When appraising medical office facilities associated with hospitals or other medical groups there may be a reflexive reaction to view the lease rental rates as non-market because of the relationship between the business entities. We believe this is often a mistake. Due to anti-kickback laws medical facilities and doctors are highly motivated to ensure lease agreements are at market levels.
Since the government pays huge amounts of money for medical care, they try to ensure that financial considerations do not influence doctors’ professional judgement. The Anti-Kickback Law (AKL) criminalizes payments made to any parties for referrals for the sale of medical services or products that are reimbursed by the federal government. It is unethical for physicians to pay referral fees. The Stark Act prohibits certain referrals and applies to physicians. Sweetheart lease arrangements between medical facilities and doctors are not permitted as they could skew proper care of patients and the cost of services.
The Stark Act and AKL directly impact leasing arrangements involving physicians, physician organizations and others who furnish items and services payable by Medicare, Medicaid and other federal and state health care programs. The Stark law prohibits a physician from referring a Medicare or Medicaid patient to any entity if the physician has a financial relationship with that entity. Leases are included in this restriction unless the lease fits within certain strict parameters. Violations of the law can have severe penalties including exclusion from Medicare and Medicaid reimbursement, as well as very high fines.
The knowing and willful solicitation of any remuneration, direct or indirect designed to induce referrals or the purchase, lease or ordering of any service is prohibited. Remuneration under the Anti-Kickback Law is any transaction that does not reflect fair market value for goods or services.
Other requirements state a lease must be commercially reasonable even if no referrals are made between landlord and tenant. Leases must be set in advance, in writing, and must account for tenant improvement allowances and a host of other restrictions.
Given the legal restrictions in place, it would be difficult to argue out of hand that leases between physician groups and other medical parties are not at a market level consideration simply because they may do business with each other.
*Descriptions of the Stark Rule and AKL were derived from a paper Stark Reality: A Primer on Medical Office and Health Care Leasing Issues by Barbara Mueller of Davis Graham & Stubbs LLP.
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