2 Key Stark Law items: Strict liability and volume or value

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The Physician Self-Referral Law aka Stark Law (“Stark I”), was first signed into law in 1989. Since then, Stark II was passed in 1993 with three phases of implementing regulations. Recently, I was asked to present on avoiding liability with a specific focus on physician contracts. Physician agreements take many forms, including physician-hospital contracts, agreements with medical device or pharmaceutical companies, office rental agreements, and physician-ownership in ambulatory surgery centers (ASCs), just to name a few.

How does one avoid liability under Stark, as well as a potential False Claims Act case? The simple answer is meet an exception “to the referral prohibition related to compensation arrangements.” (42 C.F.R. 411.357). It is important to appreciate that the U.S. Department of Health and Human Services Office of the Inspector General (HHS-OIG) states that, “[t]he five most important Federal fraud and abuse laws that apply to physicians are the False Claims Act (FCA), the Anti-Kickback Statute (AKS), the Physician Self-Referral Law (Stark law), the Exclusion Authorities, and the Civil Monetary Penalties Law (CMPL).” (emphasis added). HHS OIG, the U.S. Department of Justice (DOJ), and the Centers for Medicare & Medicaid Services (CMS) are the agencies tasked with enforcing these laws. This brings us to two of the key aspects of Stark highlighted in this article – strict liability and volume or value.

Strict liability

As recently as the new Final Rule, which was published in the Federal Register on Dec. 2, 2020, CMS reiterated that the Stark law is a “strict liability” statute and highlighted that even though an exception to the Stark Law may apply, the AKS, which is an intent-based criminal law and has a separate set of safe harbors, still needs to be considered because the Stark Law exceptions and the AKS safe harbors differ. (85 Fed. Reg. 77492, 77495 (Dec. 2, 2020)) (emphasis added). In fact, CMS mentions the term “strict liability” eight (8) times.

The physician self-referral law is a strict liability statute, which requires all the requirements of an exception to be satisfied at the time a referral is made. The failure to fully satisfy even a single requirement of an exception triggers the self-referral law’s referral and billing prohibitions where a financial relationship exists between a physician and an entity that furnishes designated health services. 85 Fed. Reg. at 77643. (emphasis added).

In essence, the key take-away is that liability under the Stark Law, which is a civil statute only, does not require intent or scienter. Stated another way, “strict liability” in civil cases, is imposed simply because of the relationship between the parties, or due to the fact that the defendant has undertaken an activity which resulted in injury [or a regulatory violation]. See McKinnie v. Lundell Mfg. Co., Inc., 825 F. Supp. 834, 838 (W.D. Tenn. 1993). As it applies to the Stark Law, a landmark Stark case is instructive regarding, “[t]he Stark Law is a strict liability statute so it is immaterial whether one intended to violate the law; an inadvertent violation can trigger liability.” United States ex rel. Drakeford v. Tuomey, 792 F.3d 364, 392 (4th Cir. Jul. 2, 2015).

Like the AKS, it is well established that compliance with the Stark Law (or alternatively squarely meeting an exception) is material to the Government’s payment of claims. While there is no intent to violate the Stark Law, a Relator’s counsel who bring a False Claims Act case through the qui tam (whistleblower) provision should have a pretty low bar to clear to meet the FCA’s knowledge standard. As a wrote in a recent Physicians Practice article analyzing the knowledge requirement in light of the Supreme Court’s unanimous decision in United States ex rel. Schutte v. SuperValu,Inc., 598 U.S. 739 (2023),

For those who may be unfamiliar with the FCA, the statute, which is rooted in the common law, establishes a three-part definition of “knowingly”. 31 U.S.C. §3729(b)(1)(A) defines “knowingly” as actual knowledge deliberate disregard for the truth or falsity of the information, or reckless disregard for the truth or falsity of the information. There are essentially two prongs that lead to a FCA violation – “(1) the falsity of the claim and (2) the defendant’s knowledge of the claim’s falsity.” SuperValu at 1398; see also 31 U.S.C. § 3729(a)(1)(A). The key is what the person believed at the time the claim was being submitted – not in retrospect what an objectively reasonable person may have discerned. (emphasis added).

Making sure that an exception is met is the only valid way under the Stark Law and the FCA to avoid liability. When entering into contracts with physicians related to designated health services, ensuring that fair market value, commercial reasonableness, general market value, utilizing a method for compensation that in no way takes into account volume or value is critical to avoiding liability through a government enforcement action or a FCA case initiated by a whistleblower.

Volume or value

Any arrangement that takes into account “volume or value” is expressly prohibited by the Stark Law. As the Court noted in Tuomey, “[t]o begin with, we note that the Stark Law’s ‘volume or value’ standard can be implicated when aggregate compensation varies with the volume or value of referrals, or otherwise takes into account the volume or value of referrals. 42 C.F.R. § 411.354(c)(2)(ii).” (emphasis added). The Court further goes on to state,

In drafting the contracts, Tuomey was well aware of the constraints imposed by the Stark Law. While we discuss the provisions of that law in greater detail below, in broad terms, the statute, 42 U.S.C. § 1395nn, prohibits physicians from making referrals to entities where “[t]he referring physician ... receives aggregate compensation ... that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing” the designated health services. 42 C.F.R. § 411.354(c)(2)(ii) (2014). Pursuant to the Stark Law, “[a] hospital may not submit for payment a Medicare claim for services rendered pursuant to a prohibited referral.” United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 675 F.3d 394, 397–98 (4th Cir.2012). (emphasis added).

If one is unfamiliar with the terms “volume” or “value”, common meanings apply.

In sum, in order to avoid an action by the HHS OIG, CMS, and/or DOJ (including a FCA case initiated by a relator), it is imperative to ensure that all elements of a Stark Law exception are met. Afterall, it is a low bar to establish a violation and it is well established that a violation is material for payment.

Rachel V. Rose, JD, MBA, advises clients on compliance, transactions, government administrative actions, and litigation involving healthcare, cybersecurity, corporate and securities law, as well as False Claims Act and Dodd-Frank whistleblower cases. She also teaches bioethics at Baylor College of Medicine in Houston. Rachel can be reached through her website, www.rvrose.com.