Historical Legal Information
This article was published in November 2019 and is preserved for historical and educational purposes. It is not legal or compliance advice. Physician self-referral regulations and official guidance have changed since publication, including a major CMS modernization and clarification rule issued in 2020. Healthcare organizations, property owners, physicians, and investors should consult qualified healthcare counsel and review the current CMS physician self-referral law and regulations before acting.
Originating in 1988, the Stark Law is nothing new. However, it continues to have a reverberating effect for all parties surrounding the sale and leasing of medical office space. As described in the original 2019 newsletter, the Stark Law is a set of United States federal laws addressing physician self-referral. Specifically, certain referrals involving a physician or immediate family member’s financial relationship with a healthcare entity may be prohibited unless a recognized exception applies.
If self-referral sounds like an oxymoron, consider this example. Suppose you are a physician who has invested in an imaging center. The Stark Law requires the resulting financial relationship to fit within a recognized exception, or referrals and billing for certain designated services may be prohibited.
This law creates some interesting considerations for the healthcare real estate market. Of particular interest is the notion of fair market value.
Why the Concern About Fair Market Value?
Investopedia tells us that fair market value is the price that one party interested in buying or leasing a given property would pay to another party interested in selling or leasing that property. Therefore, the price of a particular space or building should represent its actual worth. So, if party A is interested in leasing space from party B, the $17 per square foot that is paid should generally be an accurate representation of the value of the space on the open market.
Over time, within the healthcare industry, this free-market-style approach got messy. Hospitals and medical centers grew, but so did patients’ needs for community-centered care and easier access to physicians. To meet demand, stay competitive and staff their facilities, hospitals and medical centers entered into property arrangements with practitioners. For various considerations like surgical referrals or affiliating their practice with a healthcare center, practitioners were able to utilize office space that was arguably granted to them below fair market value.
Impact on Healthcare Real Estate
As a result of the Stark Law and other legislation surrounding kickbacks, “off-book” considerations like those stated above cannot be accounted for in the price of medical office space. Although they had been around, at least in part, for more than 30 years when this article was published, these laws still created uncertainty for healthcare tenants leasing medical office space. Without a doubt, these reforms caused an increase in prices through the effects of actual fair market value. They also created new practice paradigms. Individual providers might look for significantly larger suites with the hope of bringing more providers into the practice to offset fair-market property rental or purchase costs.
Hospitals with attached or adjacent medical office buildings must be careful in considering property usage in light of fair-market-value regulations. Outbuildings and annexes cannot be used improperly as incentives for attracting top-tier practitioners. That may create heavy burdens for less profitable medical institutions.
Navigating Regulations
Medical professionals, hospitals, and other facilities need to consult experienced legal and real estate professionals when assessing opportunity, risk, and compliance. Some providers had faced seven-figure penalties because they conducted “business as usual.”
The pitfalls can be numerous. For instance, a doctor who owns a building and plans to provide services to a hospital must carefully evaluate an arrangement in which the hospital leases that property. As another example, a health system attempting to sell medical office buildings previously leased to physicians may face scrutiny during due diligence if those leases were noncompliant.
Working with qualified healthcare counsel and experienced commercial real estate professionals can help healthcare organizations identify possible issues and obtain appropriate, independent support for fair-market-value decisions.
This article originally appeared in Healthcare Realty Group’s November 2019 newsletter. Its legal descriptions, examples, interpretations, penalty discussion, market commentary, and property listings reflect the original publication date and should not be relied upon as current legal guidance.
