The Stark Reality

July 15, 2001

An overview of Stark II requirements


More than three years after the Health Care Financing Administration (HCFA) introduced Stark II regulations on physician self-referral, the first phase of the final rules was finally released in January 2001. Physicians and their advocates have begun preparing to comply with the new regulations and are finding the work easier than expected; and the consensus is that the new rules are an improvement over the original proposals.

The Stark law, passed in 1989 and revised in 1993, prevents physicians from referring Medicare and Medicaid patients for tests and procedures at facilities where the physicians or their families hold a financial interest. Physicians must comply with the first phase of its final rule by January 4, 2002.

“I’m not saying [the regulations] aren’t complex,” says Aaron Krupp, a government affairs representative for the Medical Group Management Association (MGMA). “You still have to wade through hundreds of pages of regulations. But I think there are significant improvements in the final regulations compared to the proposed rules.”

For instance, there are new safe harbors that allow groups to choose their own compensation practices.

“I think that was our single biggest concern, and if it was up to us, we would have removed the restrictions altogether,” Krupp says. “But these do offer more flexibility in setting up compensation packages.”

The new rules may not change anything for Keith Chew, practice administrator of the 23-physician radiology practice, Imaging Radiologists, based in Springfield, Ill.

“We already made the changes we had to when the proposals came out,” says Chew, whose experience offers lessons for practices that awaited the final rules before acting.

Reinventing the practice

As a result of Stark, Chew says his practice had to change its structure - from a group of independent contractors who distributed revenue equally to a limited liability company (LLC). Each physician established a professional corporation and all became members of the LLC. Under Illinois law, LLCs must vote unanimously to expand, which has dampened recruitment efforts, particularly since there is a shortage of radiologists, he says.

“Before, we provided guaranteed compensation for a certain number or years, worked up recruits to partnership, and that was that,” he says. “Now we can’t guarantee partnership.”

There is also increased bureaucracy that can slow down decision making. Previously, a board directed the operations of the member organization and made strategic decisions, says Chew. Under the new LLC structure, members need to take a vote after the board approves proposals. Sometimes a simple majority is all that is needed, and at other times a supermajority is required. Chew says that can add two days to three weeks to the process.

Financially, the structure change cost the practice between $225,000 and $300,000, Chew says. “And it didn’t do anything for the group, improve delivery or quality of healthcare, or the services we provide to contracted facilities. It didn’t save the government any money. It just made some lawyers richer.”

The cost was higher than it needed to be because many of the individual physicians wanted their own lawyers in on the process. Only $27,000 was spent on making the legal change in practice structure, and Chew thinks that low figure was due to research he did before even contacting the lawyers.

“I knew the Stark law inside and out,” he says. “If you do your homework, you know what you have to change when it comes to compliance, and you stand in better stead. Just tell the lawyers what you want them to do. That saves money.”

The good news?


Krupp says he gets more questions from physicians about self-referral regulations than anything else. But for those practices that started dealing with the issue when the proposed regulations came out, the final rules offer good news.

“Assuming you were in compliance a year ago, you will be now,” he says. “And the bonus is that the new rules will clarify some of your questions.”

On the downside, there is another phase to come, which has yet to be released.

“Keep in mind that this is phase one,” Krupp says. “That was a surprise to most people. We didn’t know they would do this in two parts. Phase one addresses many of our concerns, but phase two will address Medicaid, provisions regarding home health, and any changes that the comment period engenders.”

Gerald Neiderman, an attorney with the Denver-based law firm Faegre & Benson, says that though the final rules show there is “a little less paranoia out there that physicians and groups are going to abuse the system to the detriment of their patients,” questions still remain. For example, using a percentage of collections as part of most compensation formulae is common, Neiderman says. “Many thought that it was OK, but there is some language in the new materials that indicates it might not be valid.”

In addition, a lot of practices have used the “long and torturous history” of the Stark law to delay taking action, says Neiderman.

“Well, the law is final now, and there is every indication that there will be active enforcement of this prohibition on referrals, and the prohibition on billing,” he says. “If you are the hospital or imaging center or office, you can’t bill the government for prohibited referrals of business, and if you do, there is substantial potential monetary liability. Some people believe, based on court cases, that the submission of improper claims under Stark could be the basis for a false claims suit.”

Neiderman adds that, with such a strict law as Stark, practices need to get legal counsel to make sure they are compliant.

“In contrast to the anti-kickback laws where the government has to prove bad intent, in this one, if you violate the law, you are in the wrong,” he says. “You don’t need to prove intent, and there is no defense if you did it.”

Lisa Hubbell can be reached at editor@physicianspractice.com.

This article originally appeared in the July/August 2001 issue of Physicians Practice.