Physicians: Beware Schemes to Circumvent Stark Law

February 9, 2014
Martin Merritt

No matter how cleverly structured, schemes to circumvent Stark Law are risky for physicians, and the consequences of failing to comply can be devastating.

As originally enacted, the Medicare program insured patients’ medical needs while providing reimbursement of physician fees at a rate of 80 percent of the usual and customary charges for services.

The government promised “no haggling,” and no “volume discounts.” Just a fair rate of compensation for a job well done.

Not surprisingly, it expected physicians to be happy with this arrangement.

Ethical prohibitions, stated in AMA Opinion 8.0321, that addressed conflicts of interest that might arise if a physician held ownership in ancillary service providers to which he might refer a patient, did not seem too onerous when reimbursement rates were high. 

Then, slowly, the rest of the world recovered from the devastation of World War II. The United States economy was forced to share the means of production, and the ability to supply the world’s needs with a worldwide workforce.

Jobs, wages, and payroll taxes, all of which financed the Medicare program, were shipped overseas.   This had a direct, and downward effect on the program’s ability to maintain physician reimbursement levels.

One natural solution for physicians seeking alternative sources of revenue was (and remains) investment in ancillary services providers, such as diagnostic imaging, pharmacies, and laboratories. 

In 1989, Stark Law was enacted to limit, but not totally forbid, the ability of physicians to “self-refer” patients to providers of ancillary services of Designated Health Services. It is in this “gray area” that trouble lurks.

Today, physicians may be barraged with investment opportunities, some of which comply strictly with Stark Law “safe harbors” and some of which are marketed as offering some clever means of circumventing the express prohibitions of the Stark Law regulations. 

As reimbursement rates continue to decline, such passive investment opportunities may seem attractive.  Be warned, from the perspective of the Office of Inspector General (OIG), the passage from Ecclesiastes 1:9 holds true, “What has been will be again, what has been done will be done again;  there is nothing new under the sun.” (Simple Translation: The OIG has seen it all, and it is not the least bit fooled.)

The Stark Law Statute defines a “circumvention scheme”  as an arrangement or scheme (such as a cross referral arrangement) that the physician or entity knows or should know has a principal purpose of assuring referrals by the physician to a particular entity which, if the physician directly made referrals to such entity, would violate the Stark Law, and is subject to a civil money penalty of not more than $100,000 for each such arrangement or scheme.

What does that mean? The AMA provides a simple, but by no means exhaustive example:

"Suppose Physician A has an ownership interest in an independent diagnostic treatment facility (F1). Suppose also that Physician A is not permitted under the Stark Law to refer Medicare patients to the F1 for the provision of DHS. Suppose that Physician B practices in the same town as Physician A and also has an ownership interest in another facility (F2) to which she is not permitted to refer Medicare patients for the provision of DHS. Finally, suppose that the Stark Law does not prohibit Physician A from referring to F2 and Physician B is not prohibited from referring to F1. Physicians A and B would enter into a prohibited circumvention scheme if Physician A agreed to refer all of his/her Medicare patients to F2 in exchange for Physician B agreeing to refer all of his/her Medicare patients to F1."

This is but a simple example, but illustrates the point.  It is the fundamental nature of the scheme, not clever semantics or “layering” of an arrangement which counts.

In sum, if you are presented with an opportunity to earn passive income through the investment in an ancillary service provider, seek the help of an experience health lawyer. Circumvention schemes, no matter how cleverly structured, can be very risky, and the consequences devastating.