Sharing office space between physicians and other healthcare providers can create a challenging landlord-tenant dynamic, but concerns exist regarding potential abuse within such arrangements.
In February 2000, the Office of Inspector General (OIG) issued a special fraud alert highlighting the possibility that these agreements might violate the Federal Anti-Kickback Statute. The OIG’s primary concern? A potential for disguised kickbacks. Rental payments could offer a method for incentivizing patient referrals between physician-landlords and the tenant healthcare provider.
Rental payments exceeding fair market value — or offered for unnecessary space — raise red flags for the OIG which worries they are veiled kickbacks for referrals. The good news? The anti-kickback statute (42 CFR 1001.952(b)) includes a safe harbor provision designed to protect legitimate space rentals. Agreements meeting all safe harbor criteria are exempt from consideration as kickbacks.
Key Requirements for the Space Rental Safe Harbor
Physician space rentals can be structured to comply with the safe harbor provision and avoid suspicion of violating the anti-kickback statute. We suggest the following guidelines:
- Having a formal written agreement signed by both parties.
- Clearly outlining all the rented premises and terms of lease for the length of the lease.
- Setting rent at fair market value based on comparable rentals in the area — and avoiding the temptation to connect volume or value of referrals a renting provider might send to the physician-landlord.
Let’s break it down a bit further.
Rental Amount
The rental amount holds the most weight. Here, the key principle involves adhering to fair market value. The rent must be established previously and set at a fixed rate. The number of referrals exchanged between parties or the overall business volume they generate for each other cannot directly or indirectly influence it.
The OIG closely scrutinizes these arrangements. If paid rent exceeds fair market value, the OIG presumes it as an illegitimate payment for patient referrals from the tenant to the physician-landlord. Conversely, a rent price significantly below fair market value can suggest an implicit agreement where the tenant refers patients to the landlord in exchange for a reduced rental cost.
Space and Time Usage
Another critical factor is the time and space a tenant uses. Here, the focus is on ensuring the rented space and lease length reasonably align with the tenant’s actual business needs. The OIG will raise a red flag if the leased space appears excessive for the tenant’s practice. Such arrangements create skepticism about the rent amount and may indicate that the rent is a disguised payment for patient referrals.
To promote transparency, the OIG emphasizes fair allocation of rent based on space usage and involves three key components:
- Exclusive space, referring to areas only the tenant uses. The OIG provides a specific formula for calculating prorated rent for this space. It considers the size of the exclusive space, tenant occupancy hours and days, total office square footage, and landlord’s operational hours.
- Physician-landlord common space, including shared areas within the physician’s office, like waiting rooms or reception areas. If a tenant uses these areas, the lease should factor in the proportional share of rent for this common space.
- Building common space, which pertains to shared areas within the entire building — like elevators or hallways. Similar to the physician’s common space, the rent for these shared areas should be apportioned among all users, including the physician-landlord and other tenants, based on proportional use.
Following these guidelines for time and space allocation enables physician-tenant agreements to maintain transparency and avoid raising concerns about disguised incentives for patient referrals.
Safe Harbor
While physician-tenant agreements aren’t illegal, the OIG has established safe harbor criteria to ensure these arrangements comply with anti-kickback laws.
- Establish a Written Agreement: All parties involved must sign a written agreement clearly outlining the rental terms. This agreement needs to be valid for at least one year.
- Clearly Define the Rented Space: The agreement should specify the exact areas being rented (offices, waiting rooms, etc.) and the duration of the lease.
- Detail Part-Time Access (if applicable): If the renter only requires the space for specific times, like during regular office hours, the agreement must detail the exact schedule of access, the duration of each interval, and the corresponding rent for those specific periods.
- Set Fair Market Rent Upfront: The total rent amount must be established upfront and be consistent with the fair market value of similar spaces in the area. The rent should reflect the value of the space itself and not be influenced by the number of patient referrals exchanged between the physician and the tenant.
- Allocate Space Based on Need: The agreement should ensure the rented space is only as large as necessary for the renter’s legitimate business needs within the physician’s office.
Serious Consequences for Violations
How serious is taking kickbacks? The Federal anti-kickback statute forbids the willful and knowing “soliciting, receiving, offering or paying anything of value to induce referrals or items or services payable by a Federal health care program.”
Entering into an agreement that violates the anti-kickback statute isn’t only unethical, it carries significant legal repercussions. Offenders face potential criminal charges punishable by fines up to $25,000, imprisonment — or both. They may also be hit with civil money penalties and excluded from participating in federal healthcare programs.
The consequences extend beyond the initial legal prosecution. When the anti-kickback statute triggers an investigation, it could lead to further actions.
- The Office of Professional Medical Conduct could investigate and potentially revoke the physician’s medical license.
- Once they learn about the violation, other insurance companies could exclude the physician from their provider networks.
- The case could also be referred to additional regulatory bodies for further scrutiny.
These potential consequences highlight the importance of ensuring physician-tenant agreements comply with the anti-kickback statute and prioritize legitimate business needs.
If you’re unsure about a specific space rental agreement, consult a healthcare attorney to ensure it meets all safe harbor criteria.
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