Overview of Federal Stark and Anti-Kickback Laws

Overview of Federal Stark and Anti-Kickback Laws

Introduction to Federal Stark Laws

With limited exceptions, Federal Stark Law provides that if a physician has a financial relationship with a hospital or entity, then:

(A) The physician may not make a referral to the entity for the furnishing of designated health services for which payment otherwise may be made under this subchapter, and
(B) the entity may not present or cause to be presented a claim under this subchapter or bill to any individual, third party payor, or other entity for designated health services furnished pursuant to a referral prohibited under sub paragraph (A).

42 U.S.C. § 1395nn (a)(1).

In addition to prohibiting a hospital from submitting claims under these circumstances, the Stark Law also prohibits payments by federal health care programs of such claims: “No payment may be made under this subchapter for a designated health service which is provided in violation of subsection (a)(1) of this section.” 42 U.S.C. §1395nn (g)(1).1

A Hospital Employing a Referring Physician Must Satisfy Each of the Requirements for “Bona Fide Employment Relationships” Under Federal Law

As discussed further below, a hospital employing and compensating a physician who refers patients covered by federal health care programs to that hospital must satisfy the statutory exception for “bona fide employment relationships.” Under the Stark Statute, a “bona fide employment relationship” must satisfy the following three relevant requirements: (1) “the amount of the remuneration under the employment….is consistent with the fair market value of the services” personally performed by the physician, (2) the remuneration “is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician,” and (3) “the remuneration is provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer.” 42 U.S.C.S. § 1395nn (e)(2). All three of these requirements are mandatory under Federal Stark Laws.

The Significant Policy Concerns to Prevent or Reduce Over-Utilization of Health Care Services

Prior to enactment of the Stark Laws, “there were a number of studies…that consistently found that physicians who had [financial relationships with]…entities to which they referred, ordered more services than physicians without those financial relationships…” 66 Federal Register 859 (January 4, 2001). “This correlation between financial ties and increased utilization was the impetus for section 1877 of the Act.” 66 Federal Register 859 (January 4, 2001).

The Federal Stark Law “was enacted to address over-utilization, anti-competitive behavior, and other abuses of health care services that occur when physicians have financial relationships with certain ancillary service entities to which they refer Medicare or Medicaid patients.” 69 Federal Register 16124 (March 26, 2004). “Physician financial arrangements may have some anti-competitive effects to the extent that those relationships discourage other providers from entering a market in which patients are primarily referred to physician-owned entities or DHS entities that maintain generous compensation arrangements with physicians.” Id. “Anti-competitive behavior can increase program costs if the DHS entities with which physicians have financial relationships are favored over other, more cost-efficient providers or providers that furnish higher quality care.” Id. “Overutilization increases program costs because Medicare (or Medicaid) pays for more items or services than are medically necessary.” Id.

“The approach taken by the Congress in enacting section 1877 of the Act is preventive because it essentially prohibits many financial arrangements between physicians and entities providing DHS.” 66 Federal Register 859. “Specifically, Section 1877 of the Act imposes a blanket prohibition on the submission of Medicare claims (and payment to the States of FFP under the Medicaid program) for certain DHS when the service provider has a financial relationship with the referring physician, unless the financial relationship fits into one of several relatively specific exceptions.” Id.

The Scope and Definitions Established in the Stark Statute

Congress enacted the Stark Statute in two parts, commonly known as Stark I and Stark II. Enacted in 1989, Stark I applied to referrals of Medicare patients for clinical laboratory services made on or after January 1, 1992 by physicians with a prohibited financial relationship with the clinical lab provider. See Omnibus Budget Reconciliation Act of 1989, P.L. 101-239, § 6204. In 1993, Congress extended the Stark Statute (Stark II) to referrals for ten additional designated health services. See Omnibus Reconciliation Act of 1993, P.L. 103-66, § 13562, Social Security Act Amendments of 1994, P.L. 103-432, § 152. As of January 1, 1995, Stark II applied to patient referrals by physicians with a prohibited financial relationship for the following ten additional “designated health services”: (1) inpatient and outpatient hospital services; (2) physical therapy; (3) occupational therapy; (4) radiology; (5) radiation therapy (services and supplies); (6) durable medical equipment and supplies; (7) parenteral and enteral nutrients, equipment and supplies; (8) prosthetics orthotics, and prosthetic devices and supplies; (9) outpatient prescription drugs; and (10) home health services. See 42 U.S.C. § 1395nn(h)(6).

The Stark Law broadly defines prohibited “financial relationships” to include “compensation arrangements” in which any “remuneration” is paid by a hospital to a referring physician “directly or indirectly, overtly or covertly, in cash or in kind.” 42 U.S.C. § 1395nn (a)(2)(B), (h)(1); 42 C.F.R. § 411.354(c).

