The Physician Self-Referral Law — known as the “Stark Law” — broadly prohibits physicians from profiting from self-referrals for “designated health services” (DHS) payable by Medicare or Medicaid. For example, the Stark Law prohibits referrals when a physician refers a patient for DHS to a medical facility in which the physician has a financial interest, either through ownership or compensation. The theory behind the prohibition is that financially interested referral practices drive up health care costs and incentivize overutilization of services.

The Stark Law imposes strict liability on defendants without requiring proof of intent to violate the law. However, implementing regulations contain 28 exceptions; the statute likewise sets forth exceptions. These exceptions tend to be technical and complex, and conduct must satisfy all of the elements of an exception to qualify for its protection. Conduct that does not squarely fit under any of the exceptions is considered a violation of the Stark Law.

One Stark Law exception protects bona fide employment relationships between physicians and the entities to which they make DHS referrals, including hospitals. To meet this exception, hospitals employing physicians may not submit claims for DHS to Medicare or Medicaid referred by the employed physician unless the physician’s compensation is consistent with fair market value, is not based on the value or volume of their referrals, and satisfies the other elements of this exception. If a compensation arrangement with a referring physician does not meet this exception, the theory is that the hospital was not entitled to payment for the DHS at issue, and the hospital thus has submitted a false claim for payment in violation of the False Claims Act (FCA).

In the past year, some of the largest recoveries obtained by the Department of Justice (DOJ) were in cases where Stark Law violations served as a predicate offense for FCA claims. These outsized recoveries raise the question of whether DOJ will increase its use of Stark Law–based theories in health care enforcement actions in the future. A few notable Stark Law–based FCA cases from 2023 are discussed below.

A. Community Health Network

In December 2023, DOJ announced that Community Health Network (Community Health) agreed to pay $345 million and to enter into a five-year Corporate Integrity Agreement to resolve allegations that the hospital violated the FCA by knowingly submitting claims to Medicare for services impermissibly referred in violation of the Stark Law.[1]

DOJ alleged that Community Health generated improper referrals to its facilities by compensating physicians in excess of fair market value and by awarding incentive compensation based upon the volume of physician referrals. While Community Health did retain an outside valuation firm to review physician compensation, DOJ nevertheless alleged that Community Health provided false compensation information to the firm to solicit positive opinions on its compensation. Additionally, DOJ alleged that Community Health ignored the valuation firm’s repeated warnings about the legal consequences of overcompensating its physicians.

The Community Health resolution is notable because of its magnitude. As DOJ touted in its press release, this case is one of the largest ever FCA settlements based solely on Stark Law violations. The Community Health resolution also was one of the government’s largest FCA recoveries of 2023.

B. Covenant Healthcare System

In March 2023, DOJ announced that Covenant Healthcare System (Covenant), a regional hospital system based in Saginaw, Michigan, and two of its physicians had agreed to pay over $69 million to resolve FCA claims based upon alleged Stark Law and Anti-Kickback Statute (AKS) violations. The government alleged that Covenant’s financial arrangements with eight referring physicians — including medical directorships, an office space rental, and other financial relationships — did not satisfy any Stark Law exception, such that the referrals and subsequent claims for payment by the government violated the FCA.

Covenant’s resolution was finalized in 2021 but remained under seal for two years during the investigation into the two physicians. The corporate resolution did not include admissions of liability or any corporate integrity agreement. The case was initiated in 2012 by a qui tam relator who was a former high-level executive and physician at Covenant. The relator received over $12 million from the resolution of these claims.

C. Cardiac Imaging Inc.

In October 2023, Cardiac Imaging Inc., along with its founder, owner, and CEO, agreed to pay over $85 million to resolve allegations that Cardiac Imaging violated the FCA, the AKS, and the Stark Law. Cardiac Imaging is a medical services company based in Illinois that performs cardiovascular stress tests with mobile equipment that the company transports to referring physician offices. DOJ alleged that Cardiac Imaging paid referring cardiologists $500 per hour (or more) — in excess of fair market value — to provide “supervision” over the mobile cardiovascular stress tests, but those physicians were allegedly treating other patients in their offices at the same time as they were supervising the tests.

The resolution with Cardiac Imaging and its founder was based on their ability to pay. In connection with the settlement, the defendants entered into a five-year Corporate Integrity Agreement requiring, among other things, compliance measures relating to financial relationships with referring physicians, a centralized annual risk assessment, and an internal review process to identify and address Stark Law- and AKS-related risks.

The case was initiated in 2018 by a qui tam relator who worked as a former billing manager at Cardiac Imaging. That qui tam complaint also brought allegations against a former executive and another part-owner of the company that were not resolved in connection with the settlement, and thus the relator’s share of the recovery has not yet been announced.

D. Steward Health System

In December 2023, DOJ and the US Attorney’s Office for the District of Massachusetts filed a Stark Law–based FCA complaint against Steward St. Elizabeth’s Medical Center of Boston, Inc., Steward Medical Group, Inc., and Steward Health Care System, LLC (collectively, “Steward”). The lawsuit alleges that Steward’s Chief of Cardiac Surgery received over $4.8 million in improper incentive-based compensation based in part upon the number of cases that the Chief of Cardiac Surgery referred to Steward affiliates.[2] As a result, the complaint alleges that Steward submitted false claims to Medicare that resulted in tens of millions of dollars in purported improper reimbursement. The Steward case is in its early stages, but the outcome may help shape DOJ’s approach to investigating and alleging Stark Law–based FCA theories of liability against health care entities.

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As these recent cases demonstrate, alleged Stark Law violations figured prominently in some of DOJ’s largest FCA settlements last year. Moreover, the Stark Law is an attractive enforcement tool for both the government and qui tam relators because it is a strict liability statute that does not require proof of intent. Health care entities therefore must closely scrutinize and monitor their relationships with referring physicians to ensure they adhere to the technical requirements of the Stark Law’s exceptions.