Stark Law & Certificate of Need: Healthcare Real Estate's Regulatory Litigation Risk
Two distinct federal and state regulatory regimes drive litigation risk unique to medical office and healthcare real estate: the Stark Law's ban on physician self-referral, which turns an ordinary office or equipment lease into a False Claims Act exposure if the economics aren't right — and state Certificate-of-Need laws, which can block or delay a facility from being built at all.
This guide goes deep on two specific regulatory frameworks behind healthcare real estate litigation: the Stark Law (42 U.S.C. § 1395nn) and its real-estate-specific exceptions, and state Certificate-of-Need (CON) regimes. For the broader landscape of medical office building litigation trends — healthcare REIT legislation, health-system bankruptcy/sale-leaseback fallout, and standard MOB lease disputes — see the Medical Office Building Litigation & Emerging Issues page; this guide does not repeat that content.
This is general legal information for orientation purposes only — not legal advice for any specific arrangement or facility. Stark Law compliance requires a fact-specific fair-market-value and commercial-reasonableness analysis; CON law and litigation status changes through active state legislation. Confirm current, binding authority before relying on anything below.
Every enforcement action, court ruling, and current-status figure below is sourced and dated — where a figure could only be confirmed to a lower confidence level, this guide says so rather than presenting it as settled.
Why an ordinary physician office lease can become a False Claims Act problem
The Stark Law (42 U.S.C. § 1395nn) bars a physician from referring Medicare/Medicaid patients to an entity for certain "designated health services" where the physician (or an immediate family member) has a financial relationship with that entity — unless the arrangement fits a specific regulatory exception. Unlike the Anti-Kickback Statute, Stark is a strict-liability statute: intent to induce referrals doesn't need to be proven, only that the arrangement falls outside an exception. For healthcare real estate, the two exceptions that matter most are the office space rental exception (42 CFR § 411.357(a)) and the equipment rental exception (§ 411.357(b)).
Office space rental exception — § 411.357(a)
- Lease in writing, signed by both parties, specifying the exact premises covered
- Term of at least one year (the parties can't terminate and re-enter a new arrangement for the same space within year one)
- Space rented is no more than reasonable and necessary for a legitimate business purpose, and used exclusively by the tenant (apart from permissible shared/common-area use)
- Rent set in advance for the full term, consistent with fair market value
- Rent is not determined using a formula based on the volume or value of referrals, and not a percentage-of-revenue or per-unit-of-service formula
- The arrangement would be commercially reasonable even if no referrals ever passed between the parties
Equipment rental exception — § 411.357(b)
Parallel requirements to the office-space exception: a written, signed agreement specifying the equipment; a term of at least one year; exclusive use by the lessee; charges set in advance at fair market value; no referral-based pricing formula; and an arrangement that would be commercially reasonable absent any referrals at all. In practice this exception is what's tested whenever a physician-owned entity leases imaging, surgical, or lab equipment back to a hospital or health system.
Source: 42 CFR § 411.357(a)–(b) — Cornell Law School's Legal Information Institute mirror of the Code of Federal Regulations, law.cornell.edu/cfr/text/42/411.357 ↗
"Fair market value" and "commercially reasonable," as CMS actually defines them
Fair market value
Defined at 42 CFR § 411.351 as the value in an arm's-length transaction, consistent with the general market value of the rental property for general commercial purposes — without taking into account its intended use. For office space specifically, the regulation goes further: value cannot be adjusted upward to reflect the additional value a physician-lessor or physician-lessee would attribute to the proximity or convenience of a location that is also a source of patient referrals. In plain terms: you can't pay above-market rent to a referring physician's practice just because having them nearby is valuable to the hospital's referral pipeline.
Commercially reasonable
Also defined at § 411.351: the arrangement must further a legitimate business purpose of the parties and be sensible given their size, type, scope, and specialty. Notably, CMS's own regulatory text confirms an arrangement can be commercially reasonable even if it doesn't turn a profit for either side — the test is whether the deal makes business sense on its own terms, not whether Stark analysis alone would justify entering it.
Source: 42 CFR § 411.351 (definitions), added by CMS's 2020 final rule (85 Fed. Reg. 77492, effective Jan. 19, 2021) — the first time these two terms were formally defined by regulation. Cross-referenced against Cornell's CFR mirror and law-firm summaries of the rule: Stevens & Lee ↗, ArentFox Schiff ↗
Which states still gate healthcare facility development, and it keeps changing
A CON requires state regulatory approval before a healthcare facility can be built, expanded, or add certain major equipment or beds — a real, direct constraint on where and whether medical office, surgical-center, imaging, and hospital real estate gets developed. As of an April 29, 2025 update, 35 states plus Washington, D.C. still operate CON programs; the rest have repealed CON in whole or in significant part, led by New Hampshire (2016) along with California, Colorado, Idaho, Kansas, New Mexico, North Dakota, Pennsylvania, South Dakota, Texas, Utah, and Wyoming. A handful of others (Arizona, Louisiana, Minnesota, Wisconsin) have no formal CON program but retain a narrower facility-approval process of their own.
2026 has been an unusually active year for CON repeal and reform
- Tennessee — SB 1369, enacted April 16, 2026, phases out CON for most acute-care hospitals by 2030 and ends it for freestanding EDs and cardiac catheterization facilities by 2028.
- Delaware — HB 17, effective April 21, 2026, repeals the "certificate of public review" requirement for major medical equipment acquisitions.
