Many health care providers may expose themselves to civil liability for conducting seemingly ordinary business transactions made illegal by the complex network of Federal laws and regulations. Some of these potential violations result from transactions prohibited by the Stark Law. These restrictions are of special concern to physician specialists, group practices, and clinics where the some of the owners “overlap” between these entities. Doctors who “moonlight” with several entities may also easily run into violations of the Stark Law innocently and unwittingly.


In general, the Stark Law1 prohibits physicians from making a referral to an entity for the furnishing of a Medicare or Medicaid covered service2 if the physician (or an immediate family member) has a financial relationship3 with that entity4. This prohibition covers a wide range of business relationships between providers of health care services, turning innocuous everyday transactions into violations of Federal law. The purpose of the Stark Law is to minimize incidences of health care providers generating revenue for themselves by recommending unnecessary services or self-capturing services where those services should be referred to a separate entity or not performed at all.

Penalties for violating the Stark Law may include being banned from the Medicare and Medicaid programs (for the physician and/or the facility), the refund of illicit payments, denial of payments requested, a $15,000 penalty per service, and/or a $100,000 penalty per illegal arrangement. Most, but not all, types of health care services are covered by the Stark Law.

There are many exceptions to the Stark Law. Some of the exceptions include:

  • Services rendered personally by another physician within a group practice of which the referring physician is a member;
  • Ancillary services provided in the same group practice or same building as the referring physician;
  • Referrals to a hospital located in Puerto Rico; 
  • Referrals to a health care provider in a rural area;
  • Referrals to a non-specialty hospital where the referring physician is authorized to perform services and the physician has an interest in the hospital itself and not a subdivision;
  • Payments to another entity for the lease of real property (office space);
  • Payments to another entity for the lease of equipment;
  • A standard employment relationship;
  • A physician incentive plan;
  • A personal service contract;
  • Any other commercial arrangement that Department of Health and Human Services (“DHHS”) determines is not a risk of program or patient abuse.

Claiming A Safe Harbor Exception

Most Stark Law exceptions follow a regular pattern that provide “safe harbor” to kinds of conduct that appear the spirit, but not the letter, of the law. To be eligible to claim one of these safe harbors, the two interested parties must conduct their transactions under a commercial arrangement that generally appears like an arms’ length transaction. If the commercial arrangement between the referring physician and the referee is implied, unwritten, casual, or a general “understanding between friends” the parties may not be able to claim a safe harbor and could face sizable penalties for violating the Stark Law.

If a physician wants to make referrals to a separate entity or pay for that entity for services where that physician has a financial interest in that party, s/he should do so under one of the safe harbor exceptions. This means doing so in a formal manner akin to commercial entities negotiating with one another.

To be specific, most of the safe harbor exceptions require the following criteria: 

  1. The referring party and the party receiving the business must record their arrangement in a writing signed by the parties;
  2. The contract provides for a term of at least one year;
  3. The contract specifies the services, equipment, or property to be rendered, leased, or rented;
  4. The services, equipment, or property provided is what is reasonably necessary for a legitimate business purpose;
  5. The equipment or property is used exclusively by the payor when being used;
  6. The fees are recorded in the writing, are consistent with fair market value, and do not reflect the volume or value of any referrals between the parties;
  7. The contract would be commercially reasonable in the absence of any referrals at all; and
  8. The contract meets other requirements dictated by DHHS.

Terms for Contract

It is recommended that health care providers seeking one of the exceptions to the Stark Law consult with and have an attorney prepare a commercial contract to govern the business conducted. Such a contract should explicitly reference the Stark law and the exception(s) to which the parties claim eligibility. The contract must be signed by authorized representatives of both entities, last for at least one year, describe the services or equipment, set the terms at fair market value, explicitly deny any obligation by either party to make referrals to one another, and state that the rates are not influenced by the volume or value of any referrals between the parties.

Aside from the protection provided by having an attorney research the matter and carefully draft the contract, the fact that the parties hired an attorney to prepare the arrangement in and of itself bolsters a claim that the business between the parties is a bona fide arm’s-length transaction.

Options for Documentation of Fairness

In the event that DHHS or the Office of the Inspector General opens an investigation into the business relationship between two interested entities, the parties will need to defend the arrangement as compliant with the Stark law and within the applicable exception. The most critical and challenging requirement will be proving that the rates set forth in the arrangement is fair market value.

Consequently, the parties should have proof that the rates set forth in their contract are the current commercially reasonable rates. One option is to contact third party health care providers and request quotes for their services or equipment. As long as the rates set forth in the contract are comparable to those quoted by other entities, those written fee quotes may substantiate your claim that you contract charges fair market value.

A second and more expensive option is to hire an economist to do a market valuation. This study would be comprehensive, supported by data, and would determine with a good deal of accuracy, the current market value of any particular good or service. A well-documented report from an economist would serve as strong support in the event that one is investigated by the DHHS for violating the Stark Law and conducting improper self-dealing.

Any health care provider considering conducting business with another provider with which one has a financial interest should contemplate and prepare for the possibility of an investigation. That contemplation includes a review of the provisions of the Stark Law and preparation would include obtaining documentation that the business arrangement between the two entities is substantially the same as an arm’s-length transaction.

1 Named after Congressman Peter Stark, the Stark Law was originally enacted in 1989 and subsequently amended in 1995 and 2007. It is currently codified at 42 USC §1395nn, which is § 1877 of the Social Security Act.

2 Many kinds of health services are covered by Stark Law, including “clinical laboratory services.” 42 USC §1395nn(h)(6)(A).

3 A “financial relationship” may be an ownership interest in the entity, an investment interest, or a compensation arrangement, including any sort of equity, debt, or other interest in the entity. 42 USC §1395nn(a)(2).

4 42 USC §1395nn(a)(1)(B) §1395nn(a)(2)(B).