How Holdover Contracts Can Violate Stark Law

Failure to sign a document, or allowing it to expire without replacement, is a common administrative oversight. However, when it comes to a medical practice, there can be severe repercussions for such a failure, including violation of the federal Physician Self-Referral Law (42 USC 1395nn), also known as “Stark."

Under Stark, a physician generally may not refer to an entity with which the physician or an immediate family member has a financial relationship or ownership interest for designated health services (DHS), unless an exception applies.  DHS can include inpatient hospital services, laboratory tests, diagnostic testing, physical therapy, home health and other services.  A medical practice and its physicians that refer federal patients for DHS to a third party they also have a financial or ownership relationship with (lease arrangement, professional services agreement, etc.) can unexpectedly find themselves in violation of Stark. This would happen if they fail to get the agreement with such third party signed upon its initial creation or, in some circumstances, to renew it upon expiration. This is true, even if the content of the agreement otherwise complies with a Stark exception.

For example, assume your medical practice has a lease arrangement with a hospital to use space in your practice’s office, and it was signed June 1, 2010.  The physician owners of the practice also refer to the hospital for a variety of DHS.  The lease arrangement expired June 1, 2014, and the parties simply failed to renew it.  Instead, the arrangement continued on the same terms.  Has there been a violation of Stark?

As of 2016, Stark allows an indefinite holdover of an expired agreement based on the above facts, as long as the following general conditions are met:
A) The arrangement met the Lease of Space Exception when it expires;
B) The holdover arrangement is on the same terms and conditions as the immediately preceding arrangement; and
C) The holdover arrangement continues to satisfy the conditions of Lease of Space Exception.

In this case, the lease expired in June 2014, and the parties have been operating under the same terms of the lease. Although it appears the agreement would be compliant with the holdover provision described above, the lease expired in 2014. Prior to the change in 2016, the Stark holdover provision only permitted a six-month holdover.  In our example, this six-month holdover would have ended in December 2014. 

Because the law changed, one might assume that the parties can simply apply the new holdover provisions.  However, the government has made it clear that only parties in a valid holdover arrangement (under the then current six-month holdover provisions) on the effective date of the final rule could make use of the indefinite holdover provisions. Specifically, if an arrangement did not qualify for the six-month holdover on the effective date of the new rule, the parties could not make use of the indefinite holdover provisions.

Based on the above scenario, the lease between the practice and the hospital would not qualify for indefinite holdover under the 2016 holdover provisions.  This potentially means that DHS referrals made to the hospital by practice physicians since June 2014 violate Stark.  The next step is counsel for the hospital and the practice to investigate whether their relationship has been in compliance with Stark and, if not, discuss the process of self-disclosure to the government.  CMS maintains a voluntary self-disclosure policy that can be used under such circumstances. 

Practices need to take the time to make sure they have no expired agreements under which they are currently operating. Also, if a practice is operating after an expired agreement under the holdover provisions, don't amend the terms of the arrangement in any manner. Any modification in the arrangement between the parties stops the holdover. The amended terms would then be viewed as a new arrangement that must independently meet Stark requirements.

An annual review of all agreements which might implicate Stark, and whether they are in force, is recommended.  If your practice discovers a contract which may violate the Stark holdover provisions, health care counsel should be contacted immediately for guidance.