OIG puts spotlight on office rental arrangements

Physicians who rent office space to health care suppliers and providers should make sure the rental amounts reflect fair-market value for the space actually used by the supplier, according to a special fraud alert issued by the Department of Health and Human Services’ Office of Inspector General (OIG) Feb. 22.

Stuart Kurlander, a partner with the Washington, DC-based law firm Latham and Watkins, says the alert is "a double-edged sword."

On the one hand, Kurlander says, the fraud alert includes a useful clarification that providers can use as an audit tool to ensure that their contracts with suppliers are in compliance with federal laws.

On the other hand, he says the Health Care Financing Administration could just as easily accomplished this through a program memorandum.

Kurlander says the alert also clarifies the ability of suppliers to pay certain individuals in the physician’s office to administer those programs, as long as the payment is consistent with the actual time spent by that person.

In addition, Kurlander says the alert includes the "fair-market value" measurement the industry was hoping for.

The fraud alert attempts to put to rest a long-running debate over the use of rental space in physician offices, otherwise known as "supply closets." Physicians and hospitals often keep limited supplies of durable medical equipment, prosthetics, orthotics and supplies on site for convenience and to facilitate patient discharge.

However, the OIG contends that excessive rental payments can be a ruse to disguise kickbacks from the suppliers to physician-landlords for referrals, and may violate the federal anti- kickback law.

According to the OIG, questionable features of suspect rental arrangements center on the following three primary areas:

- Appropriateness of rental agreements. The threshold inquiry when examining rental payments is whether payment is appropriate at all. Payments of "rent" for space that traditionally has been provided for free or for a nominal charge for the benefit of the physicians’ patients. In general, rental payments for consignment closets in physicians’ offices are suspect.

- Rental amounts. Rental amounts should be at fair-market value, 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.

- Time and space considerations. Suppliers should only rent premises of a size and for a time that is reasonable and necessary for a commercially reasonable business purpose. The basis for any proration should be documented and updated as necessary.

To read the entire OIG Fraud Alert, go to http://www.hhs.gov/oig/frdalrt/index.htm.