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General Healthcare

Stark Guidelines for Renting Equipment From a Physician

April 15, 2013

AMARILLO, TX – The Ethics in Patient Referrals Act, or Stark law, provides that “if a physician has a financial relationship with an entity” that provides certain designated health services (durable medical equipment), then the physician is prohibited from referring a Medicare or Medicaid patient to the entity.

The Stark law also prohibits an entity from presenting or causing to be presented a claim for payment related to the designated health services furnished under a prohibited referral. Let’s say that ABC Medical Equipment, Inc. (“ABC”) desires to rent DME (e.g., infusion pumps) from Dr. Jones, a referral source. This creates a financial relationship between ABC and Dr. Jones and the referral of patients by Dr. Jones to ABC triggers Stark.

To avoid a Stark violation, the equipment rental arrangement must meet one of the Stark exceptions. The relevant exception in this case is the Equipment Rental Exception, which is set forth at 42 CFR sec. 411.357 and states:

(b) Rental of equipment.  Payments made by a lessee to a lessor for the use of equipment under the following conditions:
  (1) A rental or lease agreement is set out in writing, is signed by the parties, and specifies the equipment it covers.
  (2) The equipment rented or leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease or rental and is 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.
  (3) The agreement provides for a term of rental or lease of at least 1 year. To meet this requirement, if the agreement is terminated during the term with or without cause, the parties may not enter into a new agreement during the first year of the original term of the agreement.
  (4) The rental charges over the term of the agreement are set in advance, are consistent with fair market value, and are not determined—
    (i) In a manner that takes into account the volume or value of any referrals or other business generated between the parties; or
    (ii) Using a formula based on—
        (A) A percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed on or business generated through the use of the equipment; or
        (B) Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred by the lessor to the lessee.
(5) The agreement would be commercially reasonable even if no referrals were made between the parties.
(6) A holdover month-to-month rental for up to 6 months immediately following the expiration of an agreement of at least 1 year that met the conditions of paragraphs (b)(1) through (b)(5) of this section satisfies the requirements of paragraph (b) of this section, provided that the holdover rental is on the same terms and conditions as the immediately preceding agreement.

“Commercially Reasonable” Analysis
Although the Stark equipment rental exception and the equipment rental safe harbor (to the Medicare anti-kickback statute) each requires equipment rental arrangements to be “commercially reasonable,” the Stark exception and safe harbor define this term somewhat differently.

Under the equipment rental safe harbor, the OIG defines a “commercially reasonable business purpose” as one “that must be reasonably calculated to further the business of the lessee or purchaser. In other words, the rental or the purchase must be of space, equipment, or services that the lessee or purchaser needs, intends to utilize, and does utilize in furtherance of its commercially reasonable business objectives.”

Assume that ABC will lease a reasonable number of infusion pumps from Dr. Jones based on the historical and forecasted patient demand for pumps at Dr. Jones’ office. Because ABC is in the business of supplying and maintaining pumps that are medically necessary for a patient’s care, the leased pumps will be utilized in the furtherance of ABC’s commercially reasonable business objectives in accordance with section 1001.952(c)(6) of the equipment rental safe harbor.

For purposes of the equipment rental exception to the Stark law, CMS has defined a “commercially reasonable” arrangement as one that “appears to be [a] sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.” In its 2004 Stark Phase II interim final rule, CMS attempted to clarify this definition by stating,

An arrangement will be considered “commercially reasonable” in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential [designated health services] referrals.

In evaluating whether the equipment rental arrangement is “commercially reasonable” under Stark, one must

analyze whether, absent potential patient referrals, the proposed arrangement would make commercial sense “if entered into by a reasonable entity of a similar type and size” as ABC “and a reasonable physician (or family member or group practice) of similar scope and specialty” as Dr. Jones.

Jeffrey S. Baird, JD, is Chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or