Lease agreements between dialysis operators and referring nephrologists require careful structuring to ensure compliance with healthcare regulations, fair market value (FMV) standards, and long-term business sustainability. Whether the dialysis company is leasing space from physicians or vice versa, key considerations include regulatory compliance (Stark Law, Anti-Kickback Statute), FMV assessments, lease structuring, and proper documentation.
Regulatory Compliance Items for Healthcare Real Estate Transactions including Dialysis
- STARK LAW (42 U.S.C. § 1395nn) prohibits physician self-referrals for designated health services to entities with which they have a financial relationship unless an exception applies (42 C.F.R. § 411.357). Two Exceptions include:
- Rental of Office Space Exception – The lease must be in writing, have a term of at least one year, and reflect FMV.
- FMV is the price that property would command in an arm’s-length transaction between unrelated parties, without considering referrals (42 C.F.R. § 411.351).
- Bona Fide Employment Exception – Compensation, including office space arrangements, must be commercially reasonable and independent of referrals.
- A transaction is commercially reasonable if it makes business sense even if no referrals occur. Key considerations for commercial reasonableness:
- Is the lease necessary for legitimate business operations?
- Are the space and terms appropriate for intended use?
- Would a similar deal occur between non-healthcare entities?
- A transaction is commercially reasonable if it makes business sense even if no referrals occur. Key considerations for commercial reasonableness:
- Rental of Office Space Exception – The lease must be in writing, have a term of at least one year, and reflect FMV.
- ANTI-KICKBACK STATUTE (AKS) (42 U.S.C. § 1320a-7b(b)) prohibits remuneration to induce or reward referrals, making improper lease agreements or below-market rent structures a compliance risk (42 C.F.R. § 1001.952(b)). To qualify for a safe harbor, a lease must:
- Be commercially reasonable even if no referrals occur.
- Have consistent, fixed lease payments over the term.
- Be at FMV, without adjustments for patient volume or value of referrals.
Office of Inspector General (OIG) Flagged Items:
- Below-market rent offered to referring physicians.
- Free or discounted office space for physicians in hospital-affiliated buildings.
- Fluctuating rental rates based on patient volume (HHS OIG Advisory Opinion 98-14).
Key Compliance Measures:
- Require Independent FMV Appraisals
- Engage a qualified, independent real estate valuation expert with healthcare experience.
- Document the valuation method and FMV rationale.
- Ensure no referral-based adjustments in the valuation process.
- Implement a Standardized Lease Review Process
- Establish FMV benchmarks for lease rates through third party valuation.
- Conduct periodic lease audits for compliance.
- Maintain a centralized database of lease agreements and FMV reports.
- Ensure Lease Terms Are Fixed and Transparent
- Avoid percentage-based rent adjustments tied to patient volume.
- Set consistent rental terms for all tenants in a facility.
- Require written agreements for all leases with clear compliance language.
- Conduct Regular Compliance Training
- Educate real estate teams, finance, and administrators on Stark Law, AKS, and FMV.
- Train staff on recognizing high-risk lease arrangements.
- Integrate real estate compliance into annual risk assessments.
- Monitor Regulatory Changes and OIG Guidance
- Stay updated on OIG advisory opinions and enforcement trends.
- Adjust real estate policies as regulations evolve.
- Engage legal counsel for complex or high-risk transactions.
Conclusion
Lease agreements between dialysis operators and referring nephrologists require careful structuring to avoid regulatory pitfalls while ensuring financial viability. Whether the dialysis company is leasing from physicians or vice versa, FMV assessments, commercial reasonableness, and regulatory compliance are critical to mitigating legal risks. By implementing proper due diligence, independent appraisals, and transparent lease agreements, dialysis providers and nephrologists can establish legally sound and mutually beneficial leasing arrangements.
Pinnacle Healthcare Consulting, through its valuation and commercial real estate experts, can provide services to exceed these needs and requirements. Contact Mike Vandaveer at MVandaveer@AskPHC.com to discuss and opportunities to be involved.
