🚨 The Anti-Kickback and Fair Market Value Pitfall: Why Free Space is a Felony Risk
Following the Letter of Intent (LOI), the next major area of risk for a growing healthcare practice isn't financial—it’s regulatory. The complexity of the Anti-Kickback Statute (AKS) can turn a simple act of partnership into a massive compliance exposure.
This post will guide you through the dangerous illusion of "convenience" and the necessity of using Fair Market Value (FMV) to protect your business and yourself.
Disclaimer: The content of this post is for informational and educational purposes only and does not constitute legal advice. Retained CRE is not a law firm, and readers must consult with qualified legal counsel specializing in real estate and healthcare regulatory compliance for advice specific to their situation.
🛑 The Dangerous Illusion of "Convenience": Why Intent Doesn't Matter
The most common misunderstanding among growing healthcare founders is the role of intent. Founders are typically not trying to commit fraud; they are trying to be good partners and make things easier for their patients and colleagues.
The conversation usually goes like this: "Of course, use our conference room for your sales meeting. We have it available, it's convenient for everyone, and it strengthens the partnership."
This seemingly common-sense, good-faith effort is precisely where the compliance risk explodes.
The key AKS standard is the "One Purpose" Test: If one purpose of the arrangement is to induce referrals, the statute is violated. The law does not care that 99% of your intent was "convenience" and "partnership"; if the remaining 1% was to encourage patient referrals, the arrangement is illegal.
This lack of connection between a simple action (lending a room) and a serious felony penalty is why founders must pause the moment they consider letting a referral source use their space.
💰 The "Free Space" Trap: Remuneration is Anything of Value
Free space is one of the most common forms of illegal remuneration in healthcare real estate. The value of the space (even if used for only one hour) is considered remuneration in kind.
This occurs when a related entity—such as a referring physician, an affiliated insurance company, or a downstream partner—uses your clinic space for any purpose (sales events, training, meetings) without paying Fair Market Value (FMV) rent.
Common Risk Scenarios
The Insurance Trap: Allowing an affiliated insurance company to use your clinic conference room monthly for free sales or enrollment seminars.
The Sweetheart Sublease: Subleasing a single exam room to a specialist who is a guaranteed referral source, but charging rent that is below the true market rate for comparable space.
The Shared Cost Trap: Allowing an affiliated marketing or management group free use of your patient waiting room for non-patient staff training on weekends.
In all these cases, the free or discounted use of the space is remuneration exchanged for the benefit of patient referrals.
🛡️ The FMV Solution: Safe Harbor Compliance
To avoid AKS prosecution, the financial relationship must fit within one of the Safe Harbor Regulations. For real estate, the relevant standard is the Rental of Space Safe Harbor.
To comply, the transaction must be: in writing, for a defined term, set in advance, and, most critically, conducted at Fair Market Value (FMV).
Defining Fair Market Value (FMV) and Avoiding the Pitfall
ELI5 FMV: FMV is the rental amount that a lessee would pay a lessor in an arm's-length transaction, consistent with general market value. It must be not greatly above or below the cost of comparable office space.
The most common mistake founders make is using their own Base Rent as the FMV rate for a sublease with a related party. This often results in a non-compliant rate because it fails to account for:
Total Occupancy Cost: True FMV includes a pro-rata share of all operating expenses (taxes, utilities, CAM), not just the base rental rate.
Short-Term/Partial Use Premium: The rate must reflect the market value for limited or part-time use, which is typically higher per unit of time than a long-term full-service lease.
Your Guardrail: To prove compliance, you must obtain an objective, third-party valuation (an independent FMV appraisal) for any license or sublease agreement with a referral source. Do not rely on internal calculations.
Practical Application: License Agreements
For short-term or single-use events, you need a License Agreement instead of a full lease. Crucially, the rate charged for this license must still be based on the FMV of the space on a per-use basis. A written agreement and an FMV payment are mandatory, even for an afternoon meeting.
⚖️ The Cost Objection: Personal Liability vs. Compliance Fees
When the regulatory risk is raised, founders often object to the business cost of compliance: "We have to pay legal fees for reviewing a license agreement, and we have to go through the process of collecting the FMV from the partner."
However, the cost of non-compliance is vastly higher than the legal fees for compliance review.
Non-Compliance Penalty (AKS)
Personal Criminal Liability: Up to 10 years in jail.
Financial Fines: Up to $100,000 criminal fine per violation.
Professional Exclusion: Mandatory exclusion from participating in Federal healthcare programs (a "financial death sentence").
Compliance Cost (FMV Safe Harbor)
Legal Fees: Flat fee for compliance review and license agreement drafting.
FMV Appraisal: Cost for an independent, third-party FMV valuation.
Partner Payment: Fee collected from the partner (the FMV rent) which offsets the cost of the appraisal/legal review.
You are balancing the reward of gaining referrals against the risk of personal and professional ruin. Any time you find yourself thinking, "This is low risk of getting caught," your compliance alarm should be sounding.📞 Your Next Call: Compliance Over Convenience
Any time a potential referral source asks to use your space for any non-patient-care activity, your immediate action must be to say, "We need to structure this under a compliance safe harbor, which requires me to speak with regulatory counsel first."
Do not let convenience today become a devastating liability tomorrow.