The Stark Law broadly defines a prohibited “compensation arrangement”:

The term “compensation arrangement” means any arrangement involving any remuneration between a physician (or an immediate family member of such physician) and any entity other than an arrangement involving only remuneration described in subparagraph (C).
The term “remuneration” includes any remuneration, directly or indirectly, overtly or covertly, in cash or in kind.

42 U.S.C. § 1395nn(h)(1).

This language makes clear that Congress intended the definition of “financial relationship” to include any type of financial relationship in which physicians receive any remuneration or any kind from a hospital, directly or indirectly, overtly or covertly.

The Stark Statute defines “referral” as “the request or establishment of a plan of care by a physician which includes the provision of designated health services.” 42 U.S.C. § 1395nn (h) (5) (A). The accompanying regulations applying the Stark Statute also broadly define “referral” as, among other things, “a request by a physician that includes the provision of any designated health service for which payment may be made under Medicare, the establishment of a plan of care by a physician that includes the provision of such a designated health service, or the certifying or recertifying of the need for such a designated health service . . . .” 42 C.F.R § 411.351. A referring physician is defined in the same regulation as “a physician who makes a referral as defined in this section or who directs another person or entity to make a referral or who controls referrals made to another person or entity.” Id.

As discussed above, the Stark Statute broadly defines prohibited “financial relationships” to include any “compensation” paid directly or indirectly to a referring physician. The Stark Statute’s exceptions then identify specific transactions that will not trigger its referral and billing prohibitions. To avoid the referral and billing prohibitions in the Stark Statute, a hospital’s financial relationship with a physician must satisfy one of the exceptions.

Once the plaintiff or the government has established proof of each element of a violation under the Act, the burden shifts to the defendant to establish that the conduct was protected by an exception. If no exception applies to a Stark violation, then all referrals from the referring employed physician to the DHS entity are subject to prohibition.

A Bona Fide Employment Relationship Must Satisfy Four Primary Requirements

A hospital employing and compensating a physician who makes referrals to that hospital of Medicare and Medicaid patients must satisfy the statutory exception for “bona fide employment relationships.” Under the Stark Statute, a “bona fide employment relationship” must satisfy the following four relevant requirements: (1) the “employment is for identifiable services,” (2) “the amount of the remuneration under the employment….is consistent with the fair market value of the services” personally provided by the physician, (3) the remuneration “is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician,” and (4) “the remuneration is provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer.” 42 U.S.C.S. § 1395nn (e)(2).

Physician Compensation Must be “Consistent with the Fair Market Value of the Services” Personally Performed by the Physician

In pertinent part, the statutory language focuses on “the fair market value of the services” personally performed by the physician. 42 U.S.C.S. § 1395nn (e)(2). “[S]ection 1877 of the Act contemplates that physicians—whether group practice members, independent contractors or employees—can be paid in a manner that directly correlates to their own personal labor…” 66 Federal Register 876 (emphasis added). “In the case of…employees under the bona fide employment exception, the amount of compensation for personal productivity is limited to fair market value for the services they personally perform.” Id. “In other words, ‘productivity,’ as used in the statute, refers to the quantity and intensity of a physician’s own work, but does not include the physician’s fruitfulness in generating DHS performed by others…” Id. (emphasis added). “The fair market value standard in these exceptions acts as an additional check against inappropriate financial incentives.” Id.

The Stark Statute provides that “[t]he term ‘fair market value’ means the value in arm’s length transactions, consistent with the general market value . . .” 42 U.S.C. § 1395nn(h)(3). Federal regulations amplify this definition as follows:

Fair market value means the value in arm’s-length transactions, consistent with the general market value. “General market value” means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement.” 42 C.F.R. § 411.351 (emphasis added).

The Stark Statute “establishes a straightforward test that compensation arrangements should be at fair market value for the work or service performed….not inflated to compensate for the physician’s ability to generate other revenues.” 66 Fed. Reg. at 877.

Compensation Must Not be “Determined in a Manner that Takes into Account (Directly or Indirectly) the Volume or Value of any Referrals by the Referring Physician”

The Stark Law also requires that “the amount of the remuneration under the employment….is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.” 42 U.S.C.S. § 1395nn (e)(2). If physicians are paid “per service” or “per time period,” the “per service” amount “must reflect fair market value at inception not taking into account the volume or value of referrals and must not change over the term of the contract based on the volume or value of DHS referrals…” 66 Federal Register 878. Compensation based on a unit of service or time must be “fair market value for services or items actually provided” and personally performed by an employed physician. 69 Federal Register 16069.

Apparent fixed payments to physicians may also violate Federal Stark laws. “If the payments reflect or take into account non-personally performed services, they may raise concerns under the statute and would merit case-by-case determination, regardless of the apparent fixed determination.” 69 Federal Register 16088. The Stark Statute prohibits a hospital from determining compensation “in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.” 42 U.S.C.S. § 1395nn (e)(2).

