Health Care Laws for the Real Estate Lawyer

If referrals for DHS, including clinical laboratory and radiology services, are occurring between the hospital and any of the physicians in the practice, then Stark requires the following:

• There must be a written agreement with a term of at least one year, signed by the parties, specifying the premises covered;
• The leased premises must not exceed what is reasonable and necessary for the legitimate business purposes of the lease (except that the lease may include appropriately prorated payments for use of common areas);
• The leased premises must be used exclusively by the lessee;
• This is not to preclude the lessee from subletting the premises, but is only to say that the space cannot be shared with the lessor, or any person or entity related to the lessor (including real estate holding companies or subsidiaries) when in use by the lessee or any subsequent sublessee. For example, if an entity providing DHS were to lease examination rooms from a physician practice, the practice would not be able to use the rooms while they are being leased (or subleased) by the entity. 69 Fed. Reg. 16086 (Mar. 26, 2004).
• Rent must be set in advance and be consistent with fair market value; fair market value cannot be adjusted to reflect any additional value a prospective lessee or lessor may attribute to the proximity or convenience of the parties when the arrangement provides a source of referrals;
• Rent must not take into account the volume or value of referrals or other business (e.g., certain private pay health care business) generated between the parties;
• Rent must not be: 1) based on a percentage of revenue attributable to the services performed or business generated in the premises; or 2) based on per-unit of service charges (e.g., $500 per ultrasound performed by the physicians in the space); and
• The lease must be “commercially reasonable” even if no referrals were being made between the lessee and the lessor.

See 42 CFR 411.357(a).

'Per-Click' Rental Charges

Note, in particular, the prohibition on per-unit or “per-click” rental charges, which was included in a set of rules promulgated by the Centers for Medicare and Medicaid Services (“CMS”) in August, 2008. 73 Fed. Reg. 48434 (Aug. 19, 2008); see also notice of correction at 73 Fed. Re. 57541-42 (Oct. 3, 2008). In a typical per-click arrangement, rental payments are based on a set amount paid per-procedure or service (“clicks”), with no limit on the number of such “clicks.” The new rule prohibits the use of this methodology to the extent that rental charges reflect services provided to patients referred by the lessor to the lessee. 73 Fed. Reg. 57541. The prohibition on per-click payments applies regardless of whether the physician (or physician organization) is: 1) the lessor and refers patients to the DHS entity as lessee; or 2) the lessee and pays the DHS entity lessor a per-click payment. Although the general effective date for this most recent set of regulations was Oct. 1, 2008, CMS is delaying the effective date of the amendments to the lease exceptions until Oct. 1, 2009, to afford parties adequate time to restructure existing arrangements.

In order to comply with these new regulations, many attorneys representing health care clients have turned to block leases (e.g., flat-fee rental charges based on a set block of time, like $1,000 per month for use of the premises) as alternatives to per-click arrangements. CMS cautions, however, that while properly structured block leases may be permissible, parties should avoid making blocks of time available “on demand” to the lessee, or crafting leases for very small blocks of time (e.g., four hours once a week), because such arrangements imitate per-click leases and may indicate that the lessee is leasing space it does not need or cannot use in order to compensate the lessor for referrals. 73 Fed. Reg. 48719 (Aug. 19, 2008).

The Anti-Kickback Statute

There is substantial interplay between the civil Stark law and the criminal Anti-Kickback Statute (42 U.S.C. 1320a-7b(b)), which generally prohibits a person from willfully or knowingly offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce referrals of business covered by a federal health care program. Running afoul of one law could indicate a violation of the other. In 1991, with subsequent updates, the Department of Health and Human Services published safe harbor regulations, which set forth certain arrangements and practices that are deemed to fall outside the purview of the Anti-Kickback Statute because of a low risk of fraud and abuse.

Specifically, there is a safe harbor available to parties who may be exchanging referrals and desire to enter into a leasing arrangement for office space. 42 CFR ' 1001.952(b). This safe harbor provides protection from application of the Anti-Kickback Statute, such that “remuneration” does not include any payment made by a lessee to a lessor for the use of premises, so long as certain standards are met. Id. Those standards closely track the elements of the Stark law exception for space leasing, with a handful of variances in wording that result in slightly different requirements for satisfaction of the safe harbor. While failure to satisfy the provisions of a safe harbor does not make a particular arrangement per se illegal, attorneys should advise clients to comply with the standards whenever, and to the extent, possible.

