Stark Law Group Practice

Declining reimbursement or the threat thereof, rising expenses, and general inflationary factors have lead many physicians to evaluate other potential sources of income for their practice.

Some physicians are taking a second look at the opportunity to generate income off of the referrals that would ordinarily be sent out to other providers. Other physicians are exploring the formation of practice groups to offset overhead costs and obtain economies of scale. Both of these options involve physician compensation arrangements.  When government payers are involved, the physician has to ensure that compensation arrangements comply with the federal self-referral and anti-kickback statutes. Failure to comply can have devastating consequences. Physician groups and self-referrals both implicate compensation arrangements, which are the purview of the self-referral and anti-kickback statutes. Both of these statutes prescribe the requirements necessary to satisfy the proper formation of a "group practice" which permits certain referral and compensation arrangements.

The Prohibitions Imposed by Stark Law and Anti-Kickback Statute

The federal self-referral statutes and anti-kickback statutes were created to prohibit referrals between financially related parties. The federal self-referral statute, commonly known as the Stark Law, prohibits physicians from making a patient referral to an entity for the purposes of providing "designated health services" in which that physician (or a family member) has a financial interest, where payment is sought under Medicare or Medicaid. 1 Stark law was enacted in an attempt to eliminate unnecessary patient care and the overutilization of the Medicare and Medicaid programs. 2 Designated health services include clinical laboratory services, physical therapy, occupational therapy, outpatient speech pathology services, radiology, radiation therapy, durable medical equipment, parenteral and enteral nutrients, prosthetics and orthotics, home health care, outpatient prescription drugs, and inpatient/outpatient hospital services. 3 Similar to Stark law, the anti-kickback statute prohibits certain referral practices involving Medicare patients. This statute prohibits the intentional payment of kickbacks, bribes or rebates, directly or indirectly, to induce another person to refer a patient to a healthcare provider for services paid under a Federal health benefit program. 4

Physicians' self-referral and the profit distributions from the physicians' ownership in a group practice may trigger the Stark law and anti-kickback statute. Despite the prohibitions imposed by Stark and anti-kickback statute, certain exceptions and safe harbors exist which permit physician referrals back to the practice in which that physician has a financial interest. A physician's referral to his/herself does not constitute a referral if that physician is going to personally provide the service. A physician's referral back to the medical practice is deemed to be a referral for purposes of the statutes. Therefore, it is only permitted if the physician and/or practice satisfies all of the requirements of an exception or safe harbor.

Carve-outs to the Prohibitions

Stark law provides several exceptions to the prohibition on self-referrals. Under the exceptions, a physician who qualifies as a member of a group practice may personally provide health services, including 'designated health services,' to an individual who has been referred back to the practice by another member of the same group. 5 Under Stark, physical therapy is one such designated health service. For example, for the physician must satisfy the applicable exception to refer Medicare patients back to the group practice for physical therapy. One exception is termed the "in-office ancillary services" exception. 6 It allows a physician to self-refer for designated health services. This self-referral exception permits the physician to personally provide or supervise individuals providing the designated health service in a building where the referring physician performs his/her primary services. 7 The exception encompasses the physician's referral of designated health services that are performed personally by the referring physician, by other physicians in the same group practice, or by individuals who are supervised by another physician in the same group practice. 8

Qualifying as a "group" under Stark law is important because it permits physicians within the group to use the in-office ancillary services exception. A group practice means more than having a bunch of doctors under one roof sharing expenses. To provide designated health services, the physicians must satisfy several requirements to obtain group practice status. 9 A group practice must be composed of two or more physicians that are legally organized as a partnership, professional corporation, foundation, or not-for-profit corporation. Next, each physician must provide a full range of services that are routine to that physician's practice, which includes "medical care, consultation, diagnosis, or treatment, through the joint use of shared office space, facilities, equipment and personnel." 10 The group's services must be billed under the group's billing number, and revenues received must be treated as belonging to the group, with a predetermined allocation of income and overhead expenses. 11 A physician's compensation may not be based on his/her volume of referrals back to the group. 12 Lastly, the group physicians must perform 75% of all of the medical services provided (including designated health services) by the group. 13

The Unified Business Test

As you may expect, the government's inquiry to see if the aggregation of physicians truly qualifies as a group goes deeper than satisfying the aforementioned criteria. Both Stark and the anti-kickback statute require that the group operate as a singular integrated business enterprise. 14 The "unified business test" determines whether the group practice operates in this fashion. 15 The test ascertains whether there is legal and organizational integration. Under the "unified business test", the group must satisfy the following essential elements. The group must utilize a representative, centralized decision-making process, which maintains effective control over the group's assets and liabilities. The group must use consolidated billing, accounting, and financial reporting. Utilization review must be conducted on a centralized basis. According to CMS, the test was designed to "preclude group practice status for loose confederations of physicians that are group practices in name, but not operation." 16 "It is a statutory requirement that a group's compensation methodology be determined in advance. Unrestricted ad hoc compensation systems would allow groups to compensate physicians directly based on the number of designated health care services referrals they generate-the very conduct the statute is intended to prohibit." 17

