Stark and dermatology

Legally Speaking

Daniel F. Shay
Alice G. Gosfield

Daniel F. Shay, Esq. and Alice G. Gosfield, Esq., are health care attorneys at Alice G. Gosfield and Associates, P.C.

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The essence of the Stark statute is a prohibition on a physician (or immediate family member) referring a Medicare patient to an entity with which the physician or family member has a financial relationship, when the referral is for any of a targeted list of “designated health services” (DHS), unless the financial relationship meets one of a host of exceptions. For dermatology, the primary impact of this law is on relationships between dermatology practices and dermatopathologists. Because clinical laboratory services are DHS, the complexities are considerable.

Being a group

A “referral” under Stark is any request for a service, item, or good payable by Medicare; this definition includes referrals within a group practice. In order to refer to another physician for the professional portion of a pathology service, or to ancillary personnel to perform the technical portion, the relationship of the physicians must meet the definition of a group practice. To qualify as a group practice, there must be at least two “members” of the group. A member is a shareholder, W-2 employee, or a partner. Independent contractors do not count as members. The group may be legally structured in any way that complies with state law.

Each member of the group must provide the full range of services — medical care, consultation, diagnosis, or treatment — he or she routinely provides. Services must be provided through the joint use of shared office space, facilities, equipment, and personnel. Substantially all of the services of members of the group must be provided through the group and be billed under a billing number assigned to the group. The monies received must be considered the group’s receipts. It is legitimate to have cost centers by location, for example, but the expenses must be expenses of the group. The formula to allocate overhead expenses and income must be established in advance of their application. The formula may be changed prospectively, but not retrospectively.

Group members must personally conduct no less than 75 percent of the group’s physician-patient encounters. In addition, another rule requires that the members spend substantially all their time in the group. To determine whether this occurs, you must look at each individual physician and count the clinical time that physician spends with the group. For example, a part-time physician who only works 20 hours a week but spends all of those 20 hours with the group would count as 100 percent. The average of all of the clinical time of the physicians must be at least 75 percent, meaning that an appropriate ratio of full-timers to part-timers must be maintained. Again, independent contractors do not count in this calculation.[pagebreak]

The definition of a group practice reaches directly into the compensation formulas that the group may use. The primary rule is that no physician may be compensated for the volume or value of his referrals of DHS. A physician may always be compensated dollar-for-dollar for the services he or she performs, and he or she may be paid a productivity bonus for his or her own work. In addition, within a group practice, compensation may include profit sharing. Profits are the fruits of someone else’s labors, so the revenues from technical components of pathology services would fall into this category since the physicians do not personally perform the pathology services.

The allocation of profits can be on a per capita basis, or on a basis that reflects surrogates for ordering services, such as volume of evaluation and management (E/M) services, volume of work RVUs, number of patients treated, seniority or any other reasonable formula that does not directly reflect the volume or value of DHS services ordered. In large enough groups, there can be subgroups of physicians as long as each “pod” is no fewer than five physicians. Within each “pod,” a compensation formula must be applied consistently. In addition, there is no requirement that all physicians must participate in a profit-sharing plan. For example, in a group of seven physicians, two junior employees need not share in the profits while the five senior employees might. There is a fair degree of flexibility in this context but applying the rules correctly can require sophisticated health law advice, depending on the desired complexity of the formula.

In-office ancillary services

One of the exceptions under Stark allows referrals to a physician who is “in the group.” This includes an independent contractor when he or she is performing services on the premises of the group. Dermatology groups that are engaging with dermatopathologists often do so on an independent contractor basis. However, the group may not bill for that physician’s Medicare services unless when he or she performs them, he or she utilizes the group’s premises.

