Stark Law is one of the most important and complex regulations that healthcare providers need to understand. It governs how and when physicians can refer patients for certain services, and violations can result in steep penalties. Whether you're part of a compliance team, managing provider contracts, or navigating referrals, this guide will help you break down the key elements of Stark Law, from its core definitions to real-world enforcement examples.
In this article:
What Is Stark Law in Simple Terms?
What Are Designated Health Services (DHS)?
Stark Law in Action: Examples and Real-World Violations
Financial Relationships and Compensation Arrangements
Understanding Stark Law Exceptions
Value-Based Arrangements and Stark Law Modernization
Stark Law vs. Anti-Kickback Statute
Compliance Tips for Healthcare Providers and Compliance Teams
FAQs About Stark Law Compliance
What Is Stark Law in Simple Terms?
Definition and Purpose
Stark Law, also known as the physician self-referral law, is a federal regulation that prohibits doctors from referring patients to certain healthcare services in which they or their immediate family members have a financial interest. These services are known as Designated Health Services (DHS) and include things like lab tests, physical therapy, imaging, and hospital services.
The purpose of Stark Law is to prevent financial incentives from influencing medical decisions. By restricting self-referrals, the law aims to protect patients from unnecessary services and reduce fraud in federal healthcare programs like Medicare and Medicaid. In other words, it helps keep the focus on patient care, not profit.
The law is codified in 42 U.S. Code ยง 1395nn, and it applies regardless of whether the service referred is medically necessary or provided at a fair market rate. Even unintentional violations can lead to penalties, which makes understanding and complying with the law essential for all healthcare organizations.
How Stark Law Differs from the Anti-Kickback Statute
While both Stark Law and the Anti-Kickback Statute (AKS) deal with financial relationships in healthcare, they function differently.
Stark Law is a strict liability statute, meaning intent doesn't matter. If a prohibited referral happens, it's a violation, even if the physician didn't mean to break the law. The Anti-Kickback Statute, on the other hand, requires proof of intent to offer or receive payment in exchange for referrals.
Another key difference is scope. Stark Law only applies to physicians and referrals for Designated Health Services under Medicare and Medicaid. However, AKS applies more broadly to all healthcare providers and payers, including commercial insurance, and covers any kind of inducement, not just ownership or investment interests.
Understanding both laws is crucial, as a single financial arrangement could potentially trigger scrutiny under each.
Who Is Affected: Physicians and Entities
Stark Law primarily applies to:
Physicians (MDs, DOs, dentists, podiatrists, optometrists, and chiropractors)
Immediate family members of those physicians
Entities that provide Designated Health Services, such as hospitals, outpatient centers, labs, and therapy clinics
If a physician or their family has a financial relationship with a DHS provider, whether through ownership, investment, or compensation, and refers Medicare or Medicaid patients to that provider, it may be a violation unless a specific exception applies.
Even non-physician administrators, compliance officers, and billing teams need to understand Stark Law, since violations can occur through routine referrals, contracts, or outdated compensation structures.
What Are Designated Health Services (DHS)?
In the context of Stark Law, Designated Health Services (DHS) refer to specific health care services that are subject to physician self-referral restrictions. These services are defined by the Centers for Medicare & Medicaid Services (CMS) and play a central role in determining whether a referral might violate the law.
Understanding which services are classified as DHS is essential for healthcare organizations, especially when assessing contracts and referral patterns for compliance risks.
Full DHS List
According to CMS, the following are considered Designated Health Services under Stark Law:
Clinical laboratory services
Physical therapy, occupational therapy, and outpatient speech-language pathology services
Radiology and certain other imaging services
Radiation therapy services and supplies
Durable medical equipment (DME) and supplies
Parenteral and enteral nutrients, equipment, and supplies
Prosthetics, orthotics, and prosthetic devices and supplies
Home health services
Outpatient prescription drugs
Outpatient hospital services
Each of these service types is linked to potential financial gain. That's why Stark Law restricts physicians from referring patients for these services if they have a financial interest in the entity providing them.
