Introduction
In the U.S. healthcare system, maintaining ethical, transparent, and compliant medical practices is critical. One of the most important regulatory frameworks supporting this mission is the Physician Self-Referral Law, often referred to as the Stark Law, which applies specifically to referrals involving what the Centers for Medicare & Medicaid Services (CMS) defines as designated health service. The law exists to prevent financial self-interest from influencing clinical judgment, ensuring that patient care always comes first.
Over the decades, the law has continued to evolve, shaped by regulatory rulings, Final Rules, and updates that reflect the modern realities of healthcare delivery. In 2025, understanding these rules remains essential for hospitals, physicians, healthcare entities, compliance officers, and regulatory professionals. This article provides a comprehensive examination of designated health services, regulatory history, major exceptions, compliance requirements, and best practices to avoid violations and costly penalties.
What Is the Physician Self-Referral Law?
The Physician Self-Referral Law, authorized under Section 1877 of the Social Security Act, prohibits a physician from referring Medicare patients to an entity for designated health services if the physician—or their immediate family member—has a financial relationship with that entity. This may include:
- Ownership interest
- Investment interest
- Compensation arrangements
Unless the arrangement meets the criteria of a legally recognized exception, both the physician and the entity are prohibited from:
- Making the referral
- Billing Medicare or other third-party payors for services rendered under that referral
This law acts as a safeguard against fraud, unnecessary medical services, and conflicts of interest in the Medicare program.
What Qualifies as a Designated Health Service (DHS)?
CMS defines designated health services as a specific list of services and supplies for which the Stark Law applies. The following categories qualify:
1. Clinical Laboratory Services
This includes standard diagnostic laboratory testing commonly used in routine or specialized patient care.
2. Physical Therapy Services
All physical therapy offered in outpatient or facility-based clinical environments.
3. Occupational Therapy
Evaluation and treatment aimed at functional improvement, administered by licensed therapists.
4. Outpatient Speech-Language Pathology Services
Therapeutic services supporting speech, swallowing, communication, and language function.
5. Radiology and Imaging Services
These include:
- Diagnostic radiology
- MRI
- CT scanning
- Ultrasound
- Nuclear medicine and related services
6. Radiation Therapy and Supplies
Both radiation treatment and associated medical supplies fall under DHS rules.
7. Durable Medical Equipment and Supplies
Common items include:
- Wheelchairs
- Walkers
- Home oxygen equipment
- Other medically necessary equipment
8. Enteral and Parenteral Nutrients, Equipment, and Supplies
This refers to clinically necessary nutritional therapies and related hardware.
9. Prosthetics and Orthotics
Artificial devices and supports used to enhance mobility and bodily function.
10. Home Health Services
Includes clinical nursing or therapy services provided by a licensed home health agency.
11. Outpatient Prescription Drugs
Medications dispensed in a clinical setting and billed to Medicare.
12. Inpatient and Outpatient Hospital Services
Hospital admissions, surgical procedures, diagnostics, and other reimbursable services fall under Stark regulations.
These categories are updated annually by CMS to reflect changes in coding systems, including CPT and HCPCS, ensuring that compliance standards remain current.
How the Law Evolved: A Historical Overview
The Stark Law has undergone multiple expansions and refinements since it was enacted. Key historical milestones include:
1989 – Initial Adoption
The original law only applied to physician referrals for clinical laboratory services.
1993–1994 – Expansion
Congress broadened the prohibition to include additional designated health service categories, also extending elements of the law to Medicaid.
1995–2007 – Rulemaking Phases
CMS issued three major rulemaking phases:
- Phase I (2001) – Initial framework for implementation
- Phase II (2004) – Strengthened reporting requirements and clarified definitions
- Phase III (2007) – Finalization and refinement of prior provisions
2009 IPPS Final Rule
Introduced new restrictions such as:
- Ending percentage-based rental calculation structures
- Prohibiting “per-click” lease payments tied to volume
- Expanding the definition of “entity”
2015–2018 Regulatory Clarifications
CMS issued rules to simplify compliance and reduce administrative burden. Notable changes included:
- Establishing new exceptions
- Clarifying how contractual agreements could be documented
- Allowing a signature grace period without the previous once-every-three-years limitation
2020 – Modernization and Value-Based Care
The “Modernizing and Clarifying the Physician Self-Referral Regulations” Final Rule introduced:
- Three new exceptions for value-based payment arrangements
- Donation exceptions for cybersecurity technology
- New definitions such as “commercially reasonable”
- Updated “fair market value” and indirect compensation criteria
2023 – Rural Emergency Hospitals
CMS expanded certain statutory exceptions to support Rural Emergency Hospitals created in the Consolidated Appropriations Act of 2021.
