Tironi, Paula

English

Loyola University Chicago, School of Law: LAW eCommons

Annals of Health Law
Volume 19
Issue 1 Special Edition 2010 Article 42
2010
The Stark Reality: Is the Federal Physician Self-
Referral Law Bad for the Health Care Industry
Paula Tironi
American Dental Association
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Recommended Citation
Paula Tironi The Stark Reality: Is the Federal Physician Self-Referral Law Bad for the Health Care Industry, 19 Annals Health L. 235
(2010).
Available at: http://lawecommons.luc.edu/annals/vol19/iss1/42
The "Stark" Reality: Is the Federal Physician Self-
Referral Law Bad for the Health Care Industry?
Paula Tironi*
The Beazley Institute for Health Law and Policy
was created during a decade of intense debate as to
whether "physician self-referral" was good or bad
for the health care industry. The debate led to the
1989 adoption of the federal Ethics in Patient
Referrals Act, commonly known as the "Stark Law,"
after one of its chief sponsors, Rep. Fortney "Pete"
Stark.1 The Stark Law prohibits physicians from
referring a Medicare or Medicaid patient for certain
"designated health services" (DHS)2 if the physician
(or a member of the physician's "immediate family" 3) has a direct or
indirect financial relationship with the DHS entity, unless certain
exceptions apply. The twenty years that have passed since the Stark Law's
adoption have brought increasingly complex regulations and intensifying
confusion among physicians and DHS entities, who find it difficult to
develop and implement compliance programs, report discoveries of
noncompliance, and structure business transactions without risk of
inadvertently violating the Stark Law.
Physician self-referral occurs when a physician refers a patient to a
* Assistant General Counsel, American Dental Association; B.A., University of Notre Dame;
J.D., The University of Michigan; LL.M., Loyola University Chicago School of Law; former
Corporate Legal Counsel, Armstrong International, Inc. The views expressed in the article
are the author's and do not reflect the official policy or position of the American Dental
Association or any other organization.
1. See 42 U.S.C. § 1395nn (2000).
2. DHS currently includes clinical laboratory services, physical therapy, occupational
therapy, and speech-language pathology services, radiology and certain other imaging
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, and
inpatient and outpatient hospital services.
3. The Stark regulations define "immediate family member" as "husband or wife; birth
or adoptive parent, child, or sibling; stepparent, stepchild, stepbrother, or stepsister; father-
in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law;
grandparent or grandchild; and spouse of a grandparent or grandchild." 42 C.F.R. § 411.351
(2008).
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Tironi: The Stark Reality: Is the Federal Physician Self-Referral Law Bad
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236 Annals of Health Law - 25th Anniversary Special Edition [Vol. 19
provider of certain health care services and stands to benefit from the
referral due to an otherwise legitimate financial relationship with the
provider. The financial relationship may be an ownership interest. For
example, a physician or his or her family member may be the owner, or
part-owner, of a health service such as an imaging center, radiation therapy
service, or home health care provider. The financial relationship may also
be in the form of a compensation arrangement. These may include salaried
or contract positions, such as a medical directorship at a hospital to whom
the physician refers patients, or arrangements such as the lease of space or
equipment to or from a physician or his or her family member to a health
care provider to whom the physician refers patients.
During the 1970s, physician self-referral was unregulated and fairly
common. The 1980s brought new cost containment initiatives (such as the
Medicare prospective payment system) as well as new diagnostic and
therapeutic technology, creating the incentive for physicians, hospitals, and
other entities to develop new ways to deliver health care services efficiently
and profitably. Physicians invested financially and contributed their
expertise and professional skills to entities such as specialized outpatient
centers, joint ventures, and limited partnerships.
A 1981 study of clinical laboratories found that Medicaid patients whose
physicians had an ownership interest in clinical laboratory services and
whose physicians referred them for such services received an average of
forty percent more tests than patients whose physicians did not own such an
interest. 4 The study also found that physicians who owned an interest in
clinical laboratory services referred more of their patients for tests than did
physicians without such an interest. A subsequent study indicated that
patients of physicians who had invested in clinical laboratories received 45
percent more clinical laboratory services. 5 That same study concluded that
physicians who owned and used independent laboratories that were related
to their practices received more reimbursement than independent
laboratories that were not practice-related, indicating that practice-related
6laboratories received both higher prices and more services per patient.
These studies led critics to argue that self-referral generates additional
