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Equipment Rental Lease Exception

Many of the requirements applicable to rental of office space arrangements also apply to arrangements for equipment rental.  Lease arrangements may exist when either the physician or the entity is lessor or lessee (i.e., a physician leases equipment to a provider of designated health services, or the designated health services provider leases equipment to an individual physician). This exception under 42 CFR 411.357(b) would also apply when a solo-practice physician establishes such a relationship through his/her practice or wholly owned legal entity, or where a physician stands in the shoes of his/her physician organization for purposes of the lease arrangement.

A compensation arrangement involving equipment rental must comply with the requirements set forth below:
  • The rental or lease agreement is in writing, signed by the parties and specifies the equipment it covers;
  • The equipment rented or leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease or rental, is used exclusively by the lessee and is not shared with or used by the lessor or any person or entity related to the lessor;
  • The agreement is for a term of at least one year. As with the rental of office space exception above, this requirement will be met if the agreement is terminated during the term, with or without cause, as long as the parties do not enter into a new agreement during the first year of the original term of the agreement;
  • The rental charges over the term of the agreement are set in advance, are consistent with fair market value, and are not determined:
    - in a manner that takes into account the volume or value of any referrals or other business generated between the parties; or using a formula based on a percentage of the revenue raised, earned, billed, collected, or
    - otherwise attributable to the services performed on or business generated by the use of the equipment; or per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties.
  • The agreement would be commercially reasonable even if no referrals were made between the parties; and
  • A holdover month-to-month rental for up to six months immediately following an agreement with a term of at least one year is allowed, provided that it meets the conditions of the rental equipment exception and the holder of the rental is on the same terms and conditions of the immediately preceding agreement providing for the rental of the equipment.
Additional information on modifying compensation during the term of an agreement.

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