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Stark Law Fair Market Value Compensation Exception Expanded to Cover Office Space and Equipment Leases and Clarifies Writing Requirements

In its first significant Stark Law rulemaking since 2015, the Centers for Medicare and Medicaid Services (CMS) recently issued a new final rule (Final Rule) intending to provide physicians and designated health services (DHS) entities with additional flexibility in complying with the law’s stringent requirements.

*This is the seventh article in a series analyzing recent updates to the Stark Law and Anti-Kickback Statute and their effects on health care providers. To request a copy of the entire series, click here.

Importantly, the Final Rule provides physicians and DHS entities with more flexibility and clarity regarding the fair market value (FMV) compensation exception, including by extending the scope of the exception to include office space and equipment leases. This update highlights major changes to the FMV compensation exception and provides an overview of the updated requirements.

Enhanced Flexibility for Office Space and Equipment Leases

The Final Rule removes the original FMV compensation exception’s exclusion of office rental space and clarifies that the exception applies to both office space and equipment leases. Significantly, this not only offers entities another option for covering arrangements involving office space and equipment rentals but unlike the office space and equipment rental exceptions at 42 CFR Section 411.357(a) and (b) (which require that the office space and equipment be used exclusively by the lessor, subject to specified exceptions), the FMV compensation exception still does not have an exclusive use requirement. The FMV compensation exception also does not require a one-year term, offering even greater flexibility for shorter-term arrangements. This option may be particularly beneficial to providers in rural areas, where a shorter-term lease could meet community needs, such as relocating a physician to meet facility demands. Laboratories temporarily leasing space from physicians for specimen collections while a permanent space is constructed or renovated may also find the expanded exception helpful. 

Notably, the FMV compensation exception is the only regulatory exception where CMS maintained in the Final Rule the mandate that the arrangement not violate the anti-kickback statute because, as CMS explained, it is a crucial safeguard against patient and program abuse. The explicit prohibition against violating the anti-kickback statute substitutes for certain statutory exception requirements that were omitted from this regulatory exception, including the exclusive use requirement in the case of renting office space and equipment.

Clarified Writing Requirements

Another significant change to the FMV compensation exception is CMS making the writing requirements more explicit. Although the substantive writing requirements did not themselves change, they were modified to clarify the requirement. Under the Final Rule, the signed writing required by the exception must specify:

  • The items, services, office space, or equipment covered by the arrangement;
  • The compensation to be provided; and
  • The timeframe.

These requirements are consistent with the basic requirements for other exceptions that require signed, written agreements.

Updated Fair Market Value Compensation Exception Requirements (42 CFR Section 411.357(l))

DHS entities and physicians may use the updated FMV compensation exception to protect arrangements, including the payment of compensation for items or services or the leasing of office space or equipment, if the following requirements are met:

  • Writing: The arrangement must be memorialized in a signed writing meeting the requirements described above.
  • Time Frame: The arrangement may be for any time period and may contain a termination clause. The arrangement may be renewed without limit as long as the terms of the arrangement, the compensation, and the items, services, office space, or equipment covered remain unchanged. During the course of one year, the parties may only enter into one arrangement for the same items, services, office space, or equipment (unless the arrangement meets the conditions of paragraph (z), regarding limited remuneration to a physician).
  • Compensation: The compensation provided under the arrangement must be set in advance, be consistent with fair market value, and must not take into account the referring physician’s volume or value of referrals or other business generated. If the compensation is for renting office space or equipment, it may not be based on either (i) a percentage of the revenue attributed to the services or business performed in the office space or using the equipment, or (ii) service rental charges per unit, to the extent such charges reflect services rendered to patients referred by the lessor to the lessee.
  • Commercial Reasonableness: The arrangement must be commercially reasonable, even if there were no referrals made between the parties.
  • Compliance with Other Laws: The arrangement must not violate the anti-kickback statute. Also, the services provided under the arrangement must not involve counseling or promoting a business arrangement, or other illegal activity.
  • Remuneration Conditioned on Directed Referrals: If the arrangement involves remuneration to a physician or group of physicians and is conditioned on referrals to a specific provider, practitioner, or supplier, it must meet the requirements of Section 411.354(d)(4), regarding directed referrals.

The updated FMV compensation exception became effective on January 19, 2021. DHS entities should review the changes and reassess their arrangements with physicians that rely on the FMV compensation exception to ensure the arrangements remain compliant. DHS entities also should consider whether they can benefit from the rule’s new efficiencies related to office space and equipment leases, particularly with respect to short-term arrangements.

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