The health care industry is an exceedingly complex and ever-changing arena. Federal and state governments and state governments have enacted a multitude of statutes and regulations to protect against perceived fraudulent and abusive behaviors by hospitals and health systems, including the federal Stark Law, the Anti-Kickback Statute and the False Claims Act. To ensure compliance with these laws, it is paramount that hospitals and health systems develop and implement effective compliance programs to govern transactions with potential referral sources. One area that is often overlooked when developing such programs is real estate. Not surprisingly, issues related to real estate transactions have been the focus of countless enforcement actions and settlements between the government and providers across the nation. For this reason, hospitals and health systems should make sure that their compliance programs address lease arrangements and other real estate transactions. This article is designed to provide several considerations when developing a health care real estate compliance program.
Establishing System-Wide Real Estate Policies and Procedures
A foundational element of developing an effective health care real estate compliance program is the implementation of hospital or system-wide policies and procedures. This should include processes that handle arrangements from the outset – checklists, standardized templates and a process for confirming fair market value rental rates. This should also address operational issues that are germane to the real estate sector, including auditing and monitoring processes that ensure each arrangement complies with the documentation evidencing the arrangement. Implementing such policies and procedures should produce consistent outcomes and help to create a defensible process should any individual arrangement be challenged by a regulator.
For any compliance program to be effective, the health care entity must promote a culture of compliance. Each employee of the health care entity must understand the intricacies of the program and do his or her part to ensure that the program is implemented and operated correctly. Team members with real estate responsibilities should be sufficiently educated on the applicable statutes and regulations and their application to day-to-day operations. Organizational best practices may include mandatory training for new staff members, recurring annual training for all team members and development of a compliance handbook documenting policies and procedures, including transaction checklists and other protocol documents.
Obtaining Valuation Opinions
To comply with the various health care regulatory standards, the best practice is to ensure that every lease arrangement includes a fair market value rental rate. Often this requires health care entities to obtain third-party independent valuations from industry consultants. While not a foolproof way to ensure compliance with federal regulations, the government has routinely touted the benefits of procuring valuation opinions as a way to avoid scrutiny. However, the strength and reliability of a valuation opinion is directly related to the manner in which the opinion is prepared. The selection and engagement of a real estate appraiser or commercial real estate broker should be carefully documented. Common issues with ineffective valuation opinions include:
- Omitting or failing to consider definitions of “fair market value” and “commercial reasonableness” set forth in applicable statutes and regulations;
- Failing to provide definitive and thorough conclusions regarding fair market value in satisfaction of regulatory requirements;
- Failing to account for additional tenant benefits in opining on a fair market value rental rate (e.g., tenant improvement allowances, renewal options, provided services, etc.);
- Miscategorizing the lease structure (e.g., triple net vs. full service gross lease);
- Inaccurately interpreting and calculating square footage (e.g., rentable vs. usable square footage);
- Improperly relying on dissimilar comparison properties; and
- Incorrectly portraying agreed-upon lease terms.
Employing Real Estate Management and Tracking Procedures
Hospitals and health systems must employ a reliable management and tracking system in order to accurately account for all real estate arrangements. Depending on the size of the real estate portfolio, using a property management information system can greatly increase the quality and availability of information and create efficiencies. A property management information system can serve as a repository for all property information (both owned and leased), facilitate ongoing lease administration and accounting (AP/AR) functions and provide a standard reporting dashboard. The system should separately track those arrangements involving potential referral sources that may implicate federal regulations to ensure that those arrangements are administered in a compliant manner at all times. Using property management and tracking software can help automate many of the processes and practices needed for the management and administration of real estate arrangements, such as the calculation of operating expenses or the collection of rent.
Implementing Auditing and Monitoring Procedures
Hospitals and health systems should consistently monitor and routinely audit their real estate arrangements and seek direction from impartial, outside advisers when necessary. In doing so, entities can identify any areas of noncompliance and any potential concerns with their compliance programs before such concerns become reportable issues. Members of the entity’s property management team should also visit existing buildings on a periodic basis and physically observe how space is being occupied and by whom.