Stark Settlement Demonstrates New Focus on Physician Compensation Plans

By: Dustin T. Wachler

The federal Stark law (“Stark”), or physician self-referral prohibition, was initially enacted in 1995 as the government’s response to growing evidence that physician ownership of healthcare entities resulted in conflicts of interest and increased utilization of healthcare services. Stark generally prohibits a physician from referring Medicare or Medicaid patients for designated health services (“DHS”) to an entity in which the physician has a financial interest. There are several categories of DHS under Stark, including but not limited to clinical laboratory services, physical therapy, radiology and other imaging services, outpatient prescription drugs, home health services, durable medical equipment and supplies, and inpatient and outpatient hospital services. Stark defines a financial interest broadly to include any ownership or investment interest in, or compensation arrangement with, a healthcare entity.

Stark prohibits referrals by a physician to an entity with whom the physician has a financial relationship, and also prohibits the entity from making a claim for payment under the Medicare or Medicaid programs for referrals of DHS that violate Stark. Penalties for violating Stark are severe and include denial of payment, refund of payment, and imposition of a $15,000 per service civil monetary penalty. Stark also provides for a $100,000 civil monetary penalty for each arrangement that is considered to be a circumvention scheme intended to violate Stark. Claims for payment made pursuant to Stark-prohibited referrals also often result in prosecutions under the False Claims Act (FCA). The FCA permits qui tam relators, or whistleblowers, to file lawsuits against healthcare providers on behalf of the government and receive a percentage of the judgment or settlement.

Stark is often referred to as a law of exceptions. Under Stark, statutory and regulatory exceptions exist to protect commonplace industry arrangements that the government has determined do not run the risk of overutilization and federal healthcare program abuse. The most common and beneficial Stark exception utilized by physicians is the “in-office ancillary services exception” available to group practices. Under this exception, physician groups that meet Stark’s definition of group practice are permitted to refer in-office ancillary services (e.g. lab services, x-rays, ultrasounds) within their practice. However, Stark limits the manner in which physicians may be compensated by their group practice. A physician may be paid a share of the overall profits of their group, but the physician’s compensation cannot be determined in any manner that is directly related to the physician’s volume or value of referrals of DHS. A physician may also be paid a productivity bonus based on services personally performed by the physician or services incident to such personally performed services. Of note, under Stark, diagnostic services are no longer considered incident to a physician’s personally performed service.

Our firm regularly structures physician groups and their physician compensation plans to meet Stark’s group practice definition and in-office ancillary services exception. Interestingly, while all group practices must comply with Stark, there has been a lack of enforcement by the federal government with regard to physician compensation arrangements under Stark’s group practice exception. As such, almost all Stark prosecutions to date are related to referrals in the hospital setting.

Recently, however, the U.S. Attorney for the Northern District of New York announced what is considered to be the first Stark prosecution and settlement regarding physician compensation arrangements in a group practice. As historically the issue of internal physician compensation has gone largely unmonitored, the government and qui tam relators’ new focus on physician compensation plans under Stark should put all healthcare providers on notice that physician compensation may come under scrutiny in the near future.

The New York case involved a cardiology group practice and led to a $1.336 million settlement. According to the settlement, the group’s physicians received compensation based on a formula that directly related to the volume or value of the physician’s orders of CT scans and nuclear diagnostic tests that the physicians did not personally perform, but referred within their group. Notably, the group claimed to have gone to great lengths to comply with Stark, and neither utilization nor physician compensation increased under the compensation plan at issue.

The Stark law and its exceptions are very complicated, however the law treats physician compensation within a group practice favorably. Physician compensation may be based on an overall share of the group’s profits, the physician’s referrals of non-DHS services within the group, DHS services personally performed by the physician, or personally performed relative value units (RVUs). Given the renewed focus on physician compensation plans, and the severe penalties available to prosecutors under Stark, physician practices may wish to review compensation plans to ensure compliance with all of Stark’s requirements. In all cases, be aware that physician compensation should never be tied directly to the physician’s Medicare and Medicaid DHS referrals within the practice.