Stark Law 101
The Stark Law1 comprises a series of detailed physician self-referral and billing regulations initiated by Congress during the 1990’s and continuing to the present. The law gets its name from U.S. Congressman Pete Stark, who sponsored the initial bill. The Stark Law targets certain Medicare and Medicaid reimbursable Designated Health Services (DHS) that are deemed by the Centers for Medicare and Medicaid Services (CMS) to be areas at high risk of abuse. The prohibitions in the Stark Law are based on the premise that the loyalty of a physician to a patient is unavoidably divided when a physician is influenced by a profit motive. This leads to over-prescribing of services and over-utilization of Medicare and Medicaid benefits, tending to inflate the costs of those programs.
The main objective of the Stark Law is to eliminate financial incentives that would encourage inappropriate utilization of Medicare funds by broadly prohibiting physicians from referring their Medicare patients to health care entities with which they have a financial relationship. A summary in the Federal Register states the regulatory concern:
When a patient seeks medical care, his or her physician has a major role in determining the kind and amount of health care services the patient will receive. Having a financial interest in an entity that furnishes these services can affect a physician’s decision about what medical care to furnish a patient and who should furnish the care.2
The Stark Law imposes substantial risk to hospitals and other health care services that work with referring physicians. In addition to liability for civil and criminal penalties, entities and individuals that violate the Stark Law can effectively be banned for life from providing healthcare services.
The list of DHS3 includes:
- Clinical laboratory services
- Radiology and certain other imaging services
- Radiation therapy services and supplies
- Durable medical equipment and supplies
- Orthotics, prosthetics, and prosthetic devices
- Parenteral and enteral nutrients, equipment and supplies
- Physical therapy, occupational therapy, and speech-language pathology services
- Outpatient prescription drugs
- Home health services and supplies
- Inpatient hospital services
- Outpatient hospital services
The requirements imposed by the Stark Law pose serious administrative challenges to hospitals and physicians. Even well-intentioned parties are subject to penalties. In May 2008, Miami-based Baptist Health South paid over $7 million to settle Stark Law and False Claims Act violations arising from contract payments to a physician group that had referred patients to Baptist Health South hospitals.4 The Health and Human Services Office of Inspector General (OIG) imposed substantial Stark Law fines and penalties even though Baptist Health South voluntarily disclosed its mistakes.
As the elements below illustrate, neither negligence nor intent are necessary elements of a Stark Law violation. Therefore, the Stark Law is substantially a strict liability statute of the following scope:
- a financial relationship between a physician (or immediate family member) and a DHS entity,
- a referral by the physician of a Medicare or Medicaid recipient to the DHS entity,
- the submission of a billing claim for the services by the DHS entity furnishing, and
- the absence of one or more exception.
Besides Federal and state enforcement, the strict prohibitions of the Stark Law make hospitals and clinics a popular target with private “whistleblowers” that bring suit on behalf of the United States under the federal civil False Claims Act. Whistle-blowers can receive between 15 and 30 percent of the total recovery by the government. From 1987 through 2003, such “qui tam” suits netted nearly 1 billion dollars to whistleblowers, and generated over 5 billion dollars for the Department of Health and Human Services (HHS).
Failure to abide by the Stark Law has an immediate impact on a service provider. For instance, if a hospital and physician contract violates the Stark Law, Medicare does not pay for services provided by or referred by the physician during the period of the violation. In the event an entity furnishes DHS pursuant to a prohibited referral, the entity cannot even present a claim or bill, or cause the claim or bill to be presented to Medicare or to any other payer --- without violating the Stark Law. In fact, the provider is not allowed to present such a disallowed bill or claim even to the patient or to a private insurer. Merely submitting such a claim to Medicare during a disallowance period constitutes fraud under the False Claims Act5.
Since no Medicare payment may be made for DHS rendered as a result of a prohibited referral, an entity must timely refund any amounts collected for DHS performed under a prohibited referral. Under some circumstances, civil money penalties and other remedies may also apply. Referrals and claims that violate the Stark Law can incur the following fines and penalties:
- Reimbursement of claims paid during a period of disallowance
- Civil penalty of up to $15,000 for each prohibited service provided
- Civil penalty of up to $100,000 for each circumvention scheme
- Civil penalty up to $10,000 per day failure to meet a reporting requirement
- Possible lifetime exclusion from participation in federal healthcare programs
In order to meet the strict regulatory environment, hospitals and physicians must diligently administer their contractual arrangements. The expansive prohibitions in the Stark Law affect nearly every arrangement between hospitals and physicians, physician practice groups, clinical laboratories, and independent diagnostic testing facilities. Hospital-physician contracts such as medical directorships, medical office building leases, physician recruitment and medical staff benefits all are prime candidates for legal liability under the Stark Law. Chief Compliance Officers and administrators are typically responsible for vendor and non-physician contracts, while attorneys oversee the physician contracts. Yet in the present operational and regulatory environment, these responsibilities can overlap or leave gaps.
Wherever there is a “financial relationship” between a referrer and a service provider, a carefully crafted Stark Law exception must exist. In recent years there have been many statutory changes to the Stark Act and exceptions. Usually Congress intends to address loopholes or stem perceived abuses. For example, physician ownership interests in medical device manufacturers are now under consideration for self-referral regulation.6 Occasionally the regulations are modified to ease the burden on hospitals and physicians. Change and enforcement continues, requiring further evaluation in light of future and existing contracts. A contract management system should help identify contracts needing modification in order to comply with present Stark Law regulations.
Adding to the difficulty of complying with Stark Law is an underlying tension between hospitals and physicians. Hospitals and physicians are traditionally reimbursed independently, regardless of the other’s actual performance. Although a physician may treat a patient or admit the patient to a hospital for services, it does necessarily follow that the hospital is therefore reimbursed. Tension further arises as physicians remove the most profitable services from the hospital setting and perform those services in their own free-standing clinics. Minimally invasive surgical techniques and associated diagnostic technologies are enabling physicians and physician groups to accelerate this trend.
