Presenting a 90 minute encore presentation featuring live Q&A. Today s faculty features:

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1 Presenting a 90 minute encore presentation featuring live Q&A Medical Office Leases: Navigating Stark Law, Anti Kickback Statute, Operational Restrictions, and More Drafting to Address Reciprocal Easements, Ground Leases, HIPAA, ADA, and Environmental Issues Unique to Medical Office Use TUESDAY, JULY 24, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Allison Nelson, Partner, Akerman, Denver Ayman Rizkalla, Partner, Akerman, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

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5 Medical Office Leasing: Navigating Stark, Anti-kickback and Other Concerns Ayman Rizkalla Allison Nelson July 24, 2018

6 Medical Office Leasing Introduction

7 Introduction How are medical leases different? on campus vs. off campus ground leases, master leases, and timeshares longer terms operational issues regulatory issues tenant improvement allowances 7

8 Overview Today s Discussion medical leasing trends distribution and decentralization healthcare regulatory requirements other medical leasing considerations 8

9 Medical Office Leasing Trends

10 Medical Lease Trends Urgent Care Centers Rise in UCCs continue (adding p/y) shortage in primary care physicians hospital marketing strategy convenience economical larger UCCs acquiring smaller outfits UCC Models/Successes 95% patient satisfaction rates access reduces lengths of stays at hospitals/rehab facilities/long term care $4.4B savings in hospital visits 10

11 Medical Lease Trends Urgent Care Centers Locations shopping centers 34.1% freestanding 33.2% mixed use 13.6% medical office buildings 19.1% Investors shift from physician owned to hospital owned physician JV with investors private equity (consolidating back office & utilizing direct marketing) 11

12 Medical Lease Trends Free standing ERs & Micro Hospitals What are Micro Hospitals? lower acute issues exam rooms operating room 8 10 beds ancillary services lab radiology & imaging pharmacy sometimes primary care, dietary, women s health, and outpatient surgery 12

13 Medical Lease Trends Free standing ERs & Micro Hospitals On the rise burgeoning model fills gaps between UCC and hospital campus cost effective hospital affiliations siting 20 +/ miles from hospital campus focus on User Experience $15B in 2017 (4.1% growth) in pipeline $7M $50M construction 13

14 Medical Lease Trends Hospitals Transforming into Healthcare Systems Expansion through UCC/ER; supplements physician acquisition model Move to integrated health shift in development design digital moving into communities Provider based rules 14

15 Medical Lease Trends Employers Entering the Healthcare Market Will large corporate center leases start including medical space? Amazon, J.P. Morgan Chase, and Berkshire Hathaway Warren Buffet healthcare spending is a tapeworm of the U.S. economy 17.8% of GDP Apple HQs in Santa Clara County AC Wellness (a group of health clinics for employees and families) 15

16 Medical Office Leases Healthcare Regulatory Requirements

17 Fraud and Abuse Laws The Governing Laws Federal (with State Corollaries) 17 The Physician Self Referral Act (Stark) (42 U.S.C. 1395nn) Example: Physician leases space to DHS entity above FMV and refer patients for DHS Penalties: Fines up to $23,863 for each service, repayment of claims, and potential exclusion from all federal healthcare programs The Anti Kickback Statute (AKS) (42 U.S.C. 1320a 7b(b)) Example: Physician receives below FMV rent with intent to exchange lower rent for referrals Penalties: Criminal fine (up to $100,000) and/or imprisonment (up to 10 years) Civil penalties ( up to $100,000 per violation + treble damages) Administrative penalties (exclusion from the Medicare and state healthcare programs) False Claims Act (FCA) (18 U.S.C. 287 criminal)(31 U.S.C civil) Example: Stark/AKS violation Renders all related claims false or fraudulent claims Penalties: Treble damages suffered by government, plus up to $11,181 to $22,363 per claim

18 Stark Law Prohibition: If a physician, or a member of the physician s immediate family, has a financial relationship (including space lease) with an entity, then the physician is prohibited from making a referral to the entity for the provision of designated health services ( DHS ) paid for by Medicare or Medicaid, and the entity is prohibited from billing for such service, unless an exception is satisfied Stark is a strict liability statute (no intent requirement) DHS: Clinical lab services, PT and occupational therapy, radiology and certain other imaging services (MRI, CT, ultrasound), radiation therapy and supplies, durable medical equipment and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics, and prosthetic devices and supplies, home health services, outpatient prescription drugs, inpatient and outpatient hospital services 18

19 Anti-Kickback Law Prohibits anyone from knowingly and willfully offering, paying, soliciting, or receiving any remuneration in order to induce or reward referrals of items or services reimbursable by any federal healthcare program Intent based (knowing and willful violation) Not limited to physician, covers any healthcare provider participating in federal healthcare programs Carries criminal, civil, and administrative penalties Violation if just one purpose is to induce referrals, even if there are other legitimate business reasons for the payment 19

