On February 23, 2000, the Office of Inspector General ("OIG") of the Department of Health and Human Services released a Special Fraud Alert focusing on the rental of space in physicians’ offices by persons or entities that provide health care items or services to patients referred, either directly or indirectly, by the physician-landlords (the "Fraud Alert"). This Fraud Alert stems from several reports received by the OIG that suppliers whose businesses depend upon such referrals are being requested to make, and are making, rental payments unnecessarily or in excess of fair market value for the space at issue in order to maintain the physicians’ potential referrals. A copy of the Fraud Alert is attached for your reference.

The OIG is concerned that rental payments in such circumstances may be disguised kickbacks to the physician-landlords to induce referrals in violation of the federal anti-kickback statute. In the Fraud Alert, the OIG identifies three particular rental arrangements between physician-landlords and supplier- or provider-tenants in which the physicians typically refer patients to the tenants:

The Fraud Alert, like others, does not create new law, but it does set forth guidance to physicians and suppliers about how to structure space rental arrangements so as to fall within the law. In addition, consistent with prior fraud alerts, the OIG requests that individuals contact an OIG regional office if they have information about providers or suppliers engaging in activities described in the Fraud Alert.

The OIG identifies three features commonly found in suspect rental arrangements. These features are: the appropriateness of rental agreements; rental amounts; and time and space considerations.

A. Appropriateness Of Rental Agreement: Application To DMEPOS Suppliers

The threshold inquiry made by the OIG when examining a rental agreement is whether payment of rent is appropriate at all. Rental payments for space traditionally made available to suppliers for no consideration or a nominal amount would be viewed as suspect. The OIG specifically notes that consignment closets used by DMEPOS suppliers in physicians’ offices are generally provided free of charge or for a nominal charge as an accommodation for the benefit of patients, and that any rent payments made in such instances would be deemed suspect. Thus, the balance of the Fraud Alert is primarily applicable to CORFs and mobile diagnostic equipment suppliers, along with other non-DMEPOS entities leasing physician office space.

A footnote to the OIG’s discussion of consignment closets by DMEPOS suppliers notes that the Fraud Alert does not address the appropriateness of such arrangements under the Health Care Financing Administration’s ("HCFA") supplier standards. Such interpretation by HCFA and the National Supplier Clearinghouse ("NSC") has been pending for some time, with the issue being whether equipment located in a consignment closet is sufficiently within the supplier’s "control" to meet the standards. We question concerns HCFA and the NSC have expressed on this issue in the past, but will await more formal guidance in the future. We anticipate that this issue will be addressed in revised supplier standards, which are expected to be issued later this year.

B. Rental Amounts

The OIG has long stated that any rental payments made to referral sources should reflect fair market value, be set in advance, and not take into account the volume or value of referrals or other business generated between the parties. Fair market value to the OIG does not mean what other suppliers similarly situated would be willing to pay for the same space. Rather, rent payments should reflect what parties not in a position to refer business to each other would be willing to pay for comparable property in an arms-length transaction. Moreover, absent rare circumstances, any rent paid by a supplier or provider to a physician should not exceed the lease payments made by the physician under the primary lease agreement.

The OIG sets forth certain examples of what it would deem to constitute suspect arrangements. These examples include:

• Rental amounts for subleases that exceed the rental amounts per square foot in the primary lease;
• Rental amounts that are subject to modification more often than annually;
• Rental arrangements that set a fixed fee per hour, but do not fix the number of hours or schedule of usage in advance, i.e., "as needed" arrangements; and
• Rental amounts that vary based on the volume or value of patient referrals, or are conditioned upon the receipt of payment by the lessee from a federal health care program.

It should be noted that the presence of any of these provisions in a lease agreement between a physician and provider will not constitute a violation of the anti-kickback statute per se. For example, often the square footage rental amount under a sublease for a small portion of the overall premises will exceed the square footage amount of the prime lease. In such instances, however, the parties must be able to prove to the OIG that the subleased square footage rent represents fair market value.

C. Time And Space Considerations

Suppliers or providers should only rent premises of a size and for a period of time that are reasonable and necessary for the commercially-reasonable business purpose of the arrangement. According to the OIG, rental of space in excess of the lessee’s needs or for a duration longer than necessary for the provider to furnish its services gives rise to a presumption that the payment is a disguised kickback.

Considering the OIG’s view that "as needed" arrangements are suspect, parties should pay special consideration to the amount of space and/or time needed by the tenant to effectively and efficiently furnish its services or supplies in the physician’s office. Often, however, this is not ascertainable at the time of entering into the arrangement, absent some assurance by the physician as to anticipated usage over the period of the sublease. The OIG, however, provides no guidance in the Fraud Alert as to how parties should proceed in light of this apparent conflict.

Typical rental arrangements will involve one or more of three possible space components: exclusive office space; interior office common space; and building common space. Rent payments should be prorated to accurately reflect the amount of space and duration of time the premises are used. Any proration should be contemporaneously documented and updated as necessary.

A. Exclusive Office Space

Rent for exclusive office space used by the tenant should be based on the ratio of the time the space is used by the tenant to the total amount of time the physician’s office is in use, e.g., 40 hours per week. In addition, rental payments should be based on the proportion of the space utilized by the tenant to the total amount of space comprising the physician’s office. The OIG provides a formula in the Fraud Alert for allocating exclusive office space used by supplier- or provider-tenants.

B. Interior Office Common Space

If a supplier or provider also makes use of common interior office space, such as the waiting room or restrooms, it is appropriate that the rent payments to the physician also include the tenant’s proportionate share for the use of such common space. Any apportionment must take into account the physician’s use, as well as any other subtenants’ use, of these common spaces.

C. Building Common Space

In many instances, physicians pay separate charges for common areas within and without the building, such as the lobby, elevator, and lawn maintenance. In those instances, the OIG acknowledges that prorated rent payments by suppliers or providers may be appropriate.

The OIG strongly recommends that physicians and providers or suppliers to whom the physicians make referrals structure any rental arrangements to comply with the space rental safe harbor. See 42 C.F.R. § 1001.952(b). Compliance with the safe harbor requirements will ensure the participants protection from prosecution under the anti-kickback statute. The safe harbor requirements, all of which must be met in order to qualify for protection, are as follows:

The OIG also recommends that any office equipment or personal services offered by a physician to a sublessee be structured to comply with the equipment rental safe harbor and personal services and management contracts safe harbor. See 42 C.F.R. §§ 1001.952(c) and (d).

We note in closing that any compensation arrangements with physicians should be scrutinized carefully, both for potential implications under the anti-kickback statute (as discussed in this Fraud Alert), and also under the "Stark" physician self-referral statute. See 42 U.S.C. §1395nn. Given the unique ability of physicians to direct and affect utilization of health care services, such arrangements must be crafted with particular care.

Please do not hesitate to contact Elizabeth B. Carder (202/414-9213), Scott D. Chenevert (202/414-9489), or any member of the Reed Smith health care group with whom you work if you would like additional information or if you have any questions.

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