Tuomey Affirmed; but CMS Throws the Healthcare Industry (and Itself) a Stark Law Life Raft

July 14, 2015

In a unique and welcomed move, the Centers for Medicare & Medicaid Services (“CMS”) has proposed changes to the federal physician self-referral law (or “Stark Law”) designed to improve consistency and interpretability and alleviate the number of technical violations leading to self-disclosures. This move is in stark (pun-intended) contrast to the stringent interpretation of the Stark Law by the Fourth Circuit in the Tuomey Healthcare System, Inc. decision earlier this month. Given these sizable developments, what has changed and what are the implications for the healthcare industry? 

Tuomey Case

On July 2, 2015, the Fourth Circuit Court of Appeals affirmed a ruling by the U.S. District Court for the District of South Carolina ordering Tuomey Healthcare System, a rural South Carolina hospital, to pay more than $237.5 million for Stark Law and False Claims Act violations.The Stark Law is a strict liability statute that prohibits physicians from making referrals of designated health services (DHS) payable by Medicare to entities with which the physician has a financial relationship, unless an exception is met. The statute also prohibits the entity from filing claims for reimbursement for services provided as a result of the physician’s referrals. The hefty judgment against Tuomey was initially imposed by a jury in 2013, and was based on a finding that the hospital knowingly submitted nearly $40 million in claims to Medicare for services that violated the Stark Law, requiring repayment, treble damages and penalties of $5,500 per false claim.

Tuomey was alleged to have violated the Stark Law by employing and compensating 19 part-time physicians in excess of fair market value, and in a manner that varied with the volume or value of their referrals. The Tuomey case is significant not only because of the huge financial penalty, but also because of the court’s strict reading of the Stark Law. Among other things, the Fourth Circuit opined that both the base salaries and the bonus payments to the physicians could be viewed as varying with the “volume or value of referrals” to the hospital, even though the base salaries were adjusted annually based on the physicians’ collections from professional services in the previous year, and the bonuses were tied solely to the collection of physician professional fees, and not hospital facility fees for surgical procedures. This finding is in tension with the understanding of many healthcare industry professionals who have relied on CMS commentary to interpret the regulations less strictly.Perhaps the unique facts of the Tuomey case make the court’s ruling distinguishable from other similar arrangements.

In a concurrence to the Tuomey opinion, one Fourth Circuit judge wrote to “emphasize the troubling picture this case paints: an impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area.” The judge further noted that “[i]t seems as if, even for well-intentioned health care providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure-especially when coupled with the False Claims Act.” In spite of noting these concerns, the judge agreed that the district court did not commit an error, and the jury’s verdict was supported by the record.

CMS Proposed Changes to the Stark Law

In light of the significant award in Tuomey, and other recent judgments and settlements involving the Stark Law, many providers will be relieved to see the changes to the Stark Law that were recently proposed by CMS. 

CMS issued the proposed Stark Law changes and clarifications on July 8, 2015 as part of its proposed calendar year 2016 Medicare physician fee schedule.According to CMS, the intent of the proposed Stark Law changes is to ease the technical burdens of the Stark Law and reduce the number of self-disclosures coming to CMS. Since the Stark Law self-referral disclosure protocol (“SRDP”) was created as part of the Affordable Care Act (“ACA”) in 2010, CMS has been inundated with disclosures that now create a processing backlog spanning years. As of mid-January 2015, CMS had received 529 disclosures through the SRDP, only 128 of which have been resolved through settlement or otherwise closed. CMS has recognized, after reviewing the self-disclosures, that many of the arrangements being reported are not ones that pose significant risks of abuse and are needlessly draining time, energy and resources on all sides. In order to alleviate some of the Stark Law technical requirement burdens, CMS has proposed various changes, including:

