The Stark Law, formally known as the Physician Self-Referral Law [42 U.S.C. Section 1395nn], prohibits physicians from referring Medicare or Medicaid patients to entities with which they or their immediate family members have a financial relationship, unless an exception applies. One of the most commonly used and critical exceptions to the Stark Law is the Personal Services Arrangement Exception. For healthcare providers, legal advisors, and business entities operating in the healthcare space, understanding this exception is essential for structuring compliant service agreements.
This article breaks down what the Stark Personal Services Exception entails, when it applies, and how to ensure your contracts and compensation structures fall safely within its boundaries. Whether you are forming a new physician group, drafting a management agreement for a medical practice, or evaluating your risk exposure under Stark, this guide provides practical insights and legal context.
The Stark Law is one of the fraud & abuse statutes codified in Federal law appllying to physicians, including:
- the False Claims Act (FCA),
- the Anti-Kickback Statute (AKS),
- the Physician Self-Referral Law, also known as the Stark Law,
- the Civil Monetary Penalties Law (CMPL), and
- the Exclusion Authorities.
Violations of these laws can result in criminal penalties.
The Stark Law Exceptions Explained
The Personal Services Exception under Stark Law permits certain financial relationships between referring physicians and entities that provide designated health services (DHS), so long as the arrangement meets strict requirements. This exception is vital in enabling day-to-day operations, from hiring physicians as medical directors to outsourcing management or marketing services.
How to Qualify for the Stark Law Exception
To qualify for the exception, several key elements must be met:
- The arrangement must be in writing, signed by the parties, and specify the services to be provided.
- The term of the agreement must be at least one year.
- Compensation must be set in advance, consistent with fair market value, and not based on the volume or value of referrals.
- The arrangement must serve a legitimate business purpose and not violate any federal or state anti-kickback laws.
Example scenario: A hospital contracts with a physician to provide consulting services related to surgical practices. The agreement is for 18 months, outlines specific duties, pays the physician a fixed monthly fee, and explicitly excludes any requirement to refer patients to the hospital. If structured correctly, this could qualify under the Personal Services Exception.
Action step: Business lawyers drafting or reviewing service agreements for healthcare clients should use a checklist based on these requirements to ensure each contract aligns with the exception.
Categories of Stark Law Exceptions
The Stark Law contains several well-defined exceptions that permit certain physician referrals and compensation arrangements without violating federal regulations. These categories include:
- The Personal Services Exception, which allows payments for legitimate, commercially reasonable services rendered under a written agreement;
- The In-Office Ancillary Services Exception, which permits referrals within a group practice for items like imaging or lab work;
- The Rental of Office Space or Equipment Exception, ensuring leases meet fair market value standards;
- The Employment Relationship Exception, which applies to W-2 physician-employees under specific conditions; and
- The Physician Recruitment Exception, designed to help hospitals attract needed physicians to under-served areas.
Other key exceptions include those for Isolated Financial Transactions, Non-Monetary Compensation, and Indirect Compensation Arrangements.
Each exception requires strict adherence to detailed legal criteria, and understanding these categories is essential for healthcare providers, business owners, and compliance officers to avoid costly Stark Law violations and federal penalties.
Who Uses the Personal Services Exception and Why?
This exception is widely used in a variety of business and clinical arrangements. Healthcare entities often employ physicians in dual roles, such as part-time administrators, consultants, or supervisors, who may also refer patients. Without a valid exception like this one, such financial relationships could be in violation of Stark.
Entities that commonly use the Personal Services Exception include:
- Hospitals hiring physicians as compliance officers or department heads
- Medical groups employing outside consultants for billing or EHR system implementation
- Labs or diagnostic imaging centers contracting with marketing or management firms owned by physicians
Each of these scenarios carries a significant risk if the Stark Law is not accounted for. Missteps in contract drafting, compensation structuring, or documentation can lead to civil penalties, False Claims Act liability, and exclusion from federal healthcare programs.
