medical office leases: navigating stark law, anti-kickback...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Medical Office Leases:
Navigating Stark Law, Anti-Kickback
Statute, Operational Restrictions and More Drafting to Address Reciprocal Easements, Ground Leases,
HIPAA, ADA, and Environmental Issues Unique to Medical Office Use
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, APRIL 19, 2017
Andrew Dick, Shareholder, Hall Render Killian Heath & Lyman, Indianapolis
Allison Nelson, Partner, Akerman, Denver
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Introduction
Courtesy CBRE Group, Inc.
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Introduction
– Why are medical office leases different?
• On-Campus versus Off-Campus
• Ground Leases
• Master Leases
• Timeshare Arrangements
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Introduction
– Why are medical office leases different?
• Longer lease terms
– Traditional office – 5 to 7 years
– Medical office – 7 to 15 years
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Introduction
– Why are medical office leases different?
• Large tenant improvement allowances
– Traditional office - $30 to $50 sf
» Allowances are decreasing
– Medical office - $60 to $100 sf
» Allowances are increasing
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Introduction
– Why are medical office leases different?
• Use restrictions
– Traditional office – any professional office use
– Medical office – the permitted use is heavily negotiated
» Limited scope of permitted uses
» Further limitations on ancillary services
» Heavily negotiated exclusive use covenants
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Introduction
– Why are medical office leases different?
• Necessity-based services
– Ability to operate is important
– Access is essential for patients
– Accreditation and licensure requirements
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Introduction
– Why are medical office leases different?
• Regulatory landscape
– Billing requirements
– Fraud and abuse laws
– Privacy laws
– Tax laws
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Unique Lease Terms
• Permitted Uses
– Narrow focus
• Exclusive Uses
– Often tied to the permitted use
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Unique Lease Terms
• Restricted Uses
– Services provided by a hospital
– Certain exceptions apply
• Prohibited Uses
– Imaging services
– Surgical services
– Procedures requiring anesthesia
• Restrictions on Marketing
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Unique Lease Terms
• Ethical and Religious Directives
– Family planning
– OB/GYN services
– Urology services
– End of life care
– Clinical research
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Unique Lease Terms
• Medical Staff Requirements
– On-Campus MOBs and Master Leased MOBs
» Clinicians must have active medical staff privileges
» Time commitment
» Financial commitment
» Potential fraud and abuse concerns
» Recourse if privileges are not maintained
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Unique Lease Terms
• Right to Assign / Sublet
– Credit analysis
– Exclude potential competitors
– Professional Services Arrangements
– Part-Time or Timeshare Arrangements
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Unique Lease Terms
• Operating Covenants
– Retail concepts apply to MOBs
– Tenants depend upon one another
– Remedies for default
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Unique Lease Terms
• Interruption of Services
– Back-up power
– Ability to provide back-up power
– Remedies
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Unique Lease Terms
• Remedies for Landlord Defaults
– More robust in MOB leases
– Self-help and the right to abate
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• Health Care Compliance Language
• Fraud and Abuse Language
• Excluded Provider
• Books and Records
• HIPAA
Unique Lease Terms
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• Accessibility
• ADA compliance
• Parking
Unique Lease Terms
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• Medical Waste
• Regulatory requirements
• Modern disposal practices
• Preferred provider arrangements
• Lease terms
Unique Lease Terms
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• Property Tax Exemptions
• Availability
• Right to seek an exemption
• Opportunity for shared savings
Unique Lease Terms
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• Termination Rights
• Sale to a competitor
• Death or disability requirements
Unique Lease Terms
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Billing Requirements
Privacy Laws
Environmental Laws
Tax Laws
Fraud and Abuse Laws
Overview of the Regulatory
Landscape
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Hospital Campuses (move from single building to campus with “component facilities” - outside 4 walls of
hospital)
Hospital can bill Medicare for technical components of certain services at the facility if the facility satisfies
the “provider-based” rules.
Significant integration between a hospital and a component facility (joint licensure, except in states
where joint licensure is prohibited, in which case an exception may be granted), a shared medical staff,
financial integration, and significant clinical and administrative oversight of the facility.
Must meet certain fire code and CMS survey requirements.
Move to integrated health
Shift in development design
Digital
Moving into communities
Billing Requirements
Impact of Federal Regulations / CMS
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Healthcare provider tenants are covered entities under HIPAA and have an obligation to safeguard patient’s
protected health information (“PHI”).