Examples of Services Most Often Involved
Some Designated Health Services appear more frequently in enforcement cases and compliance reviews. Common examples include:
A physician referring Medicare patients to a diagnostic imaging center they partially own
A medical group directing patients to a home health agency owned by the physician's spouse
Therapy referrals, such as physical or speech therapy, made to an in-house service without meeting Stark Law exceptions
Use of DME suppliers in which a referring physician has an investment interest
These types of arrangements may seem routine in clinical settings but carry significant legal risks without appropriate exception documentation.
Why DHS Matters in Compliance Audits
DHS classifications are at the heart of many compliance audits and federal investigations. That's because they directly impact whether a physician referral is legal or violates Stark Law.
Auditors typically review:
Referral logs and billing claims for DHS
Contracts and compensation tied to therapy or medical equipment vendors
Financial relationships between physicians and outpatient facilities
Failure to properly identify or document DHS referrals can lead to civil monetary penalties and repayment obligations under Medicare. Understanding how Designated Health Services factor into physician relationships is key to avoiding inadvertent violations. Even a well-meaning referral can trigger violations if it involves an undisclosed financial relationship.
For compliance teams, recognizing which services fall under DHS, and tracking how referrals are managed, is essential for minimizing regulatory risk.
Stark Law in Action: Examples and Real-World Violations
By understanding how Stark Law applies in real-world scenarios, providers and compliance teams can recognize risk before it turns into a costly mistake. A Stark Law violation doesn't always stem from malicious intent. Many of them occur through routine physician referrals that don't meet legal requirements. Whether due to outdated contracts, poorly documented exceptions, or unreported financial ties, the results can be serious.
What a Stark Law Violation Looks Like
A typical violation happens when a physician refers a Medicare patient for Designated Health Services, such as clinical laboratory services, to an entity with which they or an immediate family member have a financial relationship. This type of physician self-referral arrangement is exactly what Stark Law was designed to regulate. It's important for you to understand that no Stark Law exception applies. Even when the claim is medically necessary and reimbursed at fair market value, it's still prohibited under the law.
Violations can include:
Referring a patient to a hospital-owned therapy service where the physician receives bonuses tied to referral volume
Sending lab work to a facility owned by the physician's family member
Leasing office space from a provider of Designated Health Services without a written agreement that complies with fair market terms
These examples illustrate how common and seemingly harmless actions can trigger Stark Law scrutiny if not properly documented or structured.
Recent Enforcement Cases and Penalties
Federal enforcement actions show how Stark Law violations can lead to large settlements—even when they're self-reported. For example:
In 2023, North Texas Medical Center agreed to pay $14.2 million to resolve allegations of improper physician referrals to surgery centers where they had financial ties. The Department of Justice led the investigation, citing multiple contract irregularities.
A 2020 enforcement case cited in the Federal Register involved hospitals that used "per-click" payment structures for leased equipment, violating Stark Law, by basing compensation on volume of referrals.
Other cases involve improper bonus structures tied to DHS volumes or failure to renew expired contracts for office space, resulting in noncompliant arrangements.
These examples make clear that even technical oversights, such as a missing signature or a lapsed agreement, can turn into significant financial penalties.
Civil and Criminal Consequences
Stark Law is a strict liability statute, which means the government doesn't have to prove intent to penalize a provider. The penalties can be steep:
Denial of payment for all services provided under the illegal referral
Refund of amounts previously paid by Medicare
Civil penalties of up to $27,018 per service billed in violation
Exclusion from participation in federal healthcare programs
Additional fines for false claims under the False Claims Act, which may apply when billing occurs after a known Stark violation
While Stark Law itself does not carry criminal penalties, related violations under the Anti-Kickback Statute or False Claims Act can lead to criminal charges.
For providers and compliance professionals, these cases reinforce the need to monitor contracts, review referral relationships, and ensure all arrangements meet a valid exception under the law.
Financial Relationships and Compensation Arrangements
At the heart of most Stark Law compliance issues is the nature of the financial relationship between a physician and an entity that provides Designated Health Services (DHS). Whether formal or informal, every financial arrangement must be clearly documented, meet fair market value standards, and fall under a Stark Law exception. If it doesn't, even routine compensation arrangements can result in penalties.
