The Stark Law is a federal regulation that prohibits you from referring Medicare or Medicaid patients for specific “designated health services” (DHS) to any entity with which you or an immediate family member has a financial relationship. These services include common ancillaries like lab work, imaging, and physical therapy.
This is a “strict liability” law. Your intent does not matter. If a financial arrangement exists and does not fit perfectly into one of the law’s specific exceptions, it is a violation.
Why This Matters to Healthcare Providers
During a practice sale, your employment agreement, compensation, and any ownership you retain with the new buyer all count as financial relationships. A buyer will dig deep into your past and proposed referral patterns during due diligence to ensure the deal structure does not violate this law. An undiscovered violation can sink a deal or lead to a major reduction in your sale price.
Example in Healthcare M&A
Scenario: A large hospital system wants to acquire your successful cardiology practice. To secure the deal, the hospital offers you and your partners employment contracts with salaries well above the 90th percentile for the region. The hospital has its own advanced imaging center and laboratory.
Application: After the sale, you will be an employee of the hospital (a financial relationship). When you refer your patients for imaging or lab work at the hospital’s facilities (referring for DHS), the Stark Law applies. Because your salary is a key part of your financial relationship, a buyer’s legal team will question if it is truly at Fair Market Value (FMV) and commercially reasonable. An above-market salary could be viewed as an improper payment for your referral stream.
Outcome: If the compensation is deemed to exceed FMV, the entire arrangement could violate Stark Law. This puts the hospital at risk for massive government penalties. To avoid this, a buyer will insist on structuring a compensation plan that is defensible as FMV, which might be lower than the initial attractive offer. Identifying this issue early prevents major problems at the closing table.
Related Terms
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Frequently Asked Questions
What is the Stark Law?
The Stark Law is a federal regulation that prohibits healthcare providers from referring Medicare or Medicaid patients for certain designated health services (DHS) to entities with which they or their immediate family members have a financial relationship.
What types of services are covered under the Stark Law?
The law covers “designated health services” which include common ancillary services such as lab work, imaging, and physical therapy.
Why is the Stark Law important during a practice sale?
During a practice sale, any financial relationships like employment agreements, compensation, and retained ownership count under the Stark Law. Violations found during buyer due diligence can jeopardize the deal or reduce the sale price.
How does the Stark Law apply in a healthcare M&A scenario?
For example, if a hospital acquires a practice and offers above-market salaries to employed physicians who refer patients for designated services at the hospital, this could violate the Stark Law if the compensation isn’t at Fair Market Value (FMV). Legal teams must ensure compensation plans are defensible as FMV to avoid violations.
What are the consequences of violating the Stark Law?
Violating the Stark Law can lead to massive government penalties and can put deals at risk of falling through or force major adjustments in compensation and deal structures to comply with the law.