New Ruling on Hospital-Physician Real Estate/Leasing Compliance

On April 18, 2017, the U.S. District Court for the Middle District of Florida adopted a magistrate judge's recommendation to grant summary judgment in favor of defendant BayCare Health System ("BayCare") in a False Claims Act whistleblower suit that focused on physician lease agreements in a hospital-owned medical office building, thereby dismissing the whistleblower's suit.

The whistleblower, a local real-estate appraiser, alleged that BayCare improperly induced Medicare referrals in violation of the federal Anti-Kickback Statute and the Stark Law because the lease agreements with its physician tenants included free use of the hospital parking garage and free valet parking for the physician tenants and their patients, as well as certain benefits related to the tax-exempt classification of the building. The brief ruling affirms the magistrate judge's determination that the whistleblower failed to present sufficient evidence to establish either the existence of an improper financial relationship under the Stark Law or the requisite remuneration intended to induce referrals under the Anti-Kickback Statute.

The alleged violation under both the Anti-Kickback Statute and the Stark Law centered on the whistleblower's argument that the lease agreements conferred a financial benefit on physician tenants – primarily, because they were not required to reimburse BayCare for garage or valet parking that was available to the tenants, their staff and their patients.  However, the whistleblower presented no evidence to show that the parking was provided for free or based on the physician tenants' referrals.  To the contrary, BayCare presented evidence stating that the garage parking benefits (and their related costs) were factored into the leases and corresponding rental payments for each tenant.  Further, BayCare presented evidence to support that the valet services were not provided to, or used by, the physician tenants or their staff, but were offered only to patients and visitors to "protect their health and safety."

In light of the evidence presented by BayCare, and the failure of the whistleblower to present any evidence that contradicted or otherwise undermined BayCare's position, the magistrate judge found that: (i) no direct or indirect compensation arrangement existed between BayCare and the physician tenants that would implicate the Stark Law, and (ii) BayCare did not intend for the parking benefits to induce the physician tenants' referrals in violation of the Anti-Kickback Statute.

This is not the first case to allege that a lease arrangement between a hospital and a physician tenant violates the healthcare fraud and abuse laws. For example:

• In 2014, West Penn Allegheny Health System entered into a $1,529,281.50 settlement of allegations that West Penn violated the federal False Claims Act when it leased space to physician-tenants at below market rates to incentivize referrals of patients to the hospital.
• In 2013, Intermountain Health entered into a $25,500,000 settlement with respect to allegations of numerous violations of both the Anti-Kickback Statute and Stark Law relating to eighteen (18) leasing arrangements with physicians that it failed to memorialize in signed written agreements.
• In 2012, HCA, Inc. entered into a $16,500,000 settlement based on allegations that one of its subsidiary hospitals leased space from a physician-owned diagnostics imaging center at a rate far in excess of fair market value.
• In 2002, McClaren Regional Medical Center scored a legal victory when it successfully defended a whistleblower suit alleging that McLaren violated the Anti-Kickback Statute and Stark Law by paying above-market rent for space that it leased in a building owned by referring orthopedic surgeons. The trial involved a "battle of the experts", with both the government and McClaren offering evidence presented by real estate appraiser and brokers to establish why the rent was, or was not, fair market value and commercially reasonable. The court took into account a number of different data points presented by each of the experts and ultimately found in favor of the defendant, McClaren.

There is clearly a continued focus on potentially problematic leasing arrangements between hospitals and referring physicians. However, the recent BayCare case builds on the key takeaways identified in the McClaren case, and further emphasizes that paying attention to detail at the time a lease is entered into can provide essential protection to landlord-tenant relationships that involve hospitals and referring physicians.

Based on the lessons learned in these cases, consider the following practical recommendations:

1. Review the lease "as a whole." Identify all space and services included in the arrangement – for example, usable and rentable square feet, utilities, common area, maintenance charges (e.g., janitorial, landscaping, snow removal), furnishings, administrative or other staffing, and IT and other "support" services.
2. Support the rental amount. Maintain documentation that supports why the rent is both fair market value and commercially reasonable in light of what the landlord is providing under the lease agreement. To this end, consider engaging real estate professionals (such as, appraisers and brokers) with knowledge and expertise in the local real estate market to provide a written valuation of the subject lease (taking into account all inclusive services).
3. Perform post-execution follow-up. Once the lease has been signed, periodically review the arrangement to confirm that it is being fully implemented, consistent with the lease terms.
4. Document the details. Even if a lease only covers a small space, the lease itself may include a number of complex details which ultimately affect the compensation terms and therefore, compliance with the fraud and abuse laws. Therefore, the more detail provided in the lease documentation, the better. For example:
   1. If a rental amount includes a number of lease components provided by the landlord (e.g., space, equipment and personnel), identify the cost break-down for each component.
   2. If the lease is executed prior to the tenant taking possession, have the parties sign and date a separate "lease commencement" document to memorialize when the terms of the lease go into effect.
   3. If the lease terms vary in any way from other similarly situated tenants, expressly identify the differences and provide an explanation, especially with respect to differences in services and rental amounts.
5. Satisfy an exception. Ensure that the arrangement satisfies all of the requirements of an applicable Stark law exception, keeping in mind that certain exception are explicitly not applicable to space leasing arrangements (e.g., the "fair market value compensation" exception).