Submerged Safe Harbors Against Stark Attacks: How to Manage the Vagaries of Anti-Kickback and Stark Laws

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On August 7, 1997, in an effort to address some areas of concern that may have led to the investigations by certain government agencies, management of Columbia/HCA announced several significant steps it plans to take to redefine the company’s approach to a number of business practices. Some of these steps include elimination of annual cash incentive compensation for the company’s employees, divestiture of the home health care business, discontinuing sales of interests in hospitals to physicians and the unwinding of existing physician interests in hospitals.

Even these steps, if successfully implemented, will not insulate Columbia/HCA from the expansive scope of the Federal Anti-Kickback Statute (42 U.S.C. §1320a-7b(b)) and the Federal Anti-Referral Law commonly known as “Stark” (42 U.S.C. §1395nn). Anti-Kickback and Stark laws will continue to affect a wide variety of ownership, compensation and other financial relationships that are common in the healthcare industry. All providers are at risk of Anti-Kickback and/or Stark attacks by the Federal Government. This risk is heightened in today’s environment where politicians, regulators and the media are waiving the black flag of fraud and abuse while the Government seeks to pirate assets from providers in a futile attempt to refill the U.S. Treasury chest before the demographic cannonball sinks the Medicare ship.

Today’s challenge for healthcare executives and individual providers alike is to successfully navigate through Stark-infested waters. This article charts the course for avoiding the implication of these extremely vague laws when possible, and, when necessary, defending against their application.

Federal Anti-Kickback Statute / New Civil Monetary Penalty

The Federal Anti-Kickback Statute makes it a crime to pay or receive any remuneration for inducing referrals to federal healthcare programs. Knowing and willful conduct is a necessary element of this criminal offense. The burden of proving intent beyond a reasonable doubt makes criminal prosecution difficult but not impossible, and the Government has demonstrated some willingness to bear the criminal burden of proof. Pursuant to a 1987 Congressional mandate, safe harbor regulations (42 C.F.R. §1001.952) have been promulgated in fourteen general areas to give healthcare providers some protection from an extremely vague statute.

The Balanced Budget Act (P.L. 105-33), signed by President Clinton on August 5, 1997, created a civil monetary penalty (42 U.S.C. §1320a-7a(a)(7)) for Anti-Kickback violations in addition to the criminal penalties and the sanction of exclusion. Effective immediately, the civil penalty is treble damages (three times the illegal remuneration) plus $50,000 per violation. The Government can now impose exorbitant fines for Anti-Kickback violations that it proves with a simple preponderance of the evidence, a standard much easier to satisfy than the criminal standard of beyond a reasonable doubt. The O. J. Simpson case demonstrated the significance of these different legal standards. The Government will be much more apt to pursue Anti-Kickback prosecutions with the lower civil standard.

Anti-Referral Statute (Stark)

In contrast to the Federal Anti-Kickback Statute, Stark is just a civil prohibition, not also a crime. The good news is that jail is not a potential punishment; the bad news is that the Government does not need to prove any intent to induce referrals. As originally adopted in 1989, Stark applied only to clinical laboratories. The scope of Stark was significantly expanded in 1993 to designated health services including clinical laboratory, physical therapy, occupational therapy, radiology, radiation therapy, durable medical equipment and supplies, home health, outpatient prescription drugs, and (as if the foregoing list was not enough) all inpatient and outpatient hospital services. In addition, a number of states (including California, New York, Florida and Georgia) have enacted their own versions of self-referral laws that should be carefully examined but are beyond the scope of this article.

Stark simply prohibits all referrals for the provision of designated health services, and all claims for federal reimbursement for such services furnished pursuant to a referral, if a physician has a financial relationship (either an ownership or a compensation arrangement) with the entity. Intent is irrelevant. If the financial relationship exists, all referrals and associated claims are illegal unless specifically excepted by statute. Unlike Anti-Kickback, that is still defensible based on lack of intent even if no safe harbor applies, any and all referrals of designated health services will violate Stark unless a general statutory exception applies.

