The Stark Law, formally the Physician Self-Referral Law at 42 U.S.C. § 1395nn, prohibits a physician from referring Medicare or Medicaid patients to any healthcare entity in which the physician or an immediate family member has a financial interest, unless a specific exception applies. It covers a defined list of twelve service categories. It is a strict liability statute, so the government does not have to prove the physician meant to break the rules. In 2026, a single prohibited referral can trigger a civil penalty of up to $31,670 per service, and arrangements designed to circumvent the law carry penalties reaching $211,146.
What the Law Actually Prohibits
The rule runs in one direction. A physician who has a financial relationship with a healthcare entity cannot refer Medicare or Medicaid patients to that entity for certain covered services. The prohibition targets the referring physician’s financial ties, not the entity that receives the referral. A “referral” is broad: any request or order for a service counts, and so does establishing a plan of care that steers the patient toward a particular provider or facility.
Strict liability is what makes the statute so unforgiving. The government only has to show that a financial relationship existed and a referral was made. Good faith is not a defense. Neither is ignorance of the relationship, a reasonable but mistaken reading of an exception, or the absence of any intent to profit. An accidental oversight carries the same legal consequence as a deliberate scheme. Most federal healthcare fraud statutes require prosecutors to prove some level of intent. This one does not.
The Twelve Designated Health Services
The referral ban does not reach every medical service. It applies only to a defined list of categories known as designated health services (DHS). If a service falls outside the list, the Stark Law imposes no restriction on referrals to it, no matter what financial relationship exists.
The twelve categories are:
- Clinical laboratory services
- Physical therapy services
- Occupational therapy services
- Outpatient speech-language pathology services
- Radiology and certain other imaging services, including MRI, CT scans, and ultrasound
- Radiation therapy services and supplies
- Durable medical equipment and supplies
- Parenteral and enteral nutrients, equipment, and supplies
- Prosthetics, orthotics, and prosthetic devices and supplies
- Home health services
- Outpatient prescription drugs
- Inpatient and outpatient hospital services
CMS publishes and updates a list of specific CPT and HCPCS codes that fall within each category, so providers can check whether a particular service qualifies.
Financial Relationships That Trigger the Ban
Two kinds of financial relationships activate the prohibition: ownership or investment interests, and compensation arrangements. Either is enough on its own, and both can exist at the same time.
Ownership and Investment Interests
An ownership or investment interest includes any equity, debt, or other financial stake in an entity that furnishes designated health services. Stock, stock options, partnership shares, LLC memberships, and loans or bonds secured by the entity’s property or revenue all count. The interest can be direct, where the physician personally holds the shares, or indirect, where the physician holds a stake in a parent company that in turn owns the entity delivering the service.
Compensation Arrangements
A compensation arrangement is any exchange of value between the physician (or a family member) and the entity. The category is deliberately broad. Salary, consulting fees, lease payments, profit distributions, and even below-market loans can qualify. Compensation arrangements can also run through intermediaries, so layered corporate structures do not automatically insulate the parties.
Family Members Are Included
The prohibition extends to the physician’s immediate family, including a spouse, children, stepchildren, parents, stepparents, in-laws, grandparents, and grandchildren. If a physician’s spouse owns a stake in a laboratory, the physician cannot refer Medicare patients to that lab. Routing an ownership interest through a relative does not remove it from the statute’s reach.
Exceptions That Make Normal Practice Possible
Without exceptions the law would be unworkable. A hospital-employed physician plainly has a compensation arrangement with the hospital and could never order a lab test or imaging study there. Congress and CMS built in dozens of exceptions, some covering both ownership and compensation relationships and some covering compensation alone. Every element of an exception must be met. Close does not count.
In-Office Ancillary Services
Physicians can refer patients for designated health services delivered within their own practice, provided the services are furnished by the referring physician, a physician in the same group practice, or someone they directly supervise. The services must also be provided in the same building where the physician regularly practices. This keeps routine care efficient: a family doctor who draws blood in-office for a lab panel or performs an on-site X-ray does not have to send the patient elsewhere.
Bona Fide Employment
Compensation paid under a genuine employment relationship is exempt if the pay is for identifiable services, reflects fair market value, and would be commercially reasonable even if the physician never made a single referral to the employer. Pay cannot be tied to the volume or value of referrals, although productivity bonuses based on services the physician personally performs are allowed.
