AMARILLO, TX – As the famous philosopher Charles Schwab would say: “You can put lipstick on a pig…but it is still a pig.” This statement is relevant to many arrangements in the health care space. If parties to an arrangement have to twist themselves into pretzels to justify the arrangement, then it likely violates the law.

This article focuses on one example. Let us say that a physician group (“PG”) refers patients (including those covered by a federal health care program) to a DME supplier (“Supplier”). Further assume that the PG has unused space and wants to rent the space to the Supplier. If the Supplier is to pay fixed annual rent to the PG, the parties may develop a false sense of security that the lease arrangement does not violate the federal anti-kickback statute (“AKS”) and federal physician self-referral statute (“Stark”). While fixed annual rent is an important factor in determining whether the lease is legitimate…or whether it is a disguised kickback…there are other important factors to consider.

The Federal Anti-Kickback Statute
The AKS makes it a crime to knowingly and willfully offer, pay, solicit or receive, “any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind” in return for (i) referring patients for services or equipment any part of which is reimbursable in whole or part by an FHCP or (ii) recommending, purchasing, leasing, or ordering any item or service reimbursable by an FHCP. (See 42 U.S. Code § 1320a–7b(b).) Violations of the AKS may result in a range of civil and criminal penalties.

The Office of Inspector General (“OIG”) issued safe harbors to protect certain ordinary business practices in the health care sector that, but for a safe harbor, could be construed to violate the AKS. If an arrangement does not meet all of the elements of a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means that the arrangement needs to be carefully analyzed in light of the language of the AKS, court decisions, and OIG guidance. The Space Rental safe harbor was first adopted in 1991 and later revised in 1999.

In its current form, this safe harbor excepts payments made for the rental of office space so long as the rental arrangement meets the following conditions:

(1) The lease agreement is set out in writing and signed by the parties.

(2) The lease covers all of the premises leased between the parties for the term of the lease and specifies the premises covered by the lease.

(3) If the lease is intended to provide the lessee with access to the premises for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, their precise length, and the exact rent for such intervals.

(4) The term of the lease is for not less than one year.

(5) The aggregate rental charge is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.

(6) The aggregate space rented does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental. The term “fair market value” means the value of the rental property for general commercial purposes, but shall not be adjusted to reflect the additional value that one party (either the prospective lessee or lessor) would attribute to the property as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid and all other Federal health care programs.

(See 42 CFR § 1001.952(b).)

Stark
Stark prohibits physicians from referring Medicare or Medicaid patients for certain “designated health services” to any entity with which the physician or an immediate family member has a financial relationship. (See 42 USC § 1395nn.) “Designated health services” includes durable medical equipment. Because a lease arrangement is a financial relationship, a lease between the PG and Supplier will implicate Stark unless an exception is available.

Stark violations are subject to civil penalties. Importantly, Stark has no “intent” requirement, and a violation may be deemed present on the basis of the structure of the arrangement alone. However, if intent is deemed present, Stark violations may be subject to enhanced civil monetary penalties.

Stark contemplates a number of exceptions, including an exception for space rental. A space rental arrangement will be exempted from Stark liability if it meets the following conditions:

(1) The lease arrangement is set out in writing, is signed by the parties, and specifies the premises it covers.

(2) The duration of the lease arrangement is at least one year. To meet this requirement, if the lease arrangement is terminated with or without cause, the parties may not enter into a new lease arrangement for the same space during the first year of the original lease arrangement.

(3) The space rented or leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease arrangement and is used exclusively by the lessee when being used by the lessee (and is not shared with or used by the lessor or any person or entity related to the lessor), except that the lessee may make payments for the use of space consisting of common areas if the payments do not exceed the lessee’s pro rata share of expenses for the space based upon the ratio of the space used exclusively by the lessee to the total amount of space (other than common areas) occupied by all persons using the common areas. “Exclusive use” use means that the lessee (and any other lessees of the same office space) uses the office space to the exclusion of the lessor (or any person or entity related to the lessor). The lessor (or any person or entity related to the lessor) may not be an invitee of the lessee to use the office space.

(4) The rental charges over the term of the lease arrangement are set in advance and are consistent with fair market value.

(5) The rental charges over the term of the lease arrangement are not determined—

(i) In any manner that takes into account the volume or value of referrals or other business generated between the parties; or
(ii) Using a formula based on—

(A) A percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the office space; or

(B) Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred by the lessor to the lessee.

