Think Before You Lease: Legal Restrictions on Practice Arrangements

In a tough economy everyone, including physicians, is trying to find ways to lower overhead and increase revenue. I recently received a call from a physician client who wanted to lease out some of her office space to another physician friend in an arrangement where the parties would share overhead and space. An additional incentive was the fact that the physicians had different specialties and would be able to refer to each other and thus capture referrals that were otherwise going out the door.

From a business perspective this arrangement makes perfect sense for both parties. But like all other arrangements into which physicians enter, you must take a moment to consider whether there are any regulatory implications. Under both Stark Law (“Stark”) and the Anti-Kickback Statute (“Statute”) there are laws that apply to the lease of space and equipment when parties are in a position to refer federal patients.

Stark will apply if the parties have a financial arrangement (i.e. rent being paid) and one physician is in a position to refer a federal patient to the other for a “designated health service.” The list of designated health services is long but includes ultrasound, lab testing and physical therapy. If any such items or services are the type for which a federal patient referral could be made, it is necessary to fall within an exception to Stark. The two exceptions which are applicable are the “Lease of Office Space” and/or “Lease of Equipment” exceptions, which require the following:

1. The lease is in writing, specifies the exact premises or equipment to be leased and is signed by both parties;

2. The leased space or equipment does not exceed what is necessary for the lessee’s business purpose and is exclusively used by the lessee during the leased period;

3. The lease term is for at least one year and, if terminated prior to the end of the first year, cannot be re-entered into by the parties until expiration of that first year;

4. The formula to calculate rent is set in advance, reflects fair market value and does not take into consideration the volume or value of referrals between the parties; and

5. The lease is commercially reasonable even if the parties never refer to each other.

Remember that Stark is a strict liability statute. If you are not within the exception you are technically violating the law.

Under the Anti-Kickback Statute, the referral of federal patients and the payment of any form of remuneration (i.e. rent) is the perfect mix to potentially implicate the Statute. It does not matter what type of service the referral is for, as long as it is an item or service covered under a federal healthcare program. In order to ensure that a lease arrangement does not violate the Statute, it should be structured to comply with the “Space Rental” or “Equipment Rental” safe harbors to the Statute. These safe harbors essentially require the same components as the Stark exceptions described above, with one notable exception: the Statute requires the aggregate amount of rent for the term of the lease to be set in advance (i.e., at the start of the lease the parties will know exactly how much the rent will be for the entire term of the lease).

The Anti-Kickback Statute is not a strict liability statute. Failing to meet a safe harbor does not mean the Statute has been violated but it does mean that the intent of the parties and all the facts and circumstances involved will be examined should the arrangement ever be questioned by federal investigators.

As always, if you are uncertain whether your arrangement requires that an exception or safe harbor be met, or you are not sure what the agreement between the parties should look like, talk to health law counsel. In addition, remember to always take into account local laws. Many states have statutes that are similar, if not identical, to federal regulations and which apply to non-federal patients as well.

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