MANAGING MEDICAL OFFICE BUILDINGS

as our health-Care system expands and increases in sophistication, so does the real estate that houses all our country’s various hospitals, clinics and medical offices. Years ago, healthcare-real-estate development was pretty straightforward. Developers constructed facilities as big as they could and leased out every square inch to any physician group willing to pay the most money per square foot. But nowadays the medical office is an integral part of delivering an ever-demanding continuum of care. Healthcare-real-estate facilities are now designed and built to closely tie to how their tenants support patient care. This is forcing care givers to work together to provide healthcare services and real-estate services to each other in order to better service their patients.

This changing business model spawns many legal and regulatory risks and challenges that medical-office landlords and property managers must comply with when leasing property to health-care providers. Most real-estate professionals who are not familiar with these complex laws could find themselves subjected to extensive monetary and criminal penalties. This article will summarize two major laws – HIPAA and federal anti-referral statutes.

• A “Covered Entity” is any health-care plan, provider, or service that stores and transmits PHI in an electronic form and receives some type of government-backed reimbursement (Medicaid, Medicare, VA benefits, etc.).

but that both sides comply with HIPAA’s privacy and safeguard rules. In any such case, your lease should contain a copy of the parties’ Business Associate agreement attached as an exhibit.

Hipaa

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and its related rules and regulations, safeguards personal-health information from disclosure to third parties. HIPAA violations can be very expensive – fines range from as little as $100 per violation to $50,000 per violation. To understand how HIPAA can impact medical-office landlords and tenants, we must first cover some terminology and background information:

• HIPAA protects what is commonly known as “protected health information” (or “PHI”, for short), that is stored or transmitted by a Covered Entity or its Business Associates. PHI is any information about a person’s health status, provision of health care, or payment for health care. For example, a patient’s name, social security number, address, phone number, email address, and other information that could reasonably identify a patient is PHI.

• A “Business Associate” is any party that works with Covered Entities and receives PHI from the Covered Entity. This includes service providers and vendors working with Covered Entities. In order to receive PHI from a Covered Entity, the Business Associate and the Covered Entity need to enter into a business-associate agreement that requires the Business Associate to keep any PHI confidential and to otherwise comply with HIPAA and its various related rules.

Typically, most landlord-tenant relationships do not require the landlord to comply with HIPAA. However, some relationships, and some leases, may result in the landlord being subject to HIPAA. For example, if a lease permits the landlord to enter the premises for cleaning an area where PHI is located, then the landlord is not subject to PHI, but if the landlord is required to examine, relocate, or store any PHI in order to fulfill this service, then it will probably be deemed to be a Business Associate and thus responsible for HIPAA compliance. In such a case, the landlord and tenant would need to enter into a Business Associate agreement. Consider this non-exhaustive list of scenarios that trigger a landlord’s obligation to comply with HIPAA:

• If, upon surrender of the premises, the landlord is required to retrieve and remove PHI left on site by the tenant.

• An office-suite or other scenario where landlord provides administrative services such as file storing, a reception area, and any other medical-support services involving PHI.

• A landlord’s audit of tenant’s sales records, which permits landlord to examine PHI.

There are endless other scenarios where PHI may come into play as between landlords and tenants. In such instances, the parties must ensure that they not only enter into a Business Associate agreement,

Even if the parties are not Business Associates, the lease should acknowledge the existence and confidentiality of PHI, and the restricted access and safeguards in place that prohibit the non-covered entity’s access to the tenant’s PHI. Also make sure that any conflicting boiler-plate lease clauses are revised so as to not conflict with HIPAA, including any provision that permits unrestricted access by landlord to any area containing PHI.

Further, a prudent landlord may require all of its health-care tenants to store hardcopy PHI in a secure cabinet and identify any access points or storage areas where hardcopy PHI is stored. A landlord may also require the tenant to provide a secured/encrypted format for electronic PHI, and to identify a security officer (which is required per HIPAA) who is responsible to maintain PHI.

STARK & ANTI-KICKBACK LAWS:

Over the years, as the federal government keeps increasing funds paid out for medical care, it has also ratcheted up the penalties for those who abuse the system. There are several federal laws that come into play, but the most common are the Ethics In Patient Referrals Act (known as the “Stark Law”) and the Anti-Kickback Statute (“AKS”). These laws are intended to eliminate physicians and other players in the health-care system from taking advantage of available government funds. Additionally, several states have enacted similar “anti-referral” and “anti-kickback” laws. All of these laws are fairly complicated, but this article will summarize the salient provisions of the Stark Law and AKS so that those in the medical-real-estate world can see their impact.

