Medical Office Leases: Navigating Stark Law, Anti-Kickback Statute, Operational Restrictions, and MoreDrafting to Address Reciprocal Easements, Ground Leases, HIPAA, ADA, and Environmental Issues Unique to Medical Office Use

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WEDNESDAY, APRIL 18, 2018

Presenting a live 90-minute webinar with interactive Q&A

Allison Nelson, Partner, Akerman, Denver

Ayman Rizkalla, Partner, Akerman, Washington, D.C.

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Medical Office Leasing: Navigating Stark, Anti-kickback and Other Concerns

Ayman Rizkalla

Allison Nelson

April 18, 2018

Medical Office Leasing –

Introduction

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

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Overview

• Today’s Discussion

• medical leasing trends – distribution and decentralization

• healthcare regulatory requirements

• other medical leasing considerations

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Medical Office Leasing –

Trends

Urgent Care Centers

Medical Lease Trends

• Rise in UCCs continue (adding 300-400 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

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Urgent Care Centers

Medical Lease Trends

• Locations

• shopping centers 34.1%

• freestanding 33.2%

• mixed use 13.6%

• medical office buildings 19.1%

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• Investors

• shift from physician owned to hospital owned

• physician JV with investors

• private equity (consolidating back office & utilizing direct marketing)

Free-standing ERs & Micro-Hospitals

Medical Lease Trends

• 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

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Free-standing ERs & Micro-Hospitals

Medical Lease Trends

• 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)

• 50-60 in pipeline

• $7M-$50M construction

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Hospitals Transforming into Healthcare Systems

Medical Lease Trends

• Expansion through UCC/ER; supplements physician acquisition model

• Move to integrated health

• shift in development design

• digital

• moving into communities

• “Provider-based” rules

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Employers Entering the Healthcare Market

Medical Lease Trends

• 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)

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Medical Office Leases –

Healthcare Regulatory

Requirements

The Governing Laws – Federal (with State Corollaries)

Fraud and Abuse Laws

• 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. §3729 – §3733 - 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

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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

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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

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Exception and Safe Harbor: Overview

Stark and Anti-Kickback Law

• 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

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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. Identify the specific premises rented (e.g., floor plan and square footage)

iii. 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)

iv. 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

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Elements of Stark Office Space

Rental Exceptionvii. Rental charges over the term of lease arrangement are set in advance and are

consistent with FMV

viii. Lease arrangement would be commercially reasonable even if no referrals were made between the parties

ix. 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

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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

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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

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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

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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

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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].

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].

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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

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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.

Fair Market Value Rent

RENT = PRICE PER SQUARE FOOT X SQUARE FEET

Independent Third Party Analysis

Preferred

Reliable Measurements

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Appraiser Whistleblower

Settlement Example

• $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

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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.”

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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)

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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

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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

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Medical Office Leases -

Additional Considerations

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)

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Private Inurement and Private Benefit

Tax Laws

• 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. 97-13

• tax-exempt bond financing

• limits on contracts exempt entities make (private business use/management contracts)

• safe harbor37

Hospital or Physician Parties

Healthcare Provisions

• 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

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Term, Surrender, and Termination Rights

Term Issues

• Term

• commencement (not just opening – licensure and certification)

• longer terms (5-7 vs. 7-15 years)

• Surrender

• continuity of care

• relocation

• protected health information

• Termination Rights

• excluded provider

• compliance with laws

• reimbursement

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Utilities

Operational Concerns

• Interruption

• generators

• rent abatement

• self-help

• Disproportionate use

• sub-metering

• electrical engineering studies

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Parking & Access

Operational Concerns

• Handicapped spaces

• Code requirements in a retail center

• ADA

• Life-safety

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Typical Subtenants

Subleasing

• Urgent Care Centers

• lab

• radiology

• Medical Office Buildings

• physicians

• competition

• exclusive uses

• ERs

• lab

• imaging

• pharmacy

• ancillary services/providers

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Allison NelsonDenver, CO(303) 640-2504allison.nelson@akerman.com

Ayman RizkallaWashington, D.C.(202) 393-6222ayman.rizkalla@akerman.com