Above-Market Lease, Free Nurses, and an EHR Subsidy for a Referring Oncology Group
The CEO of a 210-bed community hospital wants to grow oncology volume. The hospital proposes to lease 4,000 square feet in a medical office building owned by an independent 12-physician oncology group at $42 per square foot; the hospital's own market estimate, prepared without an appraisal, is $26–$29. The hospital also offers to place two hospital-employed infusion nurses in the group's office at no charge and to pay half of the group's new EHR license fees. The draft lease is written, runs 10 years, auto-renews, contains no fair-market-value reset, and recites that the hospital 'anticipates a mutually beneficial increase in referrals.' The group delivers in-office chemotherapy and refers surgical and radiation cases to the hospital. Nothing has been signed, but the CEO wants signatures in three weeks.
1. Analyze the proposed arrangement under Stark and under the Anti-Kickback Statute separately. Which specific elements fail, and why can the two statutes reach different conclusions on the same facts?
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Stark (physician self-referral). Stark is strict liability: intent is irrelevant, and the only question is whether a financial relationship exists, whether the physician refers Medicare-payable designated health services to the entity, and whether every element of an exception is met. Here the lease is a rental-of-office-space relationship and the free nurses and EHR subsidy are remuneration. Outpatient hospital services - including hospital-based chemotherapy and the surgical and radiation referrals - are designated health services. The space-lease exception requires a signed writing, a term of at least one year, exclusive use of the space, commercially reasonable rent, rent set in advance at fair market value, and rent that does not vary with the volume or value of referrals. Above-market rent fails the fair-market-value element outright, and the referrals recital is evidence on the volume-or-value element.
AKS (anti-kickback). The AKS is intent-based and uses a 'one purpose' test: if any purpose of the remuneration is to induce referrals of federal program business, it is prohibited regardless of fair market value, unless a safe harbor fits precisely. The space-rental safe harbor fails for the same fair-market-value reason; the hospital-employed nurses placed free in the group's office are remuneration to the group with no fitting safe harbor (the employee safe harbor does not cover services donated to an independent entity); and the EHR safe harbor and Stark EHR exception both sunset at the end of 2021 and provide no protection today.
Why they diverge: Stark condemns the arrangement even if the parties acted in complete good faith, while the AKS requires proof of improper intent - but the referrals recital and the above-market rent would be powerful evidence of that intent.
2. The CEO wants signatures in three weeks. What do you do between now and then, and what do you say to the board?
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Stop the clock. Tell the CEO and general counsel in writing that you cannot support execution until the arrangement is restructured, and that the current draft creates repayment, civil monetary penalty, and exclusion exposure. Document the advice - a contemporaneous objection is itself valuable evidence of an effective program.
Fix the valuation first. Engage an independent appraiser with no referral relationship to the group or the hospital, and instruct the appraiser to opine on rent for the specific space, term, and use. Do not rely on internal estimates. The final rent must be at or below fair market value and must not be tied to referral volume.
Restructure the terms. Reduce the term to one year with renewal at re-set fair market value and a 90-day termination right; delete the referrals recital and any auto-renewal; confirm the space is commercially reasonable and actually needed.
Unbundle the sweeteners. Either the group pays fair market value for the nurses under a written personal services agreement, or the staffing is eliminated. Drop the EHR subsidy entirely; there is no current safe harbor or exception for donated health information technology.
Tell the board in risk terms, not legal terms: the proposed deal, if signed as drafted, converts a growth initiative into a potential false claims and kickback matter, and the delay costs three to six weeks.
3. Assume the lease was instead signed 26 months ago at $42 per square foot and four quarterly payments have been made. What is your remediation path, and what is the hardest judgment call in it?
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Quantify first. Pull every lease payment, the nurses' salary and benefit cost, and any EHR payments, and calculate the differential between rent paid and defensible fair market value. That number, not a narrative, drives the disclosure decision.
Assess the overpayment question. For Medicare claims tainted by a Stark violation, there is an overpayment subject to the 60-day rule. The 60-day clock begins when the organization has credible information of a potential overpayment and completes a timely, good-faith investigation; that investigation should be scoped and documented with dates.
Choose the channel. Options include refunding through the Medicare Administrative Contractor, the CMS Self-Referral Disclosure Protocol for Stark-only conduct (which permits reduced resolution amounts), and the OIG Self-Disclosure Protocol where kickback or false claims exposure is present. The considerations are whether the conduct is Stark-only or also AKS, the dollar magnitude, whether there is evidence of intent, and whether a relator is likely to surface it first.
The hardest judgment call is whether the referral recital in the signed lease makes this an intent case rather than a technical Stark case. If counsel concludes it does, OIG self-disclosure with a credible corrective action plan is generally the better risk position than a quiet refund - but it converts a financial problem into a multi-year government relationship, which is a decision for the board, not the compliance officer alone. Either way, the lease must be renegotiated to fair market value in the interim.