Extreme care should be taken in managing Stark because of the ease with which technical violations can occur. Penalties for violating Stark are severe, including fines of up to $15,000 per service (which fines quickly become exorbitant in an extended financial relationship), and the economic death penalty of exclusion from participation in Federal healthcare programs.

General Exceptions to Stark

Stark contains a total of sixteen statutory exceptions. Eight exceptions relate only to compensation arrangements, four exceptions relate only to ownership arrangements, and four exceptions relate to both ownership and compensation arrangements. Some of the eight exceptions relating to compensation arrangements overlap with areas covered by the Anti-Kickback safe harbors as will be more fully explored below. The four exceptions relating only to ownership deal with very specific arrangements: certain publicly traded securities, hospitals in Puerto Rico, rural providers and direct hospital ownership. Three of the four exceptions relating to both ownership and compensation arrangements deal with specific situations: physicians’ services provided personally by or under the supervision of the physician, in-office ancillary services, and prepaid plans. The fourth statutory exception to Stark (“Other Permissible Exceptions”) relating to both ownership and compensation arrangements deserves special consideration for its defensive potential.

“Other Permissible Exceptions”

42 U.S.C. §1395nn(b)(4) provides as follows:

(4) Other permissible exceptions. In the case of any other financial relationship which the Secretary determines, and specifies in regulations, does not pose a risk of program or patient abuse.

Regulations have been issued to implement Stark (42 C.F.R. §411.350 et seq.). The general exceptions in these regulations largely mirror the exceptions in the statute itself. The regulations do add one additional exception for certain services included in composite rates for an ambulatory surgical center, end renal disease facility or hospice.

The Stark statute includes “Other Permissible Exceptions” for “any other financial relationship which the Secretary determines, and specifies in regulations, does not pose a risk of program or patient abuse.” The statute contains two simple elements for “Other Permissible Exceptions” to apply: (1) the financial relationship must be specified in regulations, and (2) the Secretary must determine that the financial relationship does not pose a risk of program or patient abuse.

The Stark regulations are not the only regulations that specify financial relationships which do not pose a risk of program or patient abuse; there are also the Anti-Kickback regulations. What is the interplay between the Stark regulations and the Anti-Kickback regulations? The 1989 legislative history to Stark contained the following:

The conferees wish to clarify that any prohibition, exemption, or exception authorized under this provision in no way alters (or reflects on) the scope and application of the anti-kickback provisions in [42 U.S.C. §1320a-7b(b)]. The conferees do not intend that this provision [Stark] should be construed as affecting, or in any way interfering, with the efforts of the Inspector General to enforce current law [Anti-Kickback Statute], such as cases described in the recent Fraud Alert issued by the Inspector General. In particular, entities that would be eligible for a specific exemption would be subject to all of the provisions of current law.

The legislative intent was that general exceptions to Stark would not constitute an exception to the Anti-Kickback Statute. But what about vice versa? The quoted material does not address the possibility that Anti-Kickback safe harbors could apply to Stark. The 1989 legislative history of Stark also contained the following comments about Anti-Kickback law:

The Medicare and Medicaid Patient and Program Protection Act of 1987 (P.L. 100-93) provided authority to the Inspector General of the Department of Health and Human Services to exclude a person or entity from participation in Medicare and State health care programs if it is determined that the party is engaged in a prohibited remuneration scheme. The Act required the promulgation of regulations specifying those payment practices that will not be subject to criminal prosecution and that will not provide a basis for exclusion from the Medicare and State health care programs. These are sometimes referred to as “safe harbors.” On January 23, 1989, the Secretary published a proposed rule to provide such “safe harbors.” The rule has not yet been issued in final form.

Thus, just two years prior to the enactment of Stark, Congress had mandated that the Secretary issue safe harbor regulations to clarify which business ventures would not subject a provider to the severe sanction of exclusion. The 1989 legislative history of Stark repeats the concern of Congress that clear safe harbors would be established so that providers could fairly avoid exclusion. Significantly, Stark itself included the sanction of exclusion.

