Typical Mistakes When Applying a Common Stark Exception

As physicians continue feeling the squeeze of declining reimbursements, uncompensated care, and recoupments, many are exploring the revenue-generating potential of ancillary services.  There appears to be some confusion as to the Stark Law "in-office ancillary services" and "group practice" exception.   

The very first question I ask of a client is whether or not referrals of Medicare and Medicaid patients are being contemplated.  This is the first question you must always ask when considering increasing income through referrals.  If the answer is "yes", the next question is whether the service is a Designated Health Service (DHS) which include: clinical laboratory services ,physical therapy services, occupational therapy services, outpatient speech-language pathology services, radiology and certain other imaging services, radiation therapy services and supplies, durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services.

If the referral is for a DHS and Medicare/Medicaid covers the claim, Stark Law applies.  Stark Law prohibits physicians from referring Medicare and Medicaid patients for designated health services to any entity with which the referring physician (or immediate family member) has any direct or indirect financial relationship unless an exception applies. 42 U.S.C. § 1395nn.

Unlike the Anti-kickback Statute (AKS), when Stark Law applies, the only safe way to make a referral is to fit squarely within an exception.  (Under the AKS, safe harbors are not mandatory, and the government must still prove a kickback was intended.  Thus, if the referral is for Medicare/Medicaid patients and the item is a DHS, you must find an exception or you cannot make the referral if you have any direct or indirect financial relationship with the DHS provider.

The most obvious exception is the "in office ancillary services" exception under 42 U.S.C. §1395nn(b)(2)) (or if the practice is actually a group, then you are supposed to apply the "group practice" exception under 42 C.F.R. § 411.352.) This is where people seem to be getting confused.  In order to apply the "in-office ancillary services" exception, you do not go out and buy a pharmacy, or a CLIA lab and set up down the street, or across town.  The ancillary services must be performed in the office or in the same building, and the people performing the services must be directly supervised by the physician, or a physician in the group. The services must be billed by the physician, or his group, under the same NPI number, or by an entity that is wholly owned by such physician or such group practice. In other words, the NPI number on the HCFA 1500 claim form should normally be the same as the physician or group practice.

You cannot "go in" with other doctors to buy a CLIA lab, or pharmacy, if you are not truly a "group practice," which is a "single legal entity." That is, according to 42 C.F.R. § 411.352, the group practice must consist of a single legal entity operating primarily for the purpose of being a physician group practice in any organizational form recognized by the State in which the group practice achieves its legal status.

Further, a management services arrangement typically is problematic, where a number of referring physicians do not own the DHS provider but attempt to pull profits out through a management company,  because an "indirect financial relationship" exists  under 42 C.F.R. 411.354(c)(2),  which must be analyzed under the indirect compensation exception 42 C.F.R. 411.358(p). This provides an exception if compensation is fair-market value and not determined in any manner that takes into account the value or volume of business generated. The agreement must also not violate the antikickback statute or other state or federal laws.

Finally, there are state laws to be considered. Texas, for example, will not permit a physician to dispense prescription medications for more than a 72-hour supply without complying with the Pharmacy Act. This would tend to eliminate in office pharmacies altogether.

As always, it is best to consult an experienced health attorney in your state before undertaking any plan which may implicate Stark law.