The Stark Law Explained for Small Medical Clinics

The Stark Law is commonly discussed in the context of large hospital systems and complex physician employment structures. It belongs in small clinic conversations as well. Any physician who refers Medicare or Medicaid patients for designated health services to an entity in which they hold a financial interest — an in-house lab, an imaging center with shared ownership, a co-located physical therapy practice — is subject to this statute.

Understanding the law’s reach, the designated services it covers, and the exceptions most relevant to small practices is not optional for clinics that bill federal healthcare programs.

What the Stark Law prohibits

The physician self-referral law at 42 U.S.C. § 1395nn prohibits two things:

1. A physician from making a referral to an entity for the furnishing of designated health services (DHS) covered by Medicare if the physician (or an immediate family member) has a financial relationship with that entity, unless an exception applies.

2. An entity from presenting or causing to be presented a claim to Medicare for DHS furnished pursuant to a prohibited referral.

Both the referring physician and the receiving entity face liability. A financial relationship includes ownership or investment interests and compensation arrangements. The law applies whether the financial relationship is direct (the physician owns the entity) or indirect (the physician’s family member holds the interest).

The prohibition is absolute unless one of the statutory or regulatory exceptions applies. Unlike the Anti-Kickback Statute, the Stark Law is a strict liability statute. No intent to violate is required. If a prohibited referral occurred and no exception applies, the law has been violated.

What “designated health services” covers

The DHS definition under the Stark Law is specific. It includes:

• Clinical laboratory services — the broadest category; covers most lab work ordered in a clinic setting
• Physical therapy, occupational therapy, and outpatient speech-language pathology services
• Radiology and certain other imaging services — MRI, CT, ultrasound, and related services
• Radiation therapy services and supplies
• Durable medical equipment and supplies (DME)
• Parenteral and enteral nutrients, equipment, and supplies
• Prosthetics, orthotics, and prosthetic devices and supplies
• Home health services
• Outpatient prescription drugs (limited contexts)
• Inpatient and outpatient hospital services

The practical relevance for small clinics: clinical laboratory services, imaging, physical therapy, and DME are the most common areas where small practices have in-house or co-located arrangements. Any arrangement involving these services and a physician’s financial interest must be reviewed against the Stark Law exceptions.

Financial relationships that trigger the law

The Stark Law’s financial relationship definition at 42 U.S.C. § 1395nn(a)(2) covers:

• Ownership or investment interests — direct or indirect ownership in the entity, including stock ownership, partnership interests, and membership interests in LLCs
• Compensation arrangements — any remuneration between the physician and the entity, including employment salaries, space rental, equipment rental, consulting fees, and service arrangements

The law covers arrangements with the physician’s immediate family members as well. A physician whose spouse owns an interest in a lab that receives the physician’s referrals is in a financial relationship with that lab for Stark Law purposes.

Exceptions for small practices

The law would be unworkable without exceptions. Congress and CMS have established numerous exceptions for common, legitimate arrangements. Small practices rely most often on the following.

In-office ancillary services exception

This exception at 42 U.S.C. § 1395nn(b)(2) permits referrals for DHS provided within a physician’s own practice under specific conditions:

Supervision: The service must be supervised by the referring physician, a physician who is a member of the same group practice, or a physician who is an employee of the physician or group practice. For most ancillary services, “general supervision” (availability to respond to questions, not necessarily physical presence) satisfies this requirement, though some services require direct supervision.

Same building or centralized building: The service must be provided in the same building where the referring physician provides physician services (not necessarily limited to DHS) on a regular basis, or in a centralized building for the group practice.

Billing: The service must be billed by the referring physician, the group practice, or an entity wholly owned by the physician or group practice.

This exception covers in-house labs and in-house imaging in many typical small practice configurations. It does not automatically cover arrangements where the lab or imaging operation is a separate legal entity in which the physician holds an ownership interest. That structure requires a different analysis.

Physician services exception

Referrals for DHS that are physician services performed by the referring physician themselves, or by a physician in the same group practice, are permitted. A physician who performs imaging services personally does not need to rely on another exception.

Employment exception

A physician may refer to an entity if the physician is employed by that entity and the compensation meets certain requirements — it must not be determined in a way that takes into account the volume or value of referrals. This exception covers referrals by employed physicians to their employer hospital or health system, provided the compensation arrangement meets the exception’s requirements.

Group practice exception

Physicians within a qualifying group practice may refer to the group practice for in-office DHS under the group practice exception. A group practice must meet the definition at 42 CFR §411.352, which requires that substantially all physician services be provided through the group, that revenues be pooled according to a predetermined distribution formula, and that profits not be based on the volume of referrals.

Rental of office space and equipment

A covered entity can rent space or equipment to a physician (or vice versa) without creating a prohibited financial relationship if the rental meets the exception requirements: the arrangement must be in writing, signed by the parties, have a term of at least one year, set compensation at fair market value not related to referral volume, and serve a commercially reasonable purpose.

Penalties for violations

The Stark Law’s penalties are significant and operate differently from other fraud statutes. Under 42 U.S.C. § 1395nn(g):

• Denial of payment: Medicare payment for DHS furnished pursuant to a prohibited referral is denied. If payment was made, the entity must refund it.
• Civil monetary penalties: CMS may impose civil money penalties of up to $15,000 per service for entities that knew or should have known a referral was prohibited.
• False Claims Act exposure: If claims were submitted to Medicare for services rendered pursuant to a prohibited referral, those claims may constitute false claims under 31 U.S.C. § 3729. FCA penalties range from approximately $13,000 to $27,000 per false claim, plus three times the amount of each claim. For a high-volume lab arrangement, per-claim FCA exposure accumulates rapidly.
• Exclusion: Entities may be excluded from Medicare and Medicaid participation.

Unlike the Anti-Kickback Statute, Stark Law liability does not require the government to prove intent. If a prohibited referral occurred without a qualifying exception, the violation is established. This is why proactive arrangement review — before implementing a co-located service, before a physician acquires an ownership interest, before entering a compensation arrangement — is the appropriate risk management posture.

The CMS Self-Disclosure Protocol

CMS maintains a Stark Law self-disclosure protocol that allows entities to voluntarily report Stark violations and resolve them before CMS identifies the problem independently. Self-disclosure typically results in a lower settlement than a government-initiated investigation. Clinics that discover a Stark violation should consult counsel about whether self-disclosure is appropriate.

The practical takeaway for small clinics

Small clinics face Stark Law exposure in arrangements that can seem like ordinary business decisions: opening an in-house lab, adding a physical therapy suite, acquiring DME inventory, or entering a co-ownership structure with a specialist. The law’s strict liability structure means that good intentions do not cure a non-compliant arrangement.

Review any arrangement involving physician financial interests and DHS against the exceptions before implementation. If an existing arrangement has not been reviewed, have it assessed. The combination of Stark Law penalties and False Claims Act exposure makes this a high-stakes area — one where proactive compliance costs far less than reactive resolution.