Factors Health Systems Should Consider Before Using Internal Analyses to Establish FMV Rent Rates for Timeshare Lease Arrangements between Physicians and Health Systems

Many health systems rely on internally generated analyses to establish rent rates for their timeshare lease arrangements with physicians. Health systems typically do this by procuring third-party fair market value (“FMV”) reports for their buildings that outline the FMV rent rate range for fulltime lease arrangements. Based on those FMV reports, health systems internally compute the timeshare rates by reducing the stated fulltime lease rates to an hourly or daily rent rates, which are then used in the timeshare arrangements. As outlined below, this approach presents several regulatory compliance pitfalls that can result in health systems violating the Stark Law and, perhaps, the Anti-Kickback Statute.

FMV reports for fulltime leases often fail to account for all material terms

First, the FMV reports for fulltime leases often fail to account for all the material terms that are typically included in timeshare arrangements. For example, most timeshare arrangements include, in addition to the rental of the space, the rental of furniture, fixtures, and equipment, whereas fulltime lease arrangements do not. Additionally, timeshare arrangements are typically entered into on a full-service gross basis, whereas many FMV reports for fulltime leases may outline full time lease rates on a triple-net or a modified gross basis. Many health systems fail to account for these differences in their computations of the timeshare rates, and, as a result, the computed timeshare rates could potentially fall below FMV. This could, in turn, result in health systems providing remuneration to physicians in exchange for patient referrals.

Internal computations are often calculated incorrectly or inconsistently across health systems’ real estate portfolios

Second, health systems’ internal computations of timeshare rates are often calculated incorrectly or inconsistently across the health systems’ real estate portfolios. Consequently, even if the underlying FMV report that outlines fulltime lease rates could be used as a basis to derive the timeshare rates, incorrect computations may cause the timeshare rates to not be consistent with FMV which, again, could result in health systems providing remuneration to physicians in exchange for patient referrals. Similarly, inconsistent computations of timeshare rates across the health systems’ real estate portfolios could potentially result in referring physicians and nonreferring physicians being treated differently, which could create the appearance of health systems trying to induce physicians for referrals through below FMV timeshare rates.

Many health systems fail to apply timeshare premiums when computing the timeshare rates

Third, by relying on FMV reports for fulltime leases to compute timeshare rates, many health systems fail to apply timeshare premiums when computing the timeshare rates. Although CMS has not issued any formal guidance on whether timeshare arrangements demand rent premiums, many health systems and valuation consultants regularly apply rent premiums to timeshare arrangements to account for the vacancy factor in the leased premises when they are not being utilized and to account for the convenience of being able to utilize the space when needed without having to incur costs for the space on a full time basis.

Key Takeaway

To avoid these pitfalls, a better practice is to obtain timeshare FMV reports from independent, qualified, third-party experts that will outline the FMV timeshare rent rates and account for all the material terms of the timeshare arrangements, such as furniture, fixtures, and equipment. By relying on timeshare FMV reports from qualified valuation consultants, not only are the timeshare rates more likely to be consistent with FMV, but the use of third party FMV reports can help health systems negate the intent element of the Anti-Kickback Statute if the charged rates are below FMV. For more information on our healthcare real estate advisory and compliance services, visit our Innovation Center.