Health Law Pointers - Volume IX, No. 1
For some time, there has been legitimate concern in our health sciences community over the government’s growing interest in health care fraud, particularly in the area of billing. Most professionals are aware of the need to keep accurate medical records that document the nature and complexity of the care provided to patients, and to have a compliance program. Unfortunately, the penalties for fraud are severe. The problem is compounded by a public that is encouraged by various governmental agencies to report suspicious behavior, and is rewarded for its “whistleblower” activity.
Certain remarks made recently in a compliance conference in Rochester, New York provide additional evidence of the government’s interest in the concept of “self-reporting.” Professionals and health care facilities that voluntarily report overpayments and make restitution in full are likely to receive more favorable treatment from the government than those who are “caught.” Eligibility for such favorable treatment may be conditioned upon a robust compliance program, periodic self-auditing, a clean track record and a discrete (not pervasive) problem.
Readers of this newsletter should also be aware that the federal Deficit Reduction Act of 2005 offers the states incentives to adopt local counterparts to the federal False Claims Act and the statutory whistleblower rewards offered there under. A final note: the government has expressed interest in the 20% annual growth rate in imaging procedures and may be targeting this area for its next fraud unit initiative.
Should I Lease or Buy?
At some point, medical professionals usually question whether they are better off renting office space to conduct their practices or if it makes sense to buy or build their own building. Since part of the monthly payments on a mortgage loan builds equity in a hopefully appreciating asset, investing in a building generally makes economic sense. However, the analysis is seldom that simple. Other factors including cash flow needs, tax consequences and the availability of capital for a down payment must also be considered. A detailed analysis jointly conducted by the professional’s advisors (accountant and lawyer) should take place to allow the medical professional to make an informed decision. In addition to economic factors, there are also non-monetary considerations for the busy professional concerning the time and energy investment needed to manage and maintain a building.
The following is a representative list of the factors considered in the analysis:
1. Rent and additional rent paid under a lease are fully deductible as a business expense for federal and New York State income tax purposes.
2. There are, of course, recurring office related expenses, which are common to both owners and renters such as utilities, liability insurance and routine maintenance. Leaving those common expenses aside, the monthly cost for renting office space is frequently less than a mortgage payment by an owner.
3. While tenants usually have certain maintenance responsibilities, many of the time consuming headaches associated with owning and managing a building are handled by landlords. A tenant can devote more time and attention than an owner to professional, family and other pursuits.
4. Commercial lenders, as a precondition for making a mortgage loan, regardless of whether it is to acquire an existing building or for a construction loan on a new build, often require an equity injection of 20-25% of the overall cost. For a $750,000 building, this means that the medical professional should be prepared to invest between $150,000 - $175,000 in acquiring the building. For younger professionals still paying student loans and starting families, the size of the required down payment can be a problem.
5. In addition to the equity injection, there are a variety of “soft” costs and closing costs associated with originating a new mortgage loan including, for example, loan fees, appraisal fees, environmental site assessments, mortgage tax, title insurance, bank and borrower attorney fees. In the aggregate, the soft costs and cost of closing can be considerable.
6. Mortgage interest, real estate taxes, insurance premiums and maintenance costs are deductible as business expenses by the owner of real property held for the production of income. Such deductions will reduce the taxable income resulting from the rents paid to the owner.
7. Owners of commercial buildings are also able to depreciate the building, resulting in a recovery of the cost of the building by taking annual depreciation deductions. With certain exceptions, medical office buildings are depreciable over a 29 year period, which means that the owner can take a depreciation deduction equal to 1/29th of the acquisition cost on each year’s tax return. For new builds, the medical professional should consider a cost segregation study which may allow the owner to depreciate the components of the new construction on a more accelerated basis.
8. New builds are expensive. Construction costs have risen rapidly in the last two years. Drywall, metal studs, concrete, blacktop and above all, copper wiring, have undergone fairly large price increases. Construction costs of new medical office buildings now run between $140 and $180 per square foot, considerably higher than such costs were only a few short years ago.
9. As a result, new construction can cost more than the “appraised value” of the completed building when compared with the available inventory of existing local medical office space. The result can increase the amount of the equity injection which must be made by the medical professional, as a buyer, for the luxury of having brand new space specifically designed for their practice.
10. Upon the sale of a building, the seller will have to pay tax on the gain. Currently, the tax on capital gains is 15%. However, sellers must also pay “depreciation recapture” which is taxed at a 25% rate. This means that of the depreciation deductions taken on prior returns, the medical professional owner must pay 25% of those prior deductions in the year of the sale. However, as with all real property, the capital gains tax and depreciation recapture can be deferred by engaging in a specially subsidized form of transaction known as a “like-kind exchange,” in which the property is exchanged, tax free, for other investment real property upon the meeting of certain criteria.
The foregoing are examples of the factors to be considered. Before deciding to buy rather than lease, the medical professional is well advised to determine his or her likely return on the investment.
State Reporting Obligations
Under State law, a physician’s legal and professional responsibilities include the preparation and maintenance of adequate patient medical records that accurately reflect the evaluation and treatment of patients under the physician’s care. What then must the medical professional do in the event he or she becomes aware of poor recordkeeping that may make it difficult to understand what medical advice or treatment was given or recommended?
If a physician is aware of conduct that may demonstrate that a colleague, employee or partner is susceptible to charges of professional misconduct under the State Education Law, that physician is obligated by the State Public Health Law to advise the Office of Medical Conduct of the circumstances that may implicate the Education Law. Failure by the physician to report such conduct may mean that the non-reporting physician is him/her self guilty of professional misconduct.
The Office of Professional Medical Conduct is required to investigate each complaint, and will keep the identity of the complainant confidential.