Ancillary personnel must be (1) engaged by the group (whether as employees or contractors) and (2) supervised to the extent that Medicare would otherwise require. Most pathology services need only meet a level of “general” supervision which means that a physician is responsible for quality control of the delivery of the service, but no physician need be on premises when the services are provided. To meet the requirement of “in-office,” the ancillary services must be provided either at a centralized location that the group controls 24 hours a day, seven days a week or at a location where the group maintains offices where it provides non-DHS to patients between eight and 35 hours a week, depending on the way in which services are delivered under yet another set of criteria. Because of these locational requirements, block time leasing of a clinical laboratory can be difficult unless the leasing group has offices co-located in the building where they render other non-DHS services. Where two practices are co-located in the same building, if they jointly own the equipment and jointly share space in a shared pathology, as long as each has their own CLIA numbers and meets the other Medicare requirements, each can bill for the services rendered in the joint space using the joint equipment without the necessity for block-time leasing.

The third test under the in-office ancillary services exception is that the services must be billed by the group providing them or by an entity that is wholly owned by the group. This means that literally another entity, which obtains its own Medicare and tax identification numbers, can bill for the services, but only if it is truly, wholly owned by the professional corporation or partnership which defines the referring group practice, and not by any subgroup or configuration of the shareholders of the primary practice group.[pagebreak]


In a separate set of rules that have nothing to do with Stark but address many of the same issues, Medicare has adopted an “anti-markup” rule for diagnostic services which turns on whether the physician supervising the technical component or performing the professional component “shares a practice” with the billing or ordering physician or group. There are two tests for “sharing a practice”: (1) the supervising or interpreting physician spends 75 percent of his time with the group; or, if that standard cannot be met, (2) the performing physician renders services in the offices of the ordering physician. This can be problematic when a group has multiple sites if the ordering physician is not at the location where the performing physician is rendering services, even though both locations are part of the same group.

If these standards cannot be met, then the billing physician will be limited in payment to the actual charge from the supervising or interpreting physician or the Medicare fee schedule amount, whichever is less. The ordering/billing physician cannot mark-up or make a profit on the services. Claims that are submitted in violation of this anti-markup rule are subject to a $2,000 civil money penalty and potentially are false claims which are also punishable by up to $11,000 per improper claim plus triple the charges.

Derm/dermpath relationships

Given this web of regulatory requirements, how dermatology practices relate to dermatopathologists can be highly problematic. We have seen transactions where solo practicing physicians employ, on a part-time basis, a dermatopathologist (“dermpath”) who reads slides in his own lab. Because the dermpath is not spending enough time with the referring physician, they do not meet the definition of a group. Moreover, if the dermpath stays in his own laboratory when he or she is reading the slides, the anti-markup rules will apply. In other situations, referring physicians have established slide preparation facilities and they expect the dermpaths to use these new mini-labs, when the dermpaths are capable of performing slide prep themselves. These arrangements can be structured in a compliant manner, but they are fraught with pitfalls.

We have seen other relationships where a larger group of dermatologists compensate themselves for the volume of specimens referred to the dermpath for whose services they bill. This is also not consistent with the compensation rules associated with the definition of a group practice. Yet another permutation involves dermatologists in separate practices who want to own a slide preparation facility which their preferred dermpath will use for their specimens. This would also violate the law for multiple reasons.

That said, it is legitimate to engage the services of a dermpath who reassigns his or her right to payment to the billing group and reads slides in their offices. Under that arrangement, the physician is “in the group” when he or she is performing the services, and the anti-markup rule would not apply because he or she “shares a practice” with the group. It is also legitimate for two separate physician practices in the same office building to share a dermpath laboratory they co-own, as long as each practice separately bills and meets all the applicable regulations for a lab.


The Stark statute is inordinately complex. There are very good arguments that it actually does not even accomplish its purpose. Whatever one’s philosophical views, though, unfortunately, it is black letter law and must be complied with since claims submitted in violation of Stark not only are overpayments and subject to a $15,000 civil money penalty, but also can be false claims.

The relationship between dermatology and dermatopathology is one that offers some significant financial benefit to practices that include dermatologists. However, the maze is intricate and should be entered with caution.

To learn more about the Stark Law and Medicare’s anti-markup rule, refer to the Academy’s practice management resources, including the 2012 Coding and Documentation Manual as well as the forthcoming Compliance Manual.