Physician Space Sharing & Stark Law Compliance: A Discussion with Mike Vetter, Partner at HMS Valuation Partners

Episode Date: November 6, 2024

In this episode of Stark Integrity, Mike Vetter, Partner at HMS Valuation Partners, joins Bob Wade (Captain Integrity) to discuss an increasingly common and strategically important arrangement in healthcare:

Physician space sharing—and how to do it in compliance with the Stark Law.

As healthcare organizations look for cost-effective ways to expand services and reach new communities, space-sharing arrangements offer significant opportunity—but they also introduce:

Meaningful compliance risk if not structured properly.

What Is Physician Space Sharing?

Physician space sharing allows:

• Healthcare entities
• Physician practices
• Hospitals or systems

To share office space, clinical areas, or equipment rather than building or acquiring new facilities.

This model can:

• Expand access to care
• Reduce capital expenditures
• Improve operational efficiency

The key takeaway:

Space sharing is a smart business strategy—but it must be done carefully.

Why Space Sharing Is Attractive

The episode highlights several benefits:

• Cost-effective expansion into new markets
• Ability to utilize underused space
• Increased flexibility in service delivery

For growing systems or underserved areas:

Space sharing can provide access without significant infrastructure investment.

However, these benefits come with an important caveat:

The arrangement must comply with Stark Law requirements.

The Stark Law Framework

At its core, the Stark Law:

• Prohibits physicians from referring patients
• For designated health services (DHS)
• To entities with which they have a financial relationship

Unless an exception applies

In a space-sharing arrangement:

The lease itself creates a financial relationship.

Therefore, the arrangement must fit squarely within an applicable exception, typically:

• Rental of office space
• Timeshare arrangements

Key Compliance Requirements

To meet Stark exceptions, space-sharing arrangements generally must:

• Be set out in a written agreement
• Be signed by the parties
• Have a term of at least one year
• Specify exactly what space is being used
• Be commercially reasonable
• Include compensation that is:
  • Set in advance
  • Consistent with fair market value (FMV)
  • Not tied to referrals

The takeaway:

Technical compliance details matter—and must all be satisfied.

Fair Market Value and Commercial Reasonableness

Two concepts repeatedly emphasized in the episode are:

Fair Market Value (FMV) and Commercial Reasonableness.

• FMV ensures that rent reflects market conditions—not referral potential
• Commercial reasonableness ensures the arrangement makes business sense even without referrals

These are often referred to as part of the “big three” Stark requirements:

• FMV
• Commercial reasonableness
• No volume or value of referrals

The key point:

All three must be satisfied—independently.

The “Hotel Room” Analogy

A memorable concept discussed in the episode is the “hotel room” example, which helps illustrate:

• Time-based space usage
• Allocation of shared resources
• Structuring access in a compliant manner

This analogy reinforces the importance of:

Clearly defining when and how space is used.

Common Pitfalls

The episode highlights several risks that frequently arise in space-sharing arrangements:

Informal or Unwritten Agreements

Handshake deals or loosely documented arrangements create immediate compliance exposure.

Incorrect Valuation

Charging above or below FMV may suggest improper intent.

Linking Rent to Referrals

Any connection between payment and patient volume violates Stark principles.

Undefined or Overlapping Use

Failure to clearly define space usage creates ambiguity and risk.

Short-Term or Flexible Arrangements

Arrangements that do not meet required term or structure may fail to qualify for an exception.

The takeaway:

Most space-sharing problems are preventable with proper structure and documentation.

Communication and Planning

A key theme in the discussion is:

Start with communication.

Successful arrangements require:

• Alignment between legal, compliance, and operations
• Clear documentation
• Ongoing oversight

Because:

Even well-intentioned arrangements can fail if not properly coordinated.

CMS Scrutiny and Oversight

Space-sharing arrangements are actively scrutinized by:

• CMS
• Auditors
• Enforcement agencies

Why?

Because they involve:

• Financial relationships
• Referral dynamics
• Potential for misuse

This reinforces:

These arrangements are not low-risk—they are high-visibility compliance issues.

Practical Compliance Considerations

Organizations considering space-sharing should:

• Use written, detailed agreements
• Obtain FMV support for rental rates
• Clearly define space, time, and usage
• Ensure arrangements meet a Stark exception
• Monitor compliance over time

Because:

Proper structure at the outset prevents significant risk later.

Key Takeaways

• Physician space sharing is a cost-effective strategy for expanding services
• The arrangement creates a financial relationship under Stark Law
• Compliance requires fitting within a specific Stark exception
• Written agreements, FMV, and commercial reasonableness are essential
• The “hotel room” concept helps illustrate compliant structuring
• Common pitfalls include poor documentation and improper valuation
• These arrangements are subject to regulatory scrutiny
• Strong planning and oversight reduce compliance risk

Final Thoughts

This episode highlights a practical reality in healthcare:

Operational strategies and compliance requirements are deeply intertwined.

Physician space sharing offers:

• Flexibility
• Efficiency
• Growth opportunities

But it also demands:

Precision, discipline, and compliance rigor.

Organizations that succeed in this area will:

• Plan carefully
• Document thoroughly
• Align business goals with regulatory requirements

Ultimately:

The difference between a compliant arrangement and a risky one is not the concept—it is the execution.

Because under Stark Law:

Even common-sense business arrangements must meet strict technical standards to withstand scrutiny.

Click here to listen to this Stark Integrity Podcast Episode:
https://podcasts.apple.com/us/podcast/physician-space-sharing-stark-law-compliance-a/id1588939373?i=1000675853474&l=fr-FR