The Stark Law prohibits physicians from referring patients for certain designated health services paid for by federal funds to any entity with a “financial relationship.” Stark Law violations can result in penalties from

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$20,000 up to $100,000 per violation for each health-care service that is based on a prohibited referral. Additionally, the federal government may also impose a penalty equal to three times the improper payment. Some large health-care provides have made headlines over the years after getting tagged with multi-million dollar fines Stark Law and AKS related fines. The Stark Law is a strict liability statute, so “intent” is a non-factor. Accordingly, even if a physician makes an accidental or unknowing referral, there is still a potential for liability.

A “financial relationship”, as it relates to Stark Law, is very broad and includes any direct or indirect ownership or investment by the referring physician, as well as any financial interests held by the physician’s immediate family members. Stark Law only applies to referrals for designated health services (or “DHS”). There are dozens of applicable DHS, including clinical laboratory services, physical and occupational therapy services, radiology, radiation therapy services and supplies, durable medical equipment and supplies, prosthetics, orthotics and prosthetic devices and supplies, home health services and outpatient prescription drugs.

In addition to the Stark Law, the AKS also deals with remuneration related to improper referrals. Although these two laws are similar, there are several important distinctions. The most obvious distinction is that the AKS includes a civil (monetary) as well as a criminal penalty, where the Stark Law only imposes civil penalties. Unlike the Stark Law’s strict-liability standard, in order to prove a criminal violation of the AKS, the federal government must prove intent. Further, the AKS is broader – whereas Stark Law only applies to physicians and DHS, the AKS applies to any services reimbursed by federal funds, and AKS involves any person or entity that makes a referral, not just physicians.

The AKS creates liability for anyone who consciously and deliberately accepts or offers any consideration with the intention of manipulating a referral. Punishment may include up to ten years in federal prison and fines as little as $25,000 up to $100,000 per violation. However, federal law provides for various safe-harbors to both the Stark Law and AKS, including bona-fide employment arrangements, personal services contracts, space and equipment rentals. In order to satisfy a safe-harbor requirement, these arrangements must be in writing and must be no more or no less than the fair-market value. Note that any fair-marketvalue analysis pursuant to Stark Law or AKS should be performed by an independent, qualified third party – the “back-of-the-napkin” analysis performed by the landlord’s property manager will not suffice.

In most conventional landlord-tenant relationships, Stark Law and AKS will not apply. However, in a medical-office or similar lease, these laws can come into play if the property were owned by multiple doctors or family members with certain interests in tenant medical businesses, or a tenant hospital at which the doctors have admitting privileges and provides services to the doctors’ patients. Another instance is if the tenants are those doctors who are owners and cross-refer to each other. The federal government has kindly issued warning signs for when AKS or Stark Law may be implicated: (1) excessively high or low rent, (2) rental amounts conditioned or linked patient referrals; (3) companion payments that are not based on expenses for valuable services; (4) rent for space greater than the tenant’s business needs, (5) rent that is not fixed in advance, or are reset more than once per year, (6) rent based on hourly use without fixing the number of hours to be used, (7) rent based on Federal healthcare program beneficiaries referred, or (8) rent based on Federal health care program payments. These warning signs are not exclusive – they are just free, friendly advice from the federal government.

In a garden-variety retail or office lease, these warning signs would be irrelevant, but if you are involved in a health-care-facility lease, then these factors could be problematic and give rise to civil and criminal liability. So how are real-estate professionals supposed to navigate through this maze of federal regulations? Thankfully, the law provides safe harbor exceptions, which, if followed, will help you comply with the law. Although the safe harbors in the Stark Law and the AKS are not identical, both rules have the following general requirements for heal-care-facility leases:

1. All leases must be in writing and signed by both parties.

2. The lease must specify the premises being leased.

3. The lease term must be for at least one year.

4. The size of the premises must not be too large for the medical business.

5. The rent must be fair market.

6. The lease cannot have any charges or payments for the number or value of referrals.

7. The terms of the lease must generally be commercially reasonable.

Note that each law has some additional requirements that must be followed.