BLOG: Compliance issues when leasing your real estate to referral sources
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Key takeaways:
- Relationships between health care providers and referral sources can be complex.
- Understand the federal Anti-Kickback Statute and the Stark Law to avoid regulatory scrutiny and noncompliance.
The relationship between health care providers and referral sources can present complex legal challenges.
An example is when business arrangements involve financial transactions between providers and other entities where one may be a referral source to another.
care provider who is a referral source for you. This type of arrangement, while not uncommon, can present significant legal concerns under both the federal Anti-Kickback Statute (AKS) and the Physician Self-Referral Statute (Stark Law) if not properly structured and documented. This blog entry touches on legal and compliance issues related to these leasing arrangements and the importance of having a written lease agreement and ensuring that the rent is at fair market value.
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You may remember from our earlier posts that the AKS is a federal criminal statute that prohibits the knowing and willful payment of “remuneration” to induce or reward patient referrals or the generation of business involving any item or service payable by federal health care programs (eg, drugs, supplies or health care services for Medicare or Medicaid patients). The Stark Law is a federal civil statute that prohibits physicians from referring patients to receive “designated health services” payable by Medicare or Medicaid from entities with which the physician or an immediate family member has a financial relationship unless an exception applies. Both the AKS and the Stark Law are intended, in part, to ensure that the medical judgment of a provider is not compromised by improper financial inducements.
Under the AKS, the leasing of real estate between referral sources can be scrutinized if there is a perceived intent to induce referrals through the financial arrangement, unless the arrangement meets the criteria of the “space rental” safe harbor. Lease arrangements that result in improperly induced referrals could lead to severe penalties under the AKS.
In addition to the AKS, the rental of real estate between a physician and another entity who accepts referrals for designated health services (DHS) falls within the purview of the Stark Law. As a reminder, DHS includes clinical lab services, physical or occupational therapy, imaging, durable medical equipment, parenteral/enteral supplies and equipment, prosthetics and orthotics, home health services, outpatient prescription drugs and hospital services that are payable by Medicare. Under the Stark Law, there is a “rental of office space” exception if certain conditions are met. If the exception is not met, referrals of DHS between the two parties may not be permitted and claims submitted in violation of the Stark Law’s referral prohibition can result in an overpayment from Medicare.
To minimize the risk of violating (or being perceived as violating) the AKS and the Stark Law, leasing arrangements between health care providers and referral sources should follow certain legal standards. Two critical components of compliance, in addition to other requirements, are that the lease terms be in writing and the rent be at fair market value.
Written lease
A written lease agreement may help to establish the legitimacy of a real estate leasing arrangement. Under the Stark Law’s “rental of office space” exception, the lease must be documented in writing and signed by both the landlord and tenant. The written agreement should clearly outline the terms of the lease, including the duration of the term, the amount of rent, the specific space being leased and other items included in the lease (such as equipment or services). A properly documented lease agreement can help to demonstrate that the leasing arrangement is an arm’s-length business transaction, independent of any referrals between the providers, and is not a vehicle for improper financial inducements in violation of the law.
Fair market value
The lease payments should be consistent with fair market value for the leased space — in other words, the amount that would be paid in an open, competitive, arms-length and non-referral-driven marketplace. The rental rate should be comparable to similar space in the geographic area and under similar terms, without considering the volume or value of any referrals between the landlord and tenant. A rental rate that is significantly above or below fair market value can signal to regulatory authorities that something is amiss and that there are improper financial inducements between the parties. Engaging a third-party appraiser or consultant to conduct a fair market value analysis helps to confirm that the rent amount is appropriate and that the financial terms of the lease are not intended as compensation for referrals.
Other requirements
While AKS safe harbors can be a bit more flexible, under the Stark Law, to avoid a regulatory foot fault in leases between physicians and DHS entities, the arrangement must comply with every requirement of the applicable exception. In addition to the requirements described above, a compliant office space lease under the Stark Law must also meet the following requirements:
- The duration of the arrangement must be at least 1 year, or if the lease is terminated prior to the end of the first year, the parties may not enter into a new lease arrangement for the same space during the first year of the original lease arrangement.
- The space rented must not exceed that which is reasonable and necessary for the legitimate business purposes of the lease arrangement and (except for common areas like restrooms or waiting areas for which expenses are shared pro rata among all those who use the space) the space must be used exclusively by the tenant when it is being used by the tenant.
- Rental charges must be set in advance and not determined 1) in any manner that takes into account the volume or value of referrals or other business generated between the parties or 2) using a formula based on a percentage of revenue attributable to the services performed or business generated in the space or based on per unit of service charges.
- If the lease expires, any holdover arrangement in place following expiration of the agreement must meet all the conditions of the Stark Law exception and must be on the same terms and conditions as the immediately preceding arrangement.
Because leasing real estate between health care providers and their referral sources can present compliance issues under the AKS, Stark Law and other applicable regulations, legal guidance from health care and real estate attorneys who are knowledgeable on these issues can help to mitigate the risk of regulatory scrutiny and noncompliance.
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