The Stark Law generally prohibits a physician from referring Medicare patients for certain designated health services (DHS) to an entity with which the physician (or an immediate family member) has a financial relationship. The In‑Office Ancillary Services (IOAS) Exception is one of the most important exceptions because it allows physician practices to offer common diagnostic and therapeutic services directly in their offices without violating Stark. These services often include lab work, imaging, physical or occupational therapy, and other commonly ordered tests or treatments. The IOAS exception recognizes that many of these services are integral to patient care and are more efficient when delivered in the same clinical setting.
1. What the IOAS Exception Requires
Although the IOAS exception is widely used, it has three core requirements—supervision, location, and billing—that must all be satisfied.
Supervision. The supervision requirement ensures that services are delivered under the oversight of the referring physician, another physician in the same group, or someone operating under appropriate physician supervision. For example, CMS requires different levels of supervision depending on the specific service, such as “direct supervision” for many physical therapy services billed under the “incident to” rules. These distinctions matter because failing to meet supervision standards can invalidate the exception.
Location. The location requirement ensures that DHS is provided in the group practice’s regular place of business or another centralized building the practice uses to care for its patients. This is intended to prevent practices from establishing remote, stand‑alone ancillary centers solely to capture referrals without providing integrated patient care.
Billing. The billing requirement is similarly straightforward: the DHS must be billed by the physician, the group practice, or an entity wholly owned by the physician or group. This requirement reinforces that the services are being delivered as part of the practice’s operations rather than being outsourced or routed to third‑party entities that may distort referral patterns.
Together, these three conditions help ensure the services are genuinely part of in‑office care rather than an opportunity to generate additional revenue through self‑referrals.
2. Why the “Group Practice” Definition Is So Important
The IOAS exception is only available if the referring practice meets the highly technical definition of a “group practice”. For this reason, many Stark compliance issues turn not on the IOAS elements themselves but on whether the practice qualifies as a group practice in the first place.
Single Entity. At the core of the group practice definition is the requirement that the practice function as a single legal entity. In June 2021, CMS issued Advisory Opinion 2021‑01, clarifying that a group practice remains a single legal entity even if it delivers DHS through a wholly‑owned subsidiary, so long as the subsidiary is fully owned and operationally integrated with the group. CMS explained that the practice does not lose its “single entity” status merely because a subsidiary, while itself a physician practice, would not independently qualify as a group practice. This clarification is critical for practices that structure imaging centers, therapy programs, or other ancillary operations through subsidiary entities.
Additional CMS commentary further explained that for such a structure to remain compliant, the subsidiary’s staff, revenue, and expenses must truly operate as part of the group practice. In practical terms, physicians should remain employed or contracted through the main practice, and Medicare billing should continue to flow through the parent group’s structure in accordance with Medicare’s claims processing rules. This guidance affirms that subsidiaries are permissible but only when they support, not replace, the unified operations of the parent practice.
Integrated Operations. This includes jointly using shared staff, equipment, and office space, and performing substantially the full range of medical services offered by their physicians. The group must also operate a consolidated billing system and apply consistent methods for distributing overhead and income. These elements ensure that the practice behaves like a genuine medical group rather than an association of independent physicians sharing a brand.
Substantially All. Another key feature is the “substantially all” test, requiring that at least 75% of the practice’s patient‑care services be furnished personally by physicians who are members of the group. This test ensures the practice’s operations are not primarily driven by non‑member physicians or auxiliary arrangements.
Compensation. Finally, physician compensation within the group must avoid directly taking into account the volume or value of DHS referrals. While group practices may share overall profits or productivity‑based income, they must structure such arrangements within the contours of Stark’s definitions. Recent regulatory updates published in CMS’s final rule (85 Fed. Reg. 77492) underscore how compensation plans must be aligned with these standards by the effective rule dates. This alignment is crucial because only practices meeting the Stark definition of a group practice may rely on the IOAS exception at all.
3. Why These Clarifications Matter for Physician Practices
Recent CMS guidance, particularly Advisory Opinion 2021‑01 and subsequent clarifications, offers helpful flexibility for modern practice structures. Many groups today use subsidiaries for administrative or operational efficiencies, such as centralizing imaging services or therapy operations. The confirmation that wholly‑owned subsidiaries can still fit within the group practice definition, so long as they are properly integrated, allows practices to use these structures without giving up the IOAS exception.
At the same time, the guidance reinforces that compliance depends on the substance of the arrangement, not merely its form. A subsidiary used purely as a billing conduit or a loosely affiliated clinical unit will not meet the “single legal entity” or unified business requirements. The overarching theme in CMS’s interpretations is that the group must function as one clinical and financial enterprise, regardless of whether some operations happen through wholly‑owned subsidiaries.
These rules, when combined with the supervision, location, and billing requirements, explain why the IOAS exception is both widely relied upon and tightly regulated.
4. The Practical Bottom Line
To rely on the IOAS exception, a practice must first ensure it meets the Stark group practice definition and then satisfy the supervision, location, and billing requirements for each DHS it performs. When structured correctly, the exception enables comprehensive, efficient, same‑day diagnostic and therapeutic services within a unified practice environment. But because Stark is a strict liability statute, compliance requires close attention to the practice’s legal structure, operational integration, and physician compensation models.
