Why You Should Fight for Stark Law Changes (Hint: It's Limiting Your Compensation)

Updated: Oct 26, 2021


Gavel and stethoscope in front of row of legal books. Included in article about Stark Law Changes

Nothing about providing or receiving healthcare in America is simple. Our healthcare system depends on a complex network of public and private payers and is governed by a confusing and often contradictory set of state and federal laws and regulations. That’s good news for medical lawyers, but not for patients — or the physicians who care for them.

Many of the laws governing healthcare were passed in another era and don’t fit the realities of 21st-century medical practice and patient care. These outdated laws often cause unnecessary hardship for both physicians and patients. One good (or bad) example is the Stark law. As a physician, you’ve probably heard of the Stark law, but you may not understand its full impact on your practice — and your compensation.

In this article, I want to explore why the Stark law is out of step with modern medical practice and how it detrimentally affects and artificially limits physician compensation. By the time you finish reading, I hope you’ll understand why you should care about the Stark law and join me in advocating for its modernization.

Stark Law Basics: A Brief History & Overview


I’ve spent a lot of time thinking about the Stark law, but I recognize that may not be the case for everyone, so I’ll start with a brief history of the origins and intentions of the Stark Law.

The law was passed by Congress in 1989 as the Ethics in Patient Referrals Act and is known as the Stark law in honor of Representative Peter Stark, who authored most of the original legislation. Rep. Stark proposed the law in response to evidence that doctors with financial interests in clinical labs ordered more tests.

Congress was concerned that doctors with bad intentions could exploit financial relationships with labs and other healthcare entities to make money in the form of kickbacks or even bribes for more referrals. In response, the original law prohibited physicians from referring Medicare patients to any lab in which he or she had an ownership interest or financial relationship.

Since 1989, the law has expanded to include prohibitions against referring Medicare beneficiaries to entities providing 11 kinds of “designated health services” if the referring physician or any member of his or her family has a financial relationship with the entity unless the referral qualifies as an exception under a set of complicated rules.

Even unintentional Stark law violations carry stiff penalties, and hospitals and health care practices spend vast amounts of time, money, and energy interpreting and complying with regulations.

Why the Stark Law Doesn’t Work for Modern Medicine


So far the Stark law doesn’t sound too bad, right? Kickbacks should be illegal, but here’s the problem: the world the Stark law was written for no longer exists. In the early 1980s, 75.8% of physicians were self-employed vs just 44% in 2020. Today, over 50% of physicians are employed by hospitals and the number is growing.

The shift towards physician employment reflects broader shifts in the way medicine is practiced. The healthcare landscape of 2021 bears little resemblance to the one observed in 1989. In fact, many common medical best practices are technically illegal under the terms of the Stark law.

For example, if you’re a physician employed by a hospital, the unamended Stark law would prohibit you from referring a Medicare patient for additional care or services at the hospital where you work because you have a financial relationship (i.e. employment) with the hospital — a situation which is unacceptable in today’s healthcare environment.

To compensate for the changes in how care is delivered — such as physician employment and the increased emphasis on preventative care — HHS has created 35 Stark law exceptions. Some exceptions and restrictions are extremely specific, while others are frustratingly vague and require careful interpretation to avoid violation.

Here’s the bottom line: the Stark law was written for another world. In an effort to keep up with healthcare evolution, regulators have amended and expanded the law, but the result is a confusing mish-mash of onerous regulations and unintended consequences — such as limiting physician compensation.


A Good Law Goes Bad: How the Stark Law Limits Physician Compensation


I don’t want you to misunderstand me — the original Stark law served a valuable purpose in protecting patients and preventing physicians with bad intentions from profiting from illicit referrals. Today, however, we find ourselves with a case of a good law gone bad as it’s been misinterpreted and misapplied to situations far outside its original scope.

Let me explain. Most of the Stark law exceptions are subject to the “fair market value” test, a requirement that allows us as physicians to provide care to patients, but artificially limits our compensation. The Stark law allows physicians to refer services to entities with whom they have a financial relationship as long as the compensation provided does not exceed “fair market value.” This allows physicians to be employed by hospitals and pursue valuable and innovative arrangements such as medical directorships.

Unfortunately, the definition of fair market value is unclear. Most hospitals and large practices rely on industry physician compensation data provided by sources like the Medical Group Management Association (MGMA) to set physician salaries and stipends. This is widely considered as a safe way to make sure they don’t commit a Stark law violation by paying an employee more than he or she is worth.

Here’s what gets me fired up about the situation: this way of determining fair market value is both inaccurate and effectively a form of modern-day wage-fixing. True fair market value is determined by supply and demand — not lagging indicators such as two-year-old industry surveys.

Current regulations allow hospitals to keep labor costs down under the guise of Stark law compliance. Instead of paying you what you’re worth based on your experience, qualifications, and current supply and demand, hospitals cap compensation based on the survey data.

Some hospitals refuse to offer salaries above the 75th percentile for your specialty. Others may be willing to go a bit higher, but the ultimate result is the same: the Stark law prevents you as a physician from negotiating your salary based on supply and demand and artificially caps your compensation.


It’s Broken, So Let’s Fix It: The Case for Stark Law Modernization


The Stark Law isn’t just bad for physicians — it hurts patients and hospital systems, too. Without the ability to offer increased compensation in the form of salaries or medical directorship stipends, hospitals and clinics in underserved areas can’t attract the physicians they need to care for the people in their communities. If they try to set compensation based on demand, they risk running afoul of the Stark law and incurring millions of dollars in fines.

As I’ve tried to explain here, the Stark law is broken. It doesn’t work for physicians, it doesn’t work for patients, and it doesn’t work for most hospital systems either. You can’t get paid what you’re worth, hospitals can’t offer incentives to attract the specialists they need, and everyone has to be on constant alert to avoid unintentionally violating the law.

So what’s the solution? We need a radical update of the law to reinforce the original intent and align the law’s requirements with today’s healthcare landscape. Even Pete Stark, the law’s champion and namesake, has said the law has strayed far from its original purpose and needs a major overhaul.

Ideally, this overhaul would revise or eliminate outdated provisions, clarify requirements, and narrow the scope of the law to thwart intentional bad actors instead of punishing accidental violators. It should also remove restrictions so physicians like you and me can be fairly compensated based on the laws of supply and demand.

Change is hard, and often slow — especially when Congress is involved. Our best chance at Stark law modernization is to use our influence in the medical community to discuss the issue with our colleagues, garner support for change, and work together to propose new solutions that will benefit everyone involved. It’s a daunting task, but I’m optimistic and committed to advocating for Stark law modernization.

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