Specified in Regulations

When Stark was adopted in 1989, Congress knew that the Secretary had not yet finalized the regulations that Congress had directed the Secretary to issue to provide safe harbors from exclusion. Following the adoption of Stark, the Secretary implemented two sets of regulations: (1) the Anti-Kickback regulations finalized in 1991, and (2) the Stark regulations first proposed in 1992 and finalized in 1995. Both sets of regulations describe various financial relationships, some that are quite similar and some that are different. For example, both sets of regulations describe a financial relationship in certain publicly traded entities; but only the Anti-Kickback regulations contain the exception for small investments in non-publicly traded entities, otherwise known as the “60-40 rule.”

The financial relationships described in both sets of regulations satisfy the first element of the “Other Permissible Exceptions” to Stark, namely that the financial relationships are specified in regulations. Congress expressed no intention, either in the Stark statute itself or in the related legislative history, to exclude the then-pending Anti-Kickback regulations (which Congress specifically directed in 1987 and acknowledged again in 1989 in the legislative history to Stark) from the “Other Permissible Exceptions” to Stark.

Risk of Program or Patient Abuse

In order for a financial relationship described in the safe harbor regulations under the Anti-Kickback Statute to meet the second element of the “Other Permissible Exceptions” to Stark, the financial relationship must be one which the Secretary determines does not pose a risk of program or patient abuse. When the Anti-Kickback regulations were originally proposed in 1989, the 60-40 rule was not part of the proposed regulations. However, the notice of rule making issued when the regulations were first proposed in January 1989 solicited comments on expanding the proposed investment interest safe harbor for certain publicly traded securities to protect payments from investments in small entities. In light of an enormous response in favor of the safe harbor for small entities, the Secretary adopted the 60-40 rule in 1991 with the following explanation:

Because of the significant business investment activity in these small entities – typically joint ventures – and the advantages of permitting them in certain situations, we believe that safe harbor protection is warranted. However, we have also observed widespread abuses in many of these joint ventures. Therefore, any safe harbor protection must include significant safeguards to minimize any corrupting influence the investment interest may have on the physician-investor’s decision where to refer a patient.

Eight standards were specified in the 60-40 safe harbor to minimize any corrupting influence the investment interest may have on the physician-investor’s decision where to refer a patient:

  1. Referring persons can own no more than 40 percent of the investment interests;
  2. The terms of investment must be the same as those offered to passive investors;
  3. The terms of investment must not be related to the volume of referrals;
  4. The terms of investment must not be tied to any requirement to make referrals;
  5. The entity and all investors must not market or furnish the entity’s items or services to passive investors differently than to non-investors;
  6. No more than 40 percent of the gross revenue of the entity may come from referrals from investors;
  7. The entity must not loan funds to, or guarantee a loan for, a referring investor; and
  8. Payments to investors must be directly proportional to the amount of capital investment.

The 60-40 safe harbor applies only if all eight of these standards are satisfied. The Secretary went to great lengths to ensure the financial relationship described in the 60-40 safe harbor does not pose a risk of program or patient abuse.

Separately, Richard P. Kusserow, the Inspector General at the time the Anti-Kickback safe harbor regulations were drafted and adopted in 1991, authored a 1992 article published in Health Matrix which provided the following explanation behind the regulations:

In drafting the safe harbor regulations, OIG attempted to balance two competing concerns. First, we tried to draft the regulations to accommodate as many non-abusive arrangements as possible. Second, we tried to minimize the risks of allowing abusive arrangements within the safe harbor. We believe each of the eleven [later expanded] safe harbors contained in the final rule contains criteria which offer reasonable assurance that abusive activities will not receive the comfort of being in a safe harbor.

