OIG puts spotlight on true value of physician supply closets


HHBR Washington Correspondent

Physicians who rent office space to healthcare 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’ (Washington) Office of Inspector General (OIG) Feb. 22.

Stuart Kurlander, a partner with Latham and Watkins (Washington), said the alert is a double-edged sword. On the one hand, he said, it includes a useful clarification that providers can use as an audit tool to ensure their contracts are in compliance. On the other hand, he said, the Health Care Financing Administration (HCFA; Washington) could just as easily have accomplished this through a program memorandum.

Kurlander said the alert includes the fair-market-value measurement the industry was hoping for. He noted that it also clarifies the ability to pay certain individuals in the physician’s office to administer these programs, as long as that payment is consistent with the actual time spent by that person.

The 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 (DMEPOS) on site for convenience purposes and to facilitate patient discharge.

One of the durable medical equipment carriers (DMERC) had interpreted supply closets to be inappropriate because of the supplier standard that the product was not going directly to the beneficiary’s home.

"The other DMERCs did not take a similar view," according to Kurlander. But he cautioned that the OIG leaves interpretation of DMEPOS supplier standards to HCFA.

He added that supply closets are popular because they avoid the need to have patients return to the physician’s office with products shipped by suppliers.

"It makes infinitely more sense for the physician to be able to pull it out of a closet and fit the patient or show them how the product works," Kurlander said.

The OIG contends, however, 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, such as consignment closets for durable medical equipment, may be disguised kickbacks. In general, rental payments for consignment closets in physicians’ offices are suspect.

• 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 supplier generally should not exceed the rate paid by the physicians in the primary lease for their office space.

• 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. Rental of space in excess of the suppliers needs creates a presumption that the payments may be a pretext for giving money to physicians for their referrals. 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.

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