United States: Healthcare Real Estate Deals: Two Laws You Should Know

David Weissman is an Associate in our Boston office.

Healthcare real estate is one of the fastest growing construction sectors in terms of both the quantity and the size of projects. One factor contributing to this rapid growth is that hospitals and health systems can sell or lease their holdings to third parties. For example, a leading trend for large health systems is to convey real estate to investors under a long term ground lease for a term of up to 99 years. The lease will usually be subject to certain limitations, such as the condition that the land or improvements not be used to compete with the health system's business.

But when healthcare providers participate in these transactions, they implicate an array of laws and regulations that may not be familiar to professionals who handle conventional real estate transactions. In particular, the Anti-Kickback Statute and Stark Law may be implicated when a healthcare provider sells or leases real estate to any third party.

The Anti-Kickback Statute

The Anti-Kickback Statute broadly prohibits the exchange of any value in an effort to induce or reward referrals. Therefore, leasing space to a clinic that may refer patients to the healthcare system from time to time could violate the Anti-Kickback Statute unless carefully structured.

Leases between healthcare providers and potential referral sources should be designed to fall within a statutory exception (termed "safe harbor") in order to avoid governmental scrutiny. The safe harbor for space rental includes the following six requirements:

  1. The lease agreement must be set out in writing and signed by the parties;
  2. The lease must cover all of the premises leased between the parties for the term of the lease, and specify the premises covered;
  3. 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 (i.e. a time-share agreement) the lease must specify exactly the schedule of such intervals, their precise length, and the exact rent for such intervals;
  4. The term of the lease must be not less than one year;
  5. The aggregate rental charge must be set in advance, consistent with fair market value in arms-length transactions, and not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal health care programs;
  6. The aggregate space rented may not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.

In order to be fully protected from liability under the Anti-Kickback Statute, any lease must squarely fit within all six of the above requirements. However, even if a transaction does not entirely fit within the safe harbor, its risk of fraud and abuse may be sufficiently low to avoid liability. Such transactions will be evaluated on a case-by-case basis, and thus it is important that a full analysis of the facts be considered.

The Stark Law

The Stark Law prohibits physicians from referring Federal health care program patients to any entity that furnishes designated health services if the physician or an immediate family member has a financial relationship with the entity. Thus, the Stark Law may be implicated in a variety of real estate transactions involving physicians. For example, if a physician group owns a medical office building and leases space to another physician group to whom they often refer patients, the Stark Law would be implicated. Unlike the Anti-Kickback Statute, Stark is a strict liability statute, which means that the physician's lack of intent to violate Stark is not a defense to liability.

To determine if Stark applies to a leasing arrangement, consider the following:

  1. Whether a physician or immediate family member is involved;
  2. Whether the physician or family member has a financial relationship or interest in the leasing entity;
  3. Whether any referrals between the entities may be present;
  4. Whether "designated health services" may be furnished; and
  5. Whether any claims will be submitted for payment by a Federal health care program (e.g. Medicare/Medicaid).

If these factors are present, the arrangement must be structured to fit within an exception to the Stark Law. Like the Anti-Kickback Statute, an exception for the rental of office space may be applicable under Stark:

  1. The lease agreement must be set out in writing, signed by the parties, and specify the premises covered;
  2. The term must be not less than one (1) year;
  3. The space rented must not exceed that which is reasonable and necessary for the legitimate business purposes of the lease, and must be used exclusively by the lessee;
  4. The rental charges must be set in advance and consistent with fair market value, not taking into account the volume or value of referrals or other business generated between the parties;
  5. The agreement would be commercially reasonable even if no referrals were made between the lessee and lessor;
  6. Although the lease may be terminated with or without cause during the lease's initial term, the parties may not enter into another agreement for the same space during the first year of the original lease term.

Given the broadly applicable provisions of the Anti-Kickback Statute and Stark Law, it is not only important to structure healthcare real estate transactions to fit within, or close to, an available safe harbor, but also to include protective language within any related agreements and documentation. Memorializing the parties' intent or the legitimate purpose behind irregularly structured arrangements may also be helpful to ease governmental scrutiny.

There are a host of other considerations that may affect the sale or leasing of healthcare real estate, but what is most important is to be aware that such transactions implicate a variety of laws and regulations that are not triggered outside of the healthcare context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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