Negotiating a lease? "Fair market value" is the mantra

Whether you're the tenant or the landlord, setting the correct lease value can save you from Stark law scrutiny.

By Mike Norbut, amednews staff. Jan. 27, 2003.

If you're renting your office, or if you own a building with space to lease, health care attorneys say you should remember three magic words.

Fair market value.

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In the complicated world of Stark laws and anti-kickback legislation, it's easy for a physician to get in trouble without even trying, and it's difficult to explain misunderstandings or misconceptions if government investigators come calling, as they did in a recent South Dakota case that resulted in hefty fines for a hospital and a physician group.

Attorneys preach vigilance and a conscientious attitude to ensure that lease agreements stand up to investigator scrutiny. Even if the onus of preparing the documents and researching rental rates falls on the other party, such as a hospital or another medical group, investigators will still demand explanations from everyone involved, attorneys said.

"We live in a world of glass houses, and when these kinds of rules aren't really complied with, both parties will be asked questions," said Tom Crane, a Boston-based attorney with the firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. "No one wants to be on the receiving end of a subpoena."

The key to avoiding that situation is to make sure the rent you're paying or charging is consistent with market rates and that you have a current, signed lease, attorneys said. Those are the first tests to see if there are any special financial arrangements that could be attached to referrals.

Stark "self-referral" laws, which are pursued in civil court, generally prohibit physicians from referring Medicare or Medicaid patients to a facility for "designated health services" -- most laboratory or diagnostic services offered by a hospital or clinic -- if the physician has a financial interest in that particular facility.

Anti-kickback laws, which are more general criminal statutes, prohibit the acceptance or solicitation of anything of value as an inducement for patient referrals for services payable by a government program.

Some points of safety

There are "safe harbor" provisions or exceptions to both laws, including lease agreements. To meet those provisions, though, the physician and other party must have a signed agreement for at least one year, and the lease cannot take referral values into account when fair market value is being determined.

"I think [fair market value] is the primary trigger point that gets their ire up," said Gregg Wallander, an Indianapolis-based attorney with the firm Hall, Render, Killian, Heath, & Lyman. "If you don't have a written agreement, you may be in danger."

Both of those points were at the heart of a recent dispute in Rapid City, S.D., between the U.S. Dept. of Justice and an oncology group.

In a settlement announced in late December 2002, Rapid City Regional Hospital paid the government $6 million to resolve allegations that it had violated Stark laws by improperly billing Medicare for patient referrals it received from Oncology Associates, a group to which the hospital allegedly was leasing office space for below market value.

The physician group also settled with the government for $525,000, resolving claims it overcharged Medicare for some patient visits.

The settlement is said to be the largest in the nation under Stark law, according to an affidavit filed by the whistle-blower, Karen Johnson-Pochardt, a former employee of the hospital's Cancer Care Institute.

Fair market value at heart of case

According to Johnson-Pochardt's complaint, the hospital in 1991 entered into a three-year lease agreement with Oncology Associates in which the group paid the hospital $19,000 a year for 400 square feet of office space.

The complaint also alleges that at the same time, the hospital made Larry Ebbert, MD, a medical oncologist and head of the group, medical director of its Cancer Care Institute at a salary of $20,000 per year.

Between 1994, when the lease expired, and at least 2000, the group still paid the same rental rate, even after moving into new office space, the complaint alleges.

The hospital also provided other items at below fair market value, including staff services, common space, furniture and equipment, the complaint alleged.

The hospital denied any wrongdoing in the case, saying in a prepared statement that it settled to avoid "costly and time-consuming litigation." Dr. Ebbert declined to comment on the case.

Avoiding problems

While having a legitimate lease agreement will help you avoid hassles if you're the tenant, it's essential to avoiding litigation if you're leasing.

Doctors who own medical office buildings and rent to other doctors who could refer them patients have to be especially careful of Stark laws, said Maria Abrahamsen, head of the health care practice group at Dykema Gossett, a Detroit-based law firm.

Likewise, just as a group can run into trouble by paying too low a rent to a hospital, it could receive similar scrutiny for charging a hospital a rent that's higher than fair market value, attorneys said. Inflated rent can appear to be a kickback for referrals, they added.

In almost every case, it's best to seek out a third-party opinion regarding the appropriate rent value, attorneys said. Whether it's talking with area real estate agents or an appraiser, getting that expert opinion is the best way to avoid problems -- and to defend yourself against future scrutiny, they said.

"As an attorney, I would always say get a third-party objective review," Wallander said. "I would talk to an appraiser."