Physicians and Real Estate Leases: What Should Hospitals Know?

In 2008, Condell Medical Center in Libertyville, Ill., paid the federal government and Illinois $36 million after disclosing it received improper Medicare and Medicaid payments. The hospital, now part of Oak Brook, Ill.-based Advocate Health Care, reported possible violations with physicians, specifically the leasing of medical office space to physicians at rates below fair market value, among other violations.

Similarly, in January 2011, Detroit Medical Center agreed to pay the federal government $30 million to settle allegations of potentially improper relationships between the health system and roughly 250 physicians, which again included leases below fair market value.

The rise of hospitals acquiring physician practices and employing physicians is a nuanced business, and when real estate is thrown into the mix, the business and legal sides draw very fine lines. Deeni Taylor, executive vice president of Duke Realty specializing in healthcare real estate, explains how the government is heightening scrutiny of physician referral laws as they relate to hospital real estate transactions and leases.

Renewed focus
When hospitals and physicians delve into real estate transactions, Mr. Taylor explains two laws come into play: Stark Law and the federal Anti-Kickback Statute. Both, in essence, prohibit providers from offering referrals in exchange for some type of business arrangement.

Enforcement of the Stark Law and Anti-Kickback Statute is nothing new, Mr. Taylor says, but under the Patient Protection and Affordable Care Act, there is a renewed focus on making sure there is compliance on all levels, especially through self-reporting.

"In the past, if [hospitals] were leasing space below fair market value or providing free space, the hospital was at risk for a [violation of] the Anti-Kickback Statute," Mr. Taylor says. "Now [the government is additionally] focused on technical violations."

Examples of technical violations include accounting errors, such as hospitals forgetting to pass on an annual escalation fee on medical office building rent. Hospitals may also forget to have the lease officially renewed, meaning a lease technically isn't in place for a physician.

"Those kinds of things are technical violations and are just as serious doing leases below fair market value or not having a lease at all," Mr. Taylor says. "CMS has the ability to do a judgment against a hospital, and the big potential there is if a physician has seen and provided care to Medicare and Medicaid patients, those payments get sent back to the government."

What hospitals can do
There are a couple of steps hospitals can take to minimize their compliance risks around real estate and leases with physicians.

•    Ensure all leases and contracts for services are in writing before providing those services and rental space.

•    Verify fair market value is being paid on all rental properties. Mr. Taylor says providers should look at rent studies of similar properties in the market to ensure fair market value.

•    Establish and enforce a compliance program.

Astute hospital executives who have been in the industry for a long time are probably attuned to the various real estate challenges that have been omnipresent over the past several decades. However, Mr. Taylor says it never hurts to sit down and re-evaluate an organization's real estate strategy. If regulations are becoming too burdensome or capital and assets are becoming too difficult to manage, Mr. Taylor suggests hospitals look for help in the right places.

"Providers that own medical real estate should consider hiring a third-party real estate firm to provide professional real estate advisory, leasing and property management services," Mr. Taylor says. "The most experienced firms are knowledgeable about the self-referral laws and understand how the laws are changing and how seriously these laws can affect health providers."

More Articles on Hospitals and Real Estate:

5 Areas Where Hospitals Can Spend Smarter
4 Ways to Mitigate Costs When Developing Medical Offices
Steward Wants to Sell Off 11 Medical Offices on Hospital Campuses

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