Understanding what qualifies as a financial relationship, and how those relationships are structured, is essential for compliance officers, legal teams, and healthcare administrators.
What Counts as a Financial Relationship?
A financial relationship is any direct or indirect ownership, investment interest, or compensation agreement between a referring physician (or their immediate family member) and the DHS entity.
This includes:
Ownership of shares or equity in a medical imaging center or lab
Profit-sharing in a therapy group
Rental income from property leased to a physician group
Any type of salary, bonus, or consulting arrangement tied to services
It doesn't matter whether the payment is above board or medically appropriate. What matters is whether the relationship complies with Stark Law requirements.
Compensation Triggers and Red Flags
Many Stark Law violations stem from how compensation arrangements are structured. Some key triggers and red flags include:
Variable or "per-click" payments based on the number of referrals or volume of services
Bonuses or incentives tied directly to DHS usage or patient referrals
Compensation that exceeds fair market value
Failure to document the arrangement in writing
Expired or auto-renewing agreements without updated terms
These red flags will not only expose an organization to an audit, they will also create compliance gaps that can lead to denied claims, refund obligations, and exclusion from federal healthcare programs. Arrangements involving a medical device company, especially when ownership interests or referral incentives are involved, should be carefully evaluated under Stark Law.
For compliance professionals, routinely reviewing contract templates, bonus structures, and payment formulas is essential to avoid these pitfalls.
Space, Services, and Employment Agreements
Some of the most overlooked Stark Law violations come from lease arrangements, especially when involving office space or shared services. Stark Law allows for space leases and personal service agreements, but only if they meet specific criteria:
The agreement must be in writing and signed by both parties
The lease must be for at least one year
The rent or compensation must reflect fair market value and not take referrals into account
The space must be commercially reasonable and not exceed what is needed for legitimate business purposes
Similarly, employment relationships between physicians and hospitals or health systems are permitted, but they must follow structured guidelines. Employment contracts must ensure that compensation is fixed in advance, unrelated to volume or value of referrals, and clearly documented. This is particularly important when compensation is tied to physician services, which must meet Stark Law criteria even in salaried arrangements.
Any deviation, such as paying bonuses for the number of MRI scans ordered, can lead to Stark Law exposure.
Identifying Risk with HCP Compliance Tools
Healthcare Compliance Pros (HCP) provides tools and support to help organizations manage and monitor their financial arrangements effectively. If you're reviewing a physician employment agreement or a shared office lease, our compliance tools help flag risky language, ensure contract terms align with CMS guidance, and support ongoing documentation practices.
Through training, policy templates, and audit-ready contract checklists, HCP helps providers stay proactive when it comes to financial relationships and Stark Law compliance.
Understanding Stark Law Exceptions
While Stark Law is known for being strict and technical, it does allow for a number of exceptions, provided that all conditions are met. These Stark Law exceptions create essential flexibility for providers who want to offer integrated services, develop value-based care models, or maintain standard operational relationships without violating the law.
However, the burden of proof always lies with the healthcare provider. If an arrangement doesn't meet every requirement of an applicable exception, it will likely be considered noncompliant. That's why understanding both traditional and modern exceptions is a cornerstone of effective compliance programs.
The Four Core Exceptions
Some of the most widely used regulatory exceptions are longstanding and foundational across healthcare organizations. These include:
In-office ancillary services exception: Allows physicians in the same practice to refer patients internally for DHS such as lab work or therapy, as long as certain supervision, location, and billing criteria are met.
Rental of office space exception: Permits lease agreements between a physician and an entity, but only if the space is used exclusively for legitimate business purposes, rent is fair market value, and the agreement is in writing for at least one year.
Employment exception: Protects compensation arrangements between hospitals and employed physicians, as long as compensation is consistent with fair market value and is not based on referral volume.
Personal service arrangements exception: Covers contracts where a physician provides services (like medical directorships) to a DHS entity. The agreement must outline duties, last at least one year, and pay a fixed, fair-market-value fee unrelated to referrals.