- Maine — LD 1890, signed March 31, 2026, exempts most ambulatory surgical centers from CON review and raises the capital-expenditure threshold from $3M to $7.5M.
- Kentucky — HB 407, signed March 5, 2026, newly allows appeal of adverse CON decisions to the state court of appeals.
- Georgia — HB 1339, signed April 19, 2024, effective July 1, 2024, removed the $10M capital threshold trigger and exempted rural psychiatric/substance-abuse programs from CON review.
Sources: National Conference of State Legislatures, "Certificate of Need State Laws" (updated Apr. 29, 2025) — ncsl.org ↗; HFMA, "States overhaul certificate-of-need laws" (May 5, 2026) — hfma.org ↗
Real, current disputes over who gets to build
Beyond the constitutional CON challenge already covered on the Medical Office Buildings page, these are distinct, current fights over specific real estate development.
Pinnacle Health Servs. of N.C. v. NCDHHS
The North Carolina Supreme Court ruled October 17, 2025 in favor of Pinnacle Health Services over Duke University Health System and DHHS in a multi-year fight over a CON for a new MRI scanner in Wake County. The court held that a competitor who loses a CON award has, by definition, suffered the "substantial prejudice" needed to bring a challenge — a significant new precedent for standing in CON appeals generally.
Why it matters: Lowers the bar for a losing CON applicant to get judicial review, likely increasing the volume of CON litigation over future facility and equipment awards.
AdventHealth Hendersonville v. Mission Health
The NC Court of Appeals unanimously rejected AdventHealth's challenge to a CON awarded to Mission Health/HCA for a freestanding emergency department in Candler, NC on March 4, 2026 — finding regulators erred by skipping a required public hearing, but that the error didn't rise to "substantial prejudice." The NC Supreme Court granted a stay on April 14, 2026 and is weighing discretionary review.
Why it matters: Directly tests how much a competitor must show to overturn a CON grant for a rival's ED — the same standing question the Pinnacle ruling just reshaped.
AdventHealth Weaverville — a hospital stuck as a dirt field
AdventHealth bought a 25-acre, $7.5 million Weaverville, NC site to build a hospital addressing a state-identified need for 222 additional acute-care beds. Mission Health/HCA fought the CON through a three-year appeals process; the NC Supreme Court denied Mission's petition for review on December 16, 2025, clearing the way for construction to finally begin — years after the state itself found the beds were needed.
Why it matters: A concrete illustration of CON's real cost to real estate timelines — years of holding costs on undeveloped land before a shovel goes in the ground.
Southern Orthopaedic Surgery Center, Montgomery, AL
Alabama's CON Review Board approved a new 6-OR ambulatory surgery center 4-1 on January 15/16, 2025, over the opposition of four incumbent hospitals (Jackson Hospital & Clinic, Jackson Surgery Center, Baptist Hospital, and Baptist's Montgomery Surgical Center) citing their own financial-sustainability concerns. Approval came with conditions: services limited to orthopedics only, and ownership shifted entirely to the founding physicians, eliminating a private-equity minority stake.
Why it matters: Shows a CON board actively reshaping a real estate project's ownership and scope as the price of approval, not just granting or denying it outright.
Vanderbilt's Murfreesboro hospital, TN
Vanderbilt received a CON in December 2021 for a $144.3 million, 42-bed hospital on roughly 79 acres in Rutherford County. Competing hospitals persuaded an administrative judge to block the project in 2023, arguing no new capacity was needed. In January 2026, the Davidson County Chancery Court reversed that block and restored the original approval as supported by substantial evidence, finally clearing the way for construction after roughly four years of proceedings.
Why it matters: A CON grant is not the end of the story — an incumbent's administrative challenge can freeze a fully-approved, fully-financed project for years.
FTC weighs in on CON repeal, Tennessee
In an April 2, 2026 staff letter, the FTC's Office of Policy Planning backed Tennessee's proposed CON repeal for acute-care hospitals as consistent with the agency's long-standing competition advocacy — while separately warning that letting the state's Ballad Health Certificate of Public Advantage lapse before CON repeal takes effect would leave a competition gap in its wake.
Why it matters: Federal antitrust policy is now an active voice in state CON repeal debates, not a neutral bystander.
- For any lease or equipment arrangement with a referring physician: confirm it's in writing, signed, at least a one-year term, priced at a documented fair-market-value figure set in advance — and get an independent FMV opinion rather than relying on internal negotiation alone.
- Check that rent or lease pricing was never adjusted, even informally, to reflect the value of a location's proximity to referral-generating physicians — the exact defect at issue in the Trinity Hospital settlement above.
- Audit for non-cash remuneration flowing through real property or facility space — the Fresno "HQ2" case shows this scrutiny extends well beyond formal leases.
- Before committing capital to a facility in a CON state, confirm current program status and threshold levels directly with the state health planning agency — 2026 has seen frequent, fast-moving threshold and exemption changes in Tennessee, Delaware, Maine, Kentucky, and others.
- Budget realistically for CON appeal timelines when underwriting a healthcare development — the Weaverville and Murfreesboro disputes above each ran three to four years from initial CON grant to construction clearance.
Facing an issue like this?
If your portfolio has Stark Law or Certificate-of-Need exposure, it's worth a conversation before it becomes a bigger problem.
View Regulatory matters → · Medical Office Building trends → · All guides →