How Can a Medical Practice Tell If an Arrangement Could Violate the Stark Law?

Medical Answer

The Stark Law, formally known as the federal physician self-referral law, generally prohibits a physician from referring certain designated health services payable by Medicare to an entity with which the physician or an immediate family member has a financial relationship, unless an applicable exception is satisfied. A financial relationship can involve ownership or investment, or it can arise through a compensation arrangement.

For a medical practice, the most important lesson is that an arrangement does not have to look suspicious to create Stark Law concerns. Employment agreements, medical director arrangements, leases, equipment rentals, ownership interests, and other ordinary business relationships can require Stark analysis.

Instead of asking whether an arrangement “feels like a kickback,” use a structured screening process before entering the deal. Physician → Referral → Designated Health Service → Medicare → Financial Relationship → Applicable Exception

If those elements start appearing in the same arrangement, stop and determine whether the Stark Law applies before moving forward.

Don’t Use Intent as Your First Stark Test

One of the easiest ways to overlook a Stark problem is to assume that nobody did anything intentionally wrong.

Your administrator might say, “We weren’t trying to buy referrals.” Your physician might say, “I didn’t know this could be a problem.” The parties may have entered the arrangement for legitimate business reasons. Those facts don’t eliminate the need for Stark analysis.

This is one of the biggest distinctions between the Stark Law and the federal Anti-Kickback Statute. The Anti-Kickback Statute includes a knowing-and-willful intent standard. Stark is structured differently, so a practice should not rely on good intentions as its compliance strategy. Your safest approach is to evaluate the arrangement based on its actual structure.

Question 1: Is a Physician Involved?

Start by identifying the individuals involved in the arrangement.

Don’t stop with the person whose name appears on the contract. Stark can also involve a financial relationship held by a physician’s immediate family member, so your review may need to extend beyond the physician personally. CMS expressly includes financial relationships involving a physician or the physician’s immediate family member in its description of the prohibition.

For example, suppose your physician doesn’t own the imaging company receiving referrals, but the physician’s spouse has an ownership interest. That fact should immediately be identified during your compliance review.

This is why practices need a process for identifying relevant financial interests rather than relying only on what appears in the contract file.

Question 2: Is the Physician Making a Referral?

Next, determine whether referrals are flowing from the physician to the entity involved in the financial relationship.

Don’t automatically assume that a referral doesn’t count simply because the service remains within your organization. Certain internal arrangements can still require analysis. Look at what actually happens after the physician orders a service.

• Does the physician order imaging performed by the practice?
• Does the physician order laboratory services?
• Does the practice furnish physical therapy?
• Does the physician refer patients to a hospital with which the physician has a financial relationship?

Those are the types of questions that should trigger further review.

Question 3: Does the Referral Involve a Designated Health Service?

Stark doesn’t apply to every healthcare service. The referral must involve a designated health service, commonly called DHS. CMS currently identifies these DHS categories:

• Clinical laboratory services
• Physical therapy services
• Occupational therapy services
• Outpatient speech-language pathology services
• Radiology and certain other imaging services
• Radiation therapy services and supplies
• Durable medical equipment and supplies
• Parenteral and enteral nutrients, equipment, and supplies
• Prosthetics, orthotics, and prosthetic devices and supplies
• Home health services
• Outpatient prescription drugs
• Inpatient and outpatient hospital services

CMS also maintains an annually updated CPT/HCPCS Code List that helps define certain DHS categories. The 2026 list became effective January 1, 2026. This is important because you shouldn’t rely indefinitely on an old list of services or codes stored in your compliance binder.

Question 4: Is Medicare Involved?

For the federal Stark referral prohibition, determine whether the designated health service is payable by Medicare.

CMS’s current Stark guidance describes the prohibition as applying to referrals for certain designated health services payable by Medicare. CMS also notes that section 1903(s) of the Social Security Act extends aspects of the physician self-referral prohibition to Medicaid.  For your initial compliance screening, therefore, ask whether Medicare or Medicaid business could be implicated rather than assuming that an arrangement is safe because most of your patients have commercial insurance.

Also remember that state self-referral laws can be broader than federal Stark. Passing the federal Stark analysis doesn’t necessarily mean you’ve finished your legal review.

