Alice Gosfield

Let's face it, the Stark statute is confusing. No, it's draconian. No, it's both.

The statute prevents physicians from referring Medicare and Medicaid patients for designated tests, procedures, and services at facilities in which the physician or the physician's family members hold financial interests -- unless an exception applies. Referrals for X-rays, physical therapy, clinical laboratory services, prosthetics and orthotics, and certain other services may be exempted if the physician's billing entity qualifies as a group practice. 

Contrary to popular myth, there is no group practice "exception" to the Stark law. Rather, to qualify for some of the Stark law's most important exceptions, the entity -- the group -- must meet the seven specific criteria outlined in the law:

The group must be legally organized as a partnership, professional corporation, foundation, nonprofit corporation, faculty practice plan, or similar association. The ownership -- a for-profit entity, a university, individuals, or others -- does not matter. Previously existing groups may unite to form a new group practice but may not continue to function as independent groups.

The regulations also establish that members of a group include shareholders, partners, and W-2 employees, but not independent contractors. This allows groups more flexibility to use independent contractors and still meet the law's group practice standard.

Each physician-member of the group must provide the full range of services -- medical care, consultation, diagnosis, or treatment -- that he routinely provides. Those services must be provided through the joint use of shared office space, facilities, equipment, and personnel. So if an invasive cardiologist practicing the full scope of cardiology in one setting also works part-time at another group, but performs only cardiac catheterizations at the part-time gig, he would not be providing the full range of his services. However, if all he did at any site was cardiac catheterization, then that's the full range of this cardiologist's services under Stark.

Where the law says "joint use of shared office space," it doesn't mean that each physician member of the group must cycle through every one of their group's locations. Rather, this requirement applies to the somewhat complicated but critical unified business test described below.

Substantially all of the services of physicians in a group must be provided through the group. They must bill their services under a billing number assigned to the group and treat monies received as the group's receipts. Some medical groups allow physicians to bill under their own numbers, but for Stark purposes all physicians must bill through a number associated with the entity's single tax identification number.

The formula to allocate overhead expenses and income must be in accordance with methods previously determined. For example, you can't decide mid-year to allocate revenue and assess overhead differently for that period because revenues are in a nosedive. The group can change its overhead formula prospectively as often as it wants but may never change its formula retrospectively.

No physician member of the group may directly or indirectly receive compensation based on the volume or value of referrals for or by the physician. This "no volume or value" standard crops up in many areas of the statute and it is specially interpreted for groups.


A physician in a group practice may be paid a share of the group's overall profits or a productivity bonus based on services she personally performs or services performed incident-to her. But her bonus must not be determined in a manner that is directly related to the volume or value of her referrals.

Obviously, getting a share of profits indirectly reflects the referrals made within the group because referrals generate profits. But according to Stark, profit distributions are different from productivity bonuses. A profit distribution does not reflect a physician's own labors. Getting a share of the overall profits means sharing in the entire profits from the designated health services (DHS) of the entire group or any component of the group that consists of at least five physicians [Federal Register. Vol. 66, No. 3 (Jan. 4, 2001) p. 908].

Group practice members and independent contractors can receive shares of the group's overall profits. But to avoid any implication that these profit shares directly reflect DHS referrals, regulators describe three approved profit distribution methods:

Each physician has an equal share of the group's overall profits.

Distribution of DHS revenues is based on the distribution of the group practice's revenues attributed to services that are not DHS, whether payable by federal or private payers. In other words, you could allocate profits based on each physician's volume of evaluation and management (E&M) services compared with those of other physicians in the group, on a percentage of relative value units (RVUs) for surgeries compared to the group's total services, or other surrogates for DHS.

Any type of distribution of DHS revenues as long as the group's revenues from DHS are less than 5 percent of its total revenues and no physician's allocated portion is more than 5 percent of his or her total compensation from the group practice.

The Stark regulations do not pose nearly as much of a problem with the concept of productivity because it is considered a direct reflection of the physician's own efforts, rather than profits from referrals to others. The Phase II rules issued March 26, 2004 [Federal Register. Vol. 69, pp. 16063, 16067] also reaffirm that physicians may be given direct dollar-for-dollar credit for revenues from every service they perform and any service that is incident-to their services.

Group members must personally conduct no less than 75 percent of the group's physician-patient encounters. To see if you meet this standard, evaluate each physician to determine how much time he or she spends on group activities. Activities can be administrative or clinical, but they must average to 75 percent for all of the members of the group (excluding independent contractors). 

The 75 percent rule aims to exclude such entities as virtual groups of itinerant specialists who spend minimal amounts of time with a group. For example, a group of three family physicians hires an OB/GYN, an endocrinologist, and a radiologist so they can offer a women's health service. Those three specialists work as part-time employees and spend only one half-day a week with the family practice group. The group would no longer meet the law's definition of a group practice because the average of all of the physicians working in the group would equal 55 percent. 

However counterintuitive it might sound, the group would be able to qualify as a group practice if those three specialists were independent contractors, since the Stark law does not count independent contractors for this analysis.

The group must meet other standards the government may impose by regulation. Here, the most significant standards are those pertaining to the "unified business" test. It is on this standard that most "group practices without walls" -- a collection of groups that comes together with each group continuing to conduct its business as usual -- run afoul of the Stark standards.

To qualify as a unified business, a group practice must have centralized decisionmaking by a body of the practice that maintains effective control over the group's assets and liabilities including, but not limited to, budgets, compensation, and salaries. Although profit distributions may be allocated to pods of five or more physicians within the group, a pod's salary-distribution formula must be approved by a central board of the group.

The group must have consolidated billing, accounting, and financial reporting. Although this does not require a unitary or centralized computer system, the group must have a single location at which these activities are aggregated.

As you can see, the Stark statute is detailed and complex. The interim final rule for the law published March 26, 2004, smoothed out some of the regulation's rough edges, but some 20 exceptions remain embedded in its convoluted language.

Physicians who work in office-sharing arrangements, group practices without walls, virtual groups, and shared overhead expense arrangements would be wise to evaluate whether their organizational relationship can qualify under this statute.

If you are not sure whether your group qualifies and you treat Medicare or Medicaid patients, find qualified legal advice from someone who is familiar with the Stark law. And find it fast. The release of the interim rule now gives the Office of the Inspector General a clearer path to pursue legal actions against violators who may face sanctions including nonpayment or refund of their claims for prohibited referrals as well as civil monetary penalties. 

Alice G. Gosfield is principal of Alice G. Gosfield & Associates, PC, a nationally recognized law firm focusing on healthcare regulation. She is a past president of the National Health Lawyers Association and the former chair the board of directors of the National Committee for Quality Assurance. She can be reached at 

This article originally appeared in the June 2004 issue of 

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Understand how Stark defines a group practice

Author | Alice Gosfield

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