At one point or another, physicians may be approached by entities who offer to rent space in the physician’s office to do diagnostic testing, such as vascular or neurological testing. These leases are attractive as ways to easily enhance practice revenues. However, dangers lurk in these seemingly simple transactions. At Parsons Behle & Latimer, our attorneys have seen multiple doctors investigated by the Department of Justice (DOJ) for seemingly simple transactions. The DOJ is concerned that such space rentals induce a stream of referrals between the physician to the diagnostic testing entity.
In February 2000, the Office of Inspector General (OIG) issued a Special Fraud Alert focusing on the renting of space in physicians’ offices by persons or entities that provide healthcare items or services to patients that are referred by their physician-landlords. The Special Fraud Alert was to inform physicians about potentially illegal practices arising from such rental arrangements. Specifically, the Special Fraud Alert detailed potential violations of the Anti-Kickback Statute (AKS).[1]
In brief, the AKS prohibits paying or receiving “remuneration” to induce referrals of services payable by federal healthcare programs, such as Medicare and Medicaid. Remuneration, in the context of the AKS, means anything of value, including but not limited to free, reduced or excessive rent. There are, however, certain safe harbors that protect payments and business practices that might otherwise implicate the AKS, including safe harbors relating to the renting of office space.
Under Federal law, to satisfy the space rental safe harbor, a rental agreement must: (1) be in writing, signed by all parties, and for a term of more than one year; (2) specify the space rented and when such space is to be occupied; and (3) state the rental amount in advance at fair market value, not linking the volume or value of referrals a provider renting the space might make to the physician-landlord. Exact compliance with the space rental safe harbor is required for physicians to be protected from penalties.
Today, nearly three decades after the OIG issued the 2000 Special Fraud Alert, potentially illegal rental arrangements between physician-landlords and providers of federally payable items or services continue to result in significant penalties for violators. For example, in 2024, the United States Attorney for the Southern District of New York announced a $2.5 million False Claims Act (FCA) settlement with a diagnostic testing company relating to sham rental agreements. In that case, the diagnostic testing company, which was in the business of providing on-site mobile diagnostic testing services, entered into rental arrangements with more than 100 providers who, in turn, referred thousands of patients to the diagnostic testing company for diagnostic testing services that were later reimbursed by federal healthcare payors.
Through its investigation, the government investigators discovered that the diagnostic testing facility had not entered into written rental agreements with some of the providers. And, in rental agreements that did exist, the agreements often misrepresented key terms like the size of the space rented or the number of days that the space would be rented. The investigation also disclosed that the diagnostic testing company had specifically inquired about the volume of patients the providers anticipated referring for diagnostic testing services when entering into rental agreements, clearly suggesting that referrals were indeed a factor in the lease terms. For the rental agreements at issue, the anticipated referral rates were used to negotiate rental amounts, and those rental amounts, in most cases, exceeded fair market value for the diagnostic testing facility’s limited use of the rented space.
The case discussed above checked all the boxes for an AKS violation: (1) lack of a written lease; (2) leases with insufficient specificity as to the space rented; (3) connecting lease amounts to referrals; and (4) “sweetheart” lease rates that were not fair market value.
The above example is an extreme and obvious violation of the AKS. Even cases involving less egregious conduct may result in significant civil, criminal and administrative penalties for violators, including, but not limited to
· Imprisonment
· Significant per claim damages
· Treble damages
· Exclusion from federal healthcare programs
Physician-landlords and providers of items or services subject to reimbursement by federal healthcare payors should exercise caution when entering into rental agreements with each other.
The discussion above applies not only to space rentals, but also to rentals of equipment. In either situation, physicians must be conscious of the AKS restrictions in such arrangements.
Parsons’ attorneys are qualified to assist in a wide range of healthcare issues, including compliance with the AKS as it pertains to the rental arrangements discussed above. Because the space rental safe harbor requires strict compliance, legal counsel is advised to ensure compliance with the AKS.
[1] The OIG’s 2000 Special Fraud Alert also noted that rental arrangements may implicate the Stark Law, 42 U.S.C. § 1395nn. For purposes of brevity, this Article addresses only potential violations of the AKS.
