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A physician’s contract often states that the compensation cannot take into account the “volume or value of referrals.” But what exactly is a “referral” under the Stark Law? The answer is broader than you may expect, and misunderstanding “referral” can create a significant compliance risk, even risk of severe penalties.
Gardner Employment Law advises physicians on how federal laws intersect with compensation arrangements. In this article we explain how “referrals” are defined and applied under the Stark Law.
What Is a “Referral” Under the Stark Law?
Under the Stark Law (42 U.S.C. § 1395nn) and its implementing regulations (42 C.F.R. § 411.351), a “referral” generally means a physician’s request, order, or certification for DHS (Designated Health Services) payable by Medicare or Medicaid.
This definition is intentionally broad and extends well beyond what most physicians think of as a traditional referral. It captures not only formal referrals to outside providers, but also routine clinical decisions made by another provider in the course of treating a patient. That includes other providers in your clinic or hospital.
For example, when a physician orders imaging, lab work, or durable medical equipment, that action may constitute a referral if those services are provided by an entity with which the physician has a financial relationship.
The key concept is that a referral occurs when a physician directs a patient to receive DHS from a particular provider or entity. The Stark Law is designed to prevent financial incentives from influencing where patients are sent for these services.
Importantly, a referral does not require a written document or a formal transfer of care. A simple order entered into a system or a verbal direction to obtain a service can qualify.
What Counts as a Referral (and What Does Not)?
Understanding the distinction between what qualifies as a referral and what does not is critical for compliance.
| Counts as a Referral | Does NOT Count as a Referral |
| Ordering imaging (MRI, CT, X-ray) from an outside or affiliated entity | Services personally performed by the physician |
| Ordering laboratory tests billed by another entity | In-office procedures performed by the physician |
| Referring a patient to a specialist or facility | The physician’s own professional services |
| Certifying home health, hospice, or DME | Certain services performed under the physician’s supervision (depending on structure) |
| Establishing a plan of care that includes DHS provided by another entity | Internal clinical decision-making that does not direct DHS to another provider |
The central distinction is whether the physician is personally performing the service or directing the patient elsewhere for that service.
This distinction is especially important in modern practice settings where physicians may have financial relationships with imaging centers, labs, or other service providers. Even routine orders can become Stark “referrals” if they involve those entities.
Why Does the Definition of Referral Matter for Physician Compensation?
The Stark Law does not prohibit referrals outright. Instead, it prohibits compensation arrangements that take into account the volume or value of those referrals for designated health services.
To understand why this matters, physicians must also consider how “referrals” interact with a financial relationship under the Stark Law. A financial relationship generally includes compensation arrangements – such as being paid by a hospital, group practice, or other entity.
The Stark Law is implicated when a physician makes referrals for designated health services to an entity with which they have a financial relationship. In that context, the law prohibits compensation that takes into account the volume or value of those referrals.
Physicians may be compensated for:
- Services they personally perform
- Productivity based on their own work (such as RVUs or collections tied to personal services)
However, problems arise when compensation is tied – directly or indirectly – to:
- Revenue generated from DHS the physician orders but does not perform
- Profit streams that include income from referred service
- Financial arrangements that reward where a physician sends patients
The issue is that these types of revenue streams are tied to what the law defines as “referrals” – even when they arise from routine clinical decisions.
Because the definition of referral is so broad, even well-intentioned compensation structures can inadvertently incorporate referral-based revenue. The statute is a strict liability law, meaning that intent is not required. You can be liable even if you inadvertently violate the Start Law.
Even routine orders – such as imaging or lab tests – can become Stark “referrals” when they are directed to an entity with which the physician has a financial relationship.
Physicians should therefore ensure that compensation arrangements are carefully structured to reflect payment for work performed without considering any referrals, not for directing patients to particular services or entities.
Bottom Line
Under the Stark Law, a “referral” includes a wide range of physician actions that direct patients to receive designated health services – not just traditional specialist referrals.
Because the definition is expansive, physicians must take care to ensure their compensation reflects the genuine market value of their services, rather than the volume or value of patients they direct elsewhere.
If you have questions about your current compensation structure and its compliance with the stark laws, Gardner Employment Law can help.