FASB Lease Standards and Stark Law Requirements for Medical Office Buildings
For lease and property managers of medical office buildings, managing your leases goes beyond collecting rent and ensuring that you have a comprehensive view of your portfolio.
Compliance requirements and regulations, such as FASB and Stark Law, present unique challenges that must be addressed so that the organization does not face hefty fines or penalties.
What is FASB?
The Financial Accounting Standards Board (FASB) was established in 1973 to “establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.”
There are a number of standards that have been established that must be adhered to by nongovernmental companies and organizations. In 2015, FASB announced that they are proceeding with a new accounting standard that requires these organizations to include lease obligations on their balance sheets.
As a result of these changes, many companies will have to change the way that they manage their leases. Investing in a lease administration solution can simplify the process to adhere to key requirements set forth by FASB.
What is Stark Law?
Stark Law covers three separate provisions that govern physical self-referral for Medicare and Medicaid patients. A component of this includes the regulation of how health service office space is leased out to doctors.
As part of a lease Stark Law, there are specific requirements that must be met for a lease arrangement to adhere to Stark Law.
- Written agreement of at least one year.
- Space determined reasonably necessary for legitimate business purpose and includes proportional allocation of common area expenses.
- Rental charge established in advance and based on fair market value.
- Commercially reasonable lease agreement.
Hospitals and healthcare providers that have not complied with Stark Law have faced multi-million dollar fines. To ensure you comply, you can leverage a lease administration solution designed to meet the unique challenges that Stark Law presents to hospitals and healthcare organizations.
10 things to know about leases under Stark Law.
Minimizing the risk that comes with being out of compliance can be a tall order. Here are 10 key facts to know about leases under the Stark Law:
1. The Stark Law primarily addresses physician self-referral.
This occurs when a physician refers a patient to a medical practice or facility where the physician has a financial relationship in some way, whether it be an investment or compensation arrangement. It can refer to cash or something like leased space that is offered to benefit the physician financially.
2. Lease agreements.
Every lease agreement needs to be in writing and signed by all parties, including both lessee and lessor.
3. Space management.
A lease agreement must describe all spaces and should include the main leased space, as well as any other areas that may be used. In one recent settlement, a hospital landlord allowed a physician tenant to use a closet with no rent charged for nearly 30 years.
4. Common areas and maintenance.
The lease must include remuneration for common areas and associated maintenance. This should be allocated proportionally to all tenants who are leasing within the building.
5. Services and equipment.
In addition to space, the lease should include services and equipment. These elements should be charged at fair market value, as should space.
6. Termination rights.
A clear indication of termination rights needs to be included within the lease. If the tenant, for instance, goes out of business, how will the terms to the lease agreement be met? Is a tenant able to sign a waiver? These questions must be answered.
7. Timeshare leasing.
Every timeshare arrangement must adhere to Phase IV of the Stark Law, where the CMS no longer allowed “on-demand” leasing arrangement. A visiting physician, for instance, must have a fixed schedule of blocked times that are no less than four hours.
8. Self-referral disclosure protocol.
The self-referral disclosure protocol (SRDP) allows suppliers and service providers to self-disclose any potential or actual violations of the Stark Law. As a result, the offending organization can resolve the violation and avoid the risk of prosecution to the fullest extent of the law.
9. Potential consequences.
The Stark Law can result in hefty fines and even prison time. The SRDP helps healthcare landlords minimize the penalties.
For example, the first hospital that followed the SRDP was charged $579,000 to resolve its violations, instead of the estimated $14 million that would have been charged under full prosecution.
10. Under review.
The Stark Law is currently under review. In July, the CMS issued a notice of proposed changes to the Stark Law, as well as to solicit comments about whether Stark Law serves as a barrier to healthcare reform. Comments will be accepted through September 8.
What can be done to prevent Stark Law fines?
To prevent Stark Law fines, healthcare lessors need strict adherence to every requirement outlined in the regulation, in addition to other regulations they may be subject to. To meet all the requirements, leveraging a healthcare lease administration and accounting solution can streamline the lease management process.
As a result, you can access all data related to your leases in one central location, ensuring that you have the data in front of you to stay current with rent and provide support in future lease negotiations.
Contact our expert staff to learn more about how you can manage these challenges.