Each of these exceptions includes detailed requirements, and missing even one element, like failing to document the arrangement in writing, can render the exception invalid. This is especially important when physicians have investment interests in joint ventures or ancillary service providers.
Key Value-Based Care Exceptions
In response to changes in healthcare delivery, the Department of Health and Human Services introduced value-based exceptions in the 2020 Final Rule. These updates reflect the shift away from fee-for-service models and toward collaborative, outcome-driven care.
Some of the key value-based exceptions include:
Full financial risk exception: Applies to arrangements where the physician assumes full risk for patient outcomes, such as within an accountable care organization (ACO).
Meaningful downside financial risk exception: Requires that the physician take on at least 10% financial risk for failure to meet quality or cost benchmarks.
Value-based arrangements with no risk: Even when no financial risk is assumed, certain conditions like written documentation, measurable outcomes, and fair compensation can qualify the arrangement for an exception.
These value-based models allow more flexibility in care coordination and performance incentives, but they come with their own set of documentation and structural requirements. Participation in a value-based enterprise does not eliminate Stark obligations. It simply shifts what must be documented and how. Failure to meet these criteria, like tying incentives too closely to referral volume, can lead to violations.
What Makes an Exception Valid?
Regardless of whether an exception is traditional or value-based, several elements must always be in place for an applicable exception to be valid:
The arrangement must be in writing, signed by all parties, and retained for at least six years
Compensation must reflect fair market value, not take into account the volume or value of referrals
The arrangement must serve legitimate business purposes and be commercially reasonable, even if no referrals are made
All terms must be set in advance, not adjusted later based on performance or patient volume
Any involved entities must be in compliance with federal program regulations and applicable billing guidelines
For value-based exceptions, providers may also need to document measurable outcomes, track cost reductions, and demonstrate alignment with quality improvement goals.
By understanding and applying these Stark Law exceptions, providers can engage in innovative care models while staying compliant. The key is careful documentation, consistent review, and alignment with regulatory expectations.
Value-Based Arrangements and Stark Law Modernization
The healthcare industry has undergone a significant shift in recent years, going from volume-based, fee-for-service models, to outcome-driven, value-based care delivery. Recognizing this evolution, the Centers for Medicare & Medicaid Services (CMS) introduced major updates to Stark Law in 2020, modernizing its framework to better support coordinated, high-quality patient care while maintaining safeguards against fraud and abuse.
These changes offer healthcare organizations more flexibility in structuring value-based arrangements, but they also introduce new compliance requirements. Understanding how to apply the updated rules is critical for providers navigating today's complex care landscape.
What Changed in 2020 and Why It Matters
Before 2020, Stark Law was viewed by many as a barrier to innovation in care delivery. The rigid structure of the law made it difficult for providers to enter into collaborative agreements that rewarded improved patient outcomes or reduced costs.
The 2020 Final Rule introduced a new set of value-based exceptions, allowing for more adaptable payment models. Under these rules, physicians and healthcare entities can share financial risk, coordinate care, and design incentive programs, without violating Stark Law, as long as the arrangement meets certain criteria. These reforms were intended to align with modern value-based payment structures that focus on outcomes, not just service volume.
This modernization supports the development of accountable care organizations (ACOs), bundled payment initiatives, and population health strategies that focus on long-term value rather than service volume.
Risk-Sharing and Quality Incentives
The updated law defines three tiers of value-based arrangements, each with its own requirements:
Full Financial Risk: The physician assumes full responsibility for all care costs for a patient population.
Meaningful Downside Financial Risk: The physician must take on at least 10% of the financial risk in the event of poor performance.
No Risk (Care Coordination Only): Even when no money is at stake, the arrangement can still qualify if it includes performance measures, defined patient populations, and written documentation.
These models allow healthcare providers to align financial incentives with quality outcomes, including fewer hospital readmissions, improved chronic disease management, or better patient satisfaction. However, improper structuring, such as tying payments too directly to referral volume, can still result in noncompliance.
