New Regulations Aim to Reform Self-Referral Stark Law

Pharmacy TimesJune 2020
Volume 88
Issue 6

When the Stark Law, or ethics in patient referrals act, was passed in 1989, its purpose was to prevent physicians from referring patients to designated health service entities in which they had financial interest.

When the ethics in patient referrals act was passed in 1989, its purpose was to prevent physicians from referring patients to designated health service entities in which they had financial interest.

It is known as the Stark Law, to honor the member of the US House of Representatives from California who sponsored the original legislative proposal, Democratic Rep Pete Stark. At the time the law was enacted, Medicare used the fee-for-service payment model. However, there has since been a shift to focus on quality rather than quantity of services provided, which has sparked debate surrounding the ways that the Stark Law inhibits care coordination and value-based arrangements. After acknowledging that the law obstructs the ability to coordinate patient care and incentivize physicians for providing high-quality care, the US Department of Health and Human Services released proposed changes that address the concerns.1

The US Department of Health and Human Services released the proposed rules on October 9, 2019, as part of the Regulatory Sprint to Coordinated Care, an initiative it created in 2018 to evaluate regulations that may impede quality-of-care incentive programs and other arrangements.2 The purpose of the changes to the Stark Law is to refine the regulations, so that they can be better applied to situations in the health care industry. In addition, the proposed changes offer more clear-cut guidelines surrounding care coordination and value-based arrangements. The changes would authorize leniency in compliance standards without compromising the safeguards against abuse and fraud.3 If the final rules adopted are consistent with the proposed changes, this could be 1 of the most extreme changes in the last 10 years made to the Stark Law.2

The proposal outlines some updates to compensation definitions and exceptions used in the law.2 A few changes under the new compensation exceptions include those related to value-based arrangements. The definitions that the Centers for Medicare & Medicaid Services (CMS) suggests changing include clarifying the usage of the term “designated health service.” If the proposed changes become the final rule, this term would only be assigned to services rendered from an inpatient hospital if the provision of such services changes the amount paid by Medicare to the hospital under the Inpatient Prospective Payment System.

Other exceptions that are subject to modifications in the proposal are compensation exceptions including the “space lease exception, recruitment exception, [and] fair market value exception.”2

In the proposed rule submitted to the Office of the Federal Register, the CMS recommended new exceptions to the Stark Law for value-based arrangements between physicians and other entities. Some of the many modifications and new exceptions are directly related to the pharmaceutical industry. For example, the proposal discusses which entities are classified as value-based enterprise participants. In particular, the CMS contemplates whether it should disregard entities, such as distributors, pharmaceutical manufacturers, pharmacy benefit managers, and wholesalers. The argument against classifying those as value-based enterprise participants is that they do not have enough direct patient contact to contribute to care coordination, which is 1 of the Stark Act reform’s main goals.4

If the final rule is consistent with the proposal, financial relationships between physicians and the entities would not be permitted under the new proposed exceptions for value-based arrangements. Alternatively, the proposal discusses the possibility of stating in §411.357(aa) that the exceptions do not apply to value-based arrangements between a physician and the entities. Such entities are primarily involved in indirect compensation arrangements, rather than the provision of a designated health service.

Moreover, the proposed rule considers the definition of the term “indirect value-based arrangement” within the context of the new exceptions in §411.357(aa).

The CMS is contemplating whether “an unbroken chain of financial relationships” should be excluded from the definition of this term if the chain culminates with a financial relationship between a physician and an entity, such as a distributor, pharmaceutical manufacturer, pharmacy benefit manager, or wholesaler.4


It would be remiss not to note that the changes discussed are not yet the final rule. The proposal has been published in the Federal Register and is awaiting commentary from stakeholders.4 After receiving comments, the CMS will review its proposal before moving closer to a final rule.

Kennedy E. McGuire holds a BHS in clinical leadership and management from the University of Kentucky in Lexington with plans to attend law school.

Joseph L. Fink III, BSPharm, JD, DSc (Hon), FAPhA, is a professor of pharmacy law and policy and the Kentucky Pharmacists Association Endowed Professor of Leadership at the University of Kentucky College of Pharmacy.


  • Young KD. Medicare proposes overhaul to ‘kickback’ laws. Medscape. October 9, 2019. Accessed May 26, 2020.
  • Cannatti JA, Maida T, Melvin DH, PolacheckJ, Wallace M. HHS proposes substantial changes to Stark Law and anti-kickback statute regulations. McDermott Will & Emery. The Commented [AO1]: CM: Do we need a reference here? National Law Review. October 9, 2019. Accessed May 26, 2020.
  • HHS proposes Stark Law and anti-kickback statute reforms to support value-based and coordinated care. News release. US. Department of Health and Human Services. October 9, 2019. Accessed May 26, 2020.
  • Medicare Program; Modernizing and clarifying the physician self-referral regulations. Centers for Medicare & Medicaid Services. Federal Register.October 17, 2019. Accessed May 26, 2020.

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