1. Stark Law and Real Estate Office Space Leases–
How to Structure a Lease or Sublease which Complies with State and Federal Prohibitions
Against Self Referral and Kickbacks.
Copyright 2011 Martin Merritt.
As a “Stark” lawyer, I have observed that while very few lawyers have ever heard of Stark Laws,
every physician I have ever met has not only heard of it, but is terrified of the fact they have no
idea how it works. Physicians often colloquially refer to the entire body of state and federal rules
as “Stark Law” and there is no harm in this practice, as long as you retain a knowledgeable
lawyer who is current on each applicable set of rules.
While there are endless sets of statutes, court opinions, regulations and administrative
rules, the reason behind Stark Law has to do with two simple phenomena unique to medical
practice: (1) It has always been unethical for physicians to pay referral fees. Stark Law didn’t
create this idea. The patient has always been thought unqualified to diagnose his own need for
medical services. When a referral is made, it is important that the referral be based solely upon
the needs of the patient, and not some scheme of payment for the referral of business. (2) In the
case of Medicare and Medicaid, Stark Laws prohibit certain referrals, and applies only to
physicians. The Anti-Kickback Statute criminalizes payment for referrals in the sale of products,
or services, or the payment of a kickback in cash or “in kind,” if the government will be paying
the bill. In the case of payments by Medicare or Medicaid, this is necessary because the patient
does not pay for the service, and therefore lacks the traditional free-market consideration of
“value” in making a purchase decision. The patient simply trust the referral is needed, and the
government pays the bill. The government is extremely diligent in policing referral transactions
for compliance of improper financial arrangements. What counts as a “financial relationship,” or
a “Kickback?” Just about anything that can show up on a balance sheet, or profit and loss
statement. Obviously, cash payments are prohibited, but also any arrangement, for example,
where one healthcare facility does not have to pay as much for something it needs– “I will trade
you (or sell) ‘x’ at a steep discount, if you will send me Medicare patients.”
Space rental, or office real estate lease transactions are the most common Stark Law issue
I encounter. In traditional real estate retail space rental transactions, it is common for the
landlord to ask for a percentage of the tenant’s sales receipts. In a medical setting, it is common
for the more successful practice to lease space to a less established or successful one– whether
that be a general hospital leasing to a physician group, or a physician leasing to a single therapist,
or other practitioner. It would make perfect sense for the landlord to have the reasonable
business hope that it can charge above-market rates for space, because the tenant will easily
make up the extra it must pay for the space in patient referrals. This makes perfect sense, and is
perfectly illegal. Where the landlord and tenant are healthcare providers who are in a position to
refer Medicare or Medicaid patients to each other, whether a hospital leases space to a doctor, a
doctor subleases a portion of his space to a therapist, or any combination of relationships, Stark
issues will arise. This is true since, i.e., the physicians will likely refer patients to the hospital for
in-patient services or other designated health services (“DHS”) such as diagnostic testing

