Friendly Arrangements Can Result in Federal Law Violations

Ericka L. Adler, JD, LL.M


April 07, 2022

Physicians often enter into friendly relationships with other providers to allow them to use space, equipment, or personnel in their offices. Perhaps it is a good referral source or someone to whom the physician may refer patients. Maybe the parties are thinking of combining practices down the road. It could also be a favor to another doctor who needs some additional space.

Whatever the reasoning, physicians must scrutinize every relationship for legal compliance.

There are many healthcare laws that apply to physicians. One of the key laws is known as the Anti-Kickback Statute (AKS). The AKS is a criminal statute that generally prohibits the exchange (or offer to exchange) of anything of value, in an effort to induce (or reward) the referral of business reimbursable by federal healthcare programs.

The AKS essentially puts into question every relationship between parties where a referral of a federal patient, or other generation of federal business, may take place. This is true whether or not payment is actually involved. What this means is that every business relationship between healthcare providers must be scrutinized to be sure it is compliant, no matter how large or small the interaction might be.

For example, let's consider Dr Jim and Dr Jane, old medical school friends. Dr Jane has a successful cardiology practice but is considering expanding into the suburbs of the city where her office is located. She is not sure whether she wants to pursue this second office location, so she talks with her friend Dr Jim, who suggests she use one of his offices within his internal medicine practice space.

Dr Jim thinks it will be convenient to have Dr Jane on site and plans to refer patients and promote her presence in the office so she'll stay long term. Dr Jane is excited by this opportunity, which will introduce her to an existing patient base. The parties agree that Dr Jane will use reception, equipment located in the office, and all common areas. With a handshake, the parties seal the deal.

The above scenario is not unusual. These relationships are rarely documented and rent may or may not be exchanged between the parties. From a regulatory perspective, there are several things wrong with the above relationship.

The most obvious issue is that Dr Jim is providing rent and support free of charge. Does this matter since he is the one most likely to make the referrals to Dr Jane? The answer is yes. Direction of remuneration, intent of the parties, and number of referrals is not determinative. The fact is that the parties open themselves and all of their business arrangements to scrutiny if they do not structure this arrangement to comply with AKS.

The above arrangement could easily be structured to comply with the AKS, which has safe harbors that protect certain arrangements, such as the lease of space and equipment (both of which are involved in the above scenario).

This would generally require that:

  1. The lease arrangement is set out in writing and signed by the parties.

  2. The lease covers all of the equipment/space leased between the parties for the term of the lease and specifies the equipment covered by the lease.

  3. If the lease is intended to provide the lessee with use of the equipment/space for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, their precise length, and the exact rent for such interval.

  4. The term of the lease is for not less than 1 year.

  5. The aggregate rental charge is set in advance, is consistent with fair market value (FMV) in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid, or all other federal healthcare programs.

  6. The aggregate rental does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.

Drs Jim and Jane should document their relationship and determine FMV for the items and services being provided (including any use of personnel, supplies, etc.). FMV should reflect the value of the space or equipment for general commercial purposes, not taking into account the additional value that may be attributed to the space or equipment as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made by a federal program.

An audit of all relationships where referrals and/or consideration change hands should be made annually by every healthcare business that interacts with the federal government. Although many providers who fail to document these types of relationships or structure them properly are never discovered, the consequences can be significant when revealed.

Most important, for practices looking to sell their practice to a third party, improperly structured leases and similar arrangements can become an issue or deal-killer during the due diligence process and/or require self-disclosure to the Office of the Inspector General.

Similar arrangements into which physician practices tend to enter without questioning legality include: deals with labs that provide free phlebotomists, use of support staff of referral sources, paying commission fees for marketers or marketing services, management agreements with companies that oversee prescription drug/allergy/DME programs (that are improperly structured), and similar arrangements. Each of the above types of deals can be properly structured, but most often physician practices simply do not know that there is an issue and rely on the vendor's reassurance that the relationship is compliant.

The AKS is just one law that can impact arrangements between referring physicians. Physicians should also make sure that their relationships comply with the Stark law and applicable state laws as well. It always is ideal for practices to consult an experienced healthcare lawyer to review new and existing arrangements for compliance.

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About Ericka Adler
Ericka L. Adler, JD, LL.M, is a shareholder and health law practice group manager for Chicago-based law firm Roetzel. She has nearly 25 years representing individual providers, physician groups, and other healthcare entities, focusing on regulatory and transactional healthcare law. Adler is also skilled in compliance counseling, handling mergers, sales and acquisitions of healthcare entities, and has deep experience with Stark, Anti-Kickback Statute, and other challenges facing healthcare professionals.

She also works with providers in HIPAA, fraud and abuse, billing audits, government investigations, and contract disputes.

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