The Physician Self-Referral Law is a legislation which governs self-referral for Medicare and Medicaid patients. It is commonly referred to as the “Stark Law” (after the Congressman Pete Stark who sponsored the law), and is found in section 1877 of the Social Security Act.

To appreciate the law, it is necessary to understand what physician self-referral is. The term Physician self-referral is used to describe a situation where a physician refers a patient for medical tests or services which are then provided by himself (or herself) or a service provider in which they have a financial interest.

Examples include a surgeon who recommends a surgery which is carried out by herself, an optician who orders eye tests to be carried out at a clinic he owns and a doctor who refers a patient to a specialist, and is compensated by the specialist for making the referral.

Physician self-referral is known to raise health care costs. This is because physicians end up recommending tests or services which are unnecessary. The Stark Law was intended to avoid such a scenario for Medicare and Medicaid patients.

The law therefore prohibits referrals for Dedicated Health Services (DHS) for Medicaid or Medicare if a physician (or a close family member) has a financial relationship with the service provider. The law describes a “financial relationship” to include ownership, investments or compensation arrangements.

The DHS for which self-referrals are prohibited under the law include:

  • laboratory services
  • inpatient/outpatient services
  • physical and occupational therapy
  • laboratory, radiology and other imaging services
  • orthotics and prosthetic device supplies
  • outpatient prescription

The law prohibits a service provider from making claiming payments for self-referred DHS from Medicare or Medicaid. It prescribes steep penalties for those who make payment claims for self-referred services.

The penalties include $15,000 fine for each service provided in violation of the Law, three times any amount received from Medicare or Medicaid, and civil penalties of up to $100,000 for attempting to circumvent the law. On top of the financial penalties, violators face exclusion from Medicare and Medicaid.

The Stark Law prescribes certain scenarios in which a physician can be exempt from the law. For instance, if medical equipment is in the same room as the physician, then using it for carrying out a test doesn’t tantamount to self-referral. Also, the financial interest provision doesn’t apply to publicly traded companies i.e. if a physician refers a patient to a publicly traded company in which she has shares, it doesn’t count as self-referral.

The Physician Self-Referral Law was first enacted in 1989, and came into effect on January 1, 1992. This is commonly referred to as “Stark I”. The first revision was made in 1993, and dubbed “Stark II”. Another revision was made in 2008, and was dubbed “Stark III”. Each revision added more provisions to the law.

Since it was first drafted, the Stark Law has been somewhat controversial. Some critics claim that it is a blatant interference by the government in the medical practice of physicians. Others claim that it is an inconvenience to patients – since it means that they cannot access DHS which are immediately available at a physician’s premises. Proponents of the law claim that it is essential for protecting Medicare and Medicaid against crafty physicians.

The controversies notwithstanding, the Self-Referral Law is something which physicians need to observe. The penalties for violating it certainly outweigh the fringe benefits which may come with self-referrals.