2. services. The law is designed simply to prevent fee splitting, unnecessary referrals, or other
“sweetheart deals,” which are nothing more than thinly disguised kickbacks.
The Anti-kickback Statute is implicated in the foregoing arrangement and in any real
estate arrangement where there are referrals for healthcare services between a healthcare tenant
(i.e., a tenant who is, or is owned by, a provider of items or services payable by a federal
healthcare program) and a landlord who is a provider or is owned by a provider. These
relationships must be carefully analyzed in order to determine the impact of Healthcare Referral
Laws. Let’s take a closer look at each of the main sets of rules.
Stark Law regulates physician referrals for DHS (Designated Health Services) payable in whole
or in part by Medicare. Under Stark if the physician (or an immediate family member of the
physician) has a specified financial relationship with an entity, including a space rental
relationship, then the physician may not make referrals to the entity for DHS unless the
relationship qualifies for an exception under Stark.
The Anti-kickback Statute applies to any person and to any healthcare items or services
reimbursable by a federal healthcare program. The Antikickback Statute, an intent-based statute,
makes it a criminal offense to knowingly and willfully offer, pay, solicit or receive any
remuneration to induce or reward referrals of items or services reimbursable by a federal
healthcare program. Remuneration includes the transfer of anything of value, in cash or in kind,
directly or indirectly. The AKS contains an exception for real estate lease transactions.
The False Claims Act is a Civil War Era federal law, and therefore, one of the first federal laws
prohibiting certain civilian activities. It was enacted to prevent the presentation of false claims to
the government for payment. In order to qualify for participation in the Medicare program, a
health care practitioner must certify that he or she has complied with Stark Law, and the Anti-
Kickback Statute. If a claim is presented by a health care provider, but his office arrangement
violates Stark Law or the AKS, then each and every claim submitted to the government is in fact
a False Claim. The FCA contains a Qui Tam provision, which allows any person who is close to
the transaction and has first hand knowledge of it, but did not participate or profit in the fraud, to
file suit and receive a percentage of the recovery. It is also illegal to terminate a whistle blower in
retaliation.
So what are the rules by which real estate transaction in the health field are governed?
Stark Law, the AKS, and state statutes are usually very similar, as described below.
The Safe Harbor. Compensation Arrangement Exception – Rental of Office Space When a
physician or group practice either rents office space to or from a DHS entity, the arrangement
must comply with the Stark space rental exception in order for the physician or group practice to
make referrals to the DHS entity. Where a healthcare provider either rents office space to a
healthcare provider tenant or rents space from a healthcare provider landlord, the arrangement
must comply with the Anti-kickback Statute’s space rental safe harbor if the parties are in a
position to make referrals to one another or generate business for one another, which generally
they will be. The Requirements are as follows:

3. To qualify for the rental of office space exception to Stark or the space rental safe harbor
for the Anti- Kickback Statute, the lease arrangement must comply with the following
requirements:
1. The lease must be in writing, signed by the parties and specify all of the rental
space to be covered by the lease.
2. The lease term must be for at least one year. If the lease is terminated during
the term, with or without cause, the parties cannot enter into a new agreement
during the first year of the original term of the lease,
3. The rent charged must be consistent with fair market value for the property, be
set in advance, and not take into account the volume or the value of referrals or
other business generated between the lessor and lessee.
4. The space rented or leased cannot exceed that which is reasonable and
necessary for the legitimate business purposes of the lease or rental and is used
exclusively by the lessee when being used by the lessee (and is not shared with or
used by the lessor or any person or entity related to the lessor), except that the
lessee may make payments for the use of space consisting of common areas if the
payments do not exceed the lessee’s pro rata share of expenses for the space based
upon the ratio of the space used exclusively by the lessee to the total amount of
space (other than common areas) occupied by all persons using the common areas.
5. The lease would be commercially reasonable even if no referrals were made
between the parties.
6. A holdover month-to-month rental can be no longer than six months
immediately following the expiration of an agreement of at least one year
provided that the holdover rental is on the same terms and conditions as the
immediately preceding agreement.
A key component is "fair market value." Fair market value is defined as the value of the
rental property for general commercial purposes, but shall not be adjusted for any additional
value either the prospective lessee or lessor would attribute to the property as a result of its
proximity or convenience to sources of referrals or business otherwise generated for which
payment may be made in whole or in part under Medicare.
The fair market value of a particular transaction must to be determined on a case by case
basis looking at the facts and circumstances of each proposed deal. No exact number has been
explicitly recognized by the OIG, thus fair market value consists of a range rather than an exact
number. It is important for parties to document the basis for their decision on fair market value.
This means there should be some give-and-take negotiations over terms that do not include price.

4. Recommendations:
If you are a provider of Medicaid or Medicare Services, and you seek to lease or rent
space from another entity where patient referrals will be made, you need hire an experienced
Stark Lawyer to negotiate and document the negotiations of all material terms of the lease. You
must ensure that you have (1) strictly complied with the technical and defined safe harbor rules,
such as the length of term of the lease and (2) document all efforts to comply with the terms
which are not capable of being known with scientific certainty: fair market value, commercially
reasonable terms, no more than is necessary for the purpose of the legitimate business plans.