Simple Tips to Avoid Stark II Violations

With increased government enforcement, hospitals must continually be vigilant in ensuring the hospital’s compliance with the federal and state fraud and abuse laws. While there has been an escalation in the number of criminal prosecutions under the Federal Anti-Kickback Statute, there has also been an increase in the number of substantial civil fines levied under the Federal Physician Self-Referral Statute, 42 U.S.C. §1395nn (Stark II). Stark II poses a particular compliance risk for a hospital since every imaginable financial arrangement the hospital has with a physician is subject to Stark II and the hospital can easily discover that it owes the government millions of dollars in Stark II repayments and penalties due to a single minor and accidental mistake.

As applied to hospitals, Stark II prohibits a physician from referring to a hospital and a hospital from billing for any Medicare designated health service (DHS) referred to the hospital by a physician if the hospital has a financial relationship with the physician or a member of the physician’s immediate family unless the financial relationship meets each and every requirement of one of the available Stark II exceptions. Stark II is a strict liability statute that does not depend on the parties’ intent. In other words, even if a financial relationship inadvertently fails to meet an exception due to mistake or oversight, the statute is violated each time the physician makes a referral (or orders a test or procedure that are considered “referrals”) payable by Medicare and the hospital bills for such referral. Each prohibited referral will subject the hospital to civil monetary penalties of $15,000, possible exclusion from Medicare and Medicaid and potential false claims act liability as well as overpayment demands.

Considering how many referrals a single physician may make at a hospital, if the hospital has a non-Stark compliant financial relationship with that physician, the civil fines and overpayments will quickly become staggering. Consequently, a hospital’s compliance plan must include, among other things, policies and procedures designed to catch inadvertent Stark II violations. Below is a list of simple tips to avoid some of the more common errors that can quickly become catastrophic Stark II violations:

1. Maintain a Master List of Financial Arrangements: Most medical director, coverage, and other independent contractor agreements with a physician utilize the Stark II personal services exception, 42 C.F.R. § 411.357(d). One of the exception’s requirements is for the written agreement to cover all of the services to be furnished by the physician or member of the physician’s immediate family. Hospitals can meet this requirement by ensuring every arrangement cross-references every other agreement or references a “Master List.” This Master List should be maintained by the hospital in its compliance files along with a copy of any financial arrangement with the physician or member of the physician’s immediate family. The Master List is much easier to maintain over time and should be a standard part of every hospital’s compliance efforts. If the hospital has more than one financial arrangement with a physician including one utilizing the personal services exception and these arrangements do not cross reference each other or are not on a Master List, the arrangements do not meet the Stark exception and every order or referral from that physician billed to Medicare is a Stark II violation.
2. Be Aware of Immediate Family Members: Stark II defines “Immediate Family Member” as a physician’s spouse, parent, child or sibling; stepparent, stepchild, stepbrother or stepsister; father-in- law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent or grandchild; and spouse of a grandparent or grandchild. If a hospital has a medical director agreement with a physician and subsequently hires the physician’s son-in-law, the agreements must either cross-reference each other or be listed on the Master List. If the medical director’s child marries someone working at the hospital, those agreements must be cross-referenced or contained on a master list. One safeguard against inadvertently not including such immediate family member arrangements on a Master List is for the hospital to develop a personnel policy designed to discover these family ties as part of its hiring process.
3. Non-Monetary Compensation Arrangements: If [or when] someone from the hospital takes a physician out to dinner or sends them a gift for their birthday or otherwise provides the physician with anything of value, a financial relationship is created between the physician and the hospital that must fit into an exception. Otherwise, every Medicare bill submitted for every test or referral made by that physician is a Stark II violation. The most appropriate Stark II exception is the non-monetary compensation exception. This exception is available if the compensation does not take into account the volume or value of the physician’s referrals or other business, was not solicited by the physician and does not exceed a set dollar amount that is annually adjusted for inflation. For 2011, the value of the non-monetary compensation cannot exceed $359 annually. Hospitals must develop policies and procedures to meticulously track any non-monetary compensation provided to its physicians, because one too many dinners would create a non-compliant Stark II financial relationship and suddenly create hundreds of Stark II violations.
4. Double Check Signatures: One of the most puzzlingly common mistakes hospitals discover too late is that the physician or the hospital inadvertently forgot to sign a required written agreement. The following are some of the agreements that must be signed by both parties: space and equipment leases, medical director, on-call and other physician services agreements and recruitment agreements. Without valid signatures by all parties to the agreements, Stark II will be violated. Hospitals need to develop policies and procedures to ensure every agreement the hospital enters into with a physician passes a specific review by the hospital’s compliance officer or counsel to ensure it meets each requirement of the applicable Stark II exception, including having the signatures of both parties.

The above tips are merely a few examples of the simple mistakes that commonly lead to Stark II violations. Hospitals should take appropriate steps to develop sufficient procedural safeguards as part of its overall compliance plan to ensure these types of mistakes do not occur.

“Simple Tips on Avoiding Stark II Violations.”

Louisiana Hospital Association Impact Law brief, Vol. 25, (No.8). Sept. 30, 2011

Michael R. Schulze