Written by Nathan Woods; Frank Fehribach, MAI, MRICS; Kristin Herrmann, MAI, ASA
Healthcare real estate is a critical sector that supports the delivery of medical services, from hospitals and outpatient centers to medical office buildings and nursing facilities. However, this sector is heavily regulated, with specific laws aimed at preventing conflicts of interest and maintaining fair competition. Among the most influential regulations are the Stark Law, antitrust laws, and the federal Anti-Kickback Statute.
Stark Law: Preventing Self-Referral
The Physician Self-Referral Law, commonly known as the Stark Law, is designed to prevent conflicts of interest in healthcare. It prohibits physicians from referring patients to receive designated health services (DHS) payable by Medicare or Medicaid from entities with which they have a financial relationship, unless an exception applies. DHS includes a wide range of services, such as clinical laboratory services, physical therapy, and radiology. Some exceptions include in-office ancillary services, equipment and office space rental, and bona fide employment relationships. These exceptions must occur within fair market value except certain in-office ancillary services—which simply allow physicians to refer patients for certain ancillary services, such as lab tests or physical therapy—within their own practice.
Key Provisions and Compliance
1. Financial Relationships: The Stark Law targets various financial relationships, including ownership, investment interests, and compensation arrangements. In the context of healthcare real estate, this means that lease agreements, joint ventures, and other financial dealings involving physicians must be carefully structured to avoid prohibited self-referrals. A self-referral in the context of the Stark Law occurs when a physician refers a patient to a medical facility in which they or an immediate family member have a financial interest, such as ownership, investment, or compensation arrangements.
2. Fair Market Value (FMV): All financial arrangements must be at fair market value. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. This requirement ensures payments reflect what would be paid in an arm’s-length transaction and are not influenced by the volume or value of referrals.
3. Exceptions and Safe Harbors: Stark Law provides several exceptions that allow for certain financial relationships if specific criteria are met. For example, the rental of office space exception permits arrangements if they are in writing, specify the terms, have a term of at least one year, and meet FMV standards without considering the volume or value of referrals. The bona fide employment relationships exception permits compensation arrangements between physicians and employers if the employment is for identifiable services, the compensation is consistent with fair market value, and not based on the volume or value of referrals. These exceptions are designed to allow necessary and beneficial financial relationships while preventing conflicts of interest.
Compliance Challenges
Stark Law is known for its complexity. Healthcare real estate transactions must undergo careful legal and financial scrutiny to ensure compliance. Violations can result in severe penalties, including fines, exclusion from federal healthcare programs, and the requirement to repay amounts received for services provided in violation of the law.
Case Studies and Precedents
1. Tuomey Healthcare System Case (2015): Tuomey Healthcare System faced one of the largest penalties under Stark Law, amounting to $237 million. The case revolved around improper financial relationships with physicians, where the compensation was linked to the volume of referrals. This case underscores the importance of structuring compensation arrangements to comply strictly with FMV standards and avoiding any link to referral volumes.
2. Scripps Health Case (2021): Scripps Health in San Diego, California settled allegations related to violations of Stark Law. The health system was accused of compensating physicians at rates above fair market value, which were allegedly tied to the volume and value of patient referrals. The settlement amounted to $1.5 million and highlighted the importance of ensuring physician compensation arrangements strictly adhere to fair market value standards and are not linked to referral volumes.
Antitrust Laws: Ensuring Fair Competition
Antitrust laws, including the Sherman Act and the Clayton Act, aim to promote competition and prevent monopolistic practices. These laws are essential in healthcare real estate, ensuring market power is not concentrated in a way that restricts competition or harms consumers.
The Sherman Act and the Clayton Act
The Sherman Antitrust Act, enacted in 1890, is the cornerstone of antitrust legislation in the United States. It prohibits certain business activities that federal government regulators deem to be anti-competitive and that restrict interstate commerce and trade. The act broadly prohibits agreements and practices that restrain trade, such as price-fixing, bid-rigging, and market allocation agreements. It also addresses monopolization and monopolization attempts, aiming to promote fair competition, protect consumers from monopolistic practices, and foster economic efficiency.
