Fair Market Value, Leases, and Stark Self-Disclosure- New observations on a common conundrum


My AHLA colleagues and I have traded some recent stories and resulting thoughts about leases, fair market value, and the Stark self-disclosure protocols.

What happens when a hospital leases space in a medical office building, from physicians and/or physician practice groups, and enters into various sub-leases with various other physician groups, and uses as the rental amount the same rate the hospital was paying under the master lease?  Adding to the facts, the initial master lease rate was used for the sake of simplicity, and to avoid any question that it was intended to confer a discount to the physicians or physician groups.

A problem can exist if the rental rate for other space in the same building declined over time as part of an overall drop in the market, resulting in the rental payment by the  physician groups of a significant percentage (let’s say about 18% + or -) more than comparable space would have cost. Of course, neither the hospital nor the physician groups were aware of this at the time they entered into the subleases.

Because a financial relationship exists between the physicians who refer patients to the hospital for designated health services, and the Stark space rental exception appears not to apply (due to the rate being above FMV), it initially seems as though this arrangement is a potential violation that should be disclosed.

However, because the physician is paying more than FMV and making referrals (compared to the common scenario of reduced payments in exchange for referrals), this situation does not appear to include the exchange of benefits that Stark is designed to address. Additionally, given the purpose of Stark, it seems as though FMV as pertains to the lease exception would establish a floor – and not a ceiling – for rental payments.

My take on this is that the evaluation of FMV must be at the time of the transaction (lease in this case). Even though CMS is aware that markets move, any new lease (or negotiation of it) must take into account the fair market value of the lease or sub-lease’s starting date.  A Stark SDP analysis would need to be taken if no effort had been made to “correct” the sub-lease rental amount and the percentage rent discrepancy had been allowed to fester.  This is a good reason to include that annual or bi-annual appraisals will be required in leases.