August 2, 2018

QUESTION:        I was just reviewing a contract to draft a second amendment and noticed that the original contract has the hospital as a party but the first amendment has the hospital’s physician group as a party.  What should I do?

ANSWER:            This doesn’t happen that often, but it does happen enough.  The good news is that it looks like you were watching the details when drafting the second amendment.

In any event, confirm which entity is to be the party in the contract.  It may be that the person who drafted the first amendment inserted the wrong party (or, conversely, the person who drafted the original contract had the wrong party).  Or, it may be that the contract was assigned by the hospital to the physician group, but you would not know that because the assignment was not included in the package of documents you were given to draft the second amendment.

The correct party is important for compliance reasons – for example, if the contract is supposed to be with an entity that qualifies as a “group practice” under Stark, but is with the hospital, and incentive bonuses include the group’s in-office ancillary services then the contract would violate Stark.

Also important is the issue of liability.  The hospital may set up a physician corporation, or limited liability company, to shield the hospital’s assets.  If the contract is with the hospital instead of that separate entity, the hospital’s assets are at risk.

Some other details to check are to make sure the entity on the first page is the entity listed in the signature block on the last page.  Again, having a different legal entity in the signature block does not happen that often, but it does happen and making sure the entities are the same can save much heartache.

Finally, make sure the employment contract is signed by both parties.  An unsigned employment contract could spell trouble from a Stark perspective.  For example, although the Stark employment exception does not require a written contract, if an employer wants to take advantage of certain things, such as directing referrals, the contract must be in writing and signed by the physician.

So, make sure to dot those “i”s and cross those “t”s when drafting or reviewing contracts.

September 14, 2017

QUESTION:        We just discovered that several leases between the hospital and physicians who are active members of our medical staff expired several years ago without being renewed in writing.  We understand that the Stark Law requires a written lease.  Do we have any alternative other than a self-disclosure?

ANSWER:           Yes.  On November 16, 2015, CMS provided some much needed relief from technical violations of the Stark Law such as the one that you have described.

The first thing that you must determine is that a lack of a writing is the only problem that you have.  Therefore, you need to document that each lease complied with the other requirements of the Stark rental of office space exception, especially that at all times the rent that was paid by each physician constituted fair market value, commercially reasonable rent that did not take into account or vary based on any referrals or other business generated by the physicians.

If so, then you should be aware that in the November 16, 2015 Federal Register, CMS stated that it has received numerous submissions similar to your question that related to potential violations caused by the writing requirement, including the “…failure to renew an arrangement that expired on its own terms after at least 1 year.”  80 FR 71314.

CMS then clarified the writing requirement, provided policy guidance, and also provided illustrative examples of the writing requirement, including “checks issued for items, services or rent” (80 FR 71316).  (Emphasis added.)  In all likelihood, each month each physician paid the physician’s rent with a check that was in writing and signed by each physician, and each month the hospital endorsed and deposited those checks.  If the rent was deposited electronically, then the Uniform Electronic Transaction Act will give an electronic transfer of funds the same force and effect as a written check.

Those rent checks/electronic transfers of rent will be found to constitute “contemporaneous documents (that is, documents that are contemporaneous with the arrangement) [that] would permit a reasonable person to verify compliance with the applicable exception at the time that a referral is made” (80 FR 71315) and, as such, satisfied the writing requirement set forth in 42 C.F.R. §411.357(a).

Since this is a policy clarification and not a new regulation, the fact that the leases expired prior to the date of the CMS guidance does not prohibit you from applying this guidance to your situation, even if those expired leases predate that guidance.

If the leases expired after January 1, 2016, then you can take advantage of a change to the Stark Rental of Office Space exception that went into effect on January 1, 2016, which provides that the lease will continue to comply with the Stark exception so long as the lease continues to satisfy the other requirements of the exception.  (See 42 C.F.R. §411.357(a)(7).