Question 5: Is There a Financial Relationship?

This is where seemingly ordinary business arrangements can become important.

CMS explains that a financial relationship can consist of an ownership or investment interest or a compensation arrangement. That means your review shouldn’t be limited to situations in which a physician owns a company.

A financial relationship might arise through an employment agreement, medical director arrangement, lease, equipment rental, independent contractor arrangement, or another compensation relationship.

Ask: “Is money, ownership, investment, compensation, or something else of value connecting this physician to the entity receiving the referrals?”

If the answer is yes, investigate further.

Look Beyond the Obvious Contract

One of the most dangerous compliance assumptions is: “We don’t have a referral agreement.” You probably won’t.

The relevant financial relationship may be documented in an entirely different contract. For example, a physician might have a medical director agreement with an entity while separately referring patients to that entity for designated health services.

Your contract audit therefore needs to connect financial relationships with referral patterns. Reviewing the medical director agreement without examining referrals can miss half the picture.

Ownership Interests Deserve Particular Attention

Suppose several physicians own an interest in an ancillary service business.

That ownership itself isn’t enough to determine whether the arrangement violates Stark. But when physician ownership combines with referrals of Medicare patients for designated health services, your practice should immediately determine whether Stark applies and whether an appropriate exception is available.

Don’t wait until claims have been submitted to ask the question. The better sequence is: Identify Ownership → Identify Referrals → Identify DHS → Identify Medicare Business → Analyze Exception → Then Proceed

Medical Director Agreements Need More Than a Job Title

Medical director arrangements deserve special scrutiny because they create compensation relationships between physicians and healthcare entities.

A contract that simply says a physician will provide “medical director services” may not give your practice enough information to demonstrate exactly what is being purchased and why the compensation is appropriate.

Your agreement and supporting records should accurately reflect the actual arrangement. Depending on the exception being relied upon, requirements can involve matters such as the arrangement’s documentation, compensation methodology, fair market value, commercial reasonableness, and whether compensation takes into account the volume or value of referrals or other business generated.

Don’t create a generic contract and assume that signing it makes the relationship compliant.

Look Closely at Physician Compensation

Compensation deserves particular attention whenever the physician is in a position to generate business for the entity paying them. Ask how the compensation was determined. Determine whether it was established appropriately and whether there is support for the amount being paid.

Then ask one of the most important questions: “Does this physician make more money simply because they send more designated health service referrals to the entity paying them?”

Don’t assume that every productivity formula is prohibited. Physician compensation rules are considerably more nuanced than that. But unusual formulas involving referral volume or value should trigger careful review before they are implemented.

Fair Market Value Doesn’t Automatically Solve Everything

Practices sometimes believe that if compensation is fair market value, the Stark analysis is finished. It isn’t necessarily.

Fair market value can be an important requirement for particular Stark exceptions, but the arrangement still needs to satisfy the requirements of the specific exception upon which the practice relies.

The better question isn’t simply: “Is this fair market value?”

It is: “Which Stark exception are we relying on, and can we demonstrate that this arrangement satisfies each requirement of that exception?”

Commercial Reasonableness Matters Too

A compensation amount can potentially appear reasonable while the underlying business arrangement raises a different question: Why does the arrangement exist?

For example, if your practice pays someone for medical director responsibilities, there should be a legitimate need for those responsibilities and actual services supporting the arrangement. Don’t create titles simply to justify payments.

The contract, business purpose, services performed, and compensation structure should make sense together.

Written Agreements Should Match Reality

Don’t think of the contract as paperwork that goes into a drawer after everyone signs it. The actual relationship should match the agreement.

If the agreement says the physician performs particular medical director responsibilities but those responsibilities aren’t actually being performed, the written contract isn’t solving your problem. Similarly, if the physician’s responsibilities change, compensation changes, or the arrangement is renewed or modified, determine whether the agreement and Stark analysis need to be updated.

A compliant-looking contract doesn’t protect a practice from an arrangement that operates differently in real life.

Don’t Forget About Leases and Equipment Rentals

Financial relationships don’t always look like physician compensation.