Today, the regulatory environment is more flexible than ever—but also more complex, requiring healthcare entities to monitor compliance diligently.
Financial Relationships Covered by Stark
The law prohibits self-referrals only when a financial relationship exists. This includes:
1. Ownership or Investment Interests
Examples include:
- Shares
- Passive investment
- Partnership stakes
2. Compensation Arrangements
These may include:
- Employment agreements
- Independent contractor arrangements
- Leases
- Royalty agreements
- Payment-for-use contracts
Regardless of structure, compensation must be:
- Objective
- Fair market value
- Not based on the volume of referrals
- Documented in writing
Recognized Exceptions Under the Law
There are over 30 exceptions that allow referrals involving designated health services without violating the law. Common categories include:
Employment of Physicians
If a physician is employed by a practice, referrals are allowed as long as:
- Compensation is fair market value
- Payments are not based on referral volume
- The arrangement is commercially reasonable
Office Space and Equipment Leases
Permitted when:
- Written agreements exist
- Payment terms are fixed
- Charges are not calculated per unit of referred services
Group Practice Services
Medical group structures can qualify if:
- Revenue is pooled appropriately
- Compensation is compliant
- Services are incident to group operations
Personal Service Arrangements
Such as medical directorships, provided they meet documentation and FMV requirements.
Value-Based Care Exceptions (2020)
Programs supporting:
- Coordinated care
- Pay-for-performance
- Outcome-driven payment models
This reflects the shift in healthcare away from fee-for-service toward measurable patient outcomes.
The CMS Self-Referral Disclosure Protocol
In 2010, CMS launched the Self-Referral Disclosure Protocol (SRDP), allowing entities to voluntarily self-report potential Stark Law violations. Benefits include:
- Reduced repayment amounts
- Demonstration of good-faith compliance
- Faster resolution with CMS
While self-reporting does not guarantee penalty relief, it is a valuable tool for hospitals, medical groups, and physician practices dealing with historical violations.
Consequences of Non-Compliance
Failure to comply with Stark regulations can lead to:
- Denial of Medicare reimbursement
- Repayment of funds collected
- Civil monetary penalties
- Program exclusion
- False Claims Act exposure
Financial penalties can accumulate quickly, making preventive compliance essential.
Best Practices for Maintaining Compliance
To avoid costly penalties, healthcare entities should:
1. Conduct Annual Compliance Audits
Review all physician relationships and contracts for:
- Documentation
- Compensation structure
- Commercial reasonableness
2. Maintain Detailed Written Agreements
Contracts should be:
- Signed
- Dated
- Specific
- Reflective of actual terms in practice
3. Use Fair-Market-Value Valuations
Independent third-party valuation helps ensure:
- Payments are objective
- Pricing is justifiable
- No referral influence exists
4. Train Physicians and Administrative Staff
Even basic misunderstandings can create regulatory liability. Regular training reinforces compliance expectations.
5. Monitor for Business Arrangement Changes
A previously compliant agreement can become non-compliant if:
- Volume changes
- Contract terms alter
- New services are added
Continuous monitoring prevents unintentional violations.
Conclusion
The physician self-referral law remains one of the most complex and influential healthcare regulations in the United States. It ensures that financial interests do not influence patient care and helps maintain transparency and trust in Medicare reimbursement. As CMS continues refining regulations to align with modern healthcare delivery—especially in the realms of value-based care—understanding the requirements surrounding designated health service, financial relationships, regulatory exceptions, and compliance procedures is more important than ever.
Healthcare organizations that invest in proactive compliance programs, strong documentation practices, and regular policy reviews will be best positioned to avoid penalties, safeguard patient trust, and operate confidently in today’s evolving regulatory landscape.
