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Beware of Stark Law ‘self-dealing’

August 1, 2008
by Barbara Landy, NHA, MBA, MHS, FACHE, Scott Safriet, MBA, AVA, and Paul Risner, Esq.
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Savvy nursing facility administrators should seek legal and valuation assistance to assure compliance

Skilled nursing facilities that pay physicians for medical director services may be at risk for violating Section 1877 of the Social Security Act; generally referred to as the “Stark Law.” Hospitals and other healthcare entities, as well as physicians and other providers, have been concerned about all aspects of this law since it was first enacted, with limited scope, in 1989 and subsequently revised and expanded in Stark II and Stark III. The scope of the Stark Law is broad enough to govern many financial relationships between healthcare entities and physicians, but is especially applicable to skilled nursing facilities.

Simply put, the Stark Law prohibits Medicare patient referrals from physicians who have a financial relationship with a nursing home for “designated health services,” as defined in the law. In the same way that most federal regulations affecting skilled nursing facilities rely on detailed definitions, so does the interpretation of the Stark Law. The term “referrals” includes common skilled nursing home physician activities such as establishing or approving plans of care, certifying and recertifying care needs, and is further interpreted to mean any physician orders for services paid by Medicare Part B and medications under Medicare Part D. Designated health services found in skilled nursing facilities encompass: clinical laboratory, occupational therapy, physical therapy, speech therapy, radiology, medications, and parenteral/enteral nutrients, equipment, and supplies. “Financial relationships,” as defined in the law, are interpreted as either (1) ownership by physician and/or physician's family of the healthcare entity and/or the designated health service, or (2) an arrangement whereby the skilled nursing facility compensates a physician for services, unless that compensation meets specific criteria.

Financial relationship


Most skilled nursing facilities contract with and pay one or more physicians for medical directorship, administrative consulting duties, and/or direct medical services. As federal regulations and interpretive guidelines for skilled nursing facilities have become more specific and as managed care contractors more closely review utilization, some skilled nursing facilities have contracted with medical directors for assistance with specific product lines or service areas. Thus, a skilled nursing facility might be receiving administrative physician services for areas such as quality assurance, utilization review, physiatry, orthopedics, psychiatry, pulmonology, neurology, and cardiology, in addition to traditional skilled nursing facility medical directorships. Since most skilled nursing facilities serve Medicare Part B and D recipients, and because most physicians performing administrative/or directorship (paid) duties also order or certify designated health services at the contracted skilled nursing facility, the only variable the skilled nursing facility can direct to assure compliance with the Stark Law is the financial relationship with that physician.

The Stark Law allows skilled nursing facilities to structure nonclinical arrangements with physicians in a way that provides exceptions, or “safe harbors,” which may provide protection to the nursing home and the physician for the financial relationship. While there are many exceptions available as described in the Stark Law, the exception that applies most commonly to skilled nursing facilities is the “personal services exemption.” To meet the requirements of the personal services exemption, and to qualify for protection under a safe harbor, the nursing home and the physician must satisfy several key conditions.

These include, at a minimum:

  • the relationship between the skilled nursing facility and the physician must be covered by a written, signed agreement covering at least one year of service.

  • the services provided by the physician must be specifically identified.

  • the services must be reasonable and necessary for legitimate business purposes.

  • the amount paid must be set in advance and have no direct or indirect relationship to volume or referrals by the physician.

  • the agreement must be commercially reasonable.

  • the agreement must not involve counseling or promotion of any business arrangement or other activity that violates any state or federal law; and

  • the amount paid must be consistent with fair market value (FMV).

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