Medicare: Physician Self-Referral ("Stark I and II")

Publication Date: July 2004

Publisher: Library of Congress. Congressional Research Service


Research Area: Health



"Self-referrals" occur when physicians refer patients to medical facilities in which they have a financial interest. This interest can be in the form of ownership or investment interest in the entity; it may also be structured as a compensation arrangement between the physician and the entity.

Critics of self-referral arrangements state that they pose a conflict-of-interest since the physician is in a position to benefit financially from the referral. They suggest that such arrangements may encourage overutilization of services, which in turn drives up health care costs. They also contend that such arrangements create a captive referral system, which limits competition among health care providers. Others respond to these concerns by stating that while problems may exist, they are not widespread. Further, these observers contend that in many cases physician investors are responding to a demonstrated need which would not otherwise be met, particularly in a medically underserved area.

Congressional concern with the implications of self-referral arrangements led to the inclusion in the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989) of a provision barring self-referral arrangements for clinical laboratory services under the Medicare program. This provision, known as "Stark I" (after Congressman Pete Stark, the chief congressional sponsor), became effective January 1, 1992. The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) extended the ban, effective January 1, 1995, to an additional list of services and applied it to Medicaid at the same time. The OBRA 1993 provision is referred to as "Stark II." The Social Security Amendments of 1994 (P.L. 103-432) included several technical changes to the self-referral provisions. More recently, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) included a temporary provision related to referrals to specialty hospitals that focus on one category of care (e.g., orthopedic care).

It took a number of years for most of the implementing regulations to be issued for the self-referral ban. In part, this reflected the fact that Congress on several occasions considered, and in a few cases enacted, significant modifications to the original law. More important however, the delay reflected the very complicated and continually evolving nature of business relationships in the health care industry. The Centers for Medicare and Medicaid Services (CMS, the agency that administers Medicare) tried to develop regulations which on the one hand were consistent with the intention of the law while at the same time not interfering unduly with legitimate business practices. The final phase of the implementing regulations were issued March 26, 2004.

The major focus of legislative attention in the near future is likely to be the 18month moratorium, added by MMA, on referrals to specialty hospitals and whether the ban will be extended, perhaps in modified form, after the June 8, 2005, ending date. This report will be updated as events warrant.