The 60-40 safe harbor contained in the Anti-Kickback regulations satisfies both the first and second elements of the “Other Permissible Exceptions” to Stark, namely that the 60-40 safe harbor is a financial relationship specified in regulations and the Secretary has determined that the financial relationship does not pose a risk of program or patient abuse. The “Other Permissible Exceptions” exemption from Stark requires nothing more. Therefore, the 60-40 safe harbor in the Anti-Kickback regulations satisfies the “Other Permissible Exceptions” to Stark and affords providers with a defense to a possible Stark attack.

I believe a similar case can be made for all of the other Anti-Kickback safe harbors. Each safe harbor specifies a financial relationship in regulations as required by the first element of the “Other Permissible Exceptions” to Stark. Each safe harbor contains criteria to provide reasonable assurance that the financial relationship does not pose a risk of program or patient abuse as required by the second element of the “Other Permissible Exceptions” to Stark. In short, all Anti-Kickback safe harbors provide protection against possible Stark attacks.

Comparison of Anti-Kickback Safe Harbors and Stark Exceptions

Since Anti-Kickback safe harbors may satisfy one of the statutory exceptions to Stark, it is useful to compare the anti-kickback safe harbors with the Stark exceptions to determine when it may be advantageous to use an Anti-Kickback safe harbor as a statutory exception to Stark. Remember that the legislative history is clear that the converse does not apply: Stark exceptions can not be used as safe harbors from Anti-Kickback laws.

Tables A, B and C analyze the interplay between Anti-Kickback safe harbors and Stark general exceptions by grouping the various safe harbors and exceptions into the following three classes:

Healthcare executives and individual providers would enhance their abilities to manage the vagaries of Anti-Kickback and Stark by studying these tables and appreciating the interplay between Anti-Kickback and Stark. Without regurgitating the information set forth in the Tables, this article will make some observations about the groupings in general and some particular safe harbors/exceptions.

Table A – Areas of Overlap

Table A identifies eight areas where the Anti-Kickback safe harbors and the Stark exceptions overlap. In general, the technical requirements of the Stark exceptions are more difficult to satisfy than the comparable Anti-Kickback safe harbor. For example, the public securities exception of Stark applies only to public corporations having more than $75 million in stockholder equity, while the Anti-Kickback safe harbor applies to all entities (both corporate and non-corporate) having more than $50 million in net tangible assets (without reduction for liabilities).

Anti-Kickback and Stark laws also overlap in the area of risk-sharing arrangements with vastly different technical requirements. The Anti-Kickback statute was amended in 1996 to simply exclude all risk-sharing arrangements from the scope of Anti-Kickback (42 U.S.C. Sec. 1320a-7b(b)(3)(F)). On the other hand, Stark contains no general exception for risk sharing but rather a series of specific cases where risk is shared: group practice, in-office ancillary services, certain services included in composite rates, certain physician incentive plans, and certain group practice services billed by the hospital. Each specific case entails a number of technical requirements in order to avoid a Stark violation. Extreme care should be exercised to ensure risk-sharing arrangements comply with Stark.

As discussed above, overlapping Anti-Kickback safe harbors which are specified in regulations may be used to defend a situation where the technical requirements of Stark are not met but the Anti-Kickback safe harbor is satisfied. This defense will not presently work for risk-sharing arrangements because the arrangements are excluded by the Anti-Kickback statute itself, and safe harbor regulations have not yet been issued. The Stark statute should be amended to allow the same types of risk-sharing arrangements as the Anti-Kickback statute presently allows in order to avoid impeding the development of innovative risk-sharing arrangements.

Table B – Anti-Kickback Safe Harbors without a Similar Stark Exception

Table B identifies seven areas where an Anti-Kickback safe harbor exists without a similar Stark exception. This is the grouping where an Anti-Kickback safe harbor may save an otherwise blatant Stark violation. In the areas of warranties, discounts and waivers of coinsurance or deductibles, large volumes of transactions may implicate Stark even though an Anti-Kickback safe harbor exists. The Government has not yet frequently used Stark as its primary grounds for an attack, but that may be changing in the current political and regulatory climate.