Tenant’s Concerns:
Must safeguard PHI (PHI room, access, emergencies)
Accompaniment
Indemnification for Landlord’s acts
Lien rights (exclude PHI, both physical and electronic)
Landlord’s Concerns:
Taking too much responsibility for PHI
Employees, contractors, and third party liability
Privacy Laws
Health Insurance and Portability Action of 1996, expanded by
American Recovery and Reinvestment Act of 2009 (“HIPAA”)
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Medical Waste
Blood/bodily fluids, waste pharmaceuticals, chemotherapy or nuclear
waste, controlled substances
Proper storage (security), labeling, training, and disposal
Indemnification
Asbestos
Mold
Clean air (incinerators, labs)
Underground storage tanks
Clean water (wastewater discharge, floor drains, spill prevention)
Environmental Laws
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Private Inurement – A concern for non-profit entities seeking to maintain
their tax exempt status (Section 501(c)3 of the Internal Revenue Code).
No part of net earnings can benefit a private shareholder or individual (direct or indirect / close relations with
a significant degree of control)
FMV, duration of term, and rent / customary transactions
Private Benefit
Non-profit entity must operate exclusively for exempt purpose and only an insubstantial portion of its
activities can relate to non-exempt purpose
Lease between non-exempt and exempt organization
Rev. Proc. 97-13
Tax-exempt bond financing
Limits on contracts exempt entities make (private business use/ management contracts)
Safe harbor
Tax Laws
Private Inurement and Private Benefit
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The Physician Self-Referral Act (Stark) (42 U.S.C. §1395nn)
Example: Physician leases space to DHS entity above FMV and refer patients for DHS
Penalties: Fines up to $23,863 (2016) for each service, repayment of claims, and potential exclusion
from all federal healthcare programs
The Anti-Kickback Statute (AKS) (42 U.S.C. §1320a-7b(b))
Example: Physician receives below FMV rent with intent to exchange lower rent for referrals
Penalties: Civil penalties up to $73,588 (2016) per kickback plus three times the amount of the
kickback; criminal penalties (fines or imprisonment)
False Claims Act (FCA) (18 U.S.C. §287 – criminal)(31 U.S.C. §3729
– §3733 - civil)
Example: Stark violation Renders all related claims false or fraudulent overpayments
Penalties: Treble damages suffered by government, plus up to $10,781 to $21,563 (2016) per claim
Fraud and Abuse Laws
The Governing Laws – Federal (with State Corollaries)
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Prohibition: If a physician, or a member of the physician’s immediate
family, has a financial relationship (includes office & equipment leases)
with an entity, then the physician is prohibited from making a referral to the
entity for the provision of designated health services (“DHS”) paid for by
Medicare, and the entity is prohibited from billing for such service, unless an
exception is satisfied (e.g., a Stark compliant lease).
Fines per DHS billing during non-compliant arrangement
Strict Liability (no intent)
DHS = Clinical lab services, PT and occupational therapy, radiology and certain other imaging services
(MRI, CT, ultrasound), radiation therapy and supplies, durable medical equipment and supplies, parenteral and
enteral nutrients, equipment and supplies, prosthetics, orthotics, and prosthetic devices and supplies, home
health services, outpatient prescription drugs, inpatient and outpatient hospital services.
Federal Exceptions – Lease; Equipment
Stark Law
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Prohibits anyone from knowingly and willfully offering, paying, soliciting, or
receiving any remuneration in order to induce or reward referrals of items
or services reimbursable by any federal healthcare program.
Broader than Stark
Intent based (knowing and willful violation)
Not limited to physician, covers any healthcare provider participating in
federal healthcare programs.
Criminal penalties
Violation if just one purpose is to induce referrals, even if there are other
legitimate business reasons for the payment
Federal Safe Harbor Regulations (42 C.F.R. §1001.952)
Anti-Kickback Law
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Rigid and technical regulations
Aggressive governmental enforcement ($350 million)
New administration?
Hefty fines
Settlement Data Enforcement Climate
Organization Settlement Reason
Detroit Medical
Center
$30 million Rent rates below
FMV; no written lease
Condell Medical
Center
$36 million Rent rates below
FMV
Memorial Medical
Center of West
Michigan
$218,000 Rent rates below
FMV
St. Agnes Healthcare $1,414,000 Rent rates below
FMV
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$16.5 million settlement
Appraiser ($3.1 million of the settlement)
Real estate appraiser hired by hospital filed a qui tam complaint alleging
that Parkridge paid excessive rent to a real estate entity owned by
physicians whose practice Parkridge had previously purchased.
