“Medical Lease Primer”

By David L. Haron, Esq. and Suzanne D. Nolan, Esq., Frank, Haron,Weiner & Navarro, Troy, MI

Review by Erin N. Lau, Loyola University of Chicago School of Law, Class of 2012

David L. Haron, Esq. and Suzanne D. Nolan, Esq. wrote a very informative and detailed article on medical leases in the February issue of The Health Lawyer. They accurately and unquestionably showed that medical office leases are different from standard commercial office leases. Medical office leases must comply with Stark law and the Anti-kickback Statute, which are unique to medical office leases. The purpose of these laws is to prevent healthcare providers from receiving payments based on the “volume and value of referrals of patients for certain healthcare items or services payable by a federal healthcare program.”

Under Stark, unless there is an exception, a physician or a physician’s immediate family member that has a specified financial relationship with an entity then that physician may not make referrals to the entity for DHS. An entity is a provider or supplier that furnishes DHS to a patient pursuant to a physician’s order and submits a claim to Medicare for the DHS. Stark issues arise when the landlord is a healthcare provider, such as a hospital, and the tenants are physicians or physician organizations. An example would be a physical therapist that practices in an office space owned by a hospital, the physical therapist must meet an exception of Stark should it refer a patient to that hospital.

The Anti-kickback Statute is an intent based statute that “makes it a criminal offense to knowingly and willfully offer, pay, solicit or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal healthcare program.” It contains a safe harbor for space rental. When a healthcare provider rents office space to a healthcare provider tenant or rents space from a health care provider landlord, the arrangement must comply with the Anti-kickback Statute’s space rental safe harbor provision should the parties generate business for one another.

In medical office leases, if the physician owns an interest in a landlord that is an entity, analysis must also be done as to whether the arrangement is required to comply with the direct investment exception in Stark or an indirect investment exception in Stark. Stark and the Anti-kickback Statute are not usually implicated if the healthcare provider tenant invests in a non-healthcare-provider landlord. Since the investment entity formed by the healthcare provider tenant does not furnish healthcare items or service and instead only invests in the non-provider landlord, Stark and the Anti-kickback Statute are not implicated even though the non-provider landlord may be wholly owned by the tenants or by the tenants’ investment agency. However, if the healthcare tenants in this situation are in a position to generate healthcare business for one another, then compliance with the Anti-kickback Statute is required.

The office space exception in Stark and the safe harbor in the Anti-kickback Statute are based on the idea that “if rent is set at a fair market value rate and the provisions in the lease are commercially reasonable, consistent with the purposes of the relationship and result from a bona fide transaction, the remuneration designated as ‘rent’ in a lease is not apt to be disguised payment for the value or volume of rentals.” Therefore when analyzing leasing transactions under these laws, the focus is to make sure that the lease does not create “an economic benefit to a tenant group that could be interpreted as consideration for patient referrals.” Ideally, medical office leases should contain a provision prohibiting the transfer of an interest that would violate the Stark exception or the Anti-kickback statute. Medical office leases should also contain a provision that addresses what happens when the arrangement no longer complies with these laws. The lease agreement should comply with several requirements as set out by the primer with the most important requirement being that the rent must be set at a fair market value.

United States of America ex rel. Goodstein v. McLaren Regional Medical Center is most instructive on the meaning of fair market value. In its discussion, the court placed emphasis on the determination of rent by an appraisal of general office space within the relevant market area and comparable buildings, in addition to taking into account whether the lease is a triple net lease, grosses lease, or a modified gross lease. Haron and Nolan also detail three conditions that have a significant impact on appraisals or fair market value: tenant improvement allowances, landlord concessions, and holdover rent.

A landlord will usually adjust the rental rate to recoup the cost of the tenant improvements over the duration of the lease. The lease must either specify the dollar amount of the increase or set forth a specific formula for determining the increase. Abuse may occur where the landlord offers additional money for improvements in order to attract potential tenants or when the landlord makes certain concessions. If the tenant improvement is unique to a healthcare provider tenant and is not being reimbursed by that tenant, there is potential for that improvement to be an impermissible remuneration and would be in violation of the Anti-kickback Statute. If the concession the landlord makes are not standard in commercial office leases, it may not be acceptable in medical leases because the resulting rent would not be consistent with fair market value. Since CMS stated that landlords may charge a higher rent during the holdover period, provided that the rent was set forth in the written lease, holdover rent should also be taken into account in a fair market value analysis.

As for subleases, all subleases must independently qualify under Stark and the Anti-kickback Statute. Rent for subleases cannot be based on a percentage of the gross or net revenue or billing of the sublease. Furthermore, the sublease may only rent the amount of space to meet its needs. Subleasing may also involve the provision of services such as sharing staff. These services must qualify under the Stark exception and within the safe harbor provision of the Anti-kickback Statute. For a block lease to qualify under the Stark exception, the space and equipment leased to the lease cannot be shared with the lessor for the duration of the lease. Block leases are suspect for fraud because they have been used in the past to disguise joint venture arrangements. As for ground leases, they must also fit into the Stark exception and the safe harbor of the Anti-kickback statute. There is a concern that it would be a kickback for the owners if a medical building was constructed on a ground lease.

Protection of a hospital is another concern in medical leases. To protect hospitals that own medical office buildings or built medical office buildings on leased land, the landlord will usually require that all physicians are on staff at the hospital. Other protections may include restriction of the types of healthcare providers in the building. There are also protections for their patients, such as HIPPA, to consider in a medical lease.

The Health Insurance Portability and Accountability Act of 1996 (HIPPA) requires the implementation of administrative, technical, and physical safeguards to protect health information. Although the landlord does not have a statutory duty under HIPPA, lease provisions have been used to impose contractual obligations on the landlord to protect health information. A lease must address the landlord’s ability to access the health information to perform maintenance. For example, maintenance may have to be done in a room where computers house protected health information. The tenant should include in the lease provisions that the landlord and its workforce may only be present during business hours accompanied by someone from the tenant’s workforce. The lease should be drafted as to exclude Medical records from landlord’s liens in order to avoid a HIPPA violation.

There are several other considerations Haron and Nolan note that should be addressed when arranging a medical lease. First, the lease must be in compliance with ADA standards. Second, a healthcare provider may be subject to civil monetary penalties if it contracts with an individual or entity that is excluded by the OIG. Third, medical waste disposal should conform to medical waste regulatory acts and the responsibility of disposal should be allocated to the tenant. Some landlords have prohibited the generation of nuclear medical waste. Fourth, since medical tenants have specific needs, such as constant electricity for its continued operations, the lease should address utility services. Finally, there should be a provision on what signage and advertisements the landlord will permit.

Overall, there are many factors in medical leases that require special attention. The most important is to follow regulations such as Stark, the Anti-kickback Statute, ADA, and HIPPA. Lease provisions must address those issues as well as issues special to the medical arena such as utility services and medical waste.

For more information on this topic, see Volume 22, Number 3, Feburary 2010 of The Health Lawyer. [Members Only PDF].