Chiropractic Physician Office Space Rentals: Unpacking the OIG’s Special Fraud Alert
The Office of Inspector General (OIG) plays a pivotal role in ensuring the integrity of the Department of Health and Human Services’ programs (including Medicare, Medicaid, and other federal plans). Established in 1976, the OIG’s mission is to identify and eliminate fraud, abuse, and waste. The OIG has implemented a nationwide program of audits, investigations, and inspections, to promote its goal of efficiency and economy in departmental operations. The State of Illinois also has laws in place prohibiting fee splitting and self-referral, and state regulators often use OIG standards to evaluate individual physicians’ compliance with Illinois law.
For chiropractic physicians in Illinois, understanding the OIG’s stance on certain business arrangements is crucial, because, when not structured correctly, these contracts may violate both state and federal law. One area of interest is the rental of space in physician offices, particularly by entities to which physicians refer.
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The OIG issued a Special Fraud Alert that provided important guidance on this topic. Recently, the Center for Medicare and Medicaid Services (CMS) published an updated rule that adds more clarity to the “fair market value” requirement for rental arrangements. It’s important for all Illinois physicians to be familiar with the rule, because adherence to OIG and CMS guidelines will also generally ensure compliance with State of Illinois fee splitting and self-referral law.
The Concern: Questionable Rental Arrangements
The OIG has identified certain rental arrangements that may be vulnerable to abuse. These arrangements typically involve healthcare equipment or service suppliers who rent space within a physician’s office. Most of the services or items provided in the rented space are for patients referred by the physician-landlord. These arrangements are not automatically illegal, but they are subject to higher OIG scrutiny because of frequency of misuse (i.e., they may hide kickbacks). Examples include:
- Rental by comprehensive outpatient rehabilitation facilities (CORFs) offering therapy services.
- Mobile diagnostic equipment suppliers performing tests in physicians’ offices.
- Suppliers of durable medical equipment setting up “consignment closets” in physicians’ offices (see below).
The primary concern is that these rental payments might be disguised kickbacks to induce referrals, i.e., where the physician landlord refers patients to the supplier tenant. There have been reports of suppliers paying rents that are either unnecessary or above fair market value in exchange for access to referrals from physicians. These arrangements raise suspicion that the lease is a pretext for paying a commission to the referring landlord physician.
The Anti-Kickback Law
Kickbacks can distort medical decision-making and adversely affect patient care. Providers may be motivated to perform unnecessary procedures or even refrain from rendering medically necessary treatment, because of financial considerations. The Anti-Kickback Law, under Section 1128B(b) of the Social Security Act, prohibits any payments to induce referrals for items or services payable by a Federal health care program. Violations can result in severe penalties, including fines, imprisonment, and exclusion from Federal health care programs. Similarly, violations of the fee splitting prohibition of the Medical Practice Act may result in license discipline, up to and including suspension, revocation, and fines.
Identifying Suspect Rental Arrangements
The OIG has highlighted three considerations that may indicate questionable rental arrangements:
- Appropriateness of Rental Agreements: Payments for space that traditionally has been provided for free, such as consignment closets for durable medical equipment, orthotics, and supplies, may be disguised kickbacks. Payments for rent of such spaces are generally suspect.
- Rental Amounts: Rental payments should reflect fair market value and not be influenced by the volume or value of referrals. For example, suspect arrangements include the tenant paying the doctor double the comparable rent amount (disguised kickback), rental amounts that vary with patient referrals, or rental amounts that are conditioned upon receipt of payments from a health care plan or program.
- Time and Space Considerations: Tenants should rent only what is necessary for their business purpose. Renting excess space or time may indicate that payments are a pretext for giving money to physicians for referrals.
The Space Rental Safe Harbor — Updated Criteria
To protect legitimate arrangements, the OIG recommends compliance with the space rental safe harbor to the anti-kickback statute. The OIG has updated its requirements, as noted below. Meeting all criteria of this safe harbor minimizes risk of prosecution. The criteria include:
- A written and signed agreement. The update has clarified that the writing must specify:
- The items, services, office space, or equipment covered by the lease;
- The compensation to be provided; and
- The timeframe.
- Timeframe: Previously the arrangement had to be for a term of at least 1 year. The update has loosened this requirement to allow the lease to be for any time period (i.e., it may be for less than a year) and may contain a termination clause. The lease may be renewed as long as the other terms (price, office space, etc.) remain unchanged.
However, during the period of one year, the parties may only enter into one lease for the same space, and all other requirements must be met. - Compensation: The compensation (rental amount) must be:
- Set in advance
- Consistent with fair market value. Update: The new rule establishes a specific definition of “fair market value” applicable to the rental of office space as “the value in an arm’s length transaction of rental property for general commercial purposes (not taking into account its intended use), without adjustment 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, and consistent with the general market value of the subject transaction.”
