Office Legal Briefs

Deal Diagnosis

Understanding healthcare laws improves the prognosis for MOB transactions.

During the past decade, hospitals and healthcare providers have been on a building spree. Not only is the quantity of developments growing, but project size is on the rise. Hospitals and healthcare providers often build new because aging facilities cannot be easily retrofitted for today’s technology. In addition, new specialty services require more space, patients demand modern facilities in a competitive market, and healthcare providers want to establish a presence in underserved and emerging markets.

Given the fact that the healthcare sector has fared better than other real estate niches, many commercial real estate professionals are eager to pitch their services and expertise to hospitals and healthcare providers in their communities. But before prospecting to this audience, it’s important to understand that healthcare real estate transactions not only are driven by the aforementioned factors, but also by compliance with federal and state healthcare laws.

Deal Structures in Today’s Market
Today’s transaction structures are more complex than some industry professionals realize. For instance, a hospital may agree to develop a new outpatient ambulatory surgery center in a wealthy suburb of the community. The surgery center will be owned jointly by the hospital and a group of physicians. The physician ownership component allows the hospital to develop a strong relationship with the physician practice group, and this relationship hopefully will prompt physicians within the group to refer patients to the hospital for inpatient services. The surgery center also provides a way for the hospital to establish a presence within a growing suburb.

When the hospital agrees to the new business venture, its legal counsel first will determine if a surgery center may be jointly owned by a hospital and physician group. The relationship between hospitals and physicians are governed by federal and state fraud and abuse laws that will affect the project from conception to completion and beyond.

Fraud and Abuse Laws
Real estate professionals working with hospital and healthcare clients should become familiar with fraud and abuse laws to ensure they are prepared to ask the right questions when approaching these types of projects.

The two most common fraud and abuse laws are the Anti-Kickback law and the Stark law. The Anti-Kickback law prohibits the payment or receipt of kickbacks or bribes in exchange for referring an individual for a service for which payment is made under a federal healthcare program. The Stark law prohibits physicians from referring Medicare and Medicaid patients to any entity furnishing designated health services in which a physician or its family members have a financial relationship. In some cases, the laws overlap and prohibit the same conduct.

In the previous example, assume the hospital agrees to pay for the cost to develop the real estate and the surgery center building. While the surgery center entity will be owned by the hospital and physicians, it will lease space within the building to operate from the hospital. Recognizing that they will need to be close to the surgery center, the physicians would like to lease 5,000 square feet of medical office space within the building for their practice.

Fraud and abuse laws likely apply to the leasing arrangement between the hospital and physicians since the physicians make patient referrals to the hospital. The fraud and abuse laws are designed to make sure that the hospital does not provide any type of incentive, such as a reduced rental rate for the space, to the physicians as a means of encouraging the physicians to refer patients to the hospital for services reimbursed by Medicare or Medicaid. In fact, the leasing arrangement between the hospital and the physicians will be prohibited unless it falls into an exception under the laws.

Legal Exceptions
To receive protection under the law, the hospital and physician practice group’s leasing arrangement must meet the following criteria:
• the lease is put in writing and signed by the parties;
• the space is described in the lease;
• the lease term is not less than one year;
• the rental rate is set in advance and is consistent with fair-market value in arm’s-length transactions;
• the rental rate is not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties; and
• the lease terms are commercially reasonable.

While many of these criteria are easy to satisfy, the fair-market value requirement often is the most difficult. A real estate broker in the community may be able to form an opinion to satisfy this requirement, although an independent and qualified appraisal is preferred. In most cases, commercial real estate professionals should advise hospitals and healthcare clients subject to the Anti-Kickback and Stark laws to obtain a fair-market value assessment of the space or property before agreeing upon a rental rate or purchase price in a real estate transaction.

Hospitals and healthcare providers developing new facilities also must make sure that the services they provide within the space will be reimbursed by state and federal healthcare insurance programs and private insurers. In the example, state and federal healthcare insurance programs may not pay for certain procedures performed in the surgery center unless the facility obtains the proper license from the state and satisfies various space planning requirements. A surgery center generally must satisfy stringent building code and life-safety code requirements before licensure is granted.

Most healthcare clients understand the importance of complying with federal fraud and abuse laws, although they often struggle with applying the laws to real estate transactions. Commercial real estate professionals who possess knowledge of the fundamentals of these laws will be able to realistically set client expectations and avoid significant penalties.

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