20 Stark and Anti-Kickback Law Exception and Safe Harbor: Overview Stark: In order for a lease arrangement with a referral source to be compliant with the Stark law, the leasing arrangement must meet all elements of the applicable Stark law exception AKS: While failure to comply with the applicable AKS safe harbor provision does not mean that a lease arrangement is per se illegal, to be protected by a safe harbor, an arrangement must fit squarely in the safe harbor 20

21 Elements of Stark Office Space Rental Exception i. Written rental or lease agreement, signed by the parties (does not have to be in one writing) ii. iii. iv. Identify the specific premises rented (e.g., floor plan and square footage) Agreement is at least one year in duration (and if terminating during the term, parties are restricted from entering into a new agreement for the same space during the first year of the original term of the agreement) Space leased does not exceed that which is reasonable and necessary for legitimate business purposes of the lease v. Space (e.g., exam rooms, physician offices) must be used exclusively by Lessee vi. Lessee may make payments for common area maintenance fees or charges only if payments do not exceed lessee s pro rata share of expenses for the space 21

22 Elements of Stark Office Space Rental Exception vii. viii. ix. Rental charges over the term of lease arrangement are set in advance and are consistent with FMV Lease arrangement would be commercially reasonable even if no referrals were made between the parties Rental charges over the term of the lease arrangement are not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties or determined using a formula based on a percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the office space; or per unit service rental charges, to extent that such charges reflect services provided to patients referred by lessor to lessee Note: per click/per use arrangements are not permitted 22

23 Holdover Parties relying on the holdover provisions must still have contemporaneous documents establishing that the holdover continued on the same terms and conditions as the immediately preceding arrangement Parties are not permitted to amend the terms and conditions of an arrangement during a holdover, because such changes pose a risk of program or patient abuse To ensure that compensation is consistent with or does not exceed fair market value, as applicable, the proposed holdover provisions require that the holdover arrangement satisfy all the elements of the applicable exception when the arrangement expires and on an ongoing basis during the holdover Thus, if office space rental payments are fair market value when the lease arrangement expires, but the rental amount falls below fair market value at some point during the holdover, the lease arrangement would fail to satisfy the requirements of the applicable exception 23

24 Holdover Lessor can charge a holdover premium, provided that the amount of the premium was set in advance in the lease agreement (or in any subsequent renewal) at the time of its execution and the rental rate (including the premium) remains consistent with fair market value and does not take into account the volume or value of referrals or other business generated between the parties. CMS cautions that, depending on the facts and circumstances, the failure to apply a holdover premium that is legally required by the original arrangement may constitute a change in the terms and conditions of the original arrangement In such circumstances, the holdover arrangement will not meet the exception requirement that the arrangement continue on the same terms and conditions as the immediately preceding arrangement In addition, the failure to charge a holdover premium may constitute the forgiveness of a debt, thus creating a secondary financial relationship between the parties that must satisfy the requirement of an applicable exception 24

25 Elements of AKS Space Rental Safe Harbor The lease agreement is set out in writing and signed by the parties 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 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. The term of the lease is for not less than one year The aggregate rental charge is set in advance The charge is consistent with fair market value The arrangement is commercially reasonable 25

26 Practical Takeaway Regarding the Agreement Term Both Stark and AKS require that the lease agreement be at least for one year If agreement is terminated for any reason within the first year of the term, the parties cannot enter into another lease agreement for the same or substantially similar space prior to the first anniversary of the commencement date of agreement SAMPLE LANGUAGE: If this [Lease/Sublease] is terminated for any reason within the first year of the Term, the parties will not enter into another sublease agreement for the same or substantially similar space prior to the first annual anniversary of the Commencement Date. The provisions of this Section shall survive the termination of this [Lease/Sublease]. 26

27 Practical Takeaways: Suggested Language The parties agree that it is not a purpose of this [Lease/Sublease] to exert any influence over the reason or judgment of any party with respect to the referral of patients or other business between [Landlord/Sublandlord] and [Tenant/Subtenant], but that it is the parties expectation that any referrals which may be made between the parties shall be and are based solely upon the medical judgment and discretion of the patient s physician. The parties further agree and acknowledge that (a) Rent is (i) set forth in advance; (ii) consistent with fair market value in an arms length transaction; (iii) does not take into account the volume or value of any referrals or other business generated between the parties; and (iv) would be reasonable even if no referrals were made between the parties, and (b) the [Premises/Subleased] Premises do not exceed the reasonable square footage needed for the legitimate business plans of [Tenant/Subtenant]. 27

28 Practical Takeaway: Renewals Compliance Confirm lessee is using the same space Confirm lessee is paying and terms of agreement are followed (e.g., if part time, using during the correct days and times) Renewal rates set within lease Ensuring the agreement does not renew at a rate that is not within FMV Consider escalation clauses SAMPLE LANGUAGE: The Parties may extend the Initial Term for additional period(s) (the Renewal Term ) by entering into an amendment of this Lease (the Amendment ) at least 30 days prior to the expiration of the Initial Term. The Initial Term as may be extended by the Renewal Term is hereby referred to herein as the Term. Prior to the commencement of the Renewal Term, Landlord shall confirm that the then current Rent rate is at fair market rental value. If it is not, Landlord shall adjust Rent to fair market rental value which adjustment shall be reflected in the Amendment. If the Parties do not enter into the Amendment at least 30 days prior to the expiration of the Initial Term, then this Lease shall terminate on the last day of the Initial Term. 28

