The healthcare industry is heavily regulated on both the state and federal levels. Violations by a provider of laws such as the Stark Law and the federal Fraud and Abuse Statute, both of which restrict the ability of healthcare providers to refer to entities with which they have a financial relationship, could subject that provider to substantial fines, imprisonment and the loss of his or her license to practice medicine. Real estate transactions involving healthcare entities should include a thorough review of the relationships between providers, particularly where the landlord, such as a hospital, and a tenant, such as an ASC, refer business to one another.
Summary of the space rental safe harbor
A lease arrangement between two providers can be structured so that it will not violate the Fraud and Abuse Statute. A rental payment from a tenant to a landlord will not violate the Fraud and Abuse Statute, as long as the following six standards, which make up the Space Rental Safe Harbor, are met:
1. The lease agreement is set out in writing and signed by the parties.
2. The lease covers all of 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 by Medicare, Medicaid or other federal healthcare programs.
6. The aggregate space rented does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.
Fair market value for purposes of this safe harbor means the value of the rental property for general commercial purposes, but shall not be adjusted to reflect the additional value 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 or other federal healthcare programs.
A note on delinquent lease payments
Certain tenants may be currently or periodically delinquent with respect to lease payments. Here, one must assess whether the landlord uses or permits ongoing delinquencies as a means of reducing the “real” rental rate for such tenants, and whether the landlord enforces payment of rent less stringently with parties that are referral sources. Assuming that the landlord intends to collect rental payments in full and that the landlord actually does employ reasonable and standard efforts to collect such amounts, there is less regulatory concern regarding delinquent lease payments. However, regulatory concerns could arise if the landlord (or a successor landlord) relaxes its collection efforts with respect to certain referring tenants whom the landlord views as particularly valuable, or with whom the landlord has other relationships (aside from the leases). Thus, the landlord (and any successor landlord) should generally pursue collection of overdue amounts with the same vigor that would typically be used to collect from tenants who do not otherwise generate referrals or other business for the landlord.
Note: This guidance is excerpted from a white paper entitled Key Regulatory and Diligence Issues in Healthcare Real Estate Acquisitions.
E-mail Mr. Becker, Ms. Szabad or Ms. Heinze.
