Recent case law extends Stark Law to Medicaid

Several recent federal district court opinions have called into question the healthcare industry's long-held belief that the Stark Law applies only to claims for items and services reimbursable by Medicare, not those reimbursable by Medicaid.

Despite the plain language of the Stark Law and its implementing regulations, which state that the Stark Law applies only to Medicare claims, several courts have held that the Stark Law applies to Medicaid claims. This new interpretation of the Stark Law creates potential liability for Medicaid providers as well as potential liability for providers serving both Medicare and Medicaid patients for Stark Law violations. This article discusses the intersection between the Stark Law and Medicaid, including the recent court opinions holding that the Stark Law applies to Medicaid claims.

In general, the Stark Law prohibits physicians from making a referral for designated health services to an entity with which the physician has a financial relationship. The Stark Law further prohibits an entity from submitting claims to Medicare for payment associated with a referral made in violation of the Stark Law and prohibits Medicare from making any payment for such claims.

The Stark Law statute defines "referral" to include requests for items and services reimbursable by Medicare; the statute makes no mention of Medicaid-reimbursable items and services. Similarly, in the regulations that implement the Stark Law, the term "referral" is defined as "the request by a physician for, or ordering of...any [DHS] for which payment may be made under Medicare Part B...." Moreover, the Stark Law regulations define DHS to include only DHS payable by Medicare.

The Stark Law is often enforced through the False Claims Act, which imposes liability on any person or entity that "knowingly presents, or causes to be presented" to the federal government "a false or fraudulent claim for payment." These FCA cases are typically based on the theory that the claims submitted by an entity were false or fraudulent because such claims were the result of referrals prohibited by the Stark Law.

In 1993, Congress enacted the Omnibus Budget Reconciliation Act, which added section 1903(s) to the Social Security Act (section 1903(s)). Section 1903(s) is entitled "Limitations on certain physician referrals" and prohibits the federal government from making federal financial participation payments to state Medicaid programs for DHS furnished as a result of a referral that would violate the Stark Law if Medicare "covered the service to the same extent and under the same conditions" as the state Medicaid program. FFP payments are payments by the federal government to state Medicaid programs that partially fund the state Medicaid programs.

In 1998, the Health Care Financing Administration (the predecessor to the Centers for Medicare and Medicaid Services) issued a proposed rule addressing how the Stark Law interacts with section 1903(s) as it applies to Medicaid referrals. In the proposed rule, CMS stated that the Stark Law rules prohibiting certain referrals do not apply to providers "when the referral involves Medicaid services." Instead, CMS proposed to interpret section 1903(s) as prohibiting the federal government from making FFP payments to a state Medicaid program for DHS that resulted from a referral that would have violated the Stark Law "if Medicare covered the services in the same way as [Medicaid]" (emphasis in original). CMS went on to state that Medicaid providers "are not precluded from referring Medicaid patients or from billing for [DHS]" and that a state may pay providers for such claims. According to CMS, section 1903(s) was "strictly an FFP provision" such that the federal government would be required to review the Medicaid claim as if it were under Medicare, and if the referral would result in the payment being denied under Medicare, the federal government would withhold FFP payments from the state Medicaid program. In other words, providers would not violate the FCA by submitting Stark-tainted claims to a state Medicaid program; rather, the federal government would be prohibited from making FFP payments to the Medicaid program for such claims.

The proposed rules concerning section 1903(s) were not made final, and CMS stated that it would instead address section 1903(s) in the Phase II rulemaking. However, in the Phase II Final Rule, CMS declined to address section 1903(s), stating that "in the interest of expediting publication of these rules, we are reserving the Medicaid issue for a future rulemaking." To date, CMS has not issued further proposed or final rules concerning section 1903(s). Based on the plain language in the Stark Law statute, its implementing regulations, as well as CMS's commentary in the proposed rule, the health care community has interpreted the Stark Law to apply only to Medicare claims.

However, several recent federal district court decisions, albeit ones that dealt with the question in the context of motions to dismiss, which is a low threshold, may challenge this thinking. In U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center, the Department of Justice intervened in a case brought by a qui tam relator against Halifax, alleging that Halifax's financial relationships with a number of physicians violated the Stark Law. The DOJ and relator further alleged that Halifax had violated the FCA by causing the Florida Medicaid program to submit to the federal government claims for FFP payments based on referrals prohibited by the Stark Law. Halifax moved to dismiss the case for failure to state a claim, arguing that the Stark Law did not prohibit Halifax from submitting claims to or receiving payments from Florida Medicaid; thus, Halifax did not violate the FCA. The court denied Halifax's motion, finding that section 1903(s) prohibits FFP payments to a state Medicaid program for services that result from referrals that are improper under the Stark Law. Accordingly, because the relator and DOJ alleged that Halifax had "caused" the Florida Medicaid program to submit claims for FFP payments for services that Halifax knew violated the Stark Law, the allegations that Halifax violated the FCA with respect to the Medicaid claims were sufficient to survive a motion to dismiss. Halifax ultimately settled the Stark Law-related allegations for $85 million.