Penalties for Violation

It is important to note that Stark is a strict liability statute and any violation thereof may be punishable by hefty monetary penalties and exclusion from participation in federal health care programs. See 42 U.S.C. ' 1395nn(g). Additionally, it is a felony to violate the intent-based Anti-Kickback Statute, punishable by exclusion from federal health care programs and a maximum fine of $25,000 and/or imprisonment for up to five years. In the event of a violation, the law also provides for civil monetary penalties of up to $50,000 per act, and treble the amount of remuneration involved.

State Law

In addition to the aforementioned federal laws, attorneys should be aware that many states have their own physician self-referral and fraud and abuse laws which also carry very real penalties for noncompliance.

Changes to IDTF Performance Standards

Another instance in which real estate attorneys preparing leases for health care clients should exercise caution is when an Independent Diagnostic Testing Facility (“IDTF”) is involved. Some Medicare suppliers that perform diagnostic tests (other than clinical laboratory or pathology tests) are required to enroll as an IDTF. With the exception of hospital-based and mobile IDTFs, a fixed-base IDTF, such as a free-standing imaging center, is not permitted to: 1) share a practice location with another Medicare-enrolled individual or organization; 2) lease or sublease its operations or its practice location to another Medicare-enrolled individual or organization; or 3) share diagnostic testing equipment used in the initial diagnostic test with another Medicare-enrolled individual or organization. 42 CFR 410.33(g)(15). Failure to comply with the IDTF regulations results in revocation of Medicare billing privileges.

CMS has clarified that these regulations are not meant to prohibit the sharing of common hallways, parking or common areas, but that an IDTF and another Medicare-enrolled individual or organization (most commonly a physician practice) cannot be co-located within the same practice location. While the sharing of only non-clinical space and staff (e.g., reception areas and receptionists) appears to be permissible, the sharing of medical/technical staff, treatment rooms and diagnostic equipment is prohibited. 72 Fed. Reg. 66292 (Nov. 27, 2007). For example, a multi-specialty clinic and an IDTF could not enroll or remain enrolled in Medicare using the same suite number within the same office building. 72 Fed. Reg. 66290 (Nov. 27, 2007). However, the clinic and IDTF could share a common entryway and reception area so long as each operates out of separate clinical space, with separate medical staff, exam rooms and equipment. In drafting any shared space leases or licenses, it is important to acknowledge and emphasize the independent aspects of the operations, and close attention should be paid to details such as maintaining separate signage, suite numbers and letterhead.

Conclusion

This article only scratches the surface of certain health care laws that may affect the types and terms of leasing arrangements among health care providers and organizations. However, the purpose of this article is to remind real estate attorneys to ask questions about the potential financial relationship between the landlord and tenant and the types of health care organizations that will be involved in the leasing arrangement in order to flush out any potential regulatory issues, and to encourage real estate attorneys to become familiar with these regulations and to consult with a health care attorney when in doubt.

Sarah E. Rainwater is an associate in the Corporate Practice Group at Lewis, Rice & Fingersh, L.C. in St. Louis. She may be contacted at [email protected]. Phone: 314-444-7896.

No one would deny that we are in the midst of challenging and uncertain economic times. In a market where businesses are downsizing and taking other measures to ensure self-preservation, the health care industry stands out as one of the more stable sectors of the economy. With the possible exception of elective procedures, demand for medical services generally does not ebb and flow in sync with fluctuating stock prices and financial projections, and hospitals and medical office buildings are still being built and leased at steady rates. However, attorneys drafting office space leases for health care clients must be aware of certain health care laws that may have a significant impact on the terms and structure of the leasing arrangement. This article takes a brief look at a few of the more commonly applicable laws: the federal Stark law, the federal Anti-Kickback Statute and regulatory performance standards mandating certain space-sharing restrictions for Independent Diagnostic Testing Facilities.