The Clayton Antitrust Act, passed in 1914, is an amendment to the Sherman Act and further strengthens antitrust laws in the U.S. It focuses on specific practices that the Sherman Act did not clearly address, such as price discrimination and exclusive dealing contracts that may substantially lessen competition. The Clayton Act also prohibits mergers and acquisitions that may substantially lessen competition or tend to create a monopoly. It aims to prevent anti-competitive practices and promote fair competition by addressing various forms of conduct that could harm consumers or competitors in the marketplace.
Implications for Healthcare
1. Market Power and Competition: Healthcare providers acquiring substantial real estate operations must ensure these acquisitions do not unfairly limit competition. For instance, controlling a significant number of facilities in a region could raise anti-trust concerns if it reduces consumer choice or leads to higher prices.
2. Collaborations and Joint Ventures: Partnerships and joint ventures in healthcare real operations can also attract antitrust scrutiny. Such arrangements must be structured to avoid anti-competitive effects, such as price-fixing or market division.
3. Mergers and Acquisitions: Mergers and acquisitions involving healthcare operations are subject to antitrust review. This process involves analyzing market share, potential benefits, and any anti-competitive impacts. Transactions that significantly lessen competition or create monopolies can be challenged and blocked.
Compliance Challenges
Navigating antitrust laws requires a thorough understanding of market dynamics and regulatory requirements. Transactions in the healthcare sector often undergo detailed scrutiny by regulatory bodies like the Federal Trade Commission (FTC). Legal and financial experts must conduct comprehensive market analyses to demonstrate that transactions will not harm competition.
Case Studies and Precedents
1. FTC v. Advocate Health Care Network (2017): The FTC challenged the merger of Advocate Health Care Network and NorthShore University Health System, arguing that it would reduce competition and lead to higher prices for consumers in the Chicago area. The court sided with the FTC, emphasizing the importance of ensuring mergers do not negatively impact market competition.
2. St. Luke’s Health System and Saltzer Medical Group Case (2015): St. Luke’s Health System acquired Saltzer Medical Group, which the FTC argued would reduce competition for adult primary care physician services in Nampa, Idaho. The court ruled against the merger, and St. Luke’s was required to divest Saltzer. This case illustrates the need for careful antitrust review in healthcare mergers and acquisitions.
3. Pennsylvania v. UPMC and Highmark (2014): The state of Pennsylvania filed a lawsuit against UPMC and Highmark, alleging that the two healthcare giants engaged in anti-competitive practices. The case was settled with both parties agreeing to terms that ensured competition in the market, highlighting state authorities’ role in enforcing antitrust laws to protect consumers.
Anti-Kickback Statute: Preventing Inducements for Referrals
The Anti-Kickback Statute (AKS) is a federal law that prohibits the exchange or offer to exchange of anything of value to induce or reward the referral of business in a federal health care program. This law aims to prevent financial incentives that could corrupt medical decision-making and lead to increased costs for federal healthcare programs.
Key Provisions and Compliance
1. Prohibited Practices: The AKS prohibits any remuneration, including kickbacks, bribes, or rebates, that is intended to induce referrals for services covered by federal healthcare programs. This includes both direct and indirect payments.
2. Safe Harbors: The law provides for certain “safe harbors” that protect specific payment and business practices from prosecution if they meet certain requirements. These include space and equipment rentals, personal services and management contracts, and payments to bona fide employees.
Implications for Healthcare Real Estate
1. Lease Agreements: Lease agreements between healthcare providers and landlords must be carefully structured to ensure they do not involve payments for referrals. For example, rental rates must reflect fair market value and must not be influenced by the volume or value of referrals.
2. Joint Ventures: Joint ventures between healthcare entities and real estate investors must avoid arrangements where returns on investment are linked to the volume of referrals to federally funded healthcare programs.
3. Real Estate Transactions: Real estate transactions must be structured to avoid any implication that payments or benefits are provided in exchange for referrals. This requires detailed scrutiny of the terms and conditions of the transaction.
Compliance Challenges
Ensuring compliance with the AKS requires thorough documentation and a clear separation of any payments from referral activities. Violations of the AKS can lead to severe penalties, including criminal charges, fines, and exclusion from federal healthcare programs.
