Everyone working in the healthcare real estate sector should have some basic knowledge of the Physician Self-Referral Act, otherwise known as the Stark Law.

In a nutshell, the Stark Law prohibits a healthcare service provider, such as a hospital or outpatient facility, from submitting claims for Medicare/Medicaid reimbursement for services rendered to a patient referred by a doctor with whom the service provider has a financial relationship unless the relationship fits within certain exceptions.

The public policy rationale was to discourage physicians from allowing financial considerations to influence their professional judgment.

How does Stark impact medical office building leasing and development? When a physician leases office space from a hospital to which he refers patients or when a hospital leases space in a building owned by a referring doctor, the lease is considered a financial arrangement subject to Stark restrictions.

As long as a specific lease transaction between a hospital and a physician continues to satisfy a few conditions, no Stark violation will result. These lease exception criteria include: a written lease that is signed by both parties that adequately describes the leased premises; a term of at least 1 year; premises that are commercially reasonable for the intended purpose (the intended purpose must be legitimate from a business standpoint).

Unfortunately under Stark there is no such thing as a permissible “technical violation,” that is, any violation, however insignificant or inadvertent, is a violation of a federal statute that carries stout sanctions imposed by the Centers for Medicare/Medicaid Services.

These Stark sanctions include civil monetary penalties (up to $15,000 per claim submitted to CMS while the violation existed), exclusion from the federal Medicare/Medicaid programs, and exposure to whistleblower lawsuits. The reality is that most hospitals and hospital systems that own physician office space likely have dozens if not hundreds of technical, inadvertent violations of the Stark Law related to their leases with physicians or other referral sources. Until now, hospitals have dealt with this potentially serious situation by correcting any violations and moving on.

The correction might take the form of executing a lease amendment extending a term, obtaining a missing signature or attempting to collect back rent. Occasionally a hospital would, out of an abundance of caution, report the violations to CMS. However, in certain instances this self-disclosure has backfired on the reporting hospital in a big way.

The impact from the new Stark self-disclosure rules could be significant. From the perspective of a hospital buyer, there may be a dampened enthusiasm for new transactions involving the purchase of MOBs, especially where the seller is an asset-challenged, not-for-profit system whose offer of  indemnification against Stark liability is not exactly gold plated. It is not unusual for Stark violations, both technical and substantive in nature, to be discovered during the due diligence phase of such transactions. 

Potential hospital buyers will be less willing than ever to pull the trigger. From the hospitals’ standpoint, however, the changes could enhance the motivation to monetize their MOB portfolios. Monetization could accelerate in an effort by these service providers to shield themselves from the perceived arbitrary nature of CMS-enforced settlements following the now mandatory self-disclosure laws and the obligation to refund payments to CMS.

Time will tell with regard to the approach CMS decides to take, but in the interim, the name of the game should be reducing exposure to risk. This desire to reduce risk will have ripple effects through the healthcare real estate sector of the market.