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Does Your Practice Qualify as a Group Practice Under Federal Stark Law

The Federal Stark law prohibits physicians from referring Medicare/Medicaid beneficiaries to an entity in which they (or an immediate family member) have a financial relationship for designated health services (“DHS”), unless an exception applies. DHS include: clinical lab; physical therapy; occupational therapy; radiology (including, MRI, CAT scans, and ultrasounds); radiation therapy and supplies; DME 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 hospitalization services. In addition, physicians should also be mindful that the Centers for Medicare and Medicaid Services (“CMS”) issued a proposed rule to amend the Stark regulations effective January 1, 2006 to include diagnostic and therapeutic nuclear medicine, including PET scans, to the list of DHS.

Physicians must keep in mind that they cannot ignore Stark, as nearly every financial relationship between physicians and entities that furnish designated health services (“DHS”) implicate the law. Violations of the Stark law have substantial consequences for all parties involved, regardless of the intent of the parties. Sanctions include denial of payment for DHS claims, civil monetary penalties ($15,000 for each claim submitted plus two times the reimbursement claimed), and exclusion from Medicare and Medicaid. In addition, parties who enter into circumvention schemes are subject to a civil monetary penalty of up to $100,000 per scheme.

Group practices are well advised to document their compliance with Stark. Documentation supporting compliance is particularly important in today’s health care environment, which has had an increase in Federal False Claims litigation and investigations stemming from Qui Tam whistleblowers utilizing technical violations of the Stark law as a predicate for False Claims Act violations.

Application of Stark in the Group Practice Setting

Many common financial relationships can trigger the need for a Stark analysis. This article, however, will focus on Stark’s applicability in the group practice context as Stark applies to referrals of DHS within a group practice. For example, if a physician practice provides services such as physical therapy, clinical lab, x-rays, and/or ultrasounds, within the practice, Stark will be implicated. Once the prohibition is triggered, the relationship(s) must then fall within a Stark exception.

The in-office ancillary services exception has been arguably the single most important exception in the Stark law. This exception is designed to protect the in-office provision of certain DHS that are genuinely ancillary to the medical services provided by the practice. In order for a physician practice that provides DHS to protect its referrals under the in-office ancillary services exception, the physicians must first qualify for the group practice definition. The group practice definition is not an exception to Stark in and of itself, but any “group” of physicians that want to take advantage of the in-office ancillary services exception must be structured to meet the group practice definition.

The Group Practice Definition

Under Stark, a group practice is a physician practice that meets the following conditions:

Single Legal Entity.

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.


The group practice must have at least two physicians who are members of the group (whether employees, or direct or indirect owners). Stark defines a member of the group as a direct or indirect owner of a group practice (including a physician whose interest is held by his or her individual professional corporation or by another entity), a physician employee of the group practice, a locum tenens physician, or an on-call physician while the physician is providing on call services for members of the practice. An independent contractor is not a member of the group.

Range of Care.

Each physician who is a member of the group, must furnish substantially the full range of patient care services that the physician routinely furnishes, including medical care, consultation, diagnosis, and treatment, through the joint use of shared office space, facilities, equipment, and personnel.

Services Furnished by Group Practice Members.

Substantially all of the patient care services of the physicians who are members of the group (that is, at least 75% of the total patient care services of the group practice members) must be furnished through the group and billed under a billing number assigned to the group, and the amounts received must be treated as receipts of the group. Patient care services must be measured by one of the following:

  • The total time each member spends on patient care services documented by any reasonable means (for example, time cards and appointment schedules.)
  • Any alternative measure that is reasonable, fixed in advance of the performance of the services being measured, uniformly applied over time, verifiable, and documented.

Distribution of Expenses and Income.

The overhead expenses of, and income from, the practice must be distributed according to methods that are determined before the receipt of payment for the services giving rise to the overhead expense or producing the income.

Unified Business.

The group practice must be a unified business having at least the following features:

Centralized decision making by a body representative of the group practice that maintains effective control over the group’s assets and liabilities; and

Consolidated billing, accounting, and financial reporting.

Volume or Value of Referrals.

No physician who is member of the group practice directly or indirectly receives compensation based on the volume or value of referrals except as provided under the specialty rules for productivity and profit shares.

Physician-Patient Encounters.

Members of the group must personally conduct no less than 75 percent of the physician-patient encounters of the group practice.

Special Rules for Productivity Bonuses and Profit Shares

The special rules for productivity bonuses and profit shares allow a physician who is in the group practice to be paid a share of overall profits of the group or a productivity bonus based on services that he/she has personally performed (including services “incident to” those personally performed services), provided that the share or bonus is not determined in any manner that is directly related to the volume or value of referrals of DHS by the physician. CMS now takes the position that diagnostic-testing services cannot be billed as “incident to” but practices that provide physical therapy can, however, bill physical therapy services as “incident to” services (provided that all of the “incident to” requirements are met).

The Stark regulations specifically set forth examples of formulas that will be deemed not to relate directly to the volume or value of referrals. For example, a group’s profits will be deemed not to relate directly to the volume or value of referrals if revenues derived from DHS are distributed based on the distribution of the group practice’s revenue attributed to services that are not DHS payable by any Federal health care program or private payer.

Documentation of Compliance

Group practices that choose to take advantage of the special treatment that the Stark law affords them must be prepared to demonstrate compliance with the regulations. In this regard, if requested by the Secretary, group practices are required to provide documentation of the total time each member spends on patient care services, and to maintain documentation supporting compliance with the “substantially all” test. The “substantially all” test is intended to guarantee that the group practice members are providing a substantial amount of their services through the group. Groups can document compliance by any reasonable means, including without limitation, time cards, appointment schedules, personal diaries, or other reasonable means that are fixed in advance of the performance of the services being measured, uniformly applied over time, and verifiable. Groups are also required to document, in writing, a new member’s employment with, or ownership or investment in, the group practice before the new relationship commences.

The In-Office Ancillary Services Exception

In order for a group of physicians to provide DHS within the practice, including without limitation, clinical laboratory, physical therapy, x-rays, and ultrasounds, the group must first meet all of the requirements of the group practice definition. If the group practice definition is met, the group is then eligible to utilize the in-office ancillary services exception to protect its in-office DHS referrals. The in-office ancillary exception exempts services personally provided by the referring physician, a physician who is a member of the same group practice as the referring physician, an individual that is supervised by the referring physician, or if the referring physician is in a group practice, by another physician in the group practice, provided that the supervision complies with all of the Medicare payment and coverage rules for the services. In addition, the exception contains a location and a billing requirement.


This article is intended as only a brief summary of the Stark II Phase II Final Regulations in connection with the in-office provision of DHS within the group practice context. Physicians and groups that provide DHS should also be mindful that many other common financial relationships may also trigger Stark, including, without limitation, (1) lease agreements for space and equipment; (2) medical director agreements; and (3) physician employment contracts with group practices and hospitals.

Andrew Wachler PhotoAbout Author
Wachler & Associates, P.C., is a law firm providing healthcare legal services to healthcare providers, suppliers and entities nationwide. Since 1980, the attorneys of Wachler & Associates, P.C., have successfully defended thousands of Medicare, Medicaid and other third party payor audits.

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