- Must not take into account value of referring physician’s volume or value of referrals
- Commercial Reasonableness: The lease must be commercially reasonable, separate and apart from any referrals between the parties. Rental of space that is in excess of a tenant’s needs creates a presumption that the payments may be a pretext for giving money to the physician landlord in exchange for referrals.
- Compliance with Other Anti-Fraud and Abuse Laws: The arrangement must not violate the antikickback statute or constitute any other illegal activity.
Appropriateness of Rental Agreements – A Deeper Dive into the Rule and the OIG’s Examples of Suspect Arrangements
The OIG has provided details, along with some examples of noncompliant arrangements, under the space rental safe harbor. According to the OIG, the threshold inquiry when examining rental payments is whether payment for rent is appropriate at all.
For example, chiropractic physicians may be approached by sellers of durable medical equipment, prosthetics, or orthotics (DMEPOS) to rent space in the chiropractic clinic and to accept patient referrals from the clinic. Physicians should scrutinize these arrangements very carefully before entering into them. The OIG deems that payments for rent of “consignment closets” in physicians’ offices are inherently suspect unless they meet very specific requirements.
“Consignment closets” (also called “stock-and-bill”) are arrangements where a DMEPOS supplier uses a “closet” at a physician-owned practice location to maintain equipment for the physician to distribute to patients of the practice. Typically, in such arrangements, the DMEPOS supplier pays the physician rental for storage space for the inventory. Regulators consider these agreements suspect, and as a result, the Illinois Chiropractic Society strongly discourages charging rent for a consignment closet.
Rental Amounts
Rental amounts should be at fair market value, be fixed in advance and not take into account, directly or indirectly, the volume or value of referrals or other business generated between the parties. Fair market value rental payments should not exceed the amount paid for comparable property. Moreover, where a physician rents space, the rate paid by the tenant should not exceed the rate paid by the physicians in the primary lease for their office space, except in rare circumstances. CMS has provided the following examples of suspect arrangements:
• Rental amounts in excess of amounts paid for comparable property rented in arms-length transactions between persons not in a position to refer business;
• Rental amounts for subleases that exceed the rental amounts per square foot in the primary lease;
• Rental amounts that are subject to modification more often than annually;
• Rental amounts that vary with the number of patients or referrals;
• Rental arrangements 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);
• Rental amounts that are only paid if there are a certain number of Federal health care program beneficiaries referred each month; and
• Rental amounts that are conditioned upon the tenant’s receipt of payments from a Federal health care program.
Time and Space Considerations
Tenants should only rent premises of a size and for a time that is reasonable and necessary for a commercially reasonable business purpose of the tenant. Rental of space that is in excess of tenants’ needs creates a presumption that the payments may be a pretext for giving money to physicians for their referrals. CMS provides the following examples of suspect arrangements:
• Rental amounts for space that is unnecessary or not used. For instance, a comprehensive outpatient rehabilitation facility (CORF) requires one examination room and rents physician office space one afternoon a week when the physician is not in the office. The CORF calculates its rental payment on the square footage for the entire office, since it is the only occupant during that time, even though the CORF only needs one examination room;
• Rental amounts for time when the rented space is not in use by the tenant. For example, an ultrasound tenant has enough business to support the use of one examination room for four hours each week, but rents the space for an amount equivalent to eight hours per week;
• Non-exclusive occupancy of the rented portion of space. For example, a physical therapist does not rent space in a physician’s office, but rather moves from examination room to examination room treating patients after they have been seen by the physician. Since no particular space is rented, regulators will closely scrutinize the proration of time and space used to calculate the therapist’s ‘‘rent.’’
CMS Guidance for Calculation of Rent
In addition, rental amount calculations should prorate rent based on the amount of space and duration of time the premises are used. The basis for any proration should be documented and updated as necessary. Depending on the circumstances, the tenant’s rent can consist of three components: (1) Exclusive office space; (2) interior office common space; and (3) building common space.
1. Apportionment of exclusive office space.—The tenant’s rent should be calculated based on the ratio of the time the tenant uses the exclusive space compared with the total hours the physician’s office is open.
2. Apportionment of interior office common space.—Rental payments may also cover the interior office common spaces that are shared in physicians’ offices. Calculations should consider how much and how long the tenant is using the common space compared with all other usage of the same common space.
3. Apportionment of building common space.— This should be calculated similarly to rental for interior office common spaces and is applied only when the physician pays a separate charge for areas of a building that are shared by all building tenants (i.e., building lobbies)
Common Sense as a Starting Point
For chiropractic physicians in Illinois, understanding and adhering to the OIG’s guidelines on rental arrangements is essential. In general, a certain amount of common sense is a good starting point for establishing the requirements – any arrangement that does not “make sense” in light of prevailing commercial standards and the tenant’s needs is suspect. Ensuring that rental agreements are transparent, fair, and in line with the OIG’s recommendations can safeguard against potential legal pitfalls and ensure the best patient care, a win for both physicians and patients.