fees for physicians, resulting in overutilization of services that increase the
cost and decrease the quality of health care. They claimed that self-referral
creates an inherent conflict of interest for physicians, whose patients rely on
their physicians to refer them for services without regard to the physician's
4. OFFICE OF THE INSPECTOR GENERAL, OFFICE OF ANALYSIS AND INSPECTIONS, REPORT
TO CONGRESS Financial Arrangements Between Physicians and Health Care Businesses, 3
(1989).
5. Theodore N. McDowell, Jr., Physician self Referral Arrangements: Legitimate
Business or Unethical "Entrepreneurialism, 15 AM. J.L. & MED. 61, 66 (1989).
6. Id.
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2010] "Stark" Reality: Federal Physician Self-Referral Law 237
financial self-interest. This conflict of interest was said to exploit both
patients and payors such as Medicare and could lead to a loss of trust in the
medical profession. Self-referring physicians were accused of emphasizing
entrepreneurialism over professionalism, allowing financial self-interest to
influence their professional judgment, and making excessive and
unnecessary referrals for financial gain. Since patients generally defer to
their physicians' recommendations, critics argued that self-referral should
be prohibited in order to maintain doctors' integrity and autonomy.
Physicians who invested in health services were accused of controlling both
the supply and demand. Their financial self-interest was also said to
eliminate checks and balances inherent in the relationship between a
referring physician and an independent provider of health services.
Defenders of physician self-referral responded that the studies did not
prove that physician-owned services were over-utilized, merely that these
services had experienced increased utilization: there was no evidence that
the increased utilization was clinically inappropriate. Moreover, they
reasoned, certain other common industry practices, such as fee-for-service
reimbursement, could also be said to provide an incentive for
overutilization. The Federal Trade Commission came down on the side of
permitting self-referral, arguing that prohibition would eliminate an entire
class of knowledgeable physician investors. The FTC argued that
physicians' involvement in developing health care services helps identify
community need and that physicians' expertise can help assure quality
services. According to the FTC, a facility that earns a reputation for
unnecessary services or poor quality will lose business, so physician-
investors have an incentive to provide appropriate and high quality services.
Moreover, the FTC maintained that physician involvement leads to better
relationships between referring physicians and health service providers. The
FTC took the position that self-referral leads to greater efficiency and
increased competition, which tends to decrease costs and improve quality.
Prohibiting self-referral could therefore decrease access to health care
services and result in a market for medical services that is controlled by
non-physicians.
The federal Ethics in Patient Referrals Act or "Stark Law," adopted in
1989, prohibited self-referral of Medicare patients for clinical laboratory
services unless an exception applied. Over the succeeding twenty years,
Congress and the U.S. Department of Health and Human Services have
augmented the Stark Law with a confusing series of statutory and
regulatory additions until it reached its present form. The Stark Law now
applies to both Medicare and Medicaid patients, involves a number of
"designated health services" (DHS) in addition to clinical laboratory
services, and includes additional exceptions. If a physician makes a referral
in violation of the Stark Law, the DHS entity may not bill for the item or
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service (if payment has already been made the DHS entity must refund the
payment). Individuals and entities that violate the Stark Law can be subject
to civil monetary penalties and exclusion from federal health care programs.
The Stark Law is a strict liability statute so it is immaterial whether one
intended to violate the law; an inadvertent violation can trigger liability.
Given the highly detailed and technical nature of the Stark Law exceptions,
a seemingly minor oversight, such as neglecting to obtain a party's
signature on an agreement, can trigger disproportionately severe
consequences for a physician or DHS entity with no intention or awareness
of the statute or the violation.
Since its inception, the Stark Law and regulations have developed a
complex and frequently changing array of exceptions to the general
prohibition against self-referral. The exceptions contain requirements that
pertain to details such as the signatories to written agreements, the number
of hours an office is open per week, the square footage of leased space and
formulas for calculating rent, the duration of employment agreements, and
the value of incidental medical staff benefits such as free parking. Certain
exceptions apply only to ownership and investment interests, others apply
to compensation arrangements, and some apply to both. The Stark Law
features exceptions available only to group practices (as defined by the
regulations), regulations that affect the distribution of compensation within
a group practice, and a "stand in the shoes" provision that can be used to
