Stark Law Changes and Clarifications and Their Impact on Real Estate Lease Transactions

Stark Law Changes and Clarifications and Their Impact on Real Estate Lease Transactions

Speakers Jeffrey A. Calk Partner Waller Lansden Dortch & Davis, LLP Amy J. McCullough Counsel Polsinelli PC Charles A. Traughber Associate General Counsel LifePoint Health

Stark Law Changes & Clarifications Effective: January 1, 2016 1. New Exception for Time Share Arrangements (42 C.F.R. 411.357(y)) 2. New Holdover Arrangement 3. New Signature Grace Period 4. Clarifications: A. Writing Requirement B. One Year Term Requirement

Timeshare Arrangement Exception REQUIREMENTS: 1. Writing: Written arrangement, signed by the parties that specifies the premises, equipment, personnel, items, supplies, and services covered under the arrangement. 2. Parties: Arrangement must be between (a) Hospital or physician organization; and (b) physician (or physician organization in whose shoes the physician stands), but either may be the licensor or licensee. Other DHS entities such as lab or diagnostic testing facilities cannot be parties to the arrangement.

Timeshare Arrangement Exception (Cont.) 3. Use: premises, equipment, personnel, items, supplies, or services must be used predominately to furnish E/M services (not DHS) to the licensee s patients. Designated health services are defined services and include, for example, inpatient/outpatient services, radiology and imaging services, clinical lab services, physical therapy, DME No leasehold interest ( license-type arrangement)

Timeshare Arrangement Exception (Cont.) 3. Use (cont.): Could still meet new exception if arrangement requires exclusive use or has a duration of more than a year (as required under lease exception) as long as no possessory leasehold interest is conveyed (right against world) Predominately undefined but can be established by any reasonable, objective, and verifiable means (e.g., assessing patient volume, number of patient encounters, types of CPT codes billed, or amount of time spent using the timeshare premises, equipment, supplies, personnel, items, and services)

Timeshare Arrangement Exception (Cont.) 4. Equipment : If equipment is covered by the arrangement, it must: (a) be located in the same building (i.e., same U.S. postal address) where the licensee performs the E/M services; (b) be used only to furnish DHS that is incidental to the licensee s E/M services (e.g., x-rays, rapid strep tests, and urine dipsticks to test pregnancy) and furnished at the same time as those services; and (c) not be advanced imaging, radiation therapy, or clinical or pathology lab equipment (other than CLIA-waived lab tests). 5. Schedule: All locations under the timeshare arrangement, including the premises where E/M services are furnished and where DHS are furnished must be used on identical schedules.

Timeshare Arrangement Exception (Cont.) 6. No Referrals: The arrangement cannot be conditioned on the licensee s referral of patients to the licensor. 7. Compensation: Compensation must be set in advance, consistent with FMV, and not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties. Permitted: Flat fee or time-based formula (e.g., hourly) Prohibited: Per patient or per click or percentage based compensation if based on referrals of patients by party granting use

Timeshare Arrangement Exception (Cont.) 8. Commercially Reasonable: The arrangement must be commercially reasonable even if no referrals were made between the parties. 9. Not Violate Other Laws: The arrangement must not violate the Anti-Kickback Statute or any other federal or state law or regulation governing billing or claim submission.

Timeshare Arrangement Exception (Cont.) KEY DIFFERENCES FROM OFFICE SPACE EXCEPTION: New Timeshare Arrangement Exception does not require: A minimum duration of one (1) year Confirmation that the space does not exceed that which is reasonable and necessary to accomplish a legitimate or commercially reasonable business purpose Exclusive use of the space being occupied Minimum blocks of time for use

Timeshare Arrangement Exception (Cont.) PRACTICAL POINTS: New exception does not invalidate existing time share leases/license arrangements that otherwise comply with an exception Use of office space lease exception still available for timeshare arrangements Even if space does not need to be exclusively used by licensee, for operational purposes, specific blocks of time may need to be designated for exclusive use by licensee Arrangement must still comply with the Anti-Kickback Statute and any applicable state mini-stark and Anti-Kickback statutes

New Holdover Arrangement New Holdover Period: indefinite holdover period (previously 6 months) provided the requirements of the applicable exception continue to be satisfied (e.g., rent must be within FMV rental range during entire holdover period) Rent escalators during holdover may be appropriate if set in advance. Failure to apply one may constitute a change in the terms/conditions of the arrangement (i.e., forgiveness of a debt creating a secondary financial relationship that must meet an exception) Best practice is to have a new agreement after old one expires and to reassess FMV at time of renewal

New Signature Grace Period New Grace Period: 90 days grace period to obtain required signatures regardless if failure is inadvertent (can only use once every 3 years for same physician) Still no definition on what constitutes a signature Can look to state or federal law (e.g., validity of electronic signatures) Signature required on contemporaneous writing documenting arrangement (not on every page, but collectively have to clearly relate to each other)

