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Stark After Recent Enforcement Actions: Healthcare Executives Beware

If you are a healthcare executive, particularly if you're involved with physician compensation issues, you should be concerned with recent enforcement actions and cases involving the federal referrals act, commonly referred to as "Stark II.”

"Stark II," creates a limitation on certain physician referrals and prohibits physicians from referring any Medicare and Medicaid patients to an entity in which the physician has a financial relationship, defined as an investment interest or compensation arrangement. The definition of financial interest also includes a financial interest by the physician’s immediate family.

Stark prohibits referrals of designated health services (“DHS”) to owned facilities or facilities where there is a compensation arrangement. It also prohibits the DHS entity from submitting claims to Medicare for those services resulting from a prohibited referral.

Healthcare providers that are covered and licensed under Medicare and Medicaid are strictly obligated to follow the Stark Law rules. Violation of the rules can bring strict liabilities for the registered physician(s). Here the strict liability translates to the fact that the licensed provider will be held liable under the law even if he is unintentionally involved in the referrals. Also, even if the court doesn’t find an intention or proof that the provider was involved, the provider will still be liable.

The strict liability definition can vary depending on the variety of settings. According to the Stark Law, if a court sees proof that a physician was involved in the referral or an improper referral was made under his treatment, the court will impose liability whether the physician was aware of the financial interest or not. The mere act of referring would be enough to prove the liability.

However, any healthcare system, practice, or hospital that was found at fault for the improper referrals, will be required to repay all the amount received from the improper billing along with the penalty of $15,000 per improper referral. In addition, hospitals and practitioners will be excluded from all the existing and future governments’ healthcare programs.
Also, if the healthcare provider or the hospital is found intentionally and knowingly involved in the improper referrals, it would be liable for civil penalties. The penalty for civil violation for improper referrals is $100,000 per violation.

In most cases, the hospital will be liable for paying the fines and penalties, but many times the court extends its ruling and holds the practitioner liable for the violations. With this, a practitioner can still work under his medical license but would be excluded from government institutions, current, and future healthcare programs.

It is interesting to note that there is no good faith or actual knowledge standard for compliance. If you are a physician and you have an investment interest or a compensation arrangement with the entity to which are making referrals and there is not an applicable exception, it does not matter whether you knew of the arrangement or not.

More important, however, violation of Stark Law constitutes a violation of the False Claims Act. As discussed later in the review of cases, a violation of Stark can have serious repercussions when found to constitute a violation of the False Claims act. As an example, in Tuomey , the jury found the Tuomey had violated the False Claims Act by submitting 21,730 illegal claims, with a value of $39,313,065. The court determined damages in the amount of $237,454,195 (($5,5000 x 21,730 claims) + ($39,313,065 x 3)). The case settled for $72 million.


For entities looking to stay on the right side of the rules, there are a variety of compliance recommendations. Healthcare entities should:

Create a database of all healthcare employment contracts and ensure they meet the safe harbor provisions.
Keep a log of all possible conflicts of interest. 
Document all payments between parties. 
Annually train or update employees on Stark Law compliance. 
Develop internal policies on compliance, including discipline for a reported infraction.
Continue to update documentation as healthcare relationships grow or change. 


It is entirely appropriate for hospitals and medical staff executive committees to give less weight to disruptive incidents in the past when the offending practitioner’s performance has improved, and a substantial period has passed. Nevertheless, removing memoranda documenting these past incidents entirely from the practitioners file is not a good idea, since most disciplinary policies are progressive.

A progressive policy applies increasingly more severe sanctions to additional incidents of bad behavior. Without documentation of past performance, when future incidents occur, it is difficult to justify more severe sanctions. While there is a tendency to reduce the importance of minor incidents, the totality of the circumstances, including past performance and actions taken, should be considered.

It is also important to understand what constitutes disruptive behavior. Disruptive behavior includes violent or verbally abusive activity, but it is not limited to such behavior. It has been defined as:

“Anything a clinician does that interferes with the orderly conduct of hospital business, from patient care to committee work, can be considered disruptive. This includes behavior that interferes with the ability of others to effectively carry out their duties or that undermines the patient's confidence in the hospital or another member of the healthcare team.”  

It is very important that the organized medical staff have a disruptive practitioner policy. The first step is to include a statement in the medical staff bylaws to the effect that each member of the staff is expected to comply with all hospital and medical staff rules, regulations, policies and procedures relating to behavior and performance. 

After having the bylaws clearly state that such activity will not be tolerated, the next step is to have a medical staff policy regarding disruptive behavior that includes progressive discipline and/or sanctions that may be imposed before taking formal action under the corrective action directives.  

Where a practitioner is not meeting the medical staff’s standards of behavior and/or performance, the staff member responsible for the staff section to which the practitioner is assigned (usually the department chairman) should take the following action:
omeet with the offending practitioner to discuss the matter (it is usually a good idea to have another staff member in attendance who can testify to what occurred if necessary);
oinform the practitioner of the nature of the problem and the action required to correct it; and
oprepare a memorandum for the practitioner’s file detailing the problem, the meeting and the required action.  

When there is a second incident, the supervising staff member should again meet with the offending practitioner and take the following action:
o issue a written reprimand to the practitioner.
oinform the practitioner in writing that if there is a future incident, the matter will be referred to the medical executive committee for appropriate sanction under the corrective action procedures; and
oprepare a memorandum for the practitioner’s file detailing the problem, the meeting and the action taken. A copy of the reprimand and the notice to the practitioner should be included as attachments to this memorandum.

If there is a third incident, the supervising member should refer the matter, along with the practitioner’s file, to the medical executive committee with a recommendation that formal action be taken in accordance with the corrective action procedures.

If the steps outlined above are taken, there is ample evidence that this is a continuing problem, and the staff has made every effort to correct it without resorting to an adverse action. This procedure also provides documentation that the medical executive committee took the adverse action based on a substantial factual basis and that its action was not arbitrary, unreasonable or capricious. 

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