Everyone working in the healthcare real estate sector should have some basic knowledge of the Physician Self-Referral Act, otherwise known as the Stark Law. In a nutshell, the Stark Law prohibits a healthcare service provider, such as a hospital or outpatient facility, from submitting claims for Medicare/Medicaid reimbursement for services rendered to a patient referred by a doctor with whom the service provider has a financial relationship unless the relationship fits within certain exceptions. The public policy rationale was to discourage physicians from allowing financial considerations to influence their professional judgment.
How does Stark impact medical office building leasing and development? When a physician leases office space from a hospital to which he refers patients or when a hospital leases space in a building owned by a referring doctor, the lease is considered a financial arrangement subject to Stark restrictions. As long as a specific lease transaction between a hospital and a physician continues to satisfy a few conditions, no Stark violation will result. These lease exception criteria include: a written lease that is signed by both parties that adequately describes the leased premises; a term of at least 1 year; premises that are commercially reasonable for the intended purpose (the intended purpose must be legitimate from a business standpoint).
Unfortunately under Stark there is no such thing as a permissible “technical violation,” that is, any violation, however insignificant or inadvertent, is a violation of a federal statute that carries stout sanctions imposed by the Centers for Medicare/Medicaid Services. These Stark sanctions include civil monetary penalties (up to $15,000 per claim submitted to CMS while the violation existed), exclusion from the federal Medicare/Medicaid programs, and exposure to whistleblower lawsuits. The reality is that most hospitals and hospital systems that own physician office space likely have dozens if not hundreds of technical, inadvertent violations of the Stark Law related to their leases with physicians or other referral sources. Until now, hospitals have dealt with this potentially serious situation by correcting any violations and moving on. The correction might take the form of executing a lease amendment extending a term, obtaining a missing signature or attempting to collect back rent. Occasionally a hospital would, out of an abundance of caution, report the violations to CMS. However, in certain instances this self-disclosure has backfired on the reporting hospital in a big way.
Condell Medical Center, a 283-bed hospital in Libertyville, Illinois, agreed to pay the federal government $36 million following the self-disclosure of certain violations of Stark and other healthcare compliance laws, which were discovered by a potential buyer during its due diligence investigation of the facility. St. John Health System in Tulsa, Oklahoma, disclosed technical violations of Stark and was hit with a $13.2 million settlement with CMS. Hospitals quickly realized that self-disclosure was no guaranty of lenient treatment at the hands of the feds, and news of these onerous settlements likely has had a chilling effect on further self disclosure.
Recently Congress enacted new statutes that will have an impact on hospitals’ decisions to self-disclose Stark violations. The Fraud Enforcement and Recovery Act of 2009 significantly expands the scope of the False Claims Act (most often used as the basis of the whistleblower cases) and imposes a clear obligation on hospitals to make repayments of Medicare or Medicaid reimbursement payments that may have been disqualified due to a Stark violation. The Patient Protection and Affordable Care Act actually requires self-reporting and repayment of disqualified claims, but more significantly gives CMS authority to negotiate and settle self-disclosed Stark violations without having to apply the strict statutory penalties imposed under Stark. PPACA requires CMS to establish protocols for self-disclosure within 6 months following enactment of the law. At this point in time, there has yet to be a self-disclosure of violations under the new rules, and hospitals (and their counsel) are holding their collective breath waiting to see how CMS treats the first self-disclosing entity. Understandably, with the stakes so high, no one wants to be first in line.
The impact from the new Stark self-disclosure rules could be significant. From the perspective of a hospital buyer, there may be a dampened enthusiasm for new transactions involving the purchase of MOBs, especially where the seller is an asset-challenged, not-for-profit system whose offer of indemnification against Stark liability is not exactly gold plated. It is not unusual for Stark violations, both technical and substantive in nature, to be discovered during the due diligence phase of such transactions. Potential hospital buyers will be less willing than ever to pull the trigger. From the hospitals’ standpoint, however, the changes could enhance the motivation to monetize their MOB portfolios. Monetization could accelerate in an effort by these service providers to shield themselves from the perceived arbitrary nature of CMS-enforced settlements following the now mandatory self-disclosure laws and the obligation to refund payments to CMS.
Many hospital chains and larger hospital systems currently hold both the hospital facility asset and the associated MOBs in a single subsidiary. This subsidiary entity would typically hold the hospital license and CMS provider number as well as the fee title to the MOBs on the campus. Because the subsidiary entity is the landlord to a building full of doctors, there is potential for violations since the subsidiary is also the entity that files Medicare/Medicaid claims to CMS. In the post-FERA and PPACA environment, hospital operators may see less risk in transferring ownership of their MOBs to a separate real estate holding company that doesn't hold the operating license, doesn't file reimbursement claims with CMS, and is not owned by the operating hospital entity. Leases to physicians under such an arrangement arguably would not be subject to Stark restrictions.
Time will tell with regard to the approach CMS decides to take, but in the interim, the name of the game should be reducing exposure to risk. This desire to reduce risk will have ripple effects through the healthcare real estate sector of the market.
— John Claybrook is a partner in the Nashville, Tenn., office of Waller Lansden.