Case Studies and Precedents
1. United States v. Tenet Healthcare Corporation (2016): Tenet Healthcare settled for $514 million, $368 million for civil penalties, and $145.8 million in criminal penalties to resolve allegations that it paid kickbacks for patient referrals through leasing arrangements. This case underscores the necessity for healthcare real estate transactions to comply with AKS requirements to avoid substantial financial and legal repercussions.8
2. United States v. South Florida Hospital and Healthcare Association (2015): This case involved allegations that a hospital system provided financial incentives to physicians for referrals, which were disguised as above-market rental payments for office space. The settlement highlighted the importance of ensuring that rental payments reflect fair market value and are not tied to referral volumes.
Mitigating Risk and Ensuring Compliance
Due Diligence and Transparency
Conducting thorough due diligence and maintaining transparency in financial transactions are essential steps in mitigating risks associated with Stark Law, antitrust laws, and Anti-Kickback Statute compliance. Healthcare business professionals should:
- Engage Legal, Real Estate, and Financial Experts: Legal experts specializing in healthcare law can provide guidance on structuring transactions to comply with Stark Law, anti-trust regulations, and the AKS. Real estate and financial experts can help ensure that all arrangements meet FMV standards.
- Regular Compliance Audits: Regular audits of financial relationships and real estate transactions can identify potential compliance issues before they become problematic.
- Training and Education: Providing ongoing training and education for staff involved in real estate transactions can ensure they are aware of the regulatory requirements and best practices.
Adhering to Best Practices
Following established guidelines and best practices can further mitigate compliance risks. Healthcare entities should:
- Document All Arrangements: Ensure all financial relationships and real estate transactions are well-documented, with clear terms and conditions that comply with regulatory requirements.
- Avoid Tying Compensation to Referrals: Compensation arrangements with physicians should not be linked to the volume or value of referrals and should strictly adhere to FMV standards.
- Seek Pre-Approval When Necessary: In some cases, seeking pre-approval from regulatory bodies for complex transactions can provide additional assurance of compliance.
Conclusion
Stark Law, antitrust laws, and the Anti-Kickback Statute play crucial roles in regulating healthcare real estate, ensuring ethical financial relationships and promoting fair competition. While these laws present significant compliance challenges, understanding their provisions and implications is vital for healthcare real estate professionals. By adhering to best practices, conducting thorough due diligence, and seeking expert guidance, stakeholders can navigate these complex legal landscapes effectively, supporting the healthcare real estate sector’s growth and integrity. The case studies and precedents highlight the importance of compliance and the potential consequences of violations, underscoring the need for careful attention to regulatory requirements in healthcare real estate transactions.
Sources
HHS Office of Inspector General. (n.d.). Physician self-referral law [42 U.S.C. § 1395nn]. U.S. Department of Health and Human Services. Retrieved from https://oig.hhs.gov/compliance/physician-education/fraud-abuse-laws/
Social Security Act, 42 U.S.C. § 1395 (b) (2024). Retrieved from https://uscode.house.gov/view.xhtml?req=(title:42%20section:1395%20edition:prelim)
Treasury Regulation § 1.170A-1(c)(2), 26 C.F.R. (2024). https://www.law.cornell.edu/cfr/text/26/1.170A-1
Federal Trade Commission. (2017, March 22). Advocate Health Care Network. Retrieved from https://www.ftc.gov/legal-library/browse/cases-proceedings/1410231-advocate-health-care-network
Federal Trade Commission. (2015, February 10). St. Luke’s Health System, LTD, and Saltzer Medical Group, P.A. Retrieved from https://www.ftc.gov/legal-library/browse/cases-proceedings/121-0069-st-lukes-health-system-ltd-saltzer-medical-group-pa
Commonwealth v. UPMC. (2015, November 11). Casetext. https://casetext.com/case/commonwealth-v-upmc
HHS Office of Inspector General. (n.d.). Anti-Kickback Statute [42 U.S.C. § 1320a-7b(b)]. U.S. Department of Health and Human Services. Retrieved from https://oig.hhs.gov/compliance/physician-education/fraud-abuse-laws/
U.S. Department of Justice. (2016, October 3). Hospital chain will pay over $513 million for defrauding United States and making illegal payments. Retrieved from https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-513-million-defrauding-united-states-and-making-illegal-payments
