August 2000 Bulletin

OIG warns about rentals and referrals

Leasing space to obtain business may violate anti-kickback statute

By Robert Saner and Marla Spindel

The Department of Health and Human Services Office of Inspector General (OIG) has published a Special Fraud Alert that focuses on the potential for certain rental arrangements to violate the federal anti-kickback statute. The anti-kickback law prohibits the knowing and willful offer or payment of remuneration to induce the referral of business covered by a federal healthcare program, including Medicare.

The Fraud Alert, entitled "Rental of Space in Physician Offices by Persons or Entities to Which Physicians Refer," has implications for orthopaedic practices that rent office space to other providers and suppliers to which the practice refers. For instance, leasing space to independently practicing physical therapists can be problematic if the rental terms serve to induce or reward referrals from the orthopaedists to the PTs. Similarly, leasing space in the parking lot once or twice a week to a mobile MRI or other diagnostics company can raise questions about the relationship between practice referrals and rental charges.

The OIG also is particularly suspicious of "consignment closets" rented to suppliers by practices for storage of DME items, such as crutches, canes and walkers, which are ordered by the practice for its patients.

In all of these instances, the OIG is concerned that the rental payments from these entities to the physicians may be disguised kickbacks. Specifically, the OIG claims that it has "received numerous credible reports" that suppliers offer and pay rents that are unnecessary or in excess of fair market value in order to obtain referrals from the lessor physicians.

In determining whether a rental arrangement may be problematic, the OIG will look primarily at three factors:

The OIG has issued several "safe harbor" regulations that protect certain payment practices from prosecution or civil sanction under the anti-kickback statute. Compliance with a safe harbor ensures protection; arrangements that do not meet a safe harbor risk scrutiny by the OIG, but are not necessarily illegal.

One of the safe harbors protects arrangements involving the rental of office space. The significant requirements of the safe harbor are that the agreement must be in writing, specify the premises rented and be for a term of at least one-year. In addition, the aggregate rental charge must be set in advance, consistent with fair market and not determined in a manner that takes into account referrals or other business between the parties. Finally, if the agreement provides the lessee with access to the premises on a part-time basis, the agreement must specify the schedule and length of time the lessee rents the space, as well as the rent for those time periods.

To ensure that rental arrangements between orthopaedic practices and suppliers do not violate the anti-kickback statute, the requirements of the safe harbor should be met. If all of the requirements cannot be met, it is important to come as close as possible in order to reduce the risk of being viewed as violating the statute.

Robert Saner is a partner in the Washington D.C. health care law firm of Powers Pyles Sutter & Verville, and Marla Spindel is a senior associate in the firm.


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