Action step: Every healthcare-related business should conduct an annual review of all service agreements involving physicians to verify compliance with Stark exceptions, especially those that involve marketing, leasing, or professional services.
How To Qualify for the Stark Law Personal Services Exception
Ensure compliance by meeting all seven of these criteria.
- 1. Written Agreement
The arrangement must be documented in a formal, signed contract. - 2. Covers Identifiable Services
The agreement must specify exactly what services are being performed. - 3. Term of at Least One Year
The agreement must span at least 12 months, even if terminated early. - 4. Compensation Set in Advance
Payments must be determined before services are provided. - 5. Compensation is Fair Market Value
The pay must reflect fair market value, not influenced by referrals. - 6. No Volume or Value of Referrals
The agreement cannot reward or penalize based on the number of referrals. - 7. Commercially Reasonable Arrangement
The deal must make business sense even without any potential referrals.
✔️ All seven requirements must be met to stay within the exception.
Common Compliance Pitfalls
Even experienced lawyers and compliance officers can overlook small (but critical)details that could invalidate an otherwise well-intentioned agreement. Among the most frequent Stark Law pitfalls involving the Personal Services Exception:
- Missing signatures or unsigned renewals
- Terminating an agreement early and entering a new one within a year with different compensation
- Vague or overly broad service descriptions
- Basing payment on a percentage of collections or performance bonuses tied to referrals
It’s also important to remember that good intentions or industry norms do not protect against liability. If a compensation structure “feels fair” but isn’t backed by a proper fair market value (FMV) analysis, it could still result in a Stark Law violation.
Action step: Use third-party valuation firms or FMV consultants when structuring physician compensation to support compliance documentation.
Drafting a Compliant Personal Services Arrangement
When drafting an agreement intended to fall under the Personal Services Exception, legal precision is key. Contracts should include:
- A clearly defined scope of services (ideally with metrics or deliverables)
- The term of agreement (minimum of one year)
- Compensation terms (set in advance, fixed or at FMV)
- Provisions ensuring that services are not conditioned on referrals
- Clauses that acknowledge the parties’ intent to comply with Stark and other applicable laws
Including legal boilerplate is not enough, contracts must reflect the actual business reality of the arrangement. Regulators will look not just at what’s on paper, but what’s happening in practice.
Action step: Train your operations team and compliance officers to track the actual performance of the contract (i.e., is the physician providing the services as agreed?), not just the paperwork.
FAQs: Practical Questions for Healthcare Businesses
What types of contracts are typically covered under the Personal Services Exception?
Management agreements, independent contractor physician services, lease agreements (for space or equipment), and marketing or billing service agreements may all fall under this exception, if properly structured.
Can a physician be paid hourly under this exception?
Yes, as long as the hourly rate is set in advance, based on FMV, and not tied to referrals.
Does the agreement need to be exclusive?
No. The services must be specified, but the physician can provide services to other entities—just not in ways that violate other Stark restrictions.
What if services stop before the one-year term ends?
There are narrow circumstances where this is allowed, but generally, early termination requires a break in the relationship for at least 12 months before a new agreement can begin.
Summary: Why It Matters and What to Do Next
For healthcare lawyers, administrators, and business owners, understanding the Stark Personal Services Exception is not just an academic exercise—it’s a compliance necessity. Violations of the Stark Law can cost millions in fines and exclusions from Medicare/Medicaid participation.
Use this exception proactively to:
- Structure physician consulting relationships
- Pay marketing or admin teams owned by referring doctors
- Document shared-use agreements or joint ventures
But always ensure:
- The contract is specific, signed, and for a term of one year or more
- Compensation is fixed and at fair market value
- The arrangement is commercially reasonable and not a veiled referral scheme
Action step: If you’re unsure whether your current agreements are compliant, schedule a legal review with a healthcare compliance attorney or a business transactions lawyer experienced in Stark Law issues.
