Stark Enforcement in Health Care
by Andrew R. Ramirez
The hand of government is already at work in decisions about care.
“Nothing in (the Medicare Act) shall be construed to authorize any Federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services; or to exercise any supervision or control over the administration or operation of any such institution, agency, or person.”
— 42 U.S.C. §1395
Most informed physicians and health care administrators will be amused to read the forgoing “Prohibition against any Federal interference” found in the Medicare Act. Anyone working in health care knows that the Federal government routinely exercises supervision and control over the administration of health care.
Take for example the “The Ethics in Patient Referrals Act of 1989” introduced by Rep. Pete Stark, D-Calif., and now universally referred to simply as the “Stark” law. Merely uttering the word “Stark” in the midst of the negotiation of any health-care related transaction has a chilling effect, because of the severe consequence of a violation of the law, which includes an ironically named “civil monetary penalty” that is anything but “civil.”
The Stark law is intended to prohibit physicians from ordering procedures from a facility if the physician has a financial incentive to send the patient to the facility. A common example of this would be an orthopedic surgeon who owned part of a rehabilitation facility. The theory is the orthopedic surgeon is more inclined to send patients that may not need physical therapy to the rehabilitation facility if the surgeon will reap a financial benefit.
The Stark law has enjoyed a tortured history of our government enacting a regulation and then, upon finding that the regulation does not work in our health-care system, creating an exception to the rule. Indeed, the Stark law is a “rule of exceptions” and health-care lawyers earn their keep interpreting the exceptions.
Physicians continue to work to find legally permissible ways to work within the framework of the Stark law. When they cannot, it creates tension between health system administrators and their medical staff. Furthermore, hospitals pay a high price when the government alleges a Stark violation.
Take the recent example of the Covenant Medical Center of Waterloo, Iowa. It entered into a $4.5 million agreement with the Department of Justice to settle allegations it violated the Stark law by paying compensation exceeding fair market value to five employed physicians, all of whom had referred patients to Covenant. It is permissible under a Stark exception for a hospital to employ a physician as long as the physician’s compensation is “commercially reasonable” and “consistent with fair market value” for the services provided. Covenant had hired an expert to determine the fair market value of compensation for its employed physicians. However, the government noted that Covenant was paying more to one doctor than it was spending on charity care for all of its uninsured patients. Rather than challenge the government’s claim, Covenant chose to settle.
Any claim for payment submitted to Medicare based on a referral prohibited by the Stark law is an overpayment. Therefore, Covenant faced the prospect of having to repay every dollar that the government had paid for tests ordered by the five physicians over several years—even though many of these tests may have saved lives. Covenant could have faced additional “civil monetary penalties.” Given this possibility, Covenant chose to settle.
After May 20, 2009, one factor that weighs heavily in the calculus of other CEOs faced with a situation like Covenant’s is the Fraud Enforcement and Recovery Act of 2009, or FERA. Although Congress enacted it to address the potential for fraud by financial institutions participating in TARP, FERA greatly expanded the government’s ability to recover damages for alleged Medicare fraud. Given the timing of its enactment, the act likely did not apply to Covenant. However, a hospital CEO in the position of Covenant’s CEO today may also face criminal liability under FERA.
One thing is certain: When faced with the allegation of a violation, one source of relief that has not worked is to seek to enforce the “Prohibition against any Federal interference” found in the Medicare Act. 
Andrew R. Ramirez Chairman, Healthcare Care Group, Lathrop Gage.
P | 913.451.5113
E | aramirez@lathropgage.com
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