(6) The lease arrangement would be commercially reasonable even if no referrals were made between the lessee and the lessor.

(7) If the lease arrangement expires after a term of at least one year, a holdover lease arrangement immediately following the expiration of the lease arrangement satisfies the requirements of paragraph (a) of this section if the following conditions are met:

(i) The lease arrangement met the conditions of paragraphs (a)(1) through (6) of this section when the arrangement expired;
(ii) The holdover lease arrangement is on the same terms and conditions as the immediately preceding arrangement; and
(iii) The holdover lease arrangement continues to satisfy the conditions of paragraphs (a)(1) through (6) of this section.

(See 42 CFR § 411.357(a).)

The February 24, 2000 Special Fraud Alert

While the terms of the space rental safe harbor are relatively clear, the OIG has periodically voiced concerns about illicit lease arrangements, particularly with respect to office space rentals made by physician practices to other health care providers to which the physicians refer patients. Because these arrangements may be used as a disguised form of reimbursement for referrals, they have been the subject of particular scrutiny, and form the subject of a Special Fraud Alert (“Alert”).

(See 65 FR 9274 ff.)

In the Alert, the OIG draws attention to lease arrangements between physician-landlords and “[s]uppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS).” (See Alert, 9275.) In its guidance, the OIG specifies three areas of concern, including (i) the question of appropriateness of the rental relationship, (ii) the rental amounts charged, and (iii) considerations of time and space.

Concern over the rental amounts related to at least five possible kinds of disguised kickbacks, including:

• Charges above the fair market value of comparable commercial real estate in the area;
• Subleases that charged a higher rate per unit area than the rate provided in the master lease;
• Adjustable rate leases;
• Agreements that set time-based reimbursements without specifying a definite schedule; and
• Rental arrangements contingent on federal reimbursement amounts or some threshold of referred patients.

(Id., 9276.) The greatest risk pertains to the category of time and space considerations. The OIG is particularly concerned about rental amounts for unnecessary or unused space, rental for times when the space is not used by the supplier, and rental amounts for non-exclusive occupancy of the leased premises. Based on these concerns, the OIG offered specific guidance:

• Where rent is prorated for some unit of time, the time charged should be based on the ratio of the time during which the space is used by the supplier divided by the total time the space is in use.
• The charge should be based on the ratio of the used space to the total space of the premises.
• Where the master lease includes some combination of exclusive space, interior office common space, and building common space, charges for the use of such space in the sublease should be proportioned to the amount of each occupancy type used by the sublessee. (Id., 9277.)

Reduction of Risk
If the Supplier and PG enter into a lease agreement, the parties can take steps designed to reduce the risks discussed above. These steps include:

• The parties will determine what the per square foot rent is for comparable space “down the street.” The parties will multiply that per square foot dollar amount by the square feet set out in the lease agreement.
• The Supplier will use the space at all times during the term of the lease.
• No other person or entity will use the space during the time that is covered by the lease.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].

AAHOMECARE’S EDUCATIONAL WEBINAR

Employee Retention Tax Credit: Benefits and Pitfalls

 Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Kianna L. Sitarski, Esq., Brown & Fortunato

Thursday, July 11, 2024

1:30-2:30 p.m. CENTRAL TIME
The COVID pandemic was unprecedented … and traumatic … for all of us. In response, the federal government passed laws – and issued regulations – designed to (i) provide “safety nets” to businesses, (ii) expand the provision of health care in the home, and (iii) assist families financially. A key provision is the Employee Retention Tax Credit that is designed to encourage employers, that are adversely affected by the pandemic, to keep employees on their payroll. Since its inception in 2020, the Employee Retention Credit has been modified by federal statute and IRS regulations to relieve financial struggles faced by employers. This webinar will discuss the history of the Employee Retention Credit, including eligibility and value of tax credits available for wages paid between March 2020 and December 31, 2021. The webinar will also discuss how to retroactively claim the Employee Retention credits and common pitfalls to avoid when the DME supplier is amending its tax filing. Lastly, the webinar will discuss how the DME supplier can avoid the scams that have arisen in conjunction with the Employee Retention Tax Credit. 

Register for Employee Retention Tax Credit: Benefits and Pitfalls on Thursday, July 11, 2024, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq., and Kianna L. Sitarski, Esq., of  Brown & Fortunato.

Members:  $99
Non-Members:  $129