Stark Law: Referrals, Financial Relationships, and Exceptions

The Stark Law, codified at 42 U.S.C. § 1395nn, prohibits a physician from referring Medicare patients for certain designated health services to any entity in which the physician or an immediate family member holds a financial interest, unless a specific regulatory exception applies. It is a strict liability rule: the government does not have to prove anyone meant to break it. With inflation-adjusted civil penalties reaching $31,670 per improper service and $211,146 per circumvention scheme in 2026, the stakes for getting an arrangement wrong are high.¹

What Counts as a Referral

“Referral” under Stark is broader than most physicians assume. It covers any request for, ordering of, or certification of the need for a designated health service payable by Medicare.² Ordering a routine blood panel from a lab you partly own is a referral. Writing a plan of care that includes physical therapy at a facility where your spouse holds equity is a referral. Verbal orders, electronic submissions, and handwritten prescriptions all count.

One important carve-out: a service the referring physician personally performs is not a referral. Order an X-ray and read it yourself in your own office, and Stark does not apply. If anyone else provides the service, including your employees, independent contractors, or fellow group-practice members, the prohibition is back in play.²

The law reaches beyond the physician personally. A financial interest held by an immediate family member, including a spouse, parent, child, sibling, or in-law, triggers the same prohibition. Parking ownership in a family member’s name is not a workaround.

Which Services Are Covered

Stark applies only to a defined list of designated health services under 42 C.F.R. § 411.351:²

Clinical laboratory services
Physical therapy, occupational therapy, and outpatient speech-language pathology
Radiology and certain imaging services, including X-ray, ultrasound, MRI, CT, and nuclear medicine imaging
Radiation therapy services and supplies
Durable medical equipment and supplies
Parenteral and enteral nutrients, equipment, and supplies
Prosthetics, orthotics, and prosthetic devices
Home health services
Outpatient prescription drugs
Inpatient and outpatient hospital services

If a service isn’t on the list, Stark doesn’t reach it. If it is, a physician with a covered financial relationship cannot refer for it unless a specific exception protects the arrangement.

Financial Relationships That Trigger the Law

The prohibition activates whenever a physician has a “financial relationship” with the entity receiving the referral. The regulations at 42 C.F.R. § 411.354 divide those into two categories.³

Ownership and Investment Interests

Any equity stake in an entity furnishing designated health services counts, whether the physician holds stock, partnership shares, bonds, or another form of investment. Direct and indirect ownership both qualify. Shares in a holding company that in turn owns a diagnostic imaging center still create an ownership interest for Stark purposes. The concern is straightforward: a physician who profits when a facility bills more has a built-in incentive to send patients there.

Compensation Arrangements

This category captures any transfer of value between a physician and an entity, even without an ownership stake. A hospital salary, an independent contractor fee, a below-market office lease, and free use of expensive equipment all qualify. Compensation arrangements can also be direct or indirect, running through intermediaries. The question is whether the arrangement could incentivize referrals, not whether anyone intended it to.

Exceptions That Keep Normal Practice Legal

Without exceptions, the Stark Law would shut down most of modern healthcare. The regulations at 42 C.F.R. §§ 411.355 through 411.357 protect dozens of arrangements despite the presence of a financial relationship.⁴ Every element of an exception has to be satisfied. Miss one requirement and the exception fails, which means the referral was prohibited.

In-Office Ancillary Services

Group practices rely on this exception to keep lab work, imaging, and therapy in-house. The service has to be performed by the referring physician, another physician in the same group, or someone those physicians directly supervise.⁵ It must be provided in the same building where the referring physician or group normally sees patients, or in a centralized location the group uses. Billing runs through the group. The group itself has to meet the detailed structural requirements for a “group practice” under 42 C.F.R. § 411.352, including operating as a single legal entity with at least two physician-members.⁶

Bona Fide Employment

A physician employed by a hospital or medical group can be paid a salary without triggering the prohibition, as long as the pay is for identifiable services, reflects fair market value, and is not calculated based on the volume or value of referrals.⁷ The arrangement also has to be commercially reasonable on its own terms. In other words, it would make business sense even if the physician never referred a single patient.

Fair Market Value Compensation

This exception covers service contracts, office leases, and equipment rentals between a physician and an entity. The requirements are structural and rigid: the arrangement must be in writing, specify the covered items or services, set compensation in advance at fair market value, and not tie payment to referral volume.⁷ Rental rates cannot be calculated as a percentage of the revenue generated in the leased space or on the leased equipment. The arrangement must be commercially reasonable independent of referrals and must not violate the Anti-Kickback Statute.

Isolated Transactions

One-time financial events, such as the sale of a medical practice or the lump-sum settlement of a legitimate dispute, can qualify. Payment must be at fair market value and not tied to referral volume. After the transaction closes, no further financial dealings between the parties are permitted for six months, unless they independently qualify under another Stark exception or are commercially reasonable post-closing adjustments.⁷

Whole-Hospital Ownership

A physician may hold an ownership interest in an entire hospital and still refer patients there, but only if the interest is in the hospital as a whole rather than a specific department or service line. The physician must be authorized to perform services at the hospital, and the hospital must meet additional transparency and compliance requirements under 42 C.F.R. § 411.362.⁸ The Affordable Care Act froze new physician-owned hospitals and limited expansion of existing ones, so the practical benefit today runs to facilities already operating before that legislation took effect.

