In a previous post, we analyzed the new Timeshare Arrangement exception to the Stark law that CMS proposed and went into effect on January 1, 2016. Here we give an example of how the new timeshare arrangement exception works as it relates to rental of office space.
Client’s Block Lease
A client of the firm, referred to herein as “Client,” leases space in a medical office building owned by its affiliated company, referred to herein as “Client Holdings.” An unrelated group medical practice, referred to herein as “Practice,” leases space in the same office building. In 2013, Client entered into a Medical Equipment Leasing Agreement with Practice providing that Client will lease “Diagnostic Testing Office Space” from Client Holdings in the space that was leased by Practice during certain blocks of time each week, to be used primarily for diagnostic testing purposes. Client simultaneously leased an exclusive right to use Practice’s high tech imaging equipment located in the Diagnostic Testing Office Space during the same blocks of time each week. This arrangement originally qualified for both the “rental of office space” exception to the Stark law, as well as the “rental of equipment” exception. See 42 CFR 411.357(a) and (b).
Given that the Medical Equipment Leasing Agreement confers to Client an exclusive right to use the office space and equipment during specified periods of time, we analyzed this lease under the new Timeshare Arrangement exception.
Analysis of Client’s Arrangement
We determined that Client’s Medical Equipment Leasing Agreement does not meet the Timeshare Arrangement exception to the Stark law. First and foremost, the arrangement is not primarily for patient evaluation and management; the arrangement is explicitly for the purpose of providing Designated Health Services. Additionally, the equipment covered by the arrangement is not “incidental” to patient evaluation and management, but is the primary purpose of the arrangement.
However, the Medical Equipment Leasing Agreement continues to qualify for the rental of office space and equipment exceptions to the Stark law. At first blush, CMS’s comments suggest that there is a difference between a “lease” and a “timeshare arrangement”: “a lease…giv[es] the lessee an exclusive ‘right against the world’ (including right against the lessor)…a ‘timeshare arrangement’…confers a privilege to use (during specific periods of time) the premises…” CMS-1631-FC at 1146. However, the exception for rental of office space states that the space leased must be “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).” 42 C.F.R. §411.357(a)(3). This identical language is used in the exception for rental of equipment. The language, “used exclusively by the lessee when being used by the lessee” suggests that the Agreement meets this standard because Client has the exclusive right to use the space and equipment during specific times.
Accordingly, we concluded that, although the Medical Equipment Leasing Agreement does not meet the Timeshare Arrangement exception to the Stark law, it continues to meet the rental of office and equipment exceptions to the Stark law.
The new Timeshare Arrangement exception to the Stark law should be used in situations where a physician or physician group is leasing space from a hospital or physician group, primarily for patient evaluation and management, and not for designated health services, among other requirements.