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Stark Compliance: Lease Sharing Arrangements for Providers of Designated Health Services

May 23, 2024

As co-working spaces and lease sharing arrangements have become increasingly popular, physicians may require assistance on how to implement such arrangements. Physicians contemplating a proposed arrangement must ensure that it does not run afoul of applicable health care laws. Notably federal Stark Law (Stark) generally prohibits a physician from referring Medicare or Medicaid patients for designated health services (DHS) to an entity that either the physician, or an immediate family member of such physician, has a “financial relationship” with. DHS includes services such as clinical laboratory services, physical therapy services, and inpatient/outpatient hospital services.

Stark not only prohibits such referrals for DHS, but it also prohibits an entity from billing for DHS if DHS was furnished pursuant to a prohibited referral under Stark. However, there are several regulatory exceptions. In the context of a physician involved in a lease sharing arrangement, there are three relevant exceptions that may permit such an arrangement. Please note that these exceptions contain additional nuances that should be discussed with a Varnum health care attorney.

    1. Rental of Office Space Exception

    This exception provides that certain arrangements satisfying statutory requirements are permitted as they do not qualify as a “financial relationship.” By way of example, some of the requirements include that the lease arrangement be set out in writing, signed by the parties, and specify the premises it covers. Additionally, the duration of the lease arrangement must be at least one year. The rental charges over the term of the lease arrangement must also not be determined: (I) in any manner that takes into account the volume or value or referrals or other business generated between the parties, or (II) using a formula based on certain statutorily prohibited factors. See 42 U.S.C. § 1395nn and 42 C.F.R. § 411.357 for a comprehensive list of the requirements for this first exception.

    In analyzing whether this exception may apply, the requirement that there be a lease arrangement with a term of one-year or greater may pose potential difficulties. In many co-working arrangements, there may be a desire to limit the lease to less than one year, or on an “as-needed” basis. Accordingly, it must be analyzed whether a proposed co-working/lease sharing arrangement may fall under the protection of the “Rental of Office Space Exception.”

    2. Timeshare Arrangements Exception

    This exception provides another potential avenue for certain arrangements satisfying the statutory requirements to fall outside of the general rule outlined above. For instance, an arrangement may fall under this exception if the arrangement is between a physician (or the physician organization in whose shoes the physician stands) and (I) a hospital or (II) physician organization of which the physician is not an owner, employee, or contractor. Additionally, the premises, equipment, personnel, items, supplies, and services covered by the arrangement must be used (I) predominantly for the provision of evaluation and management services to patients and (II) on the same schedule. See 42 C.F.R. § 411.357 for a comprehensive list of the requirements for this second exception.

    Although these are a mere sampling of the requirements that must be met to fall under the Timeshare Arrangements Exception, they represent potential roadblocks for health care providers seeking to rely on this exception. First, the exception only applies to hospitals and physician groups. Additionally, the exception requires that the space be used predominantly for evaluation and management services on the same schedule, rather than DHS. Again, it is recommended you contact a Varnum health care attorney to determine if this second exception may apply.

    3. FMV Compensation Exception

    The third exception was announced in November 2020, when the Centers for Medicare and Medicaid Services (CMS) issued a new final rule, in part, removing the FMV exception’s exclusion of office rental space. An arrangement may qualify under this exception, for instance, if it is in writing, signed by the parties, and covers only identifiable items, services, office space, or equipment. The writing must specify: (I) the items, services, office space, or equipment covered under the arrangement; (II) the compensation that will be provided under the arrangement; and (III) the timeframe for the arrangement.

    Additionally, this third exception permits an arrangement to be for any period of time and contain a termination clause; however, an arrangement may be renewed any number of times so long as the terms of the arrangement and the compensation for the same items, services, office space, or equipment do not change. The third exception may offer greater flexibility, as there is no “exclusive use” requirement, or a one-year term requirement. However, while an arrangement may be for any period of time, parties are generally prohibited from entering into more than one arrangement for the same items, services, office space, or equipment during the course of a year (unless it falls within a statutory exception).

    See 42 C.F.R. § 411.357 for a comprehensive list of the requirements for this third exception. The specific facts of a proposed arrangement must be analyzed to determine whether this third exception may apply.

    To ensure compliance with Stark and other applicable healthcare laws, and to determine whether an exception applies, physicians providing DHS who enter a lease sharing/co-working arrangement are encouraged to contact a member of Varnum’s health care practice team.

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