Appraiser’s original appraisal = range of $8.10 to $10.10 per usable
square foot
Lease ultimately entered into had a rate of $12.59 per foot, based upon an
alleged erroneous fair market value study from an unlicensed and
uncertified appraiser.
Settlement Example
Appraiser Whistleblower
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In order to move forward with a referral source lease, the leasing
arrangement must meet all elements of a Stark law exception.
In order to move forward with a referral source lease, there must be no
intent to induce referrals and the leasing arrangement should be structure
to meet most, if not all, of the elements of an applicable AKS safe harbor.
Stark and Anti-Kickback Law
Exception and Safe Harbor
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Writing - Lease set forth in writing, signed by both parties (no longer single “formal” written
contract) moving to “arrangement”
Premises - Specifies the premises it covers (e.g., floor plan and SF)
Space is reasonable and necessary for the legitimate business purpose
Exclusive use, except for common area
Minimum 1 Year Term - If lease is terminated within first year, parties cannot enter into a new lease
for the same space during the first year
Rent -
Set in advance
Consistent with FMV
Not determined in a manner that takes into account the volume or value of referrals
Business Terms - Commercially reasonable
Stark and AKS Compliance
Key Principles for Compliance
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RENT = PRICE PER SQUARE FOOT X SQUARE
FEET
Fair Market Value Rent
Independent
Third Party
Analysis
Preferred
Reliable
Measurements
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Fair Market Value Rent
Price Per Square Foot
Rent Methodology
NNN
MG (Most difficult)
FSG
Other Services (IT, BioMed Waste,
& Cable/Satellite)
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Issue with Determining SF
No good floor plans
Square footage not included in existing documents (premises, building)
Utility closets & basements
Space not being used
Subleases
Fair Market Value Rent
Rent = Rent Rate PSF X Square Footage
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USF vs RSF
USF – footprint
RSF – load
factor
Apples to apples
Fair Market Value Rent
Square Footage
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Abatement – Obtain independent valuation
Tenant Improvements - 72 Fed. Reg. 51012, 51045 (Sept. 5, 2007).
CMS commentary states that whether the cost of capital improvements
should be allocated over the useful life of the improvement or be
passed on in their entirety to the physician lessee who requested them
will depend on the facts and circumstances of the case. Specifically, if
a lessor provides improvements for the benefit of the physician lessee
that are unlikely to be chargeable to a subsequent tenant, the lessor
should allocate the entire cost of these improvements to the lessee for
whose unique benefit they are made. Improvements that lessor
reasonably expects would be chargeable to subsequent lessees may
be allocated over their expected useful life.
Fair Market Value Rent
Abatement and Tenant Improvements
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Must describe exact, enumerated scheduled periods of time
Each Tuesday from 9 am – 3 pm
Issues with undefined periods and rent calculations
Sublease provides for 12 hours per week. Does this mean the
physician can lease the space in 15 minutes, on-demand
increments?
Sublease allows use each Monday of the month. Prorate annually
(e.g., months with 4 weeks vs. 5 weeks).
Must have exclusive use during the scheduled period.
Cannot leave personal property in the space outside the scheduled
period.
Part-Time Subleases
Scheduled Periods of Use
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A physician group wants to lease space in the Good Doctor Medical Office
Building on the hospital’s campus. The physicians in the group want to
lease the entire second floor of the office building because they expect
patient demand to increase in the next five years, they want to squeeze out
the competition, and they like the view. The group knows of another
practice group that leased space about two and a half years ago at $25.50
psf with no escalations until renewal five years later. This physician group
wants the same rate. The group also wants the hospital to provide a tenant
improvement allowance for new carpet, paint, and some radiology
equipment. Finally, the physician group is requesting the right to terminate,
at no charge, anytime within the first 5 years with six months’ prior written
notice.
Hypotheticals
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Appraisal provides a range of $10 - $15 per rentable square foot. The
space is measured at 2,500 useable square feet with a 12% load factor.
The lease sets rent at $10.00 per square foot and defines the Premises as
a 5,000 useable square foot space. The accounting department charges
$50,000.00.
Rentable square foot calculation:
5,600 X $10.00 psf = $56,000.00
Hypotheticals
Thank You
Andrew Dick
Hall Render Killian Heath & Lyman
Allison Nelson
Akerman
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