Clarification on Writing Single formal contract not required PRACTICAL POINT: Clarification should not change hospital s or provider s policies of requiring a signed, written agreement. Collection of documents may satisfy (e.g., board meeting minutes authorizing payment for services; e-mails between the parties; fee schedules; check requests/invoices that identify the services) Standard is reasonable person Documents in the collection must clearly relate to one another and clearly reference the same arrangement between the parties Writing still required to establish that terms of the agreement (e.g., compensation set in advance) are documented before services are performed

Clarification on One Year Term Arrangement with a duration of at least one (1) year as a matter of fact satisfies the requirement A formal term provision is not required in the written arrangement Contemporaneous documents evidencing the course of conduct of the parties to show that the arrangement in fact lasted for the required period of time If the arrangement is terminated during the first year, the parties must demonstrate that the parties did not enter into a new arrangement for the same space during the first year

Parties: Scenario 1 Critical Access Hospital (Licensor) Acute Care Hospital A (Licensee) Proposed Transaction: Acute Care Hospital A s Real Estate Department asks you to prepare a Time Share License Agreement on the following terms: Acute Care Hospital A s employed physician will exclusively occupy all of Suite 101 in the Critical Access Hospital s building every Tuesday from 8:00 a.m. to 12:00 p.m. for a term of 1 year. Critical Access Hospital will provide Acute Care Hospital A s employed physician with standard medical office furnishings and supplies, but no staff or special equipment, services or supplies will be provided. Acute Care Hospital A will provide its employed physician with any necessary staff and any special equipment, services or supplies. Critical Access Hospital will charge Acute Care Hospital A $75.00 per 4 hours the Acute Care Hospital A s employed physician uses the space. An independent appraiser has verified the $75.00 per 4 hours is reasonable. Questions: How should you respond? What are your options?

Suite 101 Scenario 1

Scenario 2 Parties: Hospital (Licensor) Physician (Licensee) Proposed Transaction: Hospital s Real Estate Department asks you to prepare a Time Share License Agreement on the following terms: Independent orthopedic surgeon (Physician) will license a portion of Suite 100 in the Hospital s building on every Tuesday and Thursday from 9:00 a.m. to 5:00 p.m. for a term of 1 year. During each occupancy period, the space will be occupied solely by a physical therapist employed by Physician/Licensee who will provide physical therapy services in the licensed space. Licensee will share certain shared areas (i.e. waiting room, reception area, hallways, restrooms and break room) with any other part-time users occupying a portion of the suite during Licensee s occupancy periods. Nevertheless, Licensee will have exclusive use of certain exam rooms and an office during his/her use.

Scenario 2 (Cont.) Hospital will provide Licensee with standard medical office furnishings and supplies, but no staff or special equipment, services or supplies will be provided. The Licensee will provide its own staff and any special equipment, services or supplies. Hospital will charge Licensee $100.00 per 8 hours Licensee uses the space. An independent appraiser has verified the $100.00 per 8 hours is FMV. Questions: How should you respond? What are your options?

Scenario 2 Suite 100 Color Key: Exclusive Space Shared Space Unavailable Space

Parties: Scenario 3 Hospital (Licensor) Physician (Licensee) Proposed Transaction: Hospital s Real Estate Department asks you to prepare a Time Share Lease Agreement on the following terms: Independent physician (Physician) will exclusively occupy a portion of Suite 102 in the Hospital s building every Monday and Wednesday from 9:00 a.m. to 5:00 p.m. for a term of 1 year. Physician will share certain shared areas (i.e. waiting room, reception area, hallways, restrooms and break room) with any other part-time physicians occupying a portion of the suite during Physician s use. Nevertheless, Physician will have exclusive use of certain exam rooms and an office during his/her use. Hospital will provide Physician with standard medical office furnishings and supplies, but no staff or special equipment, services or supplies will be provided. Physician will provide its own staff and any special equipment, services or supplies.

Scenario 3 (Cont.) Hospital will charge Physician $100.00 per 8 hours Physician uses the space. An independent appraiser has verified the $100.00 per 8 hours is FMV. Physician demands the arrangement be characterized as a lease rather than a license. Questions: How should you respond? What are your options?

