Three Tips to Make Healthcare Leasing a Little Easier

Healthcare Facilities Today

Authored Article

The U.S. healthcare industry continues to undergo drastic changes. With no sign of letting up, these changes can be disruptive to all aspects of a healthcare company, including its real estate leasing.

Whether it’s putting the Affordable Care Act into context, weighing the merits of nontraditional property leases or complying with regulations, facility planners have their work cut out for them when tackling a new lease or revisiting an old one. Here are three tips to help make the job a little easier.

1. Understand the Affordable Care Act

Some of the changes resulting from the 2010 Patient Protection and Affordable Care Act (ACA) have a direct impact on leasing activities. Because the ACA remains relatively new, it continues to raise a number of issues for healthcare facility planners that can be difficult to grasp and fully understand.

In part, the ACA was designed to lessen the financial burden of medical care. More affordability suggests an increased demand for more choice as consumers begin to “shop” for healthcare in a way they never have before. To meet this increased demand and new healthcare consumers, healthcare facility planners have begun to consider new submarkets and the leasing of nontraditional spaces. (See the next section for more on this trend.)

Additionally, the ACA drives efficiencies in the healthcare industry by requiring accountability in the delivery of healthcare services. Providing for a continuum of care among specialty practices contributes to these efficiencies. This has increased healthcare mergers and consolidations nationwide as hospital systems acquire physician practices to expand their brands and create economies of scale necessary to offset significant regulatory costs in part due to the ACA.

From a leasing standpoint, this suggests potentially larger leases and perhaps some significant turnover. Healthcare facility managers may also face space issues if constrained to existing hospital campuses.

2. Lease Nontraditional Spaces

The phrase “location, location, location” is just as true today as it was 20 years ago. As healthcare consumers become more plentiful and focused on convenience, healthcare facility planners must seek out new or alternative submarkets and leasing options.

These options includes everything from leasing space in retail centers and standalone single tenant buildings to subleasing space at the local grocery store or pharmacy. But healthcare facility managers will run into some curveballs when expanding beyond traditional hospital campuses.

For example, use restrictions and exclusivity provisions are common in the healthcare arena, whether a single physician is restricted in his or her activities within the leased premises or a large physician group requires an exclusivity provision as a requirement of their leasing any particular space. Similar restrictions may apply in retail settings. When drafting a healthcare lease with these restrictions and exclusions in mind, healthcare facility managers need to be a bit of a fortune teller — to see into the future and determine what uses consistent with the practice currently being used are not too restrictive, but would not be competitive with future activities of the space.

Biomedical waste is a unique concern for medically related tenants. Landlords will be especially cautious with respect to provisions involving red bag waste. Leases typically require confirmation of the licensure of pick-up and disposal companies and require that the tenant maintain all records associated with red bag waste for landlord review.

Utility use — excess and/or inconsistent — is another common issue with healthcare properties that is not necessarily consistent with traditional retail properties. For example, areas with medical equipment may require significant power use and some exam areas need to be significantly cooler than other areas. Plumbing, or the availability of potable water, is also unusually high for medically related uses. Excess utilities will generally be passed through and specifically addressed in leases.

Parking and accessibility also present a challenge, because among other factors, medical related uses might have parking needs exceeding those required pursuant to zoning regulations. As for accessibility, repurposed buildings or older retail sights may not satisfy current ADA requirements, and those costs may be passed to the tenant.

When drafting your lease with these restrictions and exclusions in mind, you need to be a bit of a fortune teller — to see into the future and determine what uses consistent with the practice currently being used are not too restrictive, but would not be competitive with future activities of the space.

3. Comply with Law and Regulations: HIPAA, Stark Law and Anti Kickback Statute

Security experts are calling 2015 “The Year of the Healthcare Hack,” and if the recent Anthem database breach of 80 million records is the precedent, we’re in for a year of patient privacy violations. But, one thing that healthcare facility planners need to remember is that HIPAA covers physical space as well as cyberspace.

The confidentiality of patient records needs to be top of mind when negotiating facility leases. For example, many leases provide maintenance and janitorial personnel relatively free access to office space after hours, and the landlord often has access to the space as well. These individuals typically have no obligations under HIPAA, and it’s the responsibility of the tenant to implement reasonable safeguards to prevent intentional and unintentional disclosures of health information from parties such as these. Does your lease have an addendum — essentially a confidentiality provision — that takes into consideration these potential liabilities of your physical space?

Though Stark Law and the Anti-Kickback Statute have been around for decades, they still remain regulatory hurdles that can be difficult to navigate if you’re not familiar with the ins and outs of the regulations.

Stark seeks to prevent inappropriate profiting from referrals among certain healthcare providers, and Anti-Kickback prohibits any payment in exchange for referring an individual to a service provider for which Medicare or Medicaid may make the payment.

Both regulations include safe harbors for certain office space rentals called the “office space rental exception” and the “space rental safe harbor,” respectively, and leases must satisfy both laws and their regulations if applicable. That the rental charge be consistent with fair market value is of paramount importance.

Although there are circumstances in which only one of the two statutes applies, in general, leases by a hospital to a physician tenant generally must comply with both statutes. Leases outside medical campuses may or may not trigger compliance issues, depending on the ownership structure of the non-medical landlord.

Either way, Stark and Anti-Kickback can turn leasing mistakes into potentially substantial criminal and civil penalties. They are regulations that healthcare facility managers really need to get to know before diving into a new leasing agreement.

Republished with permission. This article first appeared in Healthcare Facilities Today on March 3, 2015.