The U.S. Department of Health and Human Services' Office of Inspector General (OIG) recently issued a “Special Fraud Alert” on “Rental of Space in Physician Offices by Persons or Entities to Which Physicians Refer.” The OIG is aware that this kind of rental arrangement is not uncommon. An example is mobile diagnostic equipment suppliers that perform diagnosis-related tests in physicians' offices. While there is nothing fraudulent about this practice per se, the OIG also believes that the rental payments some of these supplier-tenants are making are disguised kickbacks intended to induce referrals. Since the anti-kickback statute (Section 1128B(b) of the Social Security Act) prohibits knowingly and willfully soliciting, receiving, offering or paying anything of value to induce referrals of items or services payable by a federal health care program, these disguised kickbacks are a problem.

What's the OIG looking for?

According to the fraud alert, the OIG would study three areas of a rental agreement to determine whether it is suspect.

Appropriateness of rental agreements. According to the OIG, “The threshold inquiry when examining rental payments is whether payment for rent is appropriate at all.” For instance, payments of “rent” for space that you traditionally have provided for free or for a nominal charge as an accommodation for the benefit of your patients, such as consignment closets for durable medical equipment, may be disguised kickbacks. In general, payments for rent of consignment closets in physicians' offices are suspect.

Rental amounts. According to the OIG, rental amounts should be at “fair market value,” should be fixed in advance and should not take into account, either directly or indirectly, the volume or value of referrals or other business generated between you and the lessee. “Fair market value” means the rental payments should not exceed the amount paid for comparable property. Moreover, where you rent space, the rate paid by the supplier should not exceed the rate paid by you in the primary lease for your office space, except in rare circumstances. Other examples of suspect arrangements include ones in which rental amounts are subject to modification more often than annually and ones 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).

Time and space considerations. From the OIG's perspective, suppliers should only rent premises of a size and for a time that is reasonable and necessary for a commercially reasonable business purpose. Rental of space that is in excess of suppliers' needs creates a presumption that the payments may be a pretext for giving money to physicians for their referrals. The OIG recommends that rental amount calculations should prorate rent based on the amount of space and duration of time the premises are used. The basis for any prorating should be documented and updated as necessary, and depending on the circumstances, the supplier's rent can consist of three components: exclusive office space, interior office common space and building common space.

Is there any relief?

The OIG has provided a space rental “safe harbor” to the anti-kickback statute. (See 42 CFR 1001.952(b), as amended by 64 FR 63518 [Nov. 19, 1999]). When an arrangement meets all of the criteria of a safe harbor, it is immune from prosecution under the anti-kickback statute. The following criteria must be met:

• The agreement is set out in writing and signed by the parties.

• The agreement covers all of the premises rented by the parties for the term of the agreement and specifies the premises covered by the agreement.

• If the agreement is intended to provide the lessee with access to the premises for periodic intervals rather than on a full-time basis for the term of the rental agreement, the rental agreement specifies exactly the schedule of such intervals, their precise length and the exact rent for such intervals.

• The term of the rental agreement is not less than one year.

• The aggregate rental charge is set in advance and is consistent with fair market value in arms-length transactions. It is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare or a state health care program.

• The aggregate space rented does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.

Arrangements that provide for use of office equipment or personal services of physicians' office staff should also be structured to comply with the equipment rental safe harbor as well as the personal services and management contracts safe harbor. (See 42 CFR 1001.952(c) and (d), as amended by 64 FR 63518 [Nov. 19, 1999]). Specific equipment used should be identified and documented and payment limited to the prorated portion of its use. Similarly, any services provided should be documented and payment should be limited to the time actually spent performing such services.

Is there anything else?

For the full flavor of the OIG's Special Fraud Alert, you can view it online.