Review your space rental agreements
July 1, 2000 4 minutes read
Review your space rental agreements
Supplier rentals are considered suspect
Prompted by reports that some suppliers and providers are using overpriced office rental arrangements to disguise kickbacks to practitioners, earlier this year the Office of the Inspector General (OIG) issued a fraud alert warning physicians that any rental arrangements they have with health care suppliers and/or other providers must reflect fair-market value. (See Physician’s Payment Update, April 2000, pp. 51-53.)
Given the OIG’s current policy of ferreting out potential kickback schemes, any practice renting space to outside providers or suppliers would be wise to have its lawyer review those arrangements. Areas to which the OIG is paying particular attention include rental arrangements between physician-landlords and:
• comprehensive outpatient rehabilitation facilities that provide physical and occupational therapy and speech language pathology services in physicians’ and other practitioners’ offices;
• mobile diagnostic equipment suppliers that perform diagnostic-related tests in physicians’ offices;
• suppliers of durable medical equipment, prosthetics, orthotics, and supplies that set up "consignment closets" for their supplies in physicians’ offices.
Under the OIG’s new policy, any payments for rental of consignment space or closets in physicians’ offices automatically are suspect of being disguised kickbacks.
Here’s a list of specific situations the OIG says are questionable:
• Rental amounts. Rents that do not reflect fair market value, are not fixed in advance, or are based directly or indirectly on the volume or value of referrals or other business generated between the parties will prompt an audit.
Examples would include:
— physicians who charge a supplier a higher rent than someone they could not refer patients to;
— rent for a sublease that exceeds the per square foot price of the primary lease;
— rents subject to modification more than once a year;
— rents that vary with the number of patients or referrals;
— rental contracts that set a fixed rental fee per hour but do not fix the number of hours or the schedule of usage in advance (i.e., "as needed" arrangements);
— rents that are only paid if there are a certain number of federal health care program beneficiaries referred each month;
— rental amounts that are conditioned upon the supplier’s receipt of payments from a federal health care program.
• Time and space considerations. Suppliers should only rent premises of a size and for a time period that is reasonable and necessary for their business purposes, says the OIG. Renting more space than needed "creates a presumption that the payments may be a pretext for giving money to physicians for their referrals," notes the alert.
Examples of suspect arrangements include:
— paying rent for space that is unnecessary or not used by the provider/supplier. For instance, a comprehensive outpatient rehabilitation facility only requires one examination room and rents physician office space one afternoon a week when the physician is not in the office. However, it pays rent based on the square footage for the entire office even though it only uses one examination room;
— paying rent for time when the space is being use by the supplier/provider. For instance, an ultrasound supplier only has enough business to justify using one examination room four hours each week but rents the space for eight hours per week;
— non-exclusive occupancy. Rather than renting space in a physician’s office, for instance, a physical therapist moves from examination room to examination room, treating patients after they have been seen by the doctor. Because no particular space is rented, the OIG says it would "closely scrutinize any proration of time and space used to calculate" rent paid by the therapist.
• Rent calculations. To avoid investigation, rent should be based on the amount of space and duration of time the premises are used. Depending on the circumstances, the supplier’s rent can consist of three components: exclusive office space, interior office common space, and building common space. Here are requirements for each:
1. Apportionment of exclusive office space. The supplier/provider’s rent must be calculated based on the ratio of the time it uses the space divided by the total amount of time the physician’s office is in use. Also, the rent should be based on the ratio of the amount of space that is used exclusively by the supplier/provider to the total amount of space in the physician’s office.
2. Apportionment of interior office common space. Where permitted by regulations, rental payments also may cover the interior office common space in physicians’ offices that is shared by the physicians and any subtenants, such as waiting rooms.
If other suppliers/providers use this common area for their patients, "it may be appropriate for the suppliers to pay a prorated portion of the charge for such space," says the OIG.
However, any "charge for the common space must be apportioned among all physicians and subtenants that use the interior office common space based on the amount of non-common space they occupy and the duration of such occupation."
Payment for the supplier/provider’s use of office common space should be based the ratio of the exclusive space they use compared to total amount of available space (less common areas).
3. Apportionment of building common space. If a physician pays a separate charge for areas of a building that are shared by all tenants, such as building lobbies, it may be appropriate for the supplier/provider to pay a prorated portion of such charge, the OIG notes. But the cost of the building’s common space must be apportioned among all physicians and subtenants based on the amount of noncommon space they occupy and the duration of such occupation.
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