Similarly, the court in U.S. ex rel. Parikh v. Citizens Medical Center denied the defendants' motion to dismiss for failure to state a claim related to allegations that Citizens Medical violated the FCA by submitting Stark-tainted claims to the Texas Medicaid program. As in Halifax, the court held that section 1903(s) expanded the Stark Law's reach to Medicaid claims and that the allegations that Citizens Medical caused Texas Medicaid to submit false claims for FFP payments to the federal government were sufficient to defeat Citizens Medical's motion to dismiss. The Citizens Medical lawsuit is currently ongoing.

In U.S. ex rel. Schubert v. All Children's Health System, a qui tam relator alleged that All Children's violated the FCA by engaging in financial relationships with physicians that violated the Stark Law and submitting claims to the Florida Medicaid program on the basis of referrals from those physicians. All Children's cited the Stark Law, its regulations and the 1998 proposed rule in arguing that the court should dismiss the allegations because the law does not apply to Medicaid claims. The court found this argument unpersuasive and held that, even though section 1903(s) on its face applies only to FFP payments for state Medicaid programs, a provider "[c]ertifying compliance with the Stark [Law] to ensure that CMS pays FFP for Medicaid claims that violate the Stark [Law] would be a violation of the [FCA] in the same manner that certifying compliance for full reimbursement under Medicare" would result in an FCA violation. All Children's recently settled with the relator by agreeing to pay $7 million in damages.

While the decisions in Halifax, Citizens Medical and All Children's that the Stark Law applies to Medicaid claims through section 1903(s) arose in the context of procedural issues, it bears watching the impact these decisions will have on future FCA case law. Providers, such as children's hospitals, that traditionally may not have focused on compliance with the Stark Law should carefully review their financial relationships with referring physicians for Stark Law compliance. The decisions also increase the chances that relators and the DOJ will file FCA lawsuits against Medicaid providers based on the theory that the providers submitted false Medicaid claims predicated on referrals that violated the Stark Law.

If the Stark Law's application to Medicaid claims is sustained, it could increase the amount of potential damages and penalties that providers may be subject to in an FCA lawsuit. Instead of fines and damages solely related to Medicare claims, providers who have violated the Stark Law may also be subject to fines and damages related to its Medicaid claims.

This issue of increased potential liability is compounded because the Self-Referral Disclosure Protocol appears to be available only for disclosures related to Medicare overpayments. The SRDP was enacted as part of the Affordable Care Act to encourage providers to disclose actual or potential Stark Law violations by permitting CMS to reduce the penalties associated with such violations. All references in the legislation that created the SRDP and CMS's SRDP guidance refer only to Medicare claims; no guidance relates to Medicaid claims disclosures. Therefore, Medicaid providers who are concerned that they may have violated the Stark Law have no self-disclosure option available that would allow them to reduce potentially substantial fines.

These recent Stark Law developments also have apparently caught the attention of Congress. Proposed federal legislation introduced in the House of Representatives earlier this year would repeal section 1903(s) and add a section to the Social Security Act, making it clear that the Stark Law applies to Medicaid claims. The bill would also create an SRDP specifically for Medicaid claims. While this proposed legislation is not welcome news to those hoping that cases like Halifax, Citizens Medical and All Children's are aberrations, the bill would at least provide clarity for Medicaid providers and give those who have violated the Stark Law an opportunity to seek more lenient fines and penalties than those that typically result from FCA lawsuits.

Regardless of the outcome of this pending legislation, these recent cases have called into question the belief that the Stark Law does not apply to Medicaid claims and increased the chance that the health care community will see an increase in FCA lawsuits filed against providers that serve Medicaid recipients under circumstances where the Stark Law is implicated. Providers, especially Medicaid providers, are well advised to review their existing financial arrangements with referring physicians to ensure compliance with the Stark Law.


1 42 U.S.C. § 1395nn.
242 U.S.C. § 1395nn(a)(1).
3Id.; 42 U.S.C. § 1395nn(g)(1).
442 U.S.C. § 1395nn(h)(5).
542 C.F.R. 411.351.
731 U.S.C. § 3729(a
8See, e.g., U.S. ex rel. Drakeford v. Tuomey Healthcare System, 675 F.3d 394 (4th Cir., 2012)
942 U.S.C. § 1396b(s).
1045 C.F.R. § 234.120.
1163 Fed. Reg. 1659
12Id. at 1704.
1666 Fed. Reg. 856.
1769 Fed. Reg. 16054 at 16055.
18U.S. ex rel. Baklid-Kunz v. Halifax Hosp. Med. Ctr., 2012 US Dist. LEXIS 36304 (M.D. Fla., Mar. 19, 2012).

20Id. at *10
21Id. at *10-11.
22Id. at *11.
23U.S. ex rel. Parikh v. Citizens Med. Ctr., Civil Action No. 6:10-CV-64 (S.D. Tex. Sept. 20, 2013).
25U.S. ex rel. Schubert v. All Children’s Health Sys., 2013 U.S. Dist. LEXIS 163075 (M.D. Fla., 2013).
26Id. at *15.
27Id. at *18.
2831 U.S.C. § 3729(a)(1).  Generally, damages in a FCA lawsuit are three times the total dollar amount of the false claims plus a penalty of $5,500 to $11,000 per claim submitted.
29See The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 6409, 124 Stat. 772 (2010).
30Id.; see e.g., CMS Voluntary Self-Referral Disclosure Protocol, available at
31Medicaid Physician Self-Referral Act of 2014, H.R. 4676 113th Cong. § 2 (2014).



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