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OIG fraud alert for MD office space rental

By Michael R. Burke, Esq.

On February 23, 2000, the Office of Inspector General of the Department of Health and Human Services (OIG) issued a Special Fraud Alert dealing with the rental of space in physician offices by persons or entities to which the physician-landlord refers. This Special Fraud Alert describes some of the potentially illegal practices that the OIG has found in such rental arrangements.

The OIG is concerned with rental arrangements in which physicians and other suppliers that provide health care items or services rent space in the offices of physicians or other practitioners who refer patients to the physician or supplier leasing such space. The OIG’s basic concern is that rental payments in such arrangements may be disguised kickbacks paid to the physician-landlords to induce referrals. The Special Fraud Alert notes that the OIG has received many reports that the payment of rent in such situations is either unnecessary or in excess of the fair market value of the space, and that such payments are ostensibly made to obtain access to the physician-landlord’s potential referrals.

The OIG specified three questionable features of suspect rental arrangements for space in physicians’ offices: the appropriateness of rental agreements, the rental amount, and time and space considerations. The initial inquiry that must be made when examining these rental arrangements is whether the payment for rent is appropriate at all. Payments for the rental of space that traditionally has been provided for free or for a nominal charge as an accommodation between parties for the benefit of a physician-landlord’s patients, such as consignment closets for durable medical equipment suppliers, may be disguised kickbacks. This is the only specific example given by the OIG as to where a rental arrangement may not be “appropriate”; however, the OIG notes that its discussion in this Special Fraud Alert is not exhaustive, and only gives examples of indicators of potentially unlawful activity.

Rental amounts should be fixed in advance, set at fair market value and not take into account, directly or indirectly, the volume or value of referrals or other business generated between the parties. The OIG notes that fair market rental payments should not exceed the amount paid for comparable property. Where the physician-landlord is leasing the space itself, the rate paid by the supplier or provider who is subleasing from the physician-landlord should not exceed the rate paid by the physician in the primary lease for the office space, except in rare circumstances.

The OIG provides examples of what it considers to be suspect arrangements with regard to the amount of rent paid. These examples include: rental amounts in excess of amounts paid for comparable property rented in arm’s length transactions between persons not in a position to refer business; rental amounts for subleases that exceed the rental amounts per square foot in the primary lease; rental amounts that are subject to modification more than annually; rental amounts that vary with the number of patients or referrals; and rental arrangements that set a fixed rental fee per hour, but do not fix the number of hours or the schedule of usage in advance (i.e., “as needed” arrangements).

The OIG states that a physician-landlord should only rent premises of a size and for a time that is reasonable and necessary for the commercially reasonable business purposes of the physician or supplier renting the space. Rental of space that is in excess of a physician or supplier’s needs creates the presumption that the rental payments are merely payments of remuneration for referrals. Examples of suspect arrangements include rental amounts paid for space that is not necessary or not used, rental amounts paid for a period of time when the rented space is not in use by the supplier, and non-exclusive occupancy of the rented portion of space.

The OIG goes on to state that the rental amount calculation should prorate rent based on the amount of space and the duration of the time that the premises are used, to be documented and updated as necessary. Depending upon the circumstances of a given rental arrangement, the rent paid by a physician or supplier to a physician-landlord can consist of three components: exclusive office space, interior office space and building common space.

The rent for exclusive office space should be calculated based on the ratio of time that the space is in use by the physician or supplier to the total amount of time that the physician-landlord’s office is in use. In addition, the rent should be calculated based on the ratio of the amount of space that is used exclusively by the supplier to the total amount of space in the physician-landlord’s office.

The OIG recommends that annual rent should therefore be calculated by using the following formula: (1) the rental amount per day (annual rent of primary lease divided by number of work days per year) multiplied by (2) the percentage of physician office space rented by the physician or supplier (square feet exclusively occupied by supplier divided by total office square feet) multiplied by (3) the percentage of each day rented by the physician or supplier (number of hours used by supplier divided by total office hours) multiplied by (4) the number of days per year rented by the physician or supplier.

In addition to the payment for exclusive office common space, where a physician or supplier uses interior office common areas for their patients (e.g., a waiting room), it may be appropriate for the physician or supplier to pay a prorated portion of the charges for such common space to the physician-landlord.

However, the charge for the common space must be apportioned among all physicians and subtenants who use the interior office common space based on the amount of non-common space that they occupy and the duration of such occupation. In addition, if a physician-landlord pays a separate charge for common areas shared by all tenants of the building, such as a building lobby, it may be appropriate for the physician-landlord to charge the physician or supplier a prorated portion of such charge. The prorated portion of such charge for building common space would be calculated in the same manner as interior office common space.

Finally, the OIG strongly recommends that parties to rental arrangements between physician-landlords and physicians and suppliers to whom the physicians refer or for which physicians otherwise generate business make every effort to comply with the space rental safe harbor to the federal Anti-Kickback Statute. In addition, if a physician-landlord also provides office equipment or the personal services of the physician’s office staff, these arrangements should also be structured to comply with the equipment rental safe harbor and the personal services and management contracts safe harbor, as appropriate.

As you can see, this Special Fraud Alert can have a wide ranging impact on physician-landlords who rent to other physicians and suppliers who provide items or services in their space when the physician-landlord makes referrals or generates business for the persons or entities using their space. If you are a party to such an arrangement, it would be wise for you to analyze such an arrangement at this time in light of the new Special Fraud Alert issued by the OIG.

Michael R. Burke, Esq., is a shareholder in the health care law firm of Kalogredis, Sansweet, Dearden and Burke, Ltd. located in Wayne, Pa.

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