PHYSICIAN-SUPPLIER OFFICE SPACE AGREEMENTS UNDER THE MICROSCOPE
Physicians sometimes lease office space to other suppliers of health care items or services to whom the physicians refer patients. In light of a Special Fraud Alert issued by the Office of Inspector General (OIG) on February 23, 2000, caution should be exercised in the consideration of such office space rentals. Citing concerns that physician leases of office space to suppliers may be disguised kickbacks paid by the lessee-suppliers in exchange for referrals from the landlord-physicians, the Special Fraud Alert outlines questionable features of rental agreements and provides advice on structuring legally compliant rental agreements.
Targeted Behavior
While all physicians and suppliers entering into agreements for the rental of office space from potential sources of patient referrals should be wary, OIG pointed to leasing arrangements between physicians and comprehensive outpatient rehabilitation facilities (CORFs), mobile diagnostic equipment suppliers, or suppliers of durable medical equipment, prosthetics, orthotics and supplies as particularly suspect. OIG further indicated that it will focus its attention in this area on the following aspects of such rental arrangements to evaluate their legitimacy:
- The appropriateness of rental agreements
- The rental amounts
- Time and space considerations.
Appropriateness of Rental Agreements
Under some circumstances, according to OIG, rent may not be appropriate at all. For instance, where space was traditionally provided to the supplier at no cost or for a nominal fee, any amount of rent will be suspect.
- Example: Rent for "consignment closets" in physician offices for the sale of durable medical equipment will generally be viewed as suspect by OIG.
Rental Amounts
Even where the existence of a rental arrangement is appropriate, physicians and suppliers should ensure that the amount of rent does not exceed fair market value, is fixed in advance, and does not take into account the value of or volume of referrals between the parties.
- Example: OIG views sublease rental amounts per square foot in excess of the amounts in the prime lease as suspect–apparently regardless of whether the physician had entered into a long-term prime lease that has dipped below current market value.
Time and Space Considerations
Physicians and suppliers may also come under fire where rental agreements cover an inappropriate amount of space or period of time. OIG presumes that rental payments are disguised kickbacks where the rented space exceeds the supplier's needs. It also views non-exclusive occupancy of the rented space by the supplier as suspect. However, legitimate lease arrangements may include payments for some commonly shared interior office common space (e.g., waiting room) and building common space (e.g., lobby) as long as such payments reflect the proportionate amount of space and duration of time that the premises will be used by the supplier.
- Example: OIG will closely scrutinize rent paid by suppliers who do not require exclusive space but float from one examination room to the next treating patients after they have been seen by the physician.
Avoiding Violations
Violators of the federal health care programs' anti-kickback law are subject to five years imprisonment, criminal penalties of up to $25,000 and/or exclusion from federal health care programs, as well as civil penalties of up to $50,000 plus three times the remuneration offered. See 42 U.S.C. §§ 1320a-7a(a)(7), 1320a-7b. The Special Fraud Alert reminds physicians and suppliers that "[b]oth parties to an impermissible kickback transaction are liable." In addition, the parties could conceivably face liability under a host of other laws, such as the False Claims Act, 31 U.S.C. § 3729 et seq., or Stark law, 42 U.S.C. § 1395nn.
OIG urges suppliers and physicians to make every effort to comply with the space rental safe harbor to the anti-kickback law. The safe harbor protects written and signed rental agreements that cover a reasonable amount of space necessary to serve a commercially reasonable business purpose, are not less than a year in length, cover all of the premises rented by the parties for the term of the agreement and specify the premises included, specify the time periods involved where the space will be used part-time, and provide for payments consistent with fair market value without regard to any referrals between the parties. Arrangements that meet all of the safe harbor requirements are protected from prosecution under the anti-kickback law. See 42 C.F.R. § 1001.952(b).