  • To clarify that the “in writing” requirement found in many of the Stark Law exceptions can be met through a collection of multiple documents, even in the absence of a formal contract;
  • To clarify that the term of a lease or personal services arrangement need not be in writing if the arrangement lasts at least one year and is otherwise compliant;
  • To allow expired leasing and personal services arrangements to continue on the same terms if otherwise compliant;
  • To allow a 90-day grace period to obtain missing signatures without regard to whether the failure to obtain the signature was inadvertent;
  • To clarify that DHS entities can give certain specimen collection and transport items, and test result transmittal items, to physicians where such items have one or more of a list of approved uses; and
  • To clarify that a financial relationship does not necessarily exist when a physician provides services to patients in the hospital if both the hospital and the physician bill independently for their services.4

These proposals, if finalized, will provide some welcome relief to healthcare entities seeking to avoid inadvertent technical violations of the Stark Law. However, the additional flexibility is tempered by some practical challenges. For example, even though these rules would allow a “collection of documents” to meet the “in writing” requirement for some Stark Law exceptions, there are a number of other elements to the exceptions as well, meaning that providers should still strive to have written agreements in place with physicians to help ensure compliance. Also, although the proposal to extend inadvertent noncompliance with signatures for 90 days is very helpful, this exception would still only be available for use once every three years per physician – a standard that has proven difficult to track.

Some of the clarifications by CMS are not associated with actual proposed changes to the regulations themselves, but instead are limited to informal commentary. For example, CMS stated that there is no remuneration changing hands when physicians and hospitals bill separately for their services. This is a welcome clarification; but given that courts do not always recognize preamble commentary as persuasive, it would be more helpful if CMS incorporated the clarification into the regulatory definitions to reflect its point.

Although the changes noted above loosen the Stark Law at various points, in at least one respect the proposal tightens the Stark Law requirements. Specifically, CMS proposes to revise its “stand in the shoes” provisions (which address how the Stark Law exceptions relate to physicians in a group practice) to clarify that for most purposes, other than signature requirements, all physicians in a physician organization are considered parties to a compensation arrangement between a physician organization and a DHS entity.

New Stark Law Exceptions and Physician-Owned Hospital Changes

CMS’ proposal also includes two new Stark Law exceptions. The first exception would permit timeshare arrangements for the use of office space, equipment, personnel, supplies and other services that will benefit rural or underserved areas. The second would permit hospitals to assist physicians in employing non-physician primary care practitioners in the hospital’s service area. This non-physician practitioner recruitment exception is being proposed in response to what CMS sees as an “alarming” trend in the primary care workforce shortage projections, and the increased need for primary care providers in light of the ACA’s expansion of healthcare coverage to those previously uninsured. Under this exception, hospitals would only be able to provide assistance for the first two years of the non-physician practitioner’s employment by a local physician. Also the dollar support amounts would be capped at the lower of (i) 50% of the practitioner’s salary and benefits, or (ii) the practitioner’s salary and benefits minus receivables for the practitioner’s services.

The proposed rule includes various other changes as well, including some directed toward physician-owned hospitals that are covered by the Stark Law’s “whole hospital” exception. Previously the ACA had established new restrictions on physician-owned hospitals, including limitations on expanding the level of physician ownership, and a requirement that these hospitals disclose physician ownership on their websites and in their advertising. CMS proposes to update the regulations to clarify that a broad range of actions will comply with the website and advertising requirements. CMS also proposes changes to the regulations that address baseline levels of physician ownership (i.e. how to calculate the baseline ownership levels that were in place as of the passage of the ACA in 2010). Specifically, the baseline physician ownership percentage would be based on all physician owners, rather than being based only on referring physicians. This change could be helpful to some physician-owned hospitals, but could potentially raise problems for others (for example, for hospitals that have gained non-referring physician owners after 2010, in reliance on previous CMS guidance). In recognition of the difficulty that CMS’ proposed new position could cause for such hospitals, CMS proposes a delayed effective date (possibly one year) to give these hospitals time to come into compliance.


CMS is accepting public comments on the proposed rule until September 8, 2015, and anticipates publishing a final rule in the fall. Healthcare providers are likely to welcome many of the loosened Stark Law provisions if finalized, and will hope for additional clarifications and improvements in the final rule.

United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., No. 13-2219 (4th Cir. July 2, 2015).

See 69 Fed. Reg. 16054, 16088-89 (Mar. 26, 2004).


See the CMS fact sheet discussing the proposed rule, available at: http://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-07-08.html.