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The “Fair Market Value” dilemma HEALTHCARE in the Stark Law

BY HENRY HAGENDORF, CCIM, LEED AP, and BETH YOUNG, CCIM, LEED AP, Grubb & Ellis Company-Healthcare Properties Group

In some areas, real estate transactions related to healthcare properties or healthcare tenants have a unique set of restrictions that do not affect other commercial properties. Because of the referral network that is vitally important to some medical practices, there are specific guidelines specified by the “Stark Law” that must be followed. Stark Law governs physician self-referral for Medicare and Medicaid patients. The law is named for United States Congressman Pete Stark, who sponsored the initial bill. Physician self-referral is the practice of a physician referring a patient to a medical facility in which that physician has a financial interest, be it ownership, investment, or a structured compensation arrangement. Critics of the practice allege an inherent conflict of interest, given the physician’s position to benefit from the referral. They suggest that such arrangements may encourage over-utilization of services, in turn driving up health care costs. In addition, they believe that it would create a captive referral system, which limits competition by other providers. Stark Law provisions and restrictions are very broad covering many aspects of healthcare services. When a physician’s relationship with a hospital or landlord could be called into question, one of the exceptions allowing such relationship is the “Fair Market Value” test of the proposed transaction. Fair market Value (FMV) is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. The FMV test can be applied to lease transactions also. An estimate of fair market value may be founded either on precedent or extrapolation. Fair market value differs from the intrinsic value that an individual may place on the same asset based on their own preferences and circumstances.

An estimate of Fair Market Value is usually subjective due to the circumstances of place, time, the existence of comparable precedents, and the evaluation principles of each involved person. Opinions on value are always based upon subjective interpretation of available information at the time of assessment.

The fair market value exception is very broad and it pertains to any compensation resulting from an arrangement between an entity and a physician (or an immediate family member) or any group of physicians (regardless of whether the group meets the definition of a group practice) for the provision of items or services by the physician, family member or group as long as the arrangement is set forth in an agreement that meets all of the following criteria:

• It must be in writing and must cover only specific identifiable items or services.

• It must specify the time frame, which can be less than a year as long as the compensation remains the same for each period within a year.

• The transaction must be commercially reasonable and further legitimate business purposes of the parties.

• It must meet a safe-harbor regulation under the anti-kickback statute, be explicitly approved by the Office of the Inspector General (OIG) under a favorable advisory opinion or must not violate the anti-kickback statute.

• The services must not involve the counseling or promotion of a business arrangement or other activity that violates state or federal law.

This exception can function as a safety net, applying to transactions that don’t quite meet all of the requirements of one of the other exceptions. For example, if a hospital is looking to recruit a new physician to its community and has made payments to that physician’s group as a recruitment subsidy or to cover transition expenses, the arrangement would not meet the recruitment exception, which allows payment only to the recruited physician. However, if the payments from the hospital to the group meet the six criteria of this fair market value exception, the payments would be allowed. Another example, if a hospital controls medical office space they could not offer the space for less than FMV, including the rental rate and leasehold improvements, to a physician or group, hoping to capture referral business from the practice.

Many healthcare systems are wisely reaching out to real estate professionals to assist in the fair market value assessment of many aspects of any transaction that could be questioned under Stark Law guidelines. This could be a lease rate or Landlord lease concessions specified in a lease agreement or to determine FMV of a purchase or sale of a healthcare related property. When seeking input from a real estate professional please remember that real estate brokers are not attorneys and cannot provide you with legal advice.

Disclaimer: We are not attorneys and this article is not a legal opinion nor intended to give legal advice. When in doubt you should always seek legal advice.