Leasing arrangements have become more and more commonplace in recent years. They are beneficial to those who are not utilizing their space to its fullest capacity and those needing additional space – often on a less than full-time basis. As such, the arrangements provide an additional source of revenue to the lessor and extra space (and potentially equipment) to the lessee.
Complicating these arrangements are concerns pertaining to the Stark Law (Stark) and Anti-Kickback Statutes (AKS). Violating either Stark or AKS, even unintentionally, can be problematic. As a result, it is beneficial to have a Fair Market Value (FMV) analysis prepared in order to guard against problems at a later date. Stark also relies upon the concept of General Market Value (GMV) in developing FMV. In the context of equipment or office space rental, GMV is defined as “the price that rental property would bring at the time the parties enter into the rental arrangement as the result of bona fide bargaining between a well-informed lessor and lessee that are not otherwise in a position to generate business for each other.”
In addition to Stark, there is the concept of commercial reasonableness, which states, “the arrangement must further a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope and specialty.” So, it is beneficial to be cognizant of the requirements in place as defined by FMV, GMV and commercial reasonableness.
Leasing arrangements can vary greatly. Simplistically, they may include office space solely, whereas, at the other end of the spectrum, they may consist of any number of things such as equipment, supplies, and other goods or services. In short, there are endless possibilities for leasing arrangements.
Pursuant to the most recent Stark Law (Section 411.357), the rental of office space and equipment may meet the exception to the referral prohibition – meaning the arrangement would not constitute a financial relationship if the following requirements were met:
- The lease arrangement is set forth in writing that specifies the premises covered.
- The duration of the arrangement is at least one year.
- The space rented or leased is reasonable and necessary for the intended business purpose and is intended to be used exclusively by the lessee. An exception is common areas, which are dealt with separately. Similarly, equipment charges must be reasonable and necessary and used exclusively by the lessee.
- The rental charges are set in advance and are consistent with Fair Market Value.
- The rental charges are not based on:
- A percentage of revenue raised, earned, billed, collected or otherwise attributable to the services performed or business generated within the office space.
- Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred by the lessor to the lessee.
- The lease arrangement is commercially reasonable even if no referrals were made between the lessor and the lessee.
As noted in item #4 above, the determination of FMV is a key component of meeting any exception to the referral prohibition. It is important to engage someone to consider the various components of the lease agreement, such as appraisals of real estate and/or equipment, square footage to be used, the expenses related to the property and/or equipment used, and an allowance for a profit. It is also beneficial to engage legal counsel to ensure that documents are properly drafted and that any additional considerations, such as changes in insurance coverage, are also addressed.
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For more information on this topic, please contact a member of Withum’s Healthcare Services team.