The safe harbor for small entities (60-40 rule) under Anti-Kickback may be used defensively to save those residual financial arrangements which were implicated by Stark when it was expanded from just clinical laboratories to all designated health services effective in 1995. Use of Anti-Kickback safe harbors against Stark attacks has not yet been thoroughly litigated, and as a result I would not recommend using the 60-40 Anti-Kickback safe harbor offensively to structure new arrangements without separately complying with a Stark exception.

Table C – Stark Exceptions without Similar Anti-Kickback Safe Harbor

Table C identifies five areas where a Stark exception exists without a similar Anti-Kickback safe harbor. The legislative history makes it clear that Stark exceptions do not apply to Anti-Kickback. A trap exists for anyone relying on the Stark exceptions for specific providers. While Stark has specific exceptions for hospitals in Puerto Rico, rural providers and hospital ownership, Anti-Kickback has no similar safe harbors in those situations. One would probably have to look to the safe harbors for small entities (60-40 rule) or public securities to find an Anti-Kickback safe harbor. In contrast to Stark, Anti-Kickback always has a back-up defense that no intent to induce referrals existed.

The Stark exception for isolated transactions is the best chance under Stark for saving an innocent arrangement that fails the technical requirements of the other Stark exceptions. Even this exception has a technical requirement that no additional transactions occur between the parties for six months, which significantly limits the utility of the exception.

Columbia/HCA’s Abandoned Strategies

The decisions by Columbia/HCA to eliminate annual cash incentive compensation for the Company’s employees, divest its home health care business, discontinue sales of interests in hospitals to physicians and unwind of existing physician interests in hospitals go beyond what the law requires under Anti-Kickback and Stark. Both the Anti-Kickback safe harbors and the Stark exceptions permit cash incentive compensation to employees (see Table A, Item 6 – Employees). Columbia’s ownership of home health agencies is a permitted risk-sharing arrangement under Anti-Kickback (see Table A, Item 8 – Risk-Sharing Arrangements). Stark only applies to physician (not hospital) financial relationships and any indirect ownership by physicians in home health agencies by virtue of stock ownership in Columbia/HCA is permitted under the public corporation exception to Stark (see Table A, Item 1 – Public Securities). Stark expressly permits investments by physicians directly in hospitals (see Table C, Item 1 – Specific Providers). Anti-Kickback also permits certain physician investments in hospitals at the public holding company level under the public securities safe harbor (see Table A, Item 1 – Public Securities) or at the subsidiary level as long as the requirements of the 60-40 rule are satisfied (see Table B, Item 1 – Small Entities).

The business strategies that Columbia is abandoning can be defended under existing safe harbors to Anti-Kickback and exceptions to Stark. The decision to abandon those strategies may be understandable in light of the intense regulatory and media pressure faced by Columbia/HCA. However, before other healthcare providers abandon their similar strategies, they should carefully analyze two issues:

  1. Can the strategy be well supported under current laws and regulations, including Anti-Kickback, Stark and any applicable state laws?
  2. Is the strategy still appropriate from an economic and business standpoint?

Several strategies that have developed in healthcare during the last decade may still be appropriate even after this analysis. For example, the notion of integrated healthcare systems remains the trend and can be accommodated within Anti-Kickback and Stark laws. Incentive-based compensation works well in business generally, and for the same reasons should also work in healthcare if properly structured and monitored.


Anti-Kickback safe harbors and Stark exceptions overlap in many respects. Healthcare executives and individual providers should use extreme care in structuring ownership, compensation and other financial relationships, particularly with respect to Stark, because any failure to satisfy the many technical requirements of the statutory exceptions to Stark will result in violation of Stark. While Stark exceptions may not be used to shelter a financial relationship from Anti-Kickback, Anti-Kickback safe harbors may provide protection against Stark attacks.

A thorough understanding of the interplay between Anti-Kickback and Stark is your compass in navigating the Stark-infested waters. Bon voyage!