians from referring patients for designated health services (those covered by Medicare or Medicaid) to entities with which they—or their immediate family members—have a financial relationship, unless a Stark exception applies.
Figuring out how to navigate Stark Law can be tricky. If there’s no financial relationship, or if Stark doesn’t apply to your services, there’s no issue. But if it does apply, the next step is assessing whether an exception allows your business arrangement.
To fit within a Stark exception, an arrangement must meet three general standards:
- Compensation must be at fair market value.
- The arrangement must be commercially reasonable.
- Compensation must not take into account the volume or value of referrals (or other business generated).
If an arrangement doesn’t satisfy these criteria, it could violate the Stark Law. Let’s break down each of these critical factors.
Fair Market Value: Ensuring Payment Reflects Market Rates
In healthcare law, fair market value is a common term. Whether something meets fair market value depends on whether it aligns with the general market value for the transaction. In other words, the price of services or items being exchanged should not be inflated or undervalued, and the payment should result from negotiations between both parties rather than being influenced by referrals.
In 2020, CMS refined this concept by categorizing fair market value into three three categories:
- General application (for service agreements, employment contracts, etc.)
- Rental of equipment
- Rental of office space
The standard applied depends on what is being exchanged. Notably, fair market value is distinct from the third standard—volume or value—meaning both must be met for a Stark exception to apply.
Commercial Reasonableness: Does the Arrangement Make Business Sense?
For an arrangement to qualify under Stark exceptions, it must be commercially reasonable. Regardless of profitability, the arrangement must serve a legitimate business purpose and make sense given the characteristics of the parties involved—such as their size, specialty, and scope of practice.
A key point: profitability is not required. Even if a party does not make a profit, the arrangement can still be commercially reasonable. The key consideration is whether the agreement serves a sound business purpose apart from its potential financial gain.
Imagine that Dr. Davis, an independent orthopedic surgeon, regularly orders MRIs but does not own an MRI machine. She also serves as a medical director for a local imaging center, providing oversight and reviewing protocols. Because she has a financial relationship with the center through her medical directorship, Stark applies when she refers Medicare or Medicaid patients there.
The arrangement may be commercially reasonable if the imaging center genuinely needs a medical director for compliance and quality oversight, and Dr. Davis provides legitimate administrative services in that role. If the arrangement also meets the other standards discussed here, a Stark exception may apply.
Volume or Value Standard: Avoiding Compensation Tied to Referrals
This standard examines how a physician’s compensation is structured. When payment is tied to the volume or value of referrals, it likely violates Stark Law.
For example, suppose Dr. Davis refers patients to the imaging center where she serves as medical director. If her compensation as medical director increases based on the number of her patients scanned at the facility, her pay is directly tied to the volume and value of referrals she makes—meaning no Stark exception applies.
To ensure compliance, carefully examine compensation structures. Per-referral fees can be disguised in payment structures. Flat monthly fees that do not fluctuate based on referrals are more likely to be compliant with Stark exceptions.
Why Compliance with the “Big 3” Matters
These three key factors—fair market value, commercial reasonableness, and volume/value neutrality—are fundamental to Stark Law compliance. Violating the Stark Law can lead to severe consequences, including fines and exclusion from Medicare and Medicaid participation. Because Stark is a strict liability statute, intent is irrelevant—a violation can occur even if you did not mean to break the law.
Given these risks, it’s critical to evaluate whether your arrangements comply with Stark and whether any exceptions apply. Understanding and applying the “Big 3” standards is essential for staying on the right side of the law.
Get Legal Support
If you have questions about Stark compliance, you’re not alone. A healthcare attorney can help you evaluate your arrangements and ensure they align with Stark exceptions. If you operate in one of the states where we have licensed attorneys, schedule a consultation to learn more.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.