Check Your Lease: You Could Be in Violation of the Stark Law

Regulators are on high alert for fraud within federal health care programs, as well as violations of the Stark Law. While providers and practices may be aware physician self-referrals are prohibited under Stark, and take steps to avoid them, there are many who unknowingly violate Stark provisions in ways that aren’t overt and obvious schemes – often as a result of administrative oversights and mistakes concerning lease arrangements.

Even if all terms and conditions contained in physician leases were compliant under the Stark Law when they were executed, providers and medical businesses can also still face violations and penalties when they let those leases lapse, amend terms, fail to meet requirements of applicable Stark exceptions, or restructure a practice without revisiting existing contracts.

Understanding Stark: No Intent Means Mistakes Are Violations

Because there’s no intent requirement to Stark as there is for the Anti-Kickback Statute, federal agencies can take enforcement action against those who accidentally commit violations involving leases, and may impose elevated penalties upon providers who did so knowingly.

Inadvertent Stark violations are a common result of:

  • Forgetting to sign or renew a contract;
  • Poorly structured deals involving health care businesses and providers who bill Medicare for designated health services (DHS);
  • Alternative payment / compensation arrangements;
  • Technical violations / documentation errors;
  • Omissions of certain elements required by statutory exceptions / safe harbors;

While these things can coincide with various aspects of a medical practice, there’s a particular point of risk for providers: office space lease agreements.

How Physician Lease Agreements Can Violate Stark

With the Stark Law’s lack of an intent requirement, preventing potential violations is of the utmost importance – and it’s an objective that requires meticulous due diligence, careful consideration of applicable statutory exceptions, and no room for administrative oversight. These measures are of particular relevance when it comes to common lease-related violations, including:

  • Forgetting to sign lease agreements;
  • Short-term agreements with terms under 1 year;
  • Failures to renew lease agreements upon expiration;
  • Failures to specify intermittent, part-time, or periodic leasing arrangements (when terms are not for full-time occupancy);
  • Not setting rent in advance, in accordance to fair market value, and with no consideration of value or volume of referrals;
  • Not being commercially reasonable.

Health and medical law attorneys knowledgeable in Stark Law provisions, exceptions, and health care contracts can help address many of these issues upon the creation and negotiation of lease and space agreements. However, as CMS noted when it recently amended key related provision of the Stark Law, many providers failed to satisfy exception requirements solely because lease arrangements expired, were not renewed, and were continued on the same terms beyond the holdover period.

Expired Leases & Holdover Arrangements

In October 2015, CMS announced a Final Rule (effective 2016) to address holdovers in lease arrangements, which were previously restricted to no more than 6 months. The reasoning for such a restriction was to prevent frequent re-negotiation of lease terms so as to take value or volume of referrals into account.

Under the new rule, the holdover provision of the Rental of Office Space exception was amended to allow indefinite holdovers so long as the following stipulations are met:

  • Lease agreements which expired were initially set at a term of at least 1 year;
  • The original arrangement properly fit within the Lease of Space exception upon its expiration;
  • The holdover arrangement operates on the same terms / conditions as the previously expired agreement; and
  • The holdover arrangement also continues to meet the statutory safe harbor requirements.

CMS’ Final Rule should not be interpreted by providers as a free pass – just because a holdover arrangement operates on the same terms does not mean it is compliant under the Stark Law, even if the original was. What’s more, providers operating on expired lease agreements under the holdover provision that make any modification to terms of the arrangement effectively terminate the holdover period, and risk potential non-compliance with what’s considered a new agreement.

Additional issues / regulatory red flags to consider may include:

  • Lease agreements entered into prior to 2016;
  • Lease agreements that were not compliant in their original terms;
  • Rental rates that fall below fair market value during the holdover period;
  • Changes to a practice, relationship, or leasing terms since a lease was executed;
  • The need for self-disclosure if original agreements were not compliant;

At Hendershot Cowart P.C. our Health and Medical Law team counsels health care businesses and physicians on matters of regulatory compliance, and provides defense representation to mitigate potential blowback from pending enforcement actions. If you have questions about the Stark Law, lease agreements, or other health care regulations, call (713) 909-7323 or contact us online to speak with a lawyer. We serve Houston, the state of Texas, and beyond.

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