Hall Render real estate attorneys regularly police our health care clients’ real estate contracts, particularly leases, to ensure they comply with applicable health laws. In particular, federal Stark and Anti-Kickback laws. A Michigan nonprofit hospital system’s 2011 payment of $30 million in fines for alleged health law violations demonstrates the potentially high cost of noncompliant leases.

On December 30, 2010, Detroit Medical Center, a Michigan nonprofit corporation that owned and operated 8 hospitals in Detroit, Michigan (the “DMC”), was purchased by Vanguard Healthcare Systems, Inc., a Tennessee for profit corporation. Concurrent with this widely-publicized transaction, DMC agreed to pay $30 million to the U.S. government (the “U.S.”) in early 2011 to settle many claims arising out of DMC’s allegedly unlawful business practices. Many of the alleged violations related to the DMC’s leases with third parties. The December 31, 2010 Settlement Agreement between the DMC and the U.S. documents the following specific real estate contract violations of health laws:

1. DMC rented office space to a number of physicians without written and executed leases for the entire term.

2. DMC had compensation, lease, or other financial arrangements with a number of physicians who provided services to DMC where the financial relationship may not have been consistent with fair market value and/or may have been commercially unreasonable.

3. DMC provided signage and/or may have provided advertising and biographical material for a number of physicians, on terms that may not have been commercially reasonable, fair market value terms.

The Attachments to the Settlement Agreement reference in detail the questionable leases and the parties to them, publicity the third parties would have undoubtedly preferred to avoid.

The DMC-U.S. settlement is a compelling example of the importance of ensuring that leases between health care enterprises comply with applicable health laws. If you have any questions regarding these issues, please contact one of Hall Render’s real estate attorneys.

During the 4th quarter of 2011, Grubb & Ellis (G&E) released their investor outlook for healthcare properties. The report states that demand is strong and that healthcare properties will continue to be a reliable investment over the next decade.

G&E points to a number of factors to justify its outlook. The driving force will likely be the number of baby boomers reaching age 65 during the next few years. Experts are predicting that the 65 and over population will grow 36% over the next decade. Current data suggests the 65 and over population visit hospitals and healthcare facilities twice as much as their younger counterparts. (more…)

A good reminder for leases between health care entities and physician groups is that under the Stark regulations, the space rented is reasonable and necessary for the legitimate business purposes of the lease and is used exclusively by the lessee (during such times when the lessee is using the space) and is not shared with or used by the lessor or an affiliate of lessor.  In addition, the lessee may make payments for the use of common area space if the payments do not exceed the lessee’s pro rata share of expenses for the space based upon the ratio of space used exclusively by the lessee to the total amount of space (other than common areas) occupied by all persons using the common areas.

In February, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) shed additional light on their proposed rule that changes how lease agreements are treated for accounting purposes. The proposed rule, originally published in an exposure draft on August 17, 2010, treated all lease agreements as capital lease agreements for accounting purposes. The proposed rule was originally met with criticism by most in the accounting and real estate industries.

After receiving an overwhelming amount of comments questioning the proposed rule, FASB and IASB reconsidered some of the more controversial sections of the proposed rule. In February, FASB and IASB announced that they would consider a two-model approach for accounting leases: finance leases and “other-than-finance” leases which more closely mirrored the current practice of accountants when considering capital lease agreements as distinct from operating lease agreements. (more…)

Many large construction projects, including hospitals and healthcare facilities, utilize a Fast Track project delivery process. The goal of the Fast Track method is to bring a facility from concept to reality in a fraction of the time of a normal building project. Naturally, this process provides certain benefits and risks that an owner of the project must be comfortable with.

The Fast Track process saves time by engaging the contractor prior to the completion of design. Generally, the contractor is compensated using a “Cost Plus the Contractor’s Fee” method, often with the contractor giving a Guaranteed Maximum Price (GMP). (more…)