29 Fair Market Value Rent RENT = PRICE PER SQUARE FOOT X SQUARE FEET Independent Third Party Analysis Preferred Reliable Measurements 29

30 Settlement Example Appraiser Whistleblower $16.5 million settlement Appraiser ($3.1 million of the settlement) Real estate appraiser hired by hospital filed a qui tam complaint alleging that Parkridge paid excessive rent to a real estate entity owned by physicians whose practice Parkridge had previously purchased Appraiser s original appraisal = range of $8.10 to $10.10 per usable square foot Lease ultimately entered into had a rate of $12.59 per foot, based upon an alleged erroneous fair market value study from an unlicensed and uncertified appraiser 30

31 Timeshare Exception to Stark This relatively new exception to Stark law (2016) permits physicians, physician organizations, and hospitals to share space, among other things, provided that the following conditions are met: the arrangement is set out in writing, signed by the parties, and specifies the premises, equipment, personnel, items, supplies, and services covered by the arrangement the arrangement is between a physician (or the physician's group) and (i) a hospital; or (ii) a physician organization of which the visiting physician is not an owner, employee, or contractor the premises covered by the arrangement are used (i) predominantly for the provision of evaluation and management ( E/M ) services to patients; and (ii) on the same schedule CMS emphasized that the use of office space by the physician solely or primarily to furnish DHS to patients (as opposed to E/M services) would not be protected by the new exception. 31

32 Timeshare Exception to Stark The arrangement is not conditioned on the referral of patients by the physician who is a party to the arrangement to the hospital or physician organization of which the physician is not an owner, employee, or contractor The compensation over the term of the arrangement is set in advance, consistent with fair market value, and does not take into account the volume or value of referrals Not based on the percentage of the revenue or per click charges The arrangement is commercially reasonable The arrangement does not violate AKS The arrangement does not convey a possessory leasehold interest in the space subject of the arrangement Does not protect the arrangements in which physicians are given preferred time slots based on their referrals to lessor The exception does not apply to DHS entities other than physicians, physician organizations, and hospitals (e.g., independent diagnostic testing facilities or labs) 32

33 Strategies for Mitigating Risk a) Internal monitoring and auditing of existing leases i. Compile an update list of existing arrangements ii. Request documentations of each arrangement (including documentation supporting FMV) b) Formalize leasing process and policies c) Create compliant lease template 33

34 HIPAA in The Context of Space Rentals Covered entity is responsible for safeguarding to protected health information ( PHI ) from landlords HIPAA violations result in civil penalties minimum $100/violation if did not know maximum $50,000/violation annual cap of $1.5 million for identical violations 34

35 Medical Office Leases - Additional Considerations

36 Environmental Laws Medical Waste blood/bodily fluids, waste pharmaceuticals, chemotherapy or nuclear waste, controlled substances proper storage (security), labeling, training, and disposal indemnification Asbestos Mold Clean air (incinerators, labs) Underground storage tanks Clean water (wastewater discharge, floor drains, and spill prevention) 36

37 Tax Laws Private Inurement and Private Benefit 37 Private Inurement A concern for non profit entities seeking to maintain their tax exempt status (Section 501(c)(3) of the Internal Revenue Code) no part of net earnings can benefit a private shareholder or individual (direct or indirect/close relations with a significant degree of control) FMV, duration of term, and rent/customary transactions Private Benefit non profit entity must operate exclusively for exempt purpose and only an insubstantial portion of its activities can relate to non exempt purpose lease between non exempt and exempt organization Rev. Proc tax exempt bond financing limits on contracts exempt entities make (private business use/management contracts) safe harbor

38 Healthcare Provisions Hospital or Physician Parties Permitted use limited scope/prohibited uses on campus imaging and surgical exclusive use covenants Ethical and religious directives (end of life; OB/GYN & family planning; urology) Medical staff requirements active medical staff privileges recourse Ground leases Assignment rights Death or disability termination rights 38

39 Term Issues Term, Surrender, and Termination Rights Term commencement (not just opening licensure and certification) longer terms (5 7 vs years) Surrender continuity of care relocation protected health information Termination Rights excluded provider compliance with laws reimbursement 39

40 Operational Concerns Utilities Interruption generators rent abatement self help Disproportionate use sub metering electrical engineering studies 40

41 Operational Concerns Parking & Access Handicapped spaces Code requirements in a retail center ADA Life safety 41

42 Subleasing Typical Subtenants Urgent Care Centers lab radiology Medical Office Buildings physicians competition exclusive uses ERs lab imaging pharmacy ancillary services/providers 42

43 Allison Nelson Denver, CO (303) Ayman Rizkalla Washington, D.C. (202)