Stark Law

One of the most important health care laws with which real estate attorneys representing a health care client must become familiar is Stark, which regulates financial relationships between physicians and health care entities. Generally, the Stark law (42 U.S.C. ' 1395nn) and the regulations promulgated thereunder (42 CFR ' 411.351 et. seq.) provide that, unless an exception applies, a physician may not refer a Medicare patient for certain “designated health services” (“DHS”) to an entity with which the physician (or a member of the physician's immediate family) has a financial relationship. In the commercial lease context, this means that a real estate attorney must understand the potential financial relationship that may exist between the landlord and the tenant entering into the lease agreement. An example of such a financial relationship would be where a physician practice client is entering into a space lease for offices in a hospital complex.

If referrals for DHS, including clinical laboratory and radiology services, are occurring between the hospital and any of the physicians in the practice, then Stark requires the following:

• There must be a written agreement with a term of at least one year, signed by the parties, specifying the premises covered;
• The leased premises must not exceed what is reasonable and necessary for the legitimate business purposes of the lease (except that the lease may include appropriately prorated payments for use of common areas);
• The leased premises must be used exclusively by the lessee;
• This is not to preclude the lessee from subletting the premises, but is only to say that the space cannot be shared with the lessor, or any person or entity related to the lessor (including real estate holding companies or subsidiaries) when in use by the lessee or any subsequent sublessee. For example, if an entity providing DHS were to lease examination rooms from a physician practice, the practice would not be able to use the rooms while they are being leased (or subleased) by the entity. 69 Fed. Reg. 16086 (Mar. 26, 2004).
• Rent must be set in advance and be consistent with fair market value; fair market value cannot be adjusted to reflect any additional value a prospective lessee or lessor may attribute to the proximity or convenience of the parties when the arrangement provides a source of referrals;
• Rent must not take into account the volume or value of referrals or other business (e.g., certain private pay health care business) generated between the parties;
• Rent must not be: 1) based on a percentage of revenue attributable to the services performed or business generated in the premises; or 2) based on per-unit of service charges (e.g., $500 per ultrasound performed by the physicians in the space); and
• The lease must be “commercially reasonable” even if no referrals were being made between the lessee and the lessor.

See 42 CFR 411.357(a).

'Per-Click' Rental Charges

Note, in particular, the prohibition on per-unit or “per-click” rental charges, which was included in a set of rules promulgated by the Centers for Medicare and Medicaid Services (“CMS”) in August, 2008. 73 Fed. Reg. 48434 (Aug. 19, 2008); see also notice of correction at 73 Fed. Re. 57541-42 (Oct. 3, 2008). In a typical per-click arrangement, rental payments are based on a set amount paid per-procedure or service (“clicks”), with no limit on the number of such “clicks.” The new rule prohibits the use of this methodology to the extent that rental charges reflect services provided to patients referred by the lessor to the lessee. 73 Fed. Reg. 57541. The prohibition on per-click payments applies regardless of whether the physician (or physician organization) is: 1) the lessor and refers patients to the DHS entity as lessee; or 2) the lessee and pays the DHS entity lessor a per-click payment. Although the general effective date for this most recent set of regulations was Oct. 1, 2008, CMS is delaying the effective date of the amendments to the lease exceptions until Oct. 1, 2009, to afford parties adequate time to restructure existing arrangements.

In order to comply with these new regulations, many attorneys representing health care clients have turned to block leases (e.g., flat-fee rental charges based on a set block of time, like $1,000 per month for use of the premises) as alternatives to per-click arrangements. CMS cautions, however, that while properly structured block leases may be permissible, parties should avoid making blocks of time available “on demand” to the lessee, or crafting leases for very small blocks of time (e.g., four hours once a week), because such arrangements imitate per-click leases and may indicate that the lessee is leasing space it does not need or cannot use in order to compensate the lessor for referrals. 73 Fed. Reg. 48719 (Aug. 19, 2008).

