Risk defense

Reading a physician arrangement before Stark reads it for you

The Stark Law doesn't care whether you meant to break it. It's a strict-liability statute. Intent is irrelevant. An arrangement either fits within an exception or it doesn't, and if it doesn't, the referrals it touches become non-billable and any amounts collected have to be refunded. That unforgiving structure is exactly why physician arrangements should be read closely before they're signed, not after a payer or a whistleblower reads them for you.

The Stark Law (the physician self-referral law) prohibits a physician from referring Medicare patients for designated health services to an entity the physician (or an immediate family member) has a financial relationship with, unless an exception applies. The analysis starts with four questions: Is there a referral for designated health services? Is there a financial relationship? Will a federal program be billed? And does an exception fit? If the first three are yes and the fourth is no, the arrangement has to be restructured or abandoned.

Most legitimate arrangements can fit an exception: employment, personal services, medical-director agreements, space and equipment leases. But the common compensation exceptions almost all turn on the same three standards. Get these right and most arrangements hold. Miss one and the exception evaporates, regardless of how reasonable the deal felt.

The three standards that decide it

1. Fair market value

Compensation must reflect the value of an arm's-length transaction for the services actually provided: what the work is worth, independent of who's referring to whom. The trap is benchmarking by output rather than by role: paying a medical director a rate that quietly tracks the revenue their referrals generate is not fair market value, however the contract is labeled. For higher-risk deals, an independent valuation isn't bureaucratic overhead; it's the evidence you'll wish you had if the arrangement is ever questioned.

2. Commercial reasonableness

The arrangement has to make business sense even if no referrals ever flowed between the parties. CMS's definition turns on whether the deal furthers a legitimate business purpose and is sensible given the size, type, and specialty of the parties. A useful and counterintuitive point: an arrangement can be commercially reasonable even if it loses money. Profitability isn't the test. Legitimate business purpose is. A rural clinic that runs a service line at a loss to meet community need can still be commercially reasonable; a redundant medical directorship that duplicates work already being done cannot.

3. Volume or value neutrality

Compensation must not take into account the volume or value of referrals or other business generated between the parties. This is distinct from fair market value. Both have to be satisfied independently. Any structure where aggregate compensation moves with referral volume implicates the standard. Per-click rent tied to designated-health-service use, productivity formulas that fold in referral-driven revenue, "bonuses" that correlate with downstream business. These are where arrangements quietly fail.

Fair market value and volume-or-value are two separate tests. An arrangement can be priced perfectly and still fail because the structure rewards referrals.

The mistake even careful organizations make

Here's the nuance the OIG sharpened in recent guidance: satisfying a Stark exception does not shield you from the Anti-Kickback Statute. The two laws have different purposes and structures. An arrangement can meet every element of a Stark exception on paper and still draw AKS scrutiny if a purpose of the deal is to reward or secure referrals. A space sublease to a referring physician, an ASC ownership structure, non-monetary gifts to high-volume referrers: all can clear Stark and still create kickback exposure. A transaction review that checks only Stark is doing half the job.

What a transaction review actually checks

A disciplined pre-signature review of a physician arrangement runs through a consistent set of questions:

• Is there a signed, written agreement that defines the services, the term, and compensation set in advance, before services begin?
• Is the compensation supported by fair-market-value evidence appropriate to the risk of the deal?
• Can you state the legitimate business purpose in a sentence that doesn't mention referrals?
• Does any part of the compensation formula move with referral volume or value? (If you're not sure, model it.)
• Does the arrangement also clear the Anti-Kickback Statute, ideally fitting within a safe harbor?
• Is there documentation strong enough to reconstruct the rationale a year from now, when no one remembers the deal?

None of this is exotic. It's the difference between an arrangement that's defensible on an ordinary day and one that becomes a refund obligation, a civil monetary penalty, or a False Claims Act case the moment someone looks closely. When a problem does surface, CMS's self-referral disclosure protocol offers a structured path that often reduces exposure, but the far cheaper move is the review that happens before the signature.

This article is general information, not legal advice. Brandon Goulter is not an attorney, and reading it creates no professional advisory relationship. Stark Law and Anti-Kickback analysis is fact-specific and the regulations change; confirm current requirements with a licensed healthcare attorney before structuring or relying on any arrangement.