On-campus Medical Office Building: Is a Premium Warranted? If So, When and Why?

Published by American Health Lawyers Association Healthcare real estate assets are often referred to as being located “on-campus” or “off-campus.” While real estate market participants may differ in their criteria for referring to a property as on- or off-campus, the Centers for Medicare & Medicaid Services (CMS) defines a hospital campus in the provider-based regulations at 42 C.F.R. § 413.65(a)(2) as follows: Campus means the physical area immediately adjacent to the provider’s main buildings, other areas and structures that are not strictly contiguous to the main buildings but are located within 250 yards of the main buildings, and any other areas determined on an individual case basis, by the CMS regional office, to be part of the provider’s campus. Attorneys, health care providers, and valuation professionals have grappled with whether it is permissible from a compliance perspective to adjust pricing (for lease or for sale) for an on-campus location. Similarly, the real estate investment community has analyzed the potential value impact of on-campus locations, with increased recent interest driven by health care’s continued shift to outpatient settings. A variety of regulatory and analytical issues arise when evaluating the potential impact of a medical office building’s location on- or off-campus on fair market value (FMV). This article examines the on- versus off-campus FMV issue from a regulatory perspective, a sale perspective, and a leasing perspective.

Regulatory Overview: Proximity to a Referral Source

The Stark Law and the Anti-Kickback Statute often govern financial arrangements between health care providers, including arrangements for the sale or lease of a medical office building. If a proposed sale or leasing arrangement is subject to one or both laws, the parties must structure the arrangement in a manner that fits within the applicable Stark Law exception and Anti-Kickback safe harbor. In most cases, the arrangement must be structured in a commercially reasonable manner with a purchase price (in the sale context) or a rental rate (in the leasing context) that is consistent with fair market value. The definitions of fair market value under the Stark Law and the Anti-Kickback Statute share several similarities and several differences. Under the Stark Law, the term “fair market value” is defined in 42 U.S.C. § 1395nn (h)(3) as follows: The term “fair market value” means the value in armslength transactions, consistent with the general market value, and, with respect to rentals or leases, the value of rental property for general commercial purposes (not taking into account its intended use) and, in the case of a lease of space, not adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee. (emphasis added).1 Unlike the Stark Law, the Anti-Kickback Statute does not define “fair market value” in the general sense. Instead, “fair market value” is defined in the space rental safe harbor, 42 C.F.R. § 1001.952(b)(6), as follows: The term “fair market value” means the value of the rental property for general commercial purposes, but shall not be adjusted to reflect the additional value that one party (either the prospective lessee or lessor) would attribute to the property as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid and all other Federal health care programs. (emphasis added). Both definitions describe fair market value in terms of the value paid by parties involved in an arm’s length transaction. The definitions appear to focus on proximity in terms of leasing arrangements. However, providers should also be careful when establishing the purchase price in a sale transaction. If the Stark Law applies to a sale transaction, the parties would want the transaction to fit within the isolated transaction exception.2 One of the requirements of the isolated transaction exception is that the purchase price cannot be determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals or business generated between the parties.3 In other words, providers should avoid a situation where a premium is paid in a leasing or sale transaction solely because of proximity or convenience to a referral source. Doing so may be interpreted as remuneration in exchange for referrals. Click here to continue to the full article on Medical Office Buildings.