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Understanding Stark Law and Its Impact on Physician Office Labs

Disclaimer: This blog is a marketing piece designed to promote our services and provide general information about Stark Law. It is not intended to serve as a legal document or legal guidance for Stark Law compliance. Please be advised that this blog was revised on July 5, 2023, to clarify language and definitions pertaining to Stark Law and its impact on Physician Office Labs.

The Stark Law is a federal law that prohibits physicians from referring certain services, including pathology services, to entities with which they have a financial relationship. As a result, it can have significant implications for practices considering whether to add an in-house pathology lab.  Although different in significant ways, the Stark Law is often discussed in parallel with another federal law: the federal Anti-kickback Statute (AKS). The AKS is also aimed at avoiding inappropriate influences on practitioner judgement by prohibiting paying kickbacks or other inducements to refer.

There are specific exceptions carved into the Stark that can be used to allow physicians to operate their own office labs under certain circumstances. In the article below, we outline key aspects of the Stark Law the exceptions physicians must comply with to avoid violations when operating in-house pathology labs.


What is the Stark Law?

The Stark Law bars physicians from referring certain “designated health services,” including laboratory services, payable by Medicare or Medicaid to entities with which they have a financial relationship, unless an exception applies. In essence, it serves as a measure to prevent physicians from financially benefiting from their own referrals except in certain situations. The Stark Law was initially enacted to eliminate financial incentives for physicians to order unnecessary tests.

The Stark Law is a strict liability statute, meaning that if you fail to meet an exception you have violated the law, even if you did not know or intend to violate it. Violations of the Stark Law can result in denial of payment or recoupment, the assessment of significant penalties and exclusion from participation in federal healthcare programs, as well as potential liability under the federal False Claims Act. Any of these can have a detrimental financial and/or reputational impact on a practice. As a result, compliance with Stark Law is crucial to avoid legal consequences and maintain ethical standards.


How does it differ from the Anti-Kickback Statute?

The AKS is often closely associated with Stark Law, but it is different in important ways including that it is a criminal statute. This statute prohibits physicians from offering, paying, soliciting or receiving anything of value to induce or reward referrals or items of service reimbursable by federal healthcare programs.

Like the Stark Law, there are exceptions to the AKS which are generally called “safe harbors.” However, unlike the Stark Law, the failure to meet a safe harbor does not mean the arrangement has violated the statute. Rather, it would be evaluated on a facts and circumstances basis to identify whether the parties intended to violate the law, meaning was one purpose of the arrangement to induce referrals of FHCP enrollees. In general, “whenever a laboratory offers or gives to a source of referrals anything of value not paid for a fair market value, the inference may be made that the thing of value is offered to induce the referral of business.”[1]

As a criminal statute, violations of the AKS can lead to more severe penalties than the Stark Law, including recoupment, substantial criminal and civil fines, exclusion from participation in federal healthcare programs, and even imprisonment. Violators may also face potential liabilities under the federal False Claims Act (31 U.S.C. §§ 3729–3733) and the criminal false claims statute (18 U.S.C. § 287).

There is another criminal kickback federal law – the Eliminating Kickbacks in Recovery Act (EKRA) – that applies to all CLIA-certified labs and prohibits similar behavior to the AKS statute. EKRA, however, is focused on kickbacks to induce business covered by commercial insurance payors rather than federal healthcare programs.


What exceptions are granted for Physician Office Labs (POLs)?

The Stark law contains an exception known as the “in-office ancillary services” (IOAS) exception that, if met, allows qualifying group practices to offer certain designated health services, including lab, as part of their office practice.

Qualifying As A Group Practice. To meet the IOAS exception, first the practice must qualify as a “group practice” under Stark (42 C.F.R. §411.352).  There are a number of requirements that a practice must meet to qualify as a group practice under Stark, and it is important to run through them all with your counsel.  However, most traditional practices should qualify as long as they do not have a lot of part-time or independent contractor physicians and they are operated as a unified business. In addition, physician compensation must meet certain requirements, particularly the allocation of revenues and profits from designated health services.  A group practice can pay its physician (i) a productivity bonus that includes services performed personally by the physician or by others “incident to” the physicians’ services; or (ii) a share of overall profits derived from all designated health services, as long as the share is determined in a manner that doesn’t directly relate to referrals (e.g., per capital, per wRVUs, etc.).  If the practice is large, multiple profit pools are possible as long as each pool contains at least five physicians.

Meeting the IOAS Exception.  To meet the IOAS exception with respect to pathology services, the practice and its physician referrals for pathology services must meet certain requirements related to the supervision, location, and billing:

  • Supervision: The pathology services must be furnished personally by the referring physician, another physician in the same group practice (employed or contracted), or an individual appropriately supervised by a physician in the group practice. The level of supervision (i.e., general, direct, personal) is the same as required by Medicare for billing purposes.


  • Location: The pathology services must be furnished in the same building (i.e., same street address) in which the group practice regularly provides physician services (i.e., evaluation and management services) and meets one of three specific tests. By in large, if the practice offers physician services in the building full time, it should be able to meet this requirement.  Some part-time arrangements will work too but it is important to look at the specific tests.  The IOAS exception also permits practices to use a “centralized building” owned or leased full time by the practice for providing designated health services, but another Medicare billing rule – the Medicare Anti-Markup rule (42 C.F.R. § 414.50) – largely eliminates this as a feasible avenue for a practice to provide pathology services so we opted not to describe it here.


  • Billing: The pathology services performed in the practices’ offices must be billed by the performing or supervising physician, his or her group practice, an entity wholly owned by one of the foregoing, or an independent third-party billing company acting as an agent of any of the above.


Possibility of closing the Stark IOAS exception to Pathology

The original intent of the IOAS exception was to allow tests and other services that facilitate diagnosis and treatment during patient visits. Because pathology test results are often not available during the patient visit, some argue that there is a lower tangible benefit to the patient in allowing physicians to utilize the IOAS exception for pathology tests.



In the end, understanding Stark Law and its implications is crucial for medical practices considering the establishment of in-house pathology labs. By staying informed and seeking expert guidance from experts like Lighthouse, physicians can make educated decisions about the benefits of a POL or in-house pathology lab for their practice.

Although this article focuses on the Stark Law, please note that there are a number of other laws that come into play when developing in-office pathology programs, at both a state and federal level.  For example, there are state law counterparts to both the AKS and the Stark Law that sometimes are broader than the federal law.

As briefly mentioned above, Medicare reimbursement rules (42 C.F.R. §414.50) also include a limitation on marking up diagnostic tests performed by a third party if the physician performing the service (either the technical or professional component) does not “share a practice” with the ordering physician.

Finally, a number of states have specific laws that address physicians’ ability to bill for and/or mark-up anatomical pathology services performed by a third party.  These laws are generally navigable, but important to be aware of when structuring and operating in-house pathology laboratories. Further, government and commercial payors similarly have policies limiting the ability to bill for services performed by third-party laboratories.


[1] See OIG Special Fraud Alert (Dec. 19, 1994), available here.


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