The Stark Statute Requires that Physician Compensation Must be “Commercially Reasonable Even if No Referrals were Made to the Employer”

The Stark Statute also requires that the remuneration to an employed physician must be “provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer.” 42 U.S.C.S. § 1395nn (e)(2). “An arrangement will be considered ‘commercially reasonable’ in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals.” 69 Federal Register 16093.

A negotiated agreement between interested parties does not by definition reflect fair market value. The Stark Laws are predicated on the recognition that, when one party is in a position to generate business for the other, negotiated agreements between such parties are often designed to disguise the payment of compensation in excess of fair market value.

The Anti-Kickback Statute Also Mandates that a Hospital’s Determination of Compensation to an Employed Physician Must be Consistent with the Fair Market Value of the Physician’s Services and Must Not Take Into Account the Volume or Value of Referrals to the Hospital

The Federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), prohibits any person or entity from offering, making or accepting payment to induce or reward any person for referring, recommending or arranging for federally funded medical services, including services provided under the Medicare, Medicaid, and TRICARE programs. The Anti-Kickback Statute prohibits a hospital from offering or paying “any remuneration…directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person to…refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program.” 42 U.S.C. § 1320a-7b(b).

The United States Department of Health and Human Services (“HHS”) has promulgated regulations specifying those payment practices that will not be subject to criminal prosecution or provide a basis for administrative exclusion. The “Safe Harbor” regulations, 42 C.F.R. § 1001.952, list various circumstances under which a financial relationship between a provider and a referral source would not trigger liability under the Anti-Kickback Statute.

Payments to a physician under a personal service agreement must be “set in advance, [must be]… consistent with fair market value in arms-length transactions and [must]…not [be] determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare or a State health care program.” 42 C.F.R. § 1001.952(d) (2000).

The Federal Anti-Kickback Statute arose out of Congressional concern that payoffs to those who can influence health care decisions would result in goods and services being provided that are medically unnecessary, too costly, poor quality, or even harmful to a vulnerable patient population. The Anti-Kickback Statute was partially based on studies demonstrating that physicians, even those intending to act in good faith, were likely to refer significantly more patients when there is a financial incentive to generate business.

To protect the integrity of federal health care programs, and realizing the difficulty for regulators and law enforcement to review every case for medically unnecessary procedures, Congress enacted a per se prohibition against the payment of kickbacks in any form, regardless of whether the kickback gave rise to overutilization or poor quality of care. “If any one purpose of remuneration is to induce or reward referrals of Federal health care program business, the [Anti-kickback] statute is violated.” 66 Federal Register 919 (citing United States v. Kats, 871 F. 2d 105 (9th Cir. 1989); United States v. Greber, 760 F. 2d 68(3rd Cir.), cert. denied, 474 U.S. 988 (1985)).

First enacted in 1972, Congress strengthened the Anti-Kickback Statute in 1977 and 1978 to ensure that kickbacks masquerading as legitimate transactions did not evade its reach. See Social Security Amendments of 1972, Pub. L. No. 92-603, 242(b) and 9c); 42 U.S.C. § 1320a-7b, Medicare Medicaid Antifraud and Abuse Amendments, Pub. L. No. 95-142; Medicare and Medicaid Patient and Program Protection Act of 1987, Pub. L. No. 100-93.

The Stark Laws and the Anti-Kickback Statute are “complementary and although overlapping in some aspects, not redundant.” 66 Federal Register 863. “We believe the Congress intended to create an array of fraud and abuse authorities to enable the government to protect the public fisc, beneficiaries of Federal programs, and honest health care providers from the corruption of the health care system by unscrupulous providers.” Id. “Congress only intended [the Stark laws] to establish a minimum threshold for acceptable financial relationships, and that potentially abusive financial relationships that may be permitted under Section 1877 of the Act could still be addressed through other statutes that address health care fraud and abuse, including the anti-kickback statute (Section 1128B(b) of the Act).” 66 Federal Register 860. “In some instances, financial relationships that are permitted under Section 1877 of the Act might merit prosecution under section 1128B(b) of the Act.” Id. “Conversely, conduct that may be proscribed by Section 1877 of the Act may not violate the anti-kickback statute.” Id.

Violation of the Anti-Kickback Statute may subject the perpetrator to exclusion from participation in Federal Healthcare Programs, civil monetary penalties of $50,000 per violation, and three times the amount of remuneration paid, regardless of whether any part of the remuneration is for a legitimate purpose. 42 U.S.C. § 1320-7(b) (7) and 42 U.S.C. § 1320a-7a (a) (7).

1“Designated health services” include “any of the following items or services: “clinical laboratory services, physical therapy services, occupational therapy services, radiology services…radiation therapy services and supplies, durable medical equipment and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices and supplies, home health services, outpatient prescription drugs, inpatient and outpatient hospital services.” 42 U.S.C. §1395nn (h)(6).

November 2012