Common Provider Mistakes in New Models
As providers adopt value-based strategies, several common pitfalls can lead to Stark Law issues:
Failing to document the arrangement in writing or define performance metrics clearly
Using broad incentive language that indirectly rewards referrals
Neglecting to assess fair market value of compensation in new incentive programs
Overlooking compliance updates when modifying existing fee-for-service contracts
According to a Deloitte survey cited during the CMS rulemaking process, many physicians are willing to tie a portion of their compensation to quality outcomes, but they're hesitant to assume more than 10% financial risk. This highlights the importance of designing arrangements that are both legally sound and clinically practical. When compliance isn't front and center, physician incentive plans can unintentionally cross regulatory lines.
Supporting Compliance Through HCP Tools and Training
As more organizations shift toward value-based models, Healthcare Compliance Pros (HCP) provides essential support to help teams make that transition without compromising compliance. Our contract review resources, value-based care templates, and LMS training modules are designed to help providers understand the nuances of modern Stark Law requirements.
If you're building a shared savings program or restructuring a medical directorship, HCP helps ensure your value-based arrangements align with CMS expectations while keeping the focus where it belongs: on high-quality, patient-centered care.
Stark Law vs. Anti-Kickback Statute
Stark Law and the Anti-Kickback Statute (AKS) are often mentioned together in healthcare compliance discussions with good reason. Both laws aim to prevent fraud and abuse in federal healthcare programs, particularly Medicare and Medicaid. Violations can result in steep penalties and program exclusion from Federal health care programs, even when the underlying service was medically necessary. However, they differ significantly in scope, application, and enforcement.
Understanding these differences is critical for healthcare providers, administrators, and compliance teams. Many organizations create dual review processes to ensure compliance with both the Anti-Kickback Statute and Stark Law. Many violations stem from not recognizing where one law ends and the other begins - or where both apply at once.
Key Differences
Stark Law is a civil statute that prohibits physicians from making referrals for Designated Health Services (DHS) to entities with which they have a financial relationship, unless a specific exception applies. It is a strict liability law, meaning that intent does not matter. If a prohibited referral occurs and no valid exception applies, it's a violation, even if the provider didn't intend to break the law.
In contrast, the Anti-Kickback Statute is a criminal law that prohibits knowingly and willfully offering, paying, soliciting, or receiving anything of value in exchange for patient referrals or business involving a federal healthcare program. It applies to a broader range of providers and services, not just physicians and DHS.
Key distinctions:
Stark Law: Applies only to physicians and specific services; no intent required
AKS: Applies to anyone; intent to induce referrals must be proven
Stark Law: Violations result in civil penalties and repayment
AKS: Violations can lead to criminal charges, civil fines, and exclusion from federal programs
When Both Laws Apply
In many cases, the same arrangement may trigger both Stark Law and AKS scrutiny. For example, a physician who receives a bonus tied to the volume of referrals to a therapy service they partially own could violate both laws if:
The referral violates Stark Law due to a prohibited financial relationship
The payment also constitutes an illegal inducement under AKS
Because of this overlap, compliance teams must evaluate financial relationships through both lenses. A contract that meets a Stark Law exception might still violate AKS if it appears to involve intentional inducement. That's why internal legal teams should review all agreements for consistency with both Stark and anti-kickback laws, even in low-risk scenarios.
Waivers and Safe Harbors
To help providers participate in legitimate care models without risking violations, the government offers abuse waivers and safe harbors under both laws.
Stark Law waivers (such as blanket waivers issued during the COVID-19 public health emergency) allow flexibility in specific situations, like referrals within value-based care models or emergency arrangements.
AKS safe harbors protect certain payment and business practices from prosecution, as long as they meet defined criteria. These include space rental, equipment rental, personal services, and investment interests—each with specific conditions.
It's important to understand that waivers and safe harbors are not interchangeable. Each law has its own protective framework, and compliance depends on meeting all required elements within that structure.
Compliance Tips for Healthcare Providers and Compliance Teams
Stark Law compliance is about embedding practical safeguards into everyday operations, not just understanding the legal language. From credentialing and referrals to contracts and documentation, healthcare organizations must take a proactive approach to avoid costly missteps.