Permissible Group Compensation Arrangements

Stark law applies to the practices' designated health service revenues, not non-designated health service revenues. 18 For compensation purposes, a group practice can partition its designated health service revenues from other practice income. 19 The group's overall profit distribution may be utilize a) per capita equal division of the profits; b) a distribution of designated health service revenues based on the ratio of evaluation/management services to the value units for non-designated health services; c) any distribution of designated health services revenue provided that the group's designated health service revenues and no single physician's allocated portion of those revenues are more than five percent of that physician's total compensation or the total compensation of the group. 20 Physicians in group practice may also be paid a share of the group's overall designated health service profits of the group provided that the allocation of the share is made in a "reasonable and verifiable manner" and not in a manner that is "directly related to the volume or value of the physician's referrals of designated health services." 21

Stark law also permits compensation based on productivity formulas. It allows bonus allocations based on a) the physician's total patient encounters or relative value units; b) the physician's compensation that is attributable to non-designated health services; c) any productivity bonus which includes designated health services if the group's designated health service revenues are less than five percent of the group's total revenues and no single physician's allocated portion of those revenues are more than five percent of that physician's total compensation or the total compensation of the group. 22 It is impermissible for the bonus to be determined in any manner based on the volume of referrals by the physician. 23

The anti-kickback statute extends safe harbor protection to physicians' investments in their group practices. Under the safe harbor, "remuneration" does not include any payments that are returned on an investment interest in the physicians' group practice if four specified requirements are met. The equity interests in the group must be held by physicians who practice as part of the group. Those respective equity interests in the group practice must be in the group as a whole, rather than in just parts or components of the group practice. 24 The anti-kickback statute requires that the physicians satisfy the Stark definition of a "group practice" and must be organized and operated as a unified business. 25 Revenues generated from ancillary services are permitted, provided that they satisfy the definition of "in-office ancillary services" as defined by Stark Law. 26


Physicians should check to see if their group operates in accordance to the requirements set forth under the applicable statutes, exceptions, safe harbors and satisfies the unified business test. The physician who violates Stark and/or the anti-kickback statute faces some significant penalties. Under Stark, the physician may be subjected to civil money penalty of up to $15,000 for each claim submitted to the government, where the physician knows or should know is violates the self-referral prohibition. 27 The physician may also be required to refund the government for the amounts billed and collected. The physician may also be subjected to a civil money penalty of up to $100,000 for each arrangement or scheme the physician knows or should know has a principal purpose of violating the Stark Law prohibitions. Another consequence is the possible 5-year exclusion from the Medicare or Medicaid programs for submitting claims that the physician knows or should know is improper.

Violations of the anti-kickback statute are classified as a felony. Convictions may result in a fine of not more than $25,000 or imprisonment for not more than five years, or both. 28 In addition, the Medicare and Medicaid Patient and Program Protection Act of 1987 provided an alternative civil remedy, which allows the Office of the Inspector General to exclude persons or entities from participation in the Medicare and Medicaid programs. 29

Franklin J. Rooks Jr., PT, MBA, Esq. is a physical therapist and practicing attorney in Philadelphia, Pennsylvania. Prior to his practice of law, Frank was a founding partner of PRO Physical Therapy, a Wilmington, Delaware based operator of physical therapy clinics. Frank sold his interest to a private equity firm in 2006.  This article is intended to provide only very general, non-specific legal information. This article does not cover all the issues related to the topic discussed. There are many more requirements under the ancillary services exception than discussed in the article. The specific facts that apply to your situation determine the outcome. Frank can be contacted at

1 42 U.S.C. § 1395nn
2 57 Fed. Reg. 8588 (1992).
3 42 U.S.C. § 1395nn(h)(6).
4 42 U.S.C.§ 1320(a)  7(b)(b).
5 42 U.S.C.§ 1395nn(b)(1).
6 42 U.S.C.§ 1395nn(b)(2)
7 42 U.S.C. § 1395nn(b)(2). The building must be one in which the referring physician "furnishes physicians' services unrelated to the furnishing of designated health services." 42 U.S.C. § 1395nn(b)(2)(A)(ii).
8 42 U.S.C. § 1395nn(b)(2)(A).
9 42 U.S.C. § 1395nn(h)(4).
10 42 U.S.C. § 1395nn(h)(4)(A)(i).
11 42 U.S.C. § 1395nn(h)(4)(A)(ii),(iii).
12 42 U.S.C. § 1395nn(h)(4)(A)(iv).
13 42 U.S.C. § 1395nn(h)(4)(A)(v).
14 See42 CFR § 1001.952(p).
15 66 Fed. Reg, 856-01
16 66 Fed. Reg. 856-01
17 66 Fed. Reg. 856-01
18 66 Fed. Reg. 908
19 Gosfield, Alice, Physician Compensation for Quality: Behind the Group's Green Door,2008 Health L. Handbook § 1:20
20 Gosfield, Alice, Physician Compensation for Quality: Behind the Group's Green Door,2008 Health L. Handbook § 1:20, citing 66 Fed. Reg. 908.
21 42 C.F.R. § 411.352
22 66 Fed. Reg. 908
23 House Conf. Rep. 103-213, 103d Cong., 1st Sess., 816.
24 42 C.F.R. § 1001.952(p)(1),(2).
25 42 C.F.R. § 1001.952(p)(3)(i).
26 42 C.F.R. § 1001.952(p)(4).
27 42 U.S.C.§ 1395nn(g)
28 42 U.S.C. § 1320a-7b(c)
29 P.L. No. 100-93, 100 Stat. 688 (1987).