Scenario 3 Suite 102 Color Key: Exclusive Space Shared Space Unavailable Space

Parties: Scenario 4 Private Real Estate Investment Company (limited liability company) with no referral sources as owner (Licensor) Hospital (Licensee) Proposed Transaction: Hospital s Real Estate Department asks you to prepare a Time Share License Agreement to meet new timeshare exception on the following terms: Hospital s (Licensee s) employed physician will exclusively occupy all of Suite 110 in Licensor s building every Tuesday from 8:00 a.m. to 12:00 p.m. for a term of 1 year. Licensor will provide Hospital/Licensee s employed physician with standard medical office furnishings and supplies, but no staff or special equipment, services or supplies will be provided. Hospital/Licensee will provide its employed physician with any necessary staff and any special equipment, services or supplies. Licensor will charge Hospital/Licensee with $75.00 per 4 hours Licensee s employed physician uses the space. An independent appraiser has verified the $75.00 per 4 hours is reasonable. Questions: How should you respond? What are your options?

Suite 110 Scenario 4

Parties: Hospital (Licensor) Scenario 5 Physician (Licensee) Proposed Transaction: Hospital s Real Estate Department asks you to prepare a Time Share License Agreement and asks you to help establish the occupancy fee to be charged to Physician-Licensee: Independent physician (Physician) will exclusively occupy a portion of Suite 103 in the Hospital s building every Monday, Wednesday, and Thursday from 1:00 p.m. to 5:00 p.m. for a term of 1 year. Physician does not want to use the space for any holidays that fall on his/her days of use (e.g. New Year s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day or Christmas Day). Physician will share certain shared areas (waiting room, reception area, hallways, restrooms and break room) with any other part-time physicians occupying a portion of the suite during Physician s use. Nevertheless, Physician will have exclusive use of certain exam rooms and an office during his/her use.

Scenario 5 (Cont.) Hospital will provide Physician with standard medical office furnishings and supplies. Hospital will also provide Physician with the use of a receptionist and a medical assistant. Physician will share the receptionist with any other part-time physicians occupying a portion of the suite during Physician s use, but Physician will have exclusive use of the medical assistant. Physician also wants to leave a small cabinet in one of the offices in the suite. The cabinet will contain certain supplies Physician will use during his/her occupancy period. He requested to leave the cabinet because he will not want to be responsible for taking the cabinet with him after each use. Questions: How should you calculate the rate the Physician will pay for (1) the space, (2) the staff the hospital will provide and (3) allowing the Physician to leave personal property in the suite?

Scenario 5 Suite 103 Color Key: Exclusive Space Shared Space Unavailable Space

Scenario 6 Parties: Hospital (Licensor) Physician (Licensee) Proposed Transaction: Hospital s Real Estate Department asks you to prepare a Time Share Lease Agreement on the following terms: Independent physician (Physician) will exclusively occupy a portion of Suite 120 in the Hospital s building two (2) days per month. The days of use are not known and will be agreed upon between Hospital (Licensor) and Physician (Licensee) in the future based on Licensee s patient schedule and availability of the licensed space at such time. Physician will share certain shared areas (i.e. waiting room, reception area, hallways, restrooms and break room) with any other part-time physicians occupying a portion of the suite during Physician s use. Nevertheless, Physician will have exclusive use of certain exam rooms and an office during his/her use.

Scenario 6 (Cont.) Hospital will provide Physician with standard medical office furnishings and supplies, but no staff or special equipment, services or supplies will be provided. Physician will provide its own staff and any special equipment, services or supplies. Hospital will charge Physician $25.00 per hour the Physician uses the space. An independent appraiser has verified the $25.00 per hour charge is FMV. Questions: How should you respond? What are your options?

Scenario 6 Suite 120 Color Key: Exclusive Space Shared Space Unavailable Space

Parties: Hospital (Landlord) Scenario 7 Physician (Tenant) Proposed Transaction: Hospital s Real Estate Department asks for your guidance regarding a holdover tenant involving the following facts: Hospital owns MOB on its campus. Dr. Holdover leases Suite 100 for a three (3) year term expiring September 30, 2015, pursuant to a written, signed lease On May 1, 2016, Hospital realizes Dr. Holdover is in holdover and wants to execute a new renewal lease for three (3) years The prior lease contains the following holdover provision : If Tenant fails to surrender the possession of the Premises at the expiration or termination of this Lease, Tenant shall pay, as holdover rental, an amount equal to 150% of Rent prorated for each day that Tenant fails to surrender possession of the Premises, plus all Additional Rent due hereunder. This Lease shall thereafter continue on a month-to-month basis, terminable by either party upon thirty (30) days notice.

Scenario 7 (Cont.) Hospital asks you three (3) questions: 1.Do the new indefinite holdover rules protect Hospital in this instance or is the holdover beyond 180 days not permitted in this case? 2.If the new indefinite holdover rules apply, can (or should) Hospital collect the premium holdover rent (150%) from Dr. Holdover? 3.If the new indefinite holdover rules DO NOT apply, can (or should) Hospital collect the premium holdover rent (150%) from Dr. Holdover?

Scenario 7 (Cont.) Holdover Period Sep. 30, 2015 May. 1, 2016 2015 2016 Holdover Lease Expires Holdover Discovered 34