Stark Law, Anti-Kickback and Your Medical Office Lease

The Centers for Medicare and Medicaid Services (CMS) describes the physician self-referral law, known as the Stark law, as prohibiting a physician from referring patients for certain designated health services payable by Medicare to an entity with which the physician or an immediate family member has a financial relationship, unless an exception is met. It also prohibits the entity from billing for improperly referred services. A financial relationship can be an ownership or investment interest or a compensation arrangement.

The CMS list of designated health services includes clinical laboratory services, physical and occupational therapy, radiology and certain other imaging, outpatient prescription drugs, and inpatient and outpatient hospital services, among others. The HHS Office of Inspector General (OIG) calls Stark a strict liability statute, meaning proof of specific intent to violate it is not required.

The Anti-Kickback Statute works differently. OIG describes it as a criminal law that prohibits knowingly and willfully paying remuneration to induce or reward referrals of items or services payable by federal health care programs. OIG says remuneration includes anything of value and names free rent as an example. OIG lists fines, jail terms and program exclusion among the possible consequences.

This guide explains vocabulary so you can spot the issue and raise it early. It does not tell you whether your lease complies. That conclusion belongs to your healthcare attorney.

These laws turn on who the parties are and whether referrals can flow between them. Ask counsel to review the lease when any of these describe your deal:

• The landlord is a hospital, health system, imaging or laboratory company, or another entity that bills for designated health services.
• The landlord, or an owner of the landlord, is a physician or an immediate family member of a physician who could refer to the tenant, or the reverse.
• You are subleasing or sharing rooms with another practice or provider, in either direction.
• The landlord is offering unusually low rent, free rent or a large build-out allowance, and it could benefit from your referrals.
• Physicians at the practice own the building through a separate company.

A lease with an investor landlord that has no referral relationship with you raises a much narrower question, but only counsel can confirm that no one in the ownership chain changes the answer. Ask counsel as well whether state law adds self-referral or kickback rules of its own.

The exception for rental of office space is at 42 CFR 411.357(a). Paraphrased, it looks for the following. Read the regulation itself, because the wording controls.

• In writing. The arrangement is set out in writing, signed by the parties, and specifies the premises it covers.
• Term. The duration is at least one year. If the lease ends early, with or without cause, the parties may not enter into a new lease for the same space during the first year of the original lease.
• Size and exclusive use. The space does not exceed what is reasonable and necessary for legitimate business purposes, and, when the lessee is using it, the lessee uses it exclusively and does not share it with the lessor or anyone related to the lessor. Common area payments are limited to a pro rata share.
• Rent set in advance at fair market value. Rental charges over the term are set in advance and are consistent with fair market value.
• No volume-based rent. Rent may not take into account the volume or value of referrals or other business generated between the parties. It also may not use a percentage of revenue from the space or, where it reflects patients the lessor refers to the lessee, per-unit-of-service charges.
• Commercially reasonable. The lease would make commercial sense even if no referrals were made between the parties.
• Holdover. After a term of at least one year, a holdover qualifies if the expired lease met these conditions, the holdover is on the same terms, and it continues to meet them.

Other exceptions in the same section can also reach office space, including the fair market value exception at 411.357(l) and the timeshare exception at 411.357(y). Each has its own conditions, and choosing among them is a job for counsel.

The space rental safe harbor is at 42 CFR 1001.952(b). OIG says that to be protected, an arrangement must fit squarely in a safe harbor and satisfy all of its requirements. The six standards overlap with Stark but are not identical:

1. The lease is in writing and signed by the parties.
2. It covers all of the premises leased between the parties for the term and specifies them.
3. If access is for periodic intervals and not full time, it specifies exactly the schedule, the precise length of each interval and the exact rent for each interval.
4. The term is not less than one year.
5. The aggregate rent is set in advance, is consistent with fair market value in arm's-length transactions, and does not take into account the volume or value of referrals or business otherwise generated between the parties that is payable by federal health care programs.
6. The aggregate space does not exceed what is reasonably necessary for the commercially reasonable business purpose of the rental.

Whether an arrangement that falls outside the safe harbor creates a problem is a separate, fact-specific question for counsel.

Fair market value in these rules is narrower than the phrase sounds. Under 42 CFR 411.351, fair market value for office space means the value in an arm's-length transaction of rental property for general commercial purposes, not taking into account its intended use, without adjusting for the added value a party would attribute to proximity or convenience to a lessor that is a potential referral source, and consistent with general market value. The safe harbor has a similar note: value may not be adjusted for proximity or convenience to sources of referrals.

That has a practical edge. A location beside a hospital may be worth more to a practice because of the referrals, but that premium is the thing these definitions exclude. The rent question is what the space would bring for general commercial purposes, not what the referrals are worth.

Counsel may ask for evidence that the rent is at market, such as comparable leases or an independent valuation. TAG can gather market evidence and comparable lease data for counsel to weigh, and as a tenant-side advisor it can negotiate the business terms with the structure in mind. TAG does not give legal opinions or decide whether a lease meets an exception.

Ordinary deal points can touch these rules. Before the letter of intent is signed, ask your attorney about each of these:

• ✓Is the free rent or build-out allowance something an unrelated landlord would give for this space and term?
• ✓Can rent escalations be written so that the rent is set in advance for the whole term?
• ✓Does any rent component vary with revenue, patient volume or procedures?
• ✓Is the landlord or anyone related to it sharing the space or using it at any time?
• ✓Does the lease cover all space leased between the parties, including storage and part-time rooms?
• ✓If either side can terminate early, what happens if the parties want a new deal in the first year?
• ✓What is the plan if the lease expires before a renewal is signed, and would a holdover be on the same terms?
• ✓Who keeps the file showing how the rent was determined?