attribute one physician's financial relationships to a colleague. Given this
complexity and the strict liability nature of the statute, inadvertent
noncompliance seems inevitable. An internal self-referral compliance
program can help a physician or DHS entity prove good faith and obtain
leniency in the event of a violation; however, the Stark Law's complexity
and frequent revisions make it difficult for physicians and entities to
develop and implement such programs.
Adding to the confusion, a physician or DHS entity that discovers it has
violated the Stark Law has no clear procedure to follow. Self-disclosure of a
Stark Law violation, which had been permitted under the Provider Self-
Disclosure Protocol introduced in 1998 by the U.S. Department of Health
and Human Services Office of Inspector General, is no longer available
unless a violation of the federal anti-kickback statute is also involved. Even
if self-disclosure were possible, the Centers for Medicare and Medicaid
Services (CMS) is not authorized to negotiate a DHS entity's liability for
submitting claims in violation of the Stark Law. Thus, if a hospital were to
discover that over the course of several years it submitted claims to
Medicare for services to patients referred to the hospital by a physician who
had (or whose family member had) a financial relationship with the
hospital, and the referrals violated the Stark Law due to an inadvertent
minor oversight such as omitting a signatory to a written agreement, the
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2010] "Stark" Reality: Federal Physician Self-Referral Law 239
hospital would be required to comply with the harsh sanction of refunding
the entire amount of all such claims and CMS would not have the authority
to compromise the sanction.
The Stark Law is often enforced through False Claims Act litigation
alleging that a claim for Medicare reimbursement for DHS services
provided in violation of the Stark Law amounts to a false claim in violation
of the Act. False Claims Act litigation can be brought by a whistleblower
under the Act's qui tam provision, and can add additional exposure to the
already harsh Stark Law penalties, including treble damages, penalties of up
to $11,000 for each violation, costs and attorneys' fees. Recent
amendments to the False Claims Act through the Fraud Enforcement and
Recovery Act of 2009 (FERA) could increase health care providers' Stark
Law exposure significantly. FERA applies False Claims Act liability not
only to claims that are presented to the government, but also to claims
submitted to another recipient of federal funds. Under FERA, the retention
of payments received for services provided pursuant to a prohibited referral
is sufficient to state a claim under the False Claims Act. The combination of
FERA's increased exposure to False Claims Act liability, health care
providers' inability to self-disclose if they discover a Stark Law violation,
and the difficulties inherent in implementing compliance programs and the
structuring and restructuring of health care business transactions in the face
of complex and frequently changing Stark Law regulations, make the Stark
Law a quagmire for the health care industry and misdirects time, money,
and energy into Stark Law compliance and defense that should be devoted
to patient care and improving health care quality and efficiency.
As the Beazley Institute enters its twenty-fifth year, the Stark law is
receiving intensified scrutiny and renewed criticism. Twenty-five years
have seen enormous changes in the health care industry, and some argue
that today's market, dominated by managed care networks and preferred
provider organizations, controls overutilization without the Stark Law's
complexity and propensity for inadvertent violations. Others contend that
today's constantly changing, competitive health care industry requires
innovative business transactions to provide high quality health care that is
efficient and cost-effective. The Stark Law should minimize the potential
abuse inherent in certain physician self-referrals while promoting
innovative business transactions that make efficient and cost-effective high-
quality health care available in communities where it is needed. The Stark
Law should provide clear, understandable prohibitions and exceptions to
simplify compliance programs and business transactions, develop a protocol
for self-disclosure, implement sanctions in proportion to the nature and
severity of violations and authorize the compromise of liability, while
protecting health care providers from the risk of disproportionately harsh
Stark Law and False Claims Act liability. Physician self-referral law should
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Tironi: The Stark Reality: Is the Federal Physician Self-Referral Law Bad
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240 Annals of Health Law - 25th Anniversary Special Edition [Vol. 19
be reformed to benefit patients, professionals, federal health care programs,
and the health care industry as a whole.
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The Stark Reality: Is the Federal Physician Self-Referral Law Bad for the Health Care Industry

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The Stark Reality: Is the Federal Physician Self-Referral Law Bad for the Health Care Industry

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