The Anti-Kickback Statute

There is substantial interplay between the civil Stark law and the criminal Anti-Kickback Statute (42 U.S.C. 1320a-7b(b)), which generally prohibits a person from willfully or knowingly offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce referrals of business covered by a federal health care program. Running afoul of one law could indicate a violation of the other. In 1991, with subsequent updates, the Department of Health and Human Services published safe harbor regulations, which set forth certain arrangements and practices that are deemed to fall outside the purview of the Anti-Kickback Statute because of a low risk of fraud and abuse.

Specifically, there is a safe harbor available to parties who may be exchanging referrals and desire to enter into a leasing arrangement for office space. 42 CFR ' 1001.952(b). This safe harbor provides protection from application of the Anti-Kickback Statute, such that “remuneration” does not include any payment made by a lessee to a lessor for the use of premises, so long as certain standards are met. Id. Those standards closely track the elements of the Stark law exception for space leasing, with a handful of variances in wording that result in slightly different requirements for satisfaction of the safe harbor. While failure to satisfy the provisions of a safe harbor does not make a particular arrangement per se illegal, attorneys should advise clients to comply with the standards whenever, and to the extent, possible.

Penalties for Violation

It is important to note that Stark is a strict liability statute and any violation thereof may be punishable by hefty monetary penalties and exclusion from participation in federal health care programs. See 42 U.S.C. ' 1395nn(g). Additionally, it is a felony to violate the intent-based Anti-Kickback Statute, punishable by exclusion from federal health care programs and a maximum fine of $25,000 and/or imprisonment for up to five years. In the event of a violation, the law also provides for civil monetary penalties of up to $50,000 per act, and treble the amount of remuneration involved.

State Law

In addition to the aforementioned federal laws, attorneys should be aware that many states have their own physician self-referral and fraud and abuse laws which also carry very real penalties for noncompliance.

Changes to IDTF Performance Standards

Another instance in which real estate attorneys preparing leases for health care clients should exercise caution is when an Independent Diagnostic Testing Facility (“IDTF”) is involved. Some Medicare suppliers that perform diagnostic tests (other than clinical laboratory or pathology tests) are required to enroll as an IDTF. With the exception of hospital-based and mobile IDTFs, a fixed-base IDTF, such as a free-standing imaging center, is not permitted to: 1) share a practice location with another Medicare-enrolled individual or organization; 2) lease or sublease its operations or its practice location to another Medicare-enrolled individual or organization; or 3) share diagnostic testing equipment used in the initial diagnostic test with another Medicare-enrolled individual or organization. 42 CFR 410.33(g)(15). Failure to comply with the IDTF regulations results in revocation of Medicare billing privileges.

CMS has clarified that these regulations are not meant to prohibit the sharing of common hallways, parking or common areas, but that an IDTF and another Medicare-enrolled individual or organization (most commonly a physician practice) cannot be co-located within the same practice location. While the sharing of only non-clinical space and staff (e.g., reception areas and receptionists) appears to be permissible, the sharing of medical/technical staff, treatment rooms and diagnostic equipment is prohibited. 72 Fed. Reg. 66292 (Nov. 27, 2007). For example, a multi-specialty clinic and an IDTF could not enroll or remain enrolled in Medicare using the same suite number within the same office building. 72 Fed. Reg. 66290 (Nov. 27, 2007). However, the clinic and IDTF could share a common entryway and reception area so long as each operates out of separate clinical space, with separate medical staff, exam rooms and equipment. In drafting any shared space leases or licenses, it is important to acknowledge and emphasize the independent aspects of the operations, and close attention should be paid to details such as maintaining separate signage, suite numbers and letterhead.

Conclusion

This article only scratches the surface of certain health care laws that may affect the types and terms of leasing arrangements among health care providers and organizations. However, the purpose of this article is to remind real estate attorneys to ask questions about the potential financial relationship between the landlord and tenant and the types of health care organizations that will be involved in the leasing arrangement in order to flush out any potential regulatory issues, and to encourage real estate attorneys to become familiar with these regulations and to consult with a health care attorney when in doubt.

Sarah E. Rainwater is an associate in the Corporate Practice Group at Lewis, Rice & Fingersh, L.C. in St. Louis. She may be contacted at [email protected]. Phone: 314-444-7896.