Real Estate Leasing in the Healthcare Industry: Understanding the Stark and Anti-Kickback Laws
You have likely heard of the Anti-Kickback Statute (42 U.S.C. §1320a-7b) and Stark Law (42 U.S.C. §1395NN). Most people in the healthcare industry have probably heard some horror story about penalties handed down by the federal government resulting from a violation of these laws. In fact, in January 2011, Becker’s Hospital Review published an article titled “10 Big Anti-Kickback and Stark Cases Involving Hospitals in 2010.” Some of the highlights of that article include, a $22 million payment by Towson, Md.-based St. Joseph Medical Center to resolve a lawsuit involving alleged False Claims Act and anti-kickback violations, a $108 million payment by Ohio hospitals to settle accusations they violated the anti-kickback statute and the False Claims Act, and a $49.4 million payment by a hospital in Sumter, S.C. for violating the Stark Law. Those figures are significant enough to catch anyone’s attention.
These laws carry serious ramifications. Consequently, it is imperative that both physicians and hospital administrators, as well as others involved in the health care industry be familiar with the core purposes and provisions of these laws. This is especially true for those involved in real estate transactions, including leasing of medical office space and the purchase or sale of a medical facility or medical office building.
The Anti-Kickback Statute prohibits the payment or receipt (and even the offer or solicitation) of any remuneration, directly or indirectly, either (i) to induce, or in exchange for, a referral of a person for services; or (ii) to induce, or in exchange for, the purchase of an item or service, for which payment may be made in whole or in part under a federal healthcare program. Remuneration can be cash, a discount off fair market value, or an investment opportunity. There are certain “safe harbors” created by federal regulation (42 C.F.R. §1001.952) which, if properly followed, protect parties from prosecution under the Anti-Kickback Statute for conduct which would otherwise violate the Anti-Kickback Statute. This includes a leasing safe harbor, which protects lease arrangements between entities that may refer to each other if certain elements are satisfied. Those elements are: (1) The lease agreement is set out in writing and signed by the parties; (2) The lease covers all of the premises leased between the parties for the term of the lease and specifies the premises covered by the lease; (3) If the lease is intended to provide the lessee with access to the premises for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, their precise length, and the exact rent for such intervals; (4) The term of the lease is for not less than one year; (5) The aggregate rental charge is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs; and (6) The aggregate space rented does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.
It is important to note that the Anti-Kickback Statute applies not only to hospitals, but to any person or entity in a position to influence referrals and that the statute is a criminal statute. A violation requires there to be intent - the remuneration must be intended, at least in part, to induce a referral or purchase of services. Although a violation of the statute is hard to prove because of the intent requirement, the penalties are enough to discourage any violations. Penalties include monetary fines (up to $25,000 per infraction), exclusion form Medicare and Medicaid participation, and prison.
While the Stark Law is quite similar, there are some key differences. Stark Law provides, in short, that a physician (or an immediate family member of such physician) who has a financial relationship with a healthcare entity may not make referrals to that entity for certain designated health services (including inpatient and outpatient hospital services) for which reimbursement is sought from Medicare/Medicaid, and the entity may not bill for the provision of such services, unless the financial relationship fits within a specified exception. Similar to the Anti-Kickback Statute, the Stark Law provides some exceptions relating to leasing. Those exceptions provide: (1) the lease is set out in writing, signed by the parties, and specifies the premises covered by the lease, (2) the space rented or leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease or rental and is used exclusively by the lessee when being used by the lessee, except that the lessee may make payments for the use of space consisting of common areas if such payments do not exceed the lessee’s pro rata share of expenses for such space based upon the ratio of the space used exclusively by the lessee to the total amount of space (other than common areas) occupied by all persons using such common areas, (3) the lease provides for a term of rental or lease for at least 1 year, (4) the rental charges over the term of the lease 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, (5) the lease would be commercially reasonable even if no referrals were made between the parties, and (6) the lease meets such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse.
The penalties for violation of the Stark law includemonetary fines (up to $15,000 per fraudulent claim, $10,000 per day for failure to report, and $100,000 for each noncompliant arrangement); reimbursement of money to the federal government; and exclusion from Medicare and Medicaid participation. Stark is a civil and not a criminal statute. This means there is no prison time at stake but there is also no criminal intent required to prove a Stark violation. A violation, whether intentional or accidental, is a violation nonetheless and carries significant penalties. Also, there is no materiality threshold. Seemingly minor violations may still subject a person to substantial penalties.
Now that we know the law, we have to put our knowledge into practice. How does a lessor or lessee make sure to stay on the right side of the law? The elements that are required in a lease agreement to comply with both the Anti-Kickback safe harbor and exceptions to Stark Law are substantially similar. It is good practice to have all leasing agreements, even those that may not currently involve a relation with a physician or hospital, include these basic elements. One never knows when the ownership structure might change. Determining fair market value is another key factor. Most commonly, an appraisal will be obtained. However, an appraisal is not required and reliance upon an appraisal is not self-proving that the transaction is for fair market value. It is, however, often the best information that one can find. If an appraiser is hired, the appraiser’s qualifications and experience must be considered if that appraisal will be relied upon. Always engage a competent appraiser who understands the Stark definition of fair market value and be sure the appraisal report addresses that.
There are several recent changes in the law which are also important – the Fraud Enforcement and Recovery Act (FERA) expands the scope of the False Claims Act and imposes an obligation on hospitals to make repayments of Medicare/Medicaid reimbursements that are disqualified due to a Stark violation. The Patient Protection and Affordable Care Act (PPACA) requireshospitals to self-report violations to CMS and to repay disqualified claims.
Navigating the intricacies of the Stark and Anti-Kickback laws can be difficult, even for a person who is familiar with provisions of the relevant statutes and regulations. It is crucial that any leasing arrangement involving potential referring parties be scrutinized to ensure compliance. Otherwise, you could find yourself the subject of an article on the significant Anti-Kickback and Stark Cases in 2012 or beyond.