Stark Law and Contract Drafting Perils

All of the recent posts about HIPAA and data privacy issues have left discussion of the Stark Law out of the rotation of blog topics.  This means I have not been writing about one of my favorite, although, convoluted topics.

In case anyone is unfamiliar with the Stark Law, it is the commonly used name of the Physician Self-Referral Statute.  As a general matter, the Stark Law prohibits a physician (or an immediate family member) from referring patients to an entity for designated health services with which the physician has a financial relationship.  While the Stark Law generally prohibits referrals in certain circumstances, there are many statutory and regulatory exceptions that make an otherwise impermissible relationship allowable.

It is essential to comply exactly with the Stark Law.  It is a strict liability statute, which means that parties must satisfy each and every element.  This becomes especially important when trying to meet an exception to the Stark Law.  Failure to meet each and every element will result in a violation.

Coming back to the title of this post, careful attention to detail when drafting and reviewing contracts is very important.  It can be really easy to miss a detail.  Accordingly, the following are some tips to keep when mind when drafting and reviewing contracts.

1.  Ensure that you have compliance with the Stark Law in mind throughout the contracting process.  If you have any concerns about an arrangement, go through all aspects of the proposed relationship and consider how to best draft the agreement.

2.  Consult the Stark Law regulations when drafting a particular arrangement.  It is beneficial to identify the exception or exceptions that will be relied upon to bring a proposed arrangement into compliance.  If a particular exception will be used, then the parties can check off the elements of the exception as the arrangement is being drafted.  Remember, compliance must be exact and no element can be left out.

3.  Consider whether the financial relationship can be structured as an indirect financial relationship.  There is a specific exception for indirect financial relationships that may make things easier.  However, not all relationships can be indirect, such as employment arrangements.

4.  If possible, contract with an individual physician as opposed to the physician’s group practice.  Contracting with an individual may be preferable because if an issue with the arrangement arises with one of the physicians in the group, then the entire relationship will not be tainted.  It is easier to manage a relationship with one person as opposed to a larger number.

5.  Make agreements “evergreen,” which means auto-renewing.  One area where Stark Law issues can arise is forgetting to renew or resign an agreement that expired.  While a limited few exceptions have a holdover provision, most exceptions do not and continuing a relationship even for one day without a signed agreement is a violation.  Having an evergreen clause can alleviate this problem, but be sure to review an agreement each year to determine if the parties still want to work under the particular terms of the arrangement.

6.  Avoid use of automatic compensation or payment adjustment provisions.  Examples could be an annual cost of living increase to a space lease agreement.  The concern with automatic adjustments is that the parties forget to actually implement the adjustment.  Alternatively, the wrong index could be referred to when making an adjustment.  In either case, the parties are no longer abiding by the terms of the agreement, which can give rise to compliance concerns.

7.  Do not include late fees or other penalties.  Much like the automatic adjustments, parties may often forget to actually impose the late fees or penalties.  Again, the lack of enforcement can create compliance issues because the terms of the agreement are not being followed.  The parties should ask whether the potential value of the late fee or penalty is outweighed by forgetting to enforce and the potentially ensuing penalties.

8.  Identify foreseeable conduct and account for these potential issues when drafting the arrangement.  If an action can be predicted, then the accompanying consequence may also be anticipated.  If the parties go through this exercise, then the actions and consequences may be built into the agreement itself.

9.  Keep it simple.  Do not try to get overly complicated or cute when drafting the terms and conditions of an arrangement.  The more complex an arrangement becomes, the more chances there are for something to go wrong.  This is a good rule of thumb in any situation, but an especially good one when trying to comply with the Stark Law.

While the above tips can help with compliance, it is important to note that the Stark Law is a very complex law with very serious consequences for non-compliance.  The law and the implementing regulations are convoluted and filled with many gray areas.  Accordingly, all parties to an arrangement are well-advised to seek help before an arrangement is finalized to help ensure that it does not violate the Stark Law.

About Matt Fisher

Matt is the chair of Mirick O'Connell's Health Law Group and a partner in the firm's Business Group. Matt focuses his practice on health law and all areas of corporate transactions. Matt's health law practice includes advising clients with regulatory, fraud, abuse, and compliance issues. With regard to regulatory matters, Matt advises clients to ensure that contracts, agreements and other business arrangements meet both federal and state statutory and regulatory requirements. Matt's regulatory advice focuses on complying with requirements of the Stark Law, Anti-Kickback Statute, fraud and abuse regulations, licensing requirements and HIPAA. Matt also advises clients on compliance policies to develop appropriate monitoring and oversight of operations.
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