Despite these issues, hospitals are dependent on physicians and must deal with complex networks of physicians and physician groups. The technical details in the Stark Law demand that hospitals carefully arrange and vigilantly manage their contractual agreements with physicians including their immediate family.
Under the current Stark Law, a physician cannot refer patients to an entity for a designated health service if the physician or a member of his or her immediate family has a financial relationship with the entity.7 The definition of a physician’s “immediate family member” includes many degrees of close relatives.8 Unless an exception applies, a physician and hospital violate the Stark Law if a relative independently contracts with a hospital to which the physician makes a referral for a DHS. Under the billing prohibition of the Stark Law, no entity, hospital or otherwise, can bill Medicare or Medicaid, or anyone else, for services that are improperly referred.9
There are frequent changes to the Stark Law. Usually Congress intends to address loopholes or stem perceived abuses, but occasionally statutes are modified to ease the burden on hospitals and physicians. Either way, change and enforcement continues, layering on top of already confusing, and sometimes conflicting, directives for hospitals and physicians.
In the past few years, CMS has undertaken random audits of hospitals for Stark Law compliance. CMS takes the position that hospitals should be collecting this information, making the audit report a relatively routine task. Unfortunately however, most hospitals maintain physical documents in multiple locations, without scanned and searchable copies of originals, and no facility for online analysis or reporting in accordance with the Disclosure of Financial Relationship Reports.10 In fact, many hospitals systems and processes are insufficient to meet the reporting requirements in a timely manner.
Most organizations have procurement and financial databases and systems. Yet contracts are by nature unstructured text documents. Procurement and financial databases are not architected for text-based contract management. Furthermore, a contract management system must be able to store electronic documents and records, such as bank statements, invoices, and PDF images. Evidence of material terms such as “fair market value” or “physician incentive compensation” may include records and data in formats like email, spread sheets, or financial reports. There are also Federal databases that must be accessed on an ongoing basis. For instance, the U.S. Department of Health and Human Services publishes in the Federal Register11 the medical codes that constitute designated health services.12 Hospital and physician contract administrators must monitor these updates in addition to designated health services defined in the Stark Law.13 Another data source is the List of Excluded Individuals/Entities (LEIE) published by the HHS.14 The LEIE should be referenced regularly, including when a contract is created or revised. The possible penalties for employing or contracting with LEIE parties can incur treble damages and future exclusion from Medicaid and Medicare reimbursement.15
When negotiating agreements, healthcare legal professionals prepare and refer to extensive notes and contract drafts. It is imperative that a contract management system protect the confidentiality of any attorney communications that are privileged by law. While useful in defending a regulatory action, privileged information must be correctly archived and secured to avoid inadvertent disclosure. Procurement and enterprise resource planning solutions are not designed with for this purpose.
Every business is required to keep minutes of board meetings, communications with shareholders, annual reports and similar documents for specified periods of time. Retention of the records needed for incidental reporting to Federal agencies pursuant to an audit should remain accessible for the entire statutory period of the Federal laws and regulations. The contract management system should archive and link documents in a comprehensive electronic repository, and automatically purge documents no longer necessary or relevant. The contract management system should also comply with the Federal Rules of Evidence to preserve of records in the event of regulatory investigation, civil litigation, criminal complaint or court order.
Perhaps most important is the need for a contract management solution to adapt to the changing regulatory environment. Whether a provider has legacy systems or paper-based operations, the system must keep the healthcare provider in compliance with the Stark Law. It should additionally improve efficiency and accelerate document reuse so that contracts are standardized, accessible, and in conformance current regulatory demands. Modern contract management systems bridge the limitations of word processors, providing additional text analysis, simplified updating and reporting, and improved workflow.
Conclusion
The Federal Government Office of Inspector General (OIG) estimates that every dollar spent on health care fraud enforcement returns $4.50 to the Federal government. With national health expenditures of $2.3 trillion in 2007, or $7600 per person, it is no surprise that regulator scrutiny remains intense, and the level and frequency of enforcement activities and penalties continue to increase. The Stark Law continues to be one of the federal government’s most significant healthcare enforcement tools.
The rigid requirements imposed by the Stark Law pose serious operational challenges to hospitals and physicians. In order to cope with the regulatory environment, hospitals and physicians need to be diligent in new and unanticipated ways. Proactive healthcare administration requires thoughtful implementation of information systems and processes. Gaps in responsibilities often complicate the ability of healthcare providers to perform diligent contract administration.
First generation hospital computer solutions like procurement and accounting systems are incapable of addressing the needs of contract administration. While heavy Federal and state regulations raise the bar for hospitals and physicians, their electronic systems have not kept pace. Stark Law investigations make no concessions for the operational realities or system capabilities of providers who are honestly, but ineffectively, trying to comply with Federal regulations. It is up to providers to take the initiative and implement electronic contract management and compliance procedures.
The Stark Law poses a continuous operational risk for hospitals and physicians. Regulations regularly emerge from the Department of Health and Human Services, particularly in the last few months of each year. Many requirements were recently published in the Federal Register, some demanding compliance this year, some allowing physician service contracts to be modified through 2009.
The revised Stark Law fiscal year 2009 regulations were published August 19 in the Federal Register by the CMS. They are generally effective on or after October 1, 2008, except for certain rules deferred until 2009. Hospital and physician administrators need to give immediate attention to contract changes required to comply with new definitions and scope in the application of Stark Law including physician financial interests, standing-in-the-shoes, percentage-of-revenue lease arrangements, substantial performance of services, and signature requirements.