Stark Law Series, Part III: New statutes for leasing

Over these past three weeks, we have explored certain misconceptions of the Stark Law and learned more about how it impacts physicians and healthcare providers engaged in real estate transactions.  The public policy rationale of this law was to discourage physicians from allowing financial considerations to influence decisions affecting patient care. In the medical office building (MOB) sector, when a physician leases office space from or to a hospital to which he or she refers patients, the lease is considered a financial arrangement subject to Stark restrictions.
 
Congress has recently enacted two new statutes that will impact on a hospital’s decision to self-disclose Stark Law violations relating to its leasing arrangements with physicians: the Fraud Enforcement and Recovery Act of 2009 (FERA) and the Patient Protection and Affordable Care Act (PPACA). The impact from the new self-disclosure rules on the medical office sector of the commercial real estate market could be significant.
 
We recently sat down with John Claybrook and Walter Neilsen, partners with Nashville, Tenn.-based law firm Waller Lansden Dortch & Davis, LLP, to discuss the implications of these new statutes as well as what they see is in store for regulation of medical real estate transactions.
 
MOT: Can you give us an update on the newest statutes? 
Claybrook: FERA imposes an obligation on the service providers to repay known overpayments which would include disqualified reimbursement claims under Stark. It impacts, for example, acquisitions of healthcare real estate assets where you may have potential regulatory violations involving leases, and you could have these looming overpayments that may be required.  But until we have a better sense as to how the federal government will implement these new laws, everybody is in a holding pattern.
Neilsen: The second new statute, PPACA, deals more with self-disclosure of violations and gives CMS (Center for Medicare/Medicaid Services)—the federal government agency that manages the federal healthcare reimbursement programs—the authority to negotiate a settlement if a hospital or other service provider approaches the agency about a Stark Law violation they discovered on their own. CMS can negotiate a settlement instead of being required to assess fines on a strict liability per claim basis.
 
MOT: How will these settlements be negotiated?
Claybrook: CMS posted the voluntary Self-Referral Disclosure Protocol (SRDP) to its website on September 23, 2010, as required by Congress under the Affordable Care Act.   While the SRDP does permit CMS the flexibility to negotiate settlements with potentially reduced fines, as of right now, no one knows exactly how CMS will deal with these self-disclosure situations. The SRDP does provide several specific mitigating factors which CMS could consider in reaching a settlement, such as the timeliness of the self-disclosure, the cooperation being provided and the financial position of the disclosing party. 
 
However, the SRDP also contains potential disincentives for self-disclosure, including a provision that prohibits any appeal of an overpayment amount negotiated as part of a settlement agreement, and the ability of CMS to make recommendations to the Department of Justice and the Office of the Inspector General regarding False Claims Act violations. There is still considerable uncertainty in the industry as to how the SRDP will be applied by CMS, and given the severity of the penalties, no one wants to be the “guinea pig.”  
 
MOT: Are these new statutes part of larger legislation?
Neilsen: These new statutes were enacted in 2009, separate from the Affordable Care Act that passed earlier this year, but the new laws are part of a similar mindset to eliminate waste, fraud and unfairness within the federal healthcare reimbursement system.
 
MOT: Why should MOT readers care about the new statutes?
Claybrook: The new regulatory framework may have a chilling impact on acquisitions in the healthcare area. As I said, no one wants to be the first to test these waters, so until the industry gets a better sense as to how CMS will react under PPACA, we may see a general slowdown in deal activity involving the conveyance of healthcare real property assets.
Neilsen: The new statutes do not alter the underlying intent and substance of Stark. However we are seeing a greater focus on Stark Law as well as more active enforcement of violations. CMS will likely be taking a closer look at medical office leasing relationships, so physicians and healthcare service providers should be sure that their leases are fully executed with commercially reasonable terms (e.g., tenant is paying a fair market rental).  In short, affected parties will need to pay more attention to making sure their leasing arrangements are Stark compliant.
 
MOT: With these new statutes now in play, what can hospitals and medical practices do to help themselves with Stark Law?
Claybrook: If they haven’t already, larger hospitals and hospital systems will probably be looking at hiring property managers to manage their lease transactions because the stakes are pretty high. Most if not all of the larger national real estate brokerage/management companies and property management firms now have healthcare divisions with people who are experienced in these issues and can, at least in theory, help the hospitals avoid potentially non-compliant situations.
Neilsen: The property management firm itself wouldn’t have any liability under Stark, but it should be attuned to the relevant issues.  From the hospital’s standpoint, hiring a property manager can provide a “buffer” in negotiating potentially more onerous (but Stark-compliant) lease terms with its physician-tenants.  The days of physicians’ trying to cut sweetheart lease deals with a hospital landlord are long gone.