Non-Monetary Compensation and Incidental Benefits

Hospitals often give physicians small gifts, meals, or similar non-cash items. These are allowed if their aggregate value stays under an annually adjusted ceiling. For 2026, the non-monetary compensation limit is $535 per physician per year, and medical staff incidental benefits, such as a meal during a committee meeting, must stay under $46 per occurrence.⁹

Value-Based Arrangements

Regulations finalized in 2021 added exceptions for arrangements built around a “value-based enterprise,” which is a collaboration of two or more participants working toward at least one value-based purpose: coordinating care for a defined patient population, improving quality, or reducing costs without sacrificing quality. The exceptions are tiered by financial risk. Arrangements where the physician bears meaningful downside risk, meaning at least 10 percent of total compensation is at risk, receive the most flexibility. Arrangements with less risk still qualify but face tighter restrictions on the compensation that can flow between participants. Before these exceptions existed, many care-coordination arrangements that could improve outcomes were technically Stark violations because they involved compensation linked to referral patterns.

Penalties for Violations

Because Stark is strict liability, consequences follow from the structure of the arrangement rather than anyone’s state of mind. A physician who genuinely believed the arrangement was compliant faces the same penalties as one who ignored the rules.

Statutory Penalties

Medicare will not pay for any service furnished under a prohibited referral, and amounts already collected must be refunded.¹⁰ Beyond repayment, the statute authorizes civil penalties for anyone who submits or causes the submission of a claim they knew or should have known was tainted by a prohibited referral. The base statutory penalty is $15,000 per service, adjusted to $31,670 per service for 2026.¹

For circumvention schemes, where an arrangement is deliberately structured to evade the prohibition, the base penalty is $100,000 per arrangement, reaching $211,146 in 2026 after inflation adjustments.¹⁰¹ Exclusion from federal healthcare programs, including Medicare and Medicaid, is also available.¹¹

False Claims Act Exposure

This is where financial risk multiplies. A Medicare claim resulting from a Stark violation can also be treated as a false claim under the federal False Claims Act.¹¹ That exposes the entity to treble damages, three times the government’s loss, plus additional per-claim penalties adjusted upward for inflation each year. The Act’s whistleblower provision lets current or former employees, business partners, staff, or even competitors sue on the government’s behalf and share in any recovery. Many of the largest Stark settlements start with an insider tip.

Stark Law Versus the Anti-Kickback Statute

The two laws overlap in practice but are fundamentally different. The most important distinction is intent. Stark is strict liability: if the financial relationship exists and no exception applies, the referral violates the law regardless of motive. The Anti-Kickback Statute is a criminal law requiring proof that the parties knowingly and willfully offered or received something of value to induce referrals.

The consequences follow from that difference. A Stark violation is a civil matter producing repayment obligations, monetary penalties, and potential program exclusion. An Anti-Kickback violation can lead to criminal prosecution, fines up to $25,000, and up to five years in prison, in addition to civil penalties and exclusion. Stark applies only to Medicare referrals for the ten designated health services. The Anti-Kickback Statute reaches any item or service payable by any federal healthcare program, including Medicaid.¹¹ A single arrangement can violate both simultaneously, and often does.

If You Find a Problem, or Want to Avoid One

Discovering a potential violation after the fact is common, particularly for arrangements set up years ago without careful review. CMS operates a Voluntary Self-Referral Disclosure Protocol, established under Section 6409 of the Affordable Care Act, that gives providers a structured way to report actual or potential violations and resolve overpayment liability.¹² Self-disclosure typically reduces financial exposure compared to what a government-initiated investigation would produce, though it does not guarantee immunity.

For arrangements not yet in place, CMS offers a formal advisory opinion process. Any party to an existing or planned arrangement can request a written opinion on whether a specific referral would violate the Stark Law.¹³ There are limits. CMS will not opine on whether something is fair market value or whether someone qualifies as a bona fide employee, and it will decline the request if the arrangement is already under investigation. For a novel structure, though, an advisory opinion is one of the few ways to get an authoritative answer before committing.

1
Federal Register. Annual Civil Monetary Penalties Inflation Adjustment
2
eCFR. 42 CFR 411.351 – Definitions
3
eCFR. 42 CFR 411.354 – Financial Relationship, Compensation, and Ownership or Investment Interest
4
eCFR. 42 CFR 411.355 – General Exceptions to the Referral Prohibition
5
Centers for Medicare & Medicaid Services. Physician Self-Referral Law Frequently Asked Questions
6
eCFR. 42 CFR 411.352 – Group Practice
7
eCFR. 42 CFR 411.357 – Exceptions to the Referral Prohibition Related to Compensation Arrangements
8
eCFR. 42 CFR 411.356 – Exceptions to the Referral Prohibition Related to Ownership or Investment Interests
9
Centers for Medicare & Medicaid Services. CPI-U Updates
10
Office of the Law Revision Counsel. 42 USC 1395nn – Limitation on Certain Physician Referrals
11
Office of Inspector General. Fraud and Abuse Laws
12
Centers for Medicare & Medicaid Services. Self-Referral Disclosure Protocol
13
eCFR. 42 CFR 411.370 – Advisory Opinions Relating to Physician Referrals