December 2002 Bulletin

Is fraud and abuse lurking in your closet?

Be aware of hidden traps beyond coding and billing

By Robert E. Wanerman, JD, MPH

It is no accident that many of the federal laws used to deter fraud and abuse are drafted broadly. In some instances, the plain language of those laws can touch upon many ordinary business arrangements that may have an incidental connection to reimbursement claims submitted to Medicare and other federally funded health care programs.

Nevertheless, the scope of these laws is sometimes overlooked in some ordinary transactions, such as leasing property.

The recent experience of an orthopaedic practice illustrates this problem and provides guidelines for practices to consider when entering into a wide range of leasing or service agreements: United States ex rel.Goodstein v. McLaren Regional Medical Center et al., 202 F. Supp. 2d 671 (E.D. Mich. 2002).

In 1994, Family Orthopedic Realty (FOR), a corporation owned by an orthopaedic practice in Flint, Mich., leased space in a building it owned to a local hospital for use as a physical therapy center. The physician shareholders of FOR also had privileges at the hospital and referred patients there. After nine months of negotiations (and against the advice of its counsel), FOR and the hospital entered into a lease that generally met each of the hospital’s demands, including (i) a five year term, (ii) the right to use common areas without any additional rent; (iii) a waiver of rent charges during renovations; (iv) a gross rental rate of $17 per square foot with rental rate increases limited to 4% per year; (v) FOR’s agreement that the hospital would be the exclusive provider of physical therapy services on the premises; and (vi) a noncompete clause under which FOR agreed not to own a physical therapy practice within 10 miles of the premises.

An individual whistleblower filed an action under the federal False Claims Act, and the Department of Justice intervened and pursued the case. The complaint charged that the hospital was paying FOR excessive rent for the property, and that the intent of this financial relationship was to compensate the physicians for referrals, in violation of both the Stark self-referral law and the anti-kickback statute. The government further alleged that these violations tainted the reimbursement claims submitted by the orthopaedic practice, thus also violating the False Claims Act and exposing the practice to multiple damages and penalties.

Action dismissed

A federal district court dismissed the action, finding that the government failed to prove that either the Stark law or the anti-kickback law had been violated. Instead, the court was persuaded that even though the lease payments did implicate both laws, the process leading up to the execution of the lease demonstrated that it did fit into established exceptions in both laws, because the rent payments (i) were set in advance in an arm’s length transaction, (ii) were set at fair market value (FMV), and (iii) did not reflect the volume or value of the physicians’ referrals or other business between the parties. The court also found that the rental space’s proximity to the FOR physicians, who were potential referral sources, did not provide evidence that the lease rate was determined in a manner that reflected patient referrals.

The key to the court’s reasoning was the strength of the testimony of the practice’s experts and the flaws in the analysis of the government’s experts. For example, it found that the government’s experts had not always based their analyses on properties of comparable quality and location and had limited their analysis to a single category of leases. In addition, the court was persuaded by the fact that only the practice’s experts had evaluated some of the atypical terms in this lease and had made adjustments in their FMV estimates in order to compare this lease to other leases in the same market area.

Even though the court’s decision was favorable, it did not address several points that can affect the validity of the transaction. For example, it did not determine that the space being leased was commercially reasonable for legitimate business purposes, which is a factor under the Stark and anti-kickback lease exceptions. Similarly, the terms of the exclusive provider and non-compete provisions were not separately analyzed; this is significant because the terms of any economic restriction raises the possibility that the terms were influenced by the prospect of referrals or other future business.


This decision highlights the special care that practices should exercise whenever they enter into an agreement with a potential referral or business source that may result in patient care that is reimbursable under Medicare, Medicaid or any federally funded health program. Since it is common for practitioners to have offices that are convenient, many may be located in buildings that are owned or leased by potential referral or business sources.

In this context, it is essential to take steps to ensure that their leases and personal service contracts adequately reflect FMV payment for the property or services involved and that the components of an FMV calculation be readily understood and able to withstand public scrutiny.

Robert E. Wanerman, JD, MPH, is counsel at Reed Smith LLP, Washington, D.C. He can be reached at (202) 414-9242 or via e-mail at

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