Relaxation of Stark Rules Explained

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One of the barriers to Electronic Health Record (EHR) adoption has been the inability of small practices to afford them. Health systems have had an interest in subsidizing or donating EHR’s to small practices but have not been able to do so for fear of violating Federal Kickback rules or Physician Self-referral (Stark) rules.

Federal kickback rules prevent a health system from giving anything of value to a potential referral source that in order to induce referrals. For example, giving an EHR to a physician who sends referrals to a hospital system would be seen as a violation. The Stark rules prohibits physicians from making referrals for certain Medicare or Medicaid services to an entity with which they have a financial relationship(1) . For example, a physician has a financial agreement (direct or in the case of a donated EHR, indirect) with a hospital for an EHR would not be able to refer their patients to that same hospital for services(2).

The Medicare Modernization Act of 2003 mandated that the Center for Medicare and Medicaid services (CMS) create exceptions to these rules. In August 2006 that final rule was published (2) and became effective on October 10, 2006.

The new rule published two exceptions- the first was an exception that protects certain arrangements involving electronic prescribing technology. The second exception protects certain arrangements involving interoperable EHR’s or Information Technology and training services. It is this second exception that is the focus of this article.

CMS EHR Definition

CMS defines an EHR as a repository of consumer health status information in a computer processable form used for clinical diagnosis and treatment for a broad array of clinical conditions (3).

Donors and Recipients

The EHR exception states that any entity that furnishes CMS designated health services can offer an EHR, information technology or training services. Unlike preliminary versions of the rules, the recipient does not need to be on the medical staff of the donating health system, any physician can accept.

What is included under the exception

The EHR exception covers interoperable electronic health records, information technology, or training that is necessary and predominately pertains to the creation, maintenance, transmission and reception of those records. A condition of an allowable EHR is that it must have e-prescribing capability. It is also admissible for the EHR to contain patient administration, scheduling, billing and clinical support software. In addition to the software, the exception covers any interface and translation software, all forms of connectivity services, maintenance services, secure messaging, training and support (ie. a Help desk), and a patient portal that enables the patient to have on-line personal medical records.

What is excluded

The exception does not cover hardware costs, operating system costs, storage devices, software with core functions other than an EHR, routers or modems to access connectivity, donation of personnel or data migration services.


Under the exception an EHR must be interoperable and have CCHIT (Certification Commission for Healthcare Information Technology) certification.


The exception final rule did not include a cap on the amount of the donation. However, 15% of the donor’s cost must be shared by the recipient. Any future upgrades to the EHR system must also be cost-shared. All costs for the donation must be documented in writing.


In keeping with the vision of complete adoption of EHR’s in the next 15 years- the rule will sunset on December 31, 2013. The rule can be extended at the discretion of the Department of Health and Human Services.

IRS exception

Despite the relaxation of the Stark rules there were still significant barriers to the donation of EHR’s by health systems. IRS regulations require that donations from a tax-exempt hospital or healthcare system must serve a public benefit. Hospitals were reluctant to donate EHR for fear of losing their tax-exempt status. The American Hospital Association (AHA) took the lead on this issue and sent a letter to the IRS asking for clarification on this issue (4).

On May 11, 2007 the IRS responded with a two page memo stating it would “not treat the benefits a hospital provides to its medical staff physicians as impermissible private benefits or violation if the benefit falls within the range of IT items and services that are permissible under the Department of Health and Human Services EHR regulations.” (5)

The IRS conditions for this exemption were that:

  1. Hospitals must enter into health IT agreements with physicians receiving IT items and services
  2. Hospitals must comply with HHS rules
  3. To the extent permitted by law, the hospital may access all of the electronic medical records

created by a physician using the health IT items and services

  1. Hospitals must ensure that the IT items and services are available to all staff members
  2. Hospitals must provide the same level of subsidy for all staff members.

It is the third condition that has some concerned that while the IRS does offer an exception it may not be one that is tolerable to hospitals and physicians.(6)

Reaction to rules

The reaction to the change in the Stark rules and the IRS regulations by health systems has been slow. While the regulatory barriers have been eased there are still financial and political barriers. One concern is that hospital systems will force physicians to choose the same system that they already have installed. From the hospital point of view it is not feasible to support more than one information system. There are also concerns regarding the ability of physicians to trust a health system with their patient and financial data.(7) Regardless of these concerns, the relaxation of these rules is relatively new and most health systems are proceeding with caution.


  1. Reisman G. Mancino P. Stark choices. DHHS has proposed safe harbors that would allow hospitals and other entities to provide more funds to technology-hungry physicians. Healthcare Informatics. 23(5):40-1, 2006 May.
  2. Guglielmo W. A Physician’s guide to Stark Rules. Medical Economics. 23 July,2004.
  3. eHealth initiative summary Final Rule [CMS-1303-F] Medicare Program; Physicians’ Referrals to Health Care entities with which they have financial relationships; Exceptions for Certain Electronic Prescribing and Electronic Health Record Arrangements. August 8, 2006.[1]
  4. DoBias, M and A. Robeznieks. AHA asks IRS for Help with IT. Modern Healthcare 36 (47):p32. 2006 November.
  5. Director, Exempt Organizations. Director, Exempt Organizations to Director, Exempt Organizations, Examinations and Director, Exempt Organizations, Rulings and Agreements. 5 May 2006. Internal Revenue Service Memorandum. [2]
  6. Conn, Joseph. Some Cautious of additions to IRS health IT ruling. 17 May, 2007. Modern Healthcare.Accessed on May 27, 2007 from[3]
  7. Terry, Ken. EHRs: Will relaxing Stark bind you tighter? Medical Economics. 3 July, 2006.

D Klingen