Beware of Real Estate Deals with Referral Sources
June 2013—Imaging providers contemplating a real estate transaction with potential referral sources must scrutinize the relationship in order to comply with the Federal Anti-Kickback Statute (AKS) and the Federal Stark Law (and state analogues of the same). If the contemplated agreement is structured without regard to healthcare laws, real estate transactions, such as a lease of an office or building, can lead to significant monetary penalties and possible criminal sanctions. Fortunately, there are exceptions and safe harbors to the statutes that imaging providers may employ to comply with the law. Even so, satisfying the requirements necessary to meet the exceptions/safe harbors can be difficult and require imaging providers to carefully consider all aspects of the deal.
The Physician Self-Referral Law, otherwise known as the Stark Law, prohibits a physician from making a referral for certain Medicare Designated Health Services (DHS) (including imaging services) to an entity with which the physician (or an immediate family member) has a financial relationship. Violations of the Stark Law may lead to significant civil penalties as well as potential liability under the Federal Civil False Claims Act through governmental and whistleblower law suits.
Leases of office space with potential referral sources create a financial relationship under the Stark Law. However, there are narrow exceptions that providers may use to structure real estate agreements so as to comply with the Stark Law. Specifically, the space rental exception to the Stark Law requires that leases for space must satisfy the following elements:
- The lease must be in writing, signed by the party, and specify the premises or equipment covered;
- The term must be for a minimum of at least one year;
- The leased premises must be reasonable and necessary for the business purpose of the tenant;
- The rental rate charged to the tenant must be based on Fair Market Value (FMV) and set in advance;
- [Note: Determining FMV is one of the most complex provisions to satisfy for leases under the Stark Law due to numerous real estate nuances, such as square footage calculations, additional services provided, and other considerations that need to be included]
- Holdovers are permitted on a month to month basis up to 6 months under the same terms as the original lease; and
- The lease must be commercially reasonable even in the absence of referrals between the parties to the lease.
In addition to the requirements above, imaging providers should be especially cautious in structuring periodic or shared space arrangements. The Stark Law requires that the lessor must have exclusive use of the leased or rented space and that any shared common space must be paid for by the lessor on a pro rata basis. Because of the complexity of healthcare leasing agreements, other Stark Law exceptions may need to be considered to protect the entirety of the deal, including exceptions for the rental of equipment as well as personal services agreements.
A periodic lease may be permissible, but the periods of time contemplated by the lease must be blocks of at least four hours, and the block schedule must be set before consummating the lease.
Leasing and rental agreements may also implicate the AKS. The AKS prohibits anyone from offering, paying, soliciting, or receiving remuneration to induce or in exchange for a referral of a person or the purchase of a good or service that is payable by a federal healthcare program. Unlike the Stark Law, the AKS requires that the parties have intent to seek the referral or remuneration. While the need to demonstrate the parties’ intent makes an AKS violation more difficult to prove, the AKS is a criminal law where violations can carry the potential for prison sentences, as well as significant civil penalties.
The AKS includes a number of safe harbors, including a safe harbor for the rental of space. Like the Stark Law’s space and equipment exceptions, there are a number of elements that must be satisfied in order for a lease or rental agreement to meet the safe harbor’s protection. These requirements include:
- The Lease must be written and signed.
- The agreement must cover and specify all of the premises covered by the lease.
- The term of the lease is no less than 1 year.
- The aggregate rental charge is set in advance, consistent with FMV, and is determined in a manner that does not take into account the volume or value of referrals.
- The space leased does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the lease.
As with the discussion of Stark Law above, other exceptions may be applicable and desirable depending on what services or other items are included in the lease.
Important Leasing Considerations
When structuring a leasing agreement, it is important that all aspects of the transaction are considered in order to avoid an inadvertent violation of either the Stark Law or AKS. Under or over measuring square footage can create Stark Law violations due to a party paying more or less than FMV. Also, few leases solely contemplate the square foot described in the agreement, but they include other items and services that must be considered such as trash removal, janitorial services, extra storage space, etc. Because these related services and items create value for the parties to a lease agreement, they must be considered by the parties and memorialized in the lease or in another agreement to avoid the violations discussed above. Furthermore, once the agreement has been entered, both parties must ensure that they continue to monitor the relationship to make sure that additional items, services, or discounts are not unintentionally provided to either party.
Finally, it is important to note that different provider types may be subject to additional requirements. For example, and especially pertinent to many imaging providers, independent diagnostic testing facilities/IDTFs are subject to space sharing restrictions.
Any imaging provider entering a real estate deal with a potential referral source should have the relationships and agreements reviewed by a knowledgeable healthcare attorney to ensure that the transaction does not subject the provider to significant financial and legal liability.
To illustrate that this is not purely theoretical and that even minor or inadvertent violations of these laws can result in significant liability, recent notable enforcement actions involving leases and space rentals include:
- A medical center in Georgia agreed to pay $50,000 to settle allegations that it violated Stark Law and AKS by providing a physician the free use of hospital space.
- Diagnostic testing facilities in Maryland paid more than $1 million to settle alleged violations of the Stark Law and AKS that, in part, included improper leases with doctors.
- A hospital in Massachusetts agreed to pay $36 million in order to settle Stark Law and AKS violations that, in part, involved leases to physicians and physician groups that were free or less than FMV.
Adrienne Dresevic, Esq. graduated Magna Cum Laude from Wayne State University Law School. Practicing healthcare law, she concentrates in Stark and fraud/abuse, representing various diagnostic imaging providers, eg, IDTFs, mobile leasing entities, and radiology and multi-specialty group practices.
Clinton Mikel, Esq. graduated from the University of Michigan Law School. Practicing healthcare law, he concentrates in Stark, fraud/abuse, telehealth/telemedicine, compliance, and the corporate and financial aspects of healthcare practice.
The authors are members of The Health Law Partners, P.C. and may be reached at (248) 996-8510 or (212) 734-0128, or at www.thehlp.com.