These strategies are designed to help providers and compliance officers meet their responsibilities while aligning with ongoing federal rule making and guidance from CMS and the OIG.
Contract Review Strategies
One of the most effective ways to prevent Stark Law violations is through routine contract reviews. Every financial arrangement, whether it's for space rental, employment, or consulting services, should be assessed against the latest compliance standards.
Tips for reviewing contracts:
Confirm that the agreement is in writing, signed, and retained for at least six years
Verify that compensation is set in advance, at fair market value, and unrelated to volume or value of referrals
Ensure that lease agreements for office space or equipment comply with Stark exceptions
Avoid vague or open-ended terms that could be interpreted as inducements
Schedule periodic re-evaluations of contracts to catch outdated or auto-renewed terms that may no longer meet compliance requirements
Using contract checklists and legal reviews can help standardize this process across departments or locations.
Monitoring Referrals and Audit Trails
Tracking referrals for health care services is another critical step in Stark Law compliance. Even compliant arrangements can lead to violations if referral activity isn't monitored properly.
Steps to improve oversight:
Use referral logs to track the volume and direction of physician referrals
Identify patterns that may indicate referral-based compensation or noncompliant relationships
Keep detailed records of the business purpose for any internal referrals within a group practice
Implement internal audit protocols that flag anomalies in billing, DHS volume, or provider activity
Maintaining strong audit trails makes it easier to demonstrate intent and prove compliance in the event of a government inquiry or Medicare review.
Training and Documentation Best Practices
An effective compliance program is built on education and consistent documentation. Physicians and administrative staff must understand what qualifies as a Stark Law exception, how to spot a risky financial relationship, and what steps to take when concerns arise.
Key practices include:
Enrolling teams in structured LMS training that includes Stark Law and Anti-Kickback Statute education
Documenting all financial relationships and compliance decisions clearly and contemporaneously
Keeping updated policy manuals that reflect current CMS rules and exceptions
Conducting annual compliance refreshers for physicians, billing staff, and executives
Building a culture where staff feel comfortable reporting potential violations or seeking clarification
To make these strategies easier to implement, HCP equips compliance teams with practical resources designed to support daily operations and policy adherence. From Stark Law training embedded in our LMS to real-time contract tools and credentialing guidance, our platform helps providers build a strong compliance foundation that evolves with the rules. Instead of reacting to violations, teams can stay ahead of them with scalable support built for the realities of healthcare today.
FAQs About Stark Law Compliance
Compliance with Stark Law can be complicated, especially as healthcare organizations navigate financial relationships, evolving care models, and new federal guidance. Below are answers to some of the most frequently asked questions to help clarify key points and reduce risk.
What Are the 5 Elements of a Violation?
A Stark Law violation generally involves five elements:
A physician (or their immediate family member)
Has a financial relationship (ownership, investment, or compensation arrangement)
With an entity that provides Designated Health Services (DHS)
Refers Medicare or Medicaid patients to that entity
Without fitting into a valid Stark Law exception
If all five conditions are met and the arrangement doesn't comply with an applicable exception, it constitutes a violation—even if the physician did not intend to break the law.
Can Stark Law Apply to Non-Medicare Services?
No. Stark Law only applies to referrals involving federal healthcare programs, specifically Medicare and Medicaid. It does not govern referrals or compensation arrangements tied solely to private insurance or self-pay patients.
However, organizations often apply Stark-compliant practices across the board to minimize risk, simplify policy, and avoid confusion between federal and commercial arrangements.
What Is the Penalty for Violating Stark Law?
Penalties for Stark Law violations can be severe, even if the violation is unintentional:
Denial of Medicare payments for claims related to improper referrals
Refund of payments already received
Civil monetary penalties of up to $27,018 per service
Possible False Claims Act liability if a provider knowingly bills after a violation
Exclusion from participation in federal healthcare programs
These penalties highlight the importance of monitoring compensation arrangements, maintaining clear documentation, and ensuring that all physician referrals involving Designated Health Services are evaluated for compliance.