Space and Equipment Rentals
Lease arrangements for office space or equipment are permitted if the agreement is in writing, lasts at least one year, and sets the rental rate in advance at fair market value. Rent cannot fluctuate based on how much business the physician sends to the landlord. The rule prevents a hospital from offering below-market rent in exchange for a steady stream of patient referrals.
Value-Based Arrangements
A newer set of exceptions, added by CMS to encourage care built around outcomes rather than volume, allows physicians to participate in value-based enterprises that share financial risk for patient care. The exceptions come in three tiers based on how much risk the participants accept:
- Full financial risk, where the enterprise is responsible for the cost of all patient care items and services covered by the payor for the target population, for at least one year.
- Meaningful downside financial risk, where the physician faces real financial consequences if the enterprise fails to hit its quality or cost targets.
- General value-based arrangements, which are broader and come with additional compliance requirements.
In every tier, compensation must relate to value-based activities for the target patient population and cannot be used to discourage medically necessary care. Records must be kept for at least six years.
Academic Medical Centers
Teaching hospitals and their affiliated faculty practice plans qualify for a dedicated exception. The referring physician must be a bona fide employee of an academic medical center component, hold a faculty appointment, and spend meaningful time on academic or clinical teaching work. Compensation across all academic medical center components must be set in advance, reflect aggregate fair market value, and not be driven by referral volume.
Rural Providers
An ownership or investment interest in an entity that furnishes designated health services in a rural area is exempt if at least 75% of the services provided by that entity go to residents of the rural area. “Rural” means outside a Metropolitan Statistical Area. Rural communities often have limited healthcare infrastructure, and a blanket ban on physician ownership could leave patients with no local options.
Penalties for Violations
The consequences stack up quickly. Medicare will not pay for any designated health service furnished under a prohibited referral, and any amounts already collected must be refunded. That alone can be devastating for a busy practice that finds a structural compliance failure affecting thousands of claims over several years.
The statute authorizes civil monetary penalties for anyone who submits or causes the submission of a claim they know or should know results from a prohibited referral. The base statutory amount is $15,000 per service, adjusted for inflation to $31,670 per service in 2026. For circumvention schemes, meaning arrangements whose principal purpose is to funnel referrals around the law’s restrictions, the statutory base is $100,000 per arrangement, inflation-adjusted to $211,146 in 2026.
Physicians and entities that violate the law also face exclusion from all federal healthcare programs, which effectively ends a practice’s ability to treat Medicare and Medicaid patients. A claim submitted in violation of the Stark Law can also be treated as a false claim under the False Claims Act. That opens the door to treble damages (three times the government’s loss) plus per-claim penalties currently running from roughly $14,308 to $28,619.
The math gets alarming fast. A physician group that operated under a non-compliant arrangement for three years, generating hundreds of referrals a month, could face refund demands and penalties in the millions before treble damages are added.
Self-Disclosure If You Find a Violation
Providers who discover they have been operating under an arrangement that violates the Stark Law can voluntarily report it through the Self-Referral Disclosure Protocol. The program, authorized by Section 6409(b) of the Affordable Care Act, gives the Secretary of HHS authority to reduce the amount owed for disclosed violations. A provider that comes forward proactively will generally face a significantly smaller financial hit than one caught by auditors or whistleblowers. Once CMS accepts a disclosure, the 60-day clock to return overpayments is effectively paused while the agency reviews the case.
Self-disclosure is not a guarantee of leniency, but it is far better than the alternative. Providers uncovered through audits, competitor complaints, or qui tam lawsuits under the False Claims Act face the full statutory exposure with no built-in reduction mechanism.
How the Stark Law Differs From the Anti-Kickback Statute
The two are frequently confused, and a single arrangement can violate one, both, or neither. The Anti-Kickback Statute is a criminal law. It reaches anyone who knowingly offers, pays, solicits, or receives anything of value to induce or reward referrals for services covered by federal healthcare programs, and prosecutors must prove intent. Violations carry criminal penalties, including up to ten years in prison.
The Stark Law is civil, requires no proof of intent, and applies only to physician referrals for the twelve designated health services. A hospital administrator paying kickbacks to a nurse for patient referrals might violate the Anti-Kickback Statute but would not implicate the Stark Law at all. A physician who unknowingly refers a patient to a lab owned by a spouse violates the Stark Law but might not violate the Anti-Kickback Statute if no one intended to induce the referral. Either way, the same conduct can also create liability under the False Claims Act, which is often where the largest financial exposure sits.