Suppose your practice rents office space to a physician who refers patients to your practice, or a physician rents equipment from an entity receiving referrals. Those relationships may warrant Stark and Anti-Kickback review.

Ask whether the rental arrangement is legitimate, appropriately documented, commercially reasonable, and consistent with fair market value where applicable.

Unusually low rent shouldn’t automatically be viewed as a friendly business arrangement. Unusually high rent shouldn’t automatically be viewed as good negotiating. When referrals exist between the parties, both deserve scrutiny.

Stark Exceptions Are Not Automatic

Finding a financial relationship doesn’t necessarily mean the arrangement must be abandoned.

CMS explains that the physician self-referral law contains numerous statutory and regulatory exceptions. When all requirements of an applicable exception are satisfied, the referral and billing prohibitions do not apply.

That’s an important distinction. Your analysis shouldn’t be: Financial Relationship = Illegal

It should be: Potential Stark Arrangement → Identify Applicable Exception → Verify Every Requirement → Document Compliance

The exact exception depends on the arrangement, which is why practices shouldn’t attempt to apply one generic Stark checklist to every physician relationship.

Don’t Confuse Stark Exceptions With Anti-Kickback Safe Harbors

These terms are frequently mixed up.

Under Stark, you generally evaluate whether an arrangement satisfies an applicable exception.

Under the federal Anti-Kickback Statute, you may evaluate applicable safe harbors, along with the statute and relevant facts and circumstances.

That distinction isn’t merely terminology. The statutes operate differently and an arrangement may need to be evaluated under both. An arrangement that satisfies Stark isn’t automatically compliant with the Anti-Kickback Statute or other applicable laws.

Review Arrangements Before You Sign

Compliance review is much easier when you still have the ability to change the deal.

Imagine your practice negotiates a medical director arrangement, agrees on compensation, signs the contract, begins paying the physician, and allows referrals to continue for a year. Only then does someone ask: “Does this comply with Stark?”

At that point, your practice may be investigating an existing problem rather than preventing one.

Reverse the process: Proposed Arrangement → Compliance Review → Necessary Changes → Approval → Signature → Monitoring

Make compliance review part of contracting—not cleanup after contracting.

Use the STARK Test whenever your practice enters or changes a physician financial arrangement.

1. S — SERVICE: Does the physician refer designated health services?
2. T — TIED FINANCIALLY: Does the physician or an immediate family member have an ownership, investment, or compensation relationship with the entity?
3. A — APPLICABLE PROGRAM: Is Medicare payment implicated, and are there Medicaid or other applicable requirements to consider?
4. R — RELATIONSHIP: What exactly connects the physician and entity—employment, ownership, medical directorship, lease, equipment rental, investment, or another arrangement?
5. K — KEEP WITHIN AN EXCEPTION: If Stark applies, identify the exception being relied upon and verify that the arrangement satisfies its requirements.

Then document the analysis before the arrangement goes into effect.

Real Practice Example

A physician practice wants to add imaging services. Management sees a straightforward business opportunity: patients already need imaging, the service would be convenient, and keeping the service within the practice could improve coordination of care.

The administrator initially focuses on purchasing the equipment and projecting revenue.

A compliance review asks different questions.

• Will physicians order the imaging?
• Are the services designated health services?
• Will Medicare beneficiaries receive them?
• Do the physicians have a financial relationship with the entity furnishing the imaging?
• If so, what Stark exception would allow the arrangement?

Instead of treating Stark as an issue to address after opening the service line, the practice changes its process: Business Idea → Stark Screening → Structure Review → Exception Analysis → Documentation → Implementation → Ongoing Monitoring

The imaging project may still be possible, but compliance becomes part of its design rather than an afterthought.

Does a Physician Have to Intend to Violate Stark?

Don’t use intent as your Stark compliance test. The safer approach is to determine objectively whether the physician self-referral prohibition is implicated and, if it is, whether an applicable exception is satisfied. Good intentions don’t replace that analysis.

Does Every Physician Financial Relationship Violate Stark?

No. A financial relationship alone doesn’t establish a violation.

You must examine the complete arrangement, including referrals, designated health services, Medicare payment and applicable exceptions. CMS expressly recognizes numerous statutory and regulatory exceptions.

Are Internal Referrals Automatically Safe?

