Physician-Owned Medical Buildings: Have Your Leases Outgrown Stark Exceptions Under the New Rule?

A physician-owned medical building.

On January 19, 2021, Stark Law rulemaking saw its first significant update since 2015. The new Final Rule clarifies requirements for written lease agreements, changes the exclusive-use requirement, and updates fair market value exception requirements.

How Stark Law Applies to Physician-Owned Medical Buildings

Physicians often seek to mitigate the cost of running a health care practice by investing in commercial real estate. While the Stark Law does not prohibit this practice, it does establish rules for physicians renting medical office space and equipment to or from designated health service providers when the physician also refers patients to the company for services that are reimbursable by Medicare.

There are twelve types of items or services that are considered “designated health services” (DHS) including:

  • clinical laboratory
  • physical therapy
  • occupational therapy
  • outpatient speech-language pathology
  • radiology and imaging
  • radiation therapy
  • durable medical equipment and supplies
  • parenteral and enteral nutrients, equipment, and supplies
  • prosthetics, orthotics, and prosthetic devices and supplies
  • home health
  • outpatient prescription drugs
  • hospital services

If you are wondering why the Stark Law regulates physician owners, consider the financial relationship a physician owner may have with his or her tenant or lessee. For example, a physician may want to lease space to a clinical laboratory so that his or her patients will have immediate access to phlebotomy and testing services that are ancillary to the physician’s practice. Clinical laboratories might be interested in leasing the space because it provides the laboratory with access to patients from multiple physician practices including the landlord’s practice. Instead of choosing a tenant based on which laboratory provides the best services, however, the landlord might choose a tenant based on which laboratory is willing to pay the highest rent.

In the health care industry, it is generally illegal to consider patient referrals when establishing a contractual relationship for space, items, or services. The Stark Law specifically prohibits physicians from referring patients to DHS entities with which they have “financial relationships,” unless an exception applies.

Simply put, the parts of the Stark Law that apply to you are designed to keep economic relationships for space, items, or services separate from professional relationships where patient referrals are involved – without interfering with your ability to manage the cost of running your health care practice by renting space in commercial medical buildings.

For more information, visit our blog, “Check Your Lease: You Could Be in Violation of the Stark Law.”

The Importance of Written Lease Agreements

A physician cannot exchange referrals for office space, and a written lease documents the facts of your landlord-tenant relationship. If your signed written lease does not outline the following points, regulatory agencies may become suspicious:

  • The items, services, office space, or equipment included in the lease
  • The rental charges to be provided
  • The timeframe of the lease

Historically, leases had to last for at least one year, but the new Final Rule has enhanced flexibility. While extra flexibility is nice, it may also lead to more legal questions and more risk.

What Is the Exclusive-Use Requirement?

Adding to the flexibility for physician-owned office buildings and equipment is a clarification of the exclusive-use requirement to the rental of office space exception. The amended language makes it clear that multiple tenants may lease and share the same space from a physician so long as the office space is used to the exclusion of the physician-landlord. A physician may also lease the same space to multiple parties that may only need or want to rent space on a part-time basis.

Expansion of the Fair Market Value Compensation Exception

This exception was amended so that it may be used to protect lease arrangements. The main difference between this exception and the “rental of office space” exception is the requirement relating to the duration of the lease. Under this exception, the lease arrangement may be for any period and may be renewed any number of times so long as the compensation for the office space does not change. This means that the amount of space leased and the lease rate may not change. Additionally, the parties may not enter more than one arrangement during the course of a year.

Health Law Attorney Keith Lefkowitz explains: “This means that the parties cannot use this exception, for example, to enter a lease agreement for a term of two months (February and March) and then use another exception for the same space but with different terms in September.”

The use of the fair market value exception may not be combined with any other exception, except the “limited remuneration to a physician” exception, explained here.

What is the Limited Remuneration to a Physician Exception?

The Stark Law Final Rule created a new exception relating to a lease of office space or equipment: A DHS entity may pay a physician compensation for the use of premises or equipment if the compensation does not exceed an aggregate of $5,000 per calendar year and if all other elements of this exception are met. This limited remuneration exception may be used, for example, to protect arrangements for short periods of time (one or two months) while the parties negotiate a long-term lease that might require significant tenant improvements.

Am I Safe If Neither Party Bills Medicare?

It is a common misconception that carving Medicare referrals from an arrangement provides protection from prosecution. While the Stark Law applies to relationships involving Medicare reimbursement, the Department of Justice is increasingly using other laws to prosecute kickback relationships that involve reimbursement by private healthcare benefit programs. For example, the Travel Act prohibits the use of interstate facilities to promote or carry on an unlawful activity within any state of the United States. The term “unlawful activity” is defined in part as the act of bribery. At the state level, Texas has a commercial bribery law that prohibits a physician from accepting a benefit from another on agreement or understanding that the benefit will influence the physician’s treatment of his or her patients (e.g., to which laboratory his or her patients are referred).

How to Stay Compliant

Leasing a commercial medical building as a physician is not easy nor straightforward, and although the new changes make it easier for lessees to practice, they also make the Stark Law more complicated for lessors. If you want to supplement your practice with commercial real estate, speak to an attorney before you get started.

If you are already leasing medical space to other physicians and entities, now is the perfect time to review your legal documents and update your leases to reflect best practices. Hendershot Cowart P.C. can help. Our attorneys have more than 100 years of combined experience in health and medical law and regulatory compliance. We value relationships, have a strong record of results, and are ready to exceed your expectations and help you stay compliant with the Stark Law.

Get started today – call us at (713) 909-7323 or contact us online to schedule a consultation with our firm.

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