An effective healthcare real estate compliance program: critical to health system success

May 29, 2019 2:06 pm

The consequences of noncompliance can be significant, particularly when it comes to real estate arrangements with referring physicians.

Health systems that make compliance an integral part of their corporate cultures and invest resources to establish and operate effective compliance programs are much more likely to succeed than those that fail to view compliance as an organizational responsibility.                      

Real estate lease arrangements between health systems and physicians are worth a thorough review because they represent an often-overlooked aspect of healthcare compliance, and noncompliance in this area often costs health systems big. In fact, a recent study found that the cost of settlement of a potential violation involving a real estate arrangement was 66% higher than the average settlement that did not involve a real estate arrangement.a Because real estate lease arrangements with referral sources pose regulatory risks for health systems and tend to increase the average settlement amount to be paid, health systems should create healthcare real estate compliance programs as subsets of their broader compliance programs.

Compliance risks caused by real estate lease arrangements with referral source

Real estate lease arrangements between health systems and physicians can produce financial benefits for both physicians and health systems at the expense of federal healthcare funds. For example, a physician could receive a financial benefit by paying less for medical office space than the market would otherwise dictate. The premise is that in exchange for providing a physician with medical office space at rates below fair market value (FMV), a hospital could potentially recoup the money it is losing on that lease arrangement by relying on subsequent revenue from that physician’s downstream patient referrals for services that will ultimately be paid for by Medicare. Payment for patient referrals is strictly prohibited by the applicable statutes and regulations and can serve as a predicate for whistle-blower healthcare fraud lawsuits against health systems.

These three settlements between health systems and the government illustrate the dangers posed by real estate arrangements:

  • In 2014, West Penn Allegheny Health System, Pittsburgh, paid a $1.5 million settlement for a case involving allegations of below-FMV lease rates being charged to a physician tenant to induce patient referrals.b
  • In 2013, Butte, Montana-based St. James Healthcare and its parent company in Colorado paid a $3.85 million settlement for a case involving allegations of improper financial initiatives provided to physicians involved in a joint venture arrangement including below-FMV lease rates and shared space arrangements.c
  • In 2012, Nashville-based HCA Healthcare, Inc. paid a $16.5 million settlement in a case involving allegations of above-FMV lease rates being paid to a physician landlord and leasing more space than is reasonable and necessary for a legitimate business purpose from the physician landlord to induce patient referrals.d

The Office of Inspector General (OIG) for the U.S. Department of Health and Human Services’ summary of provider self-disclosure settlements from 2011 to 2018 referenced about $20 million in settlements related to various real estate-related violations including lack of written leases, charged rent that is not consistent with FMV, improperly calculated square footage, free use of hospital space and failure to collect rent.

Health systems should enter lease agreements with physicians carefully, with a full understanding of the rules around those agreements. In general, lease arrangements between health systems and physicians should meet the following criteria. A lease should:e

  • Be in writing and adequately describe the leased premises
  • Contain lease terms of one year or more
  • Contain lease rates consistent with FMV without considering the value or volume of patient referrals
  • Be commercially reasonablef

Compliance pitfalls

Numerous compliance pitfalls associated with real estate lease arrangements exist, and they can be generally classified as transactional or operational.

Transactional compliance pitfalls stem from the lease arrangement itself and the specific structure of the transaction. They include:

  • Rent rates above or below FMV
  • Misclassified lease operating expense structures
  • Failure to account for tenant improvement allowances in determination of FMV rent
  • Inaccurate square footage measurements

Operational compliance pitfalls stem from the subsequent administration, or lack thereof, of the lease arrangements. They include:

  • Failure to properly account for rent escalators
  • Failure to collect rent
  • Reconciliation of operating expenses
  • Provision of off-lease benefits
  • Space creep

Both types of compliance pitfalls are caused by structural deficiencies in health system compliance programs, and both can expose health systems to significant liability under the law.

How to avoid compliance pitfalls

To avoid these pitfalls, health systems’ compliance programs should specifically include policies related to real estate arrangements that proactively seek to avoid regulatory infractions. At a minimum, health systems should have a full-time leasing policy for income and expense leases, a timeshare leasing policy, a real estate FMV policy, a rent collection policy and a real estate document policy listing the documents that should be included as part of each real estate package involving a referral source.

Building a strong real estate compliance program

The pillars of a strong real estate compliance program are as follows.

Know leasing policy details. The leasing policies should outline the procedure for entering into new leases or lease renewals, including the delineation of the duties and responsibilities of different departments, the approval process and the creation of requisite transaction documents. The real estate FMV policy should set forth the qualification requirements for the valuation consultant providing the FMV reports and outline the requisite information that should be provided in each report. The creation of these policies will lead to a standardization of processes, which is the driving force behind all compliance programs. Standardization of processes helps ensure consistency of outcomes and creates a defensible process and documentation trail if an arrangement is ever challenged.

Train employees on compliance. Health systems should train the relevant personnel on the real estate policies and explain how those policies apply to their job responsibilities. The policies should be widely distributed among employees and be easily retrievable. The employees also should be trained on the applicable healthcare statutes and regulations to better understand the purpose of the policies and to appreciate the importance of conducting business in a compliant manner.

Implement information management and tracking. To help ensure all real estate arrangements are accounted for within the compliance framework, executing a solid information management and tracking system is important. Every health  system should separately track its real estate lease arrangements with referral sources to help ensure that those arrangements are administered in a compliant manner. Reliance on property management and accounting software can help automate many of the processes needed for proper administration of lease arrangements, such as collection of rent. Automated processes eliminate the regulatory risks posed by human error.

Conduct annual monitoring and testing of real estate lease arrangements. By continually testing real estate lease arrangements with referral sources and seeking guidance from objective, third-party advisers, health systems can identify weak points in their compliance programs and correct them accordingly. Continuous monitoring also helps ensure noncompliant arrangements are discovered and corrected before they turn into reportable regulatory infractions.

Require employee accountability. Employees at all levels should be evaluated on their ability to abide by the applicable policies and their contributions to maintain a culture of compliance. Consequences for those who do not comply should be clear. Similarly, health systems should report discovered regulatory violations to the applicable authorities and accept responsibility for them. Hiding reportable regulatory infractions from the government can lead to significant consequences if the government were to detect them.

Having an effective healthcare real estate compliance program in place is critical to avoid penalties, fines and bad press. The government’s annual monetary recoveries from healthcare fraud cases show health systems have no other choice but to implement strong regulatory compliance frameworks designed, in part, to help keep their real estate lease arrangements with physicians compliant. 


a. Dick, A.A. , “OIG Data Confirms That Non-Compliant Real Estate Arrangements Are Costly,” Hall Render, Oct. 20, 2016.

b. The United States Attorney’s Office, Western District of Pennsylvania, “$1.5M Settlement With West Penn Allegheny Health System Resolves False Claims Act Allegations,” March 19, 2014.

c. The United States Department of Justice, Office of Public Affairs, “Colorado Health Care Organization and One of Its Montana Hospitals to Pay $3.85 Million for Allegedly Providing Financial Benefits to Referring Physicians and Physician Groups,” Dec. 31, 2013.

d. The United States Department of Justice, Office of Public Affairs, “Hospital Chain HCA Inc. Pays $16.5 Million to Settle False Claims Act Allegations Regarding Chattanooga, Tenn., Hospital,” Sept. 19, 2012.

e. See 42 U.S.C. § 1395nn(e)(1) and 42 C.F.R. § 357(a).

f. See 42 U.S.C. § 1395nn(e)(1) and 42 C.F.R. § 357(a). See also 42 C.F.R. § 1001.952(b).


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