No. Don’t assume a service is outside Stark merely because it is furnished within the physician’s practice.

For example, the in-office ancillary services exception can be extremely important for physician practices furnishing certain DHS internally, but its requirements must actually be satisfied.

What If We Discover a Possible Stark Problem After the Arrangement Has Started?

Don’t immediately attempt to fix, refund, disclose, or restructure the arrangement without understanding the issue.

Preserve relevant contracts and records, stop making undocumented changes, and obtain appropriate healthcare legal/compliance guidance. CMS maintains a Voluntary Self-Referral Disclosure Protocol (SRDP) for providers and suppliers to disclose actual or potential Stark violations, but whether and how to use that process should be carefully evaluated.

Warning Signs Your Arrangement Needs a Closer Look

Your practice should consider additional review when a physician refers Medicare patients to an entity the physician owns, invests in, works for, rents from, rents to, or receives compensation from.

You should also pay attention when compensation changes as referrals increase, a physician is being paid for vaguely defined responsibilities, an arrangement has operated without current documentation, rent appears unusually high or low, a business relationship was negotiated primarily because one party can generate significant healthcare business, or nobody can identify which Stark exception the practice is relying upon.

Another warning sign is surprisingly simple: “We’ve always done it this way.” Longevity doesn’t establish compliance.

Stark Arrangement Screening Checklist

Before approving a physician financial arrangement:

• ☐ Identify every physician involved.
• ☐ Identify relevant immediate family financial relationships.
• ☐ Determine whether the physician makes referrals to the entity.
• ☐ Determine whether those referrals involve designated health services.
• ☐ Determine whether Medicare payment is implicated.
• ☐ Consider whether Medicaid or state self-referral requirements also need review.
• ☐ Identify every ownership or investment interest.
• ☐ Identify every compensation arrangement.
• ☐ Review employment relationships.
• ☐ Review medical director and independent contractor arrangements.
• ☐ Review office and equipment leases.
• ☐ Review physician ownership or investment interests.
• ☐ Identify how compensation was determined.
• ☐ Determine whether fair market value requirements apply.
• ☐ Determine whether commercial reasonableness requirements apply.
• ☐ Examine whether compensation takes into account referral volume or value where prohibited.
• ☐ Identify the Stark exception being relied upon.
• ☐ Verify the requirements of that specific exception.
• ☐ Confirm that actual operations match the written arrangement.
• ☐ Obtain appropriate healthcare legal review when necessary.
• ☐ Establish a date to review the arrangement again.

Action Plan

Pull five physician financial arrangements from your files this week. Start with your medical director agreements, employment arrangements, leases, ancillary service relationships, and physician ownership interests.

For each one, create six columns: Physician | Entity | Financial Relationship | DHS Referrals? | Medicare? | Stark Exception

Don’t try to solve every legal question during this initial exercise. The goal is to find arrangements where your team reaches the final column and says: “We’re not sure.”

Those should move to the top of your compliance review list.

Bottom Line

You don’t need to memorize every Stark regulation to improve your practice’s first line of defense. You need a reliable process for recognizing when a proposed arrangement deserves closer examination.

Start by connecting the physician, referral, designated health service, Medicare business, and financial relationship. If those elements are present, identify the applicable Stark exception and verify its requirements before the arrangement moves forward.

The basic workflow is: Physician → DHS Referral → Medicare → Financial Relationship → Stark Review → Applicable Exception → Documentation → Monitoring

That simple screening process can help your practice catch potentially problematic arrangements while you still have time to restructure them.

Key Takeaways

• Stark is a physician self-referral law, not simply an anti-kickback rule.
• You don’t need a secret payment or obviously improper deal to create Stark concerns.
• Start by identifying whether a physician or immediate family member has a financial relationship with an entity.
• Determine whether the physician refers patients to that entity.
• Identify whether those referrals involve designated health services.
• Determine whether Medicare payment is implicated.
• Remember that financial relationships can include both ownership/investment interests and compensation arrangements.
• Don’t assume an internal referral is automatically outside Stark.
• If Stark applies, determine whether the arrangement satisfies all requirements of an applicable exception.
• Review arrangements before signing or paying—not after a problem is discovered.

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