Noncompliant Leases

Stark Act Exposure for Healthcare Investments

September 20, 2012

In the healthcare investment arena, a consistent issue that comes up in transactions involving practice management businesses and practice acquisitions is if a target physician practice or company has a lease agreement with other healthcare suppliers and providers that doesn’t meet the requirements of the Stark Act. The Stark Act, absent an exception, prohibits physicians and practices from making referrals for designated health services to persons with whom they have financial relationships, including landlord-tenant relationships. Common examples of noncompliant leases are:

  1. Unsigned or verbal leases between a physician practice and a hospital for office or practice space;
  2. Leases with terms of less than one year;
  3. Leases that have expired and do not automatically renew; and
  4. Leases with rent that is not consistent with fair market value.

Failure to comply with the rental of office space exception could result in all Medicare claims generated by referrals between the target and the landlord becoming subject to refund. Depending on the target’s culpability, additional penalties may be assessed against the target, including exclusion from Medicare and civil money penalties of up to $15,000 per claim. The Patient Protection and Affordable Care Act also created certain self-disclosure and refund obligations that are implicated when a provider or supplier becomes aware of a noncompliant arrangement.

Diligence and scheduling processes often fail to capture all noncompliant arrangements when targets view certain arrangements or leases as not material. Typically, a target will itemize all business arrangements with other healthcare suppliers and providers so the sponsor/buyer can review all relevant relationships. Self-disclosure should also be considered as a method to quantify potential exposure through negotiations with the Office of the Inspector General. Having to restructure noncompliant leases can also lead to changes in business relationships.