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Stark: A stagnant law for an evolving industry

published in McAfee & Taft Healthcare Commentary | February 16, 2016

By Michael E. Joseph

The Stark Law was originally enacted by Congress in 1989 as the Ethics in Patient Referrals Act. Initially, it prohibited a physician from referring Medicare beneficiaries to clinical labs in which the physician had an ownership interest or other financial relationship. The government had substantiated that physicians with interests in clinical labs ordered more tests. The law was later expanded, and it now prohibits physicians from referring Medicare patients to an entity that provides 11 kinds of services referred to as “designated health services” if the physician or a family member has a financial relationship with the entity. The financial relationship can be an ownership interest, an investment interest, or a compensation arrangement. If a physician makes a prohibited referral, the entity may not submit a claim for reimbursement to Medicare for the services provided. It was rooted in a sentiment that physicians engage in practice primarily to profit from their patients.

Convoluted and complicated

The Stark law has become increasingly convoluted over the years because of complicated regulations, restrictions on historically acceptable professional practices, and inability in many instances for physicians, healthcare facilities, and other healthcare providers to know if they are in compliance, even after legal consultation. Violations occur without any intent to violate the law because intent, motive, or knowledge aren’t factors that are taken into account in determining whether a violation has occurred. The principal author of the legislation, former Congressman Fortney “Pete” Stark, said in 2013 that he would favor repealing the law. According to Congressman Stark, the purpose of the law was to stop those with bad intentions.

The Stark Law, as it has evolved, is one of the worst legislative enactments affecting the healthcare industry. It inhibits innovation, contains an eccentric mix of excessively general and overly specific provisions, and provides for penalties that are unconventionally disproportionate to the prohibited activity. Thousands of pages of sometimes-inconsistent regulations that were issued in phases impede transactions and relationships that can enhance patient care. Some of the contrived definitions and descriptions of arrangements have no bearing to the practice of medicine or Medicare reimbursement principles, resulting in difficulty for physicians to understand the rules and apply them in the context of their medical practice. Some of the terms used also bear little relation to universally understood legal concepts, making them problematical for lawyers to interpret.

Take, for example, the definition of “referral.” It includes not only traditional notions of physician referrals, but also ordering designated health services, or certifying the need for designated health services for which payment may be made under Medicare Part B. A referral would not be prohibited if it is made for items or services that are not designated health services. Designated health services include hospital inpatient and outpatient services, as well as other items or services for which reimbursement may be made under Part A.

The definition of “fair market value” is fairly general. It basically means the value in arms length transactions, consistent with the general market value. Contrast that with the definition of “immediate family member,” which includes a husband or wife; birth or adoptive parent, child or sibling; stepparent, stepchild, stepbrother, or stepsister; father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent or grandchild; and spouse of a grandparent or grandchild. The definitions of “group practice” and “in office ancillary services” are so specific that they extensively cover details about office buildings, suite numbers, hours of operation, numbers of patient encounters, full-time and part-time physicians, independent contractors as members of a group, internal referrals, supervision of personnel and services, billing name, markups, payment of productivity bonuses, and methods of distributing profits.

The unusual mix of marked generality and astounding specificity reflects an inability of regulators to match up regulatory activity with the realities of medical practice. That approach to the law demonstrates that the guardians of patient care are physicians, not government regulators.

Courts are practically apologetic in upholding jury verdicts for millions of dollars as a result of Stark Law violations. In one recent case, a federal court described the Stark Law as an impenetrably complex set of laws and regulations, and “even for well-intentioned health care providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure.” U.S. ex rel Drakeford v Tuomey, 2015 U.S. App. Lexis 11460 (4th Cir.). The government, on the other hand, has continued to advance expansive interpretations of the Stark Law through complicated regulations and commentary.

Initially, CMS stated that it would promulgate regulations that create “bright line” tests for determining compliance, but CMS has wandered off from that approach. The regulatory approach has resulted in uncertainty, and both physicians and their attorneys are left to struggle with inflexible and impenetrably complex traps.

Evolving industry outpacing Stark

The Stark Law was enacted during a time when fee-for-service medicine prevailed. In a new era of value-based reimbursement, the underlying principles of the law are not as significant. The basic assumption that physician investment leads to illicit profits has not necessarily proven to be true. Other laws, such as the Medicare anti-kickback statute and laws prohibiting payments for soliciting patients, along with principles of medical ethics, address egregious conduct. Changes in medical technology, payment arrangements with payers, expanded employment of physicians by hospitals, and major healthcare industry reforms have purged the need for many of the flawed concepts of the Stark Law. Exaggerated penalties for tainted referrals, particularly those that are accidental, unintentional, and unknowing, provide incentives for whistleblowers to make obscene profits.

The Stark Law generates a huge amount of work for lawyers, accountants, and valuation consultants, but doesn’t do much to improve quality of care, access to care, or efficiency in providing care to patients. The benefits that the law might provide are outweighed by innovation, patient satisfaction, patient convenience, and benefits that could be provided without it.

Repeal or revise: Where should we go from here?

Short of repealing the Stark Law, Congress should consider revisions, such as eliminating provisions that don’t conform to Medicare reimbursement principles; requiring intentional or knowing conduct; limiting the application of the law to the Medicare program; creating bright line standards that allow for clarity and predictability; eliminating the treatment of violations as a basis for False Claims Act liability and severe penalties; providing for financial arrangement disclosure in lieu of financial arrangement prohibition; and encouraging healthcare industry innovation and implementing safeguards for innovation.

This publication has been provided for clients and friends of McAfee & Taft A Professional Corporation. It does not provide legal advice, and is not intended to create a lawyer-client relationship. Readers should not act upon information in this publication without seeking professional counsel.

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