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Physician recruitment in the wake of Stark III

By John W. Jones, Esq.

Physician recruitment arrangements have been receiving a tremendous amount of scrutiny recently. These arrangements are subject to complex rules and regulations and if not properly structured can result in significant fines and penalties. In early September, the Centers for Medicare and Medicaid Services (CMS) of the Department of Health and Human Services (HHS), published final rules amending certain regulations with respect to the physician self-referral prohibition, commonly known as Stark. Some of the most drastic and positive changes were made to the physician recruitment exception.

Generally, Stark prohibits a physician (or immediate family member) who has a financial relationship with an entity from making referrals to that entity for the furnishing of designated health services for which payment may be made under the federal health care programs, unless an exception or safe harbor is satisfied.

Under Stark, remuneration provided by a hospital (or federally qualified health center or rural health clinic (under Phase III)), to recruit a physician that is paid directly to the physician and that is intended to induce the physician to relocate her medical practice to the geographic area served by the hospital in order to become a member of the hospital’s medical staff is protected, if all of the following conditions are satisfied:

· The arrangement is set out in a signed written agreement.

· There is no condition in the arrangement that the physician refer patients to the hospital.

· The remuneration paid to the physician is not based on the volume or value of any actual or anticipated referrals by the physician or other business generated between the parties.

· The physician is permitted to establish staff privileges at other hospitals and to refer business to any other entity. Referrals may, however, be restricted under an employment or services contract that complies with Stark’s special rules on compensation applicable to bona fide employees or contractors.

The geographic area served by the hospital is the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75 percent of its inpatients (90 percent for rural hospitals) and, under the Phase III rules, may include one or more zip codes from which the hospital draws no inpatients, provided that such zip codes are entirely surrounded by zip codes in the geographic area from which the hospital draws at least 75 percent of its inpatients. In the event that a hospital draws fewer that 75 percent of its inpatients from all of the contiguous zip codes from which it draws inpatients, Phase III loosened the rules so that the geographic area served by the hospital will be the area composed of all of the contiguous zip codes from which the hospital draws its inpatients.

Note, however, that the “hole” zip codes (i.e., those zip codes from which the hospital draws no inpatients), must be entirely surrounded by zip codes in the geographic area served. CMS has instructed that, although a hospital is free to use any configuration of zip codes that satisfies the regulatory requirements at the time of the recruitment arrangement, a hospital may not use one set of zip codes for a physician and then another set to provide her with another recruitment deal after the first.

With respect to rural hospitals, if the hospital draws fewer than 90 percent of its inpatients from all of the contiguous zip codes from which it draws inpatients, the geographic area served by the hospital may include noncontiguous zip codes, beginning with the noncontiguous zip code in which the highest percentage of the hospital’s inpatients resides, and continuing to add noncontiguous zip codes in decreasing order of percentage of inpatients.

In an effort to preclude cross-town recruitment, the Phase III rules have clarified that a physician must relocate her practice from outside the geographic service area to a location inside the services area and such relocation occurs where: (1) the physician moves her medical practice at least 25 miles and into the geographic area served by the hospital; or (2) the physician moves her medical practice into the geographic area served by the hospital, and the new medical practice derives at least 75 percent of its revenues from professional services furnished to patients (including hospital inpatients) not seen or treated by the physician at her prior medical practice site during the preceding three years, measured on a fiscal or calendar year basis.

Note that, if the physician is already in the credentialing process or has courtesy privileges prior to the proposed recruitment and has not moved, the arrangement would still not comply with the safe harbor since she would be considered to have staff privileges at the hospital.

CMS continued the exception to the relocation requirement for a physician who is resident of the area or who has been in practice one year or less and added two new exceptions, where: (1) the physician was employed in a full-time basis for at least two years immediately prior to the recruitment arrangement by either the bureau of prisons, the Department of Defense or Department of Veterans Affairs, or a facility of the Indian Health Service and did not maintain a private practice in addition to such full-time employment; or (2) the Secretary of HHS (Secretary) has determined in an advisory opinion that the physician does not have an established medical practice that serves or could serve a significant number of patients who are or could become patients of the recruiting hospital.

In the case of remuneration provided by a hospital to a physician either directly to a physician who joins a physician practice or indirectly through payments made to another physician practice, the following additional requirements must be satisfied:

· The written agreement must be signed by the party to whom the payments are directly made (either the physician or physician group, as the case may be). Although CMS has indicated that such an agreement may require the physician practice to repay monies advanced to a group on behalf of a recruited physician, failure of a physician to fulfill her community service obligations would raise significant fraud and abuse concerns.

· The remuneration is passed directly through to, or remains with the recruited physician, except for actual costs incurred by the physician practice in recruiting the new physician.

· Clarifying some ambiguity under the Phase II rules, CMS provides that, in the case of an income guarantee of any type made by the hospital to a recruited physician who joins a physician practice, the costs allocated by the physician practice to the recruited physician do not exceed the actual additional incremental costs attributable to the recruited physician. This would not include costs after the physician has joined the practice.

· Providing some relief to existing practices in rural areas and Health Professional Shortage Areas (HPSAs), under Phase III, with respect to a physician recruited to join a physician practice located in a rural area or HPSA, if the physician is recruited to replace a physician who, within the previous 12-month period, retired, relocated outside of the geographic area served by the hospital, or died, then the costs allocated by the physician practice to the recruited physician may be either the actual additional incremental costs attributable to the recruited physician, or the lower of a per capita allocation or 20 percent of the practice’s aggregate costs.

· Records of the actual costs and the passed-through amounts must be maintained for a period of at least five years and made available to the Secretary upon request.

· The remuneration may not determined in a manner that takes into account the volume or value of any actual or anticipated referrals by the recruited physician or the physician practice (or any physician affiliated with the physician practice) receiving the direct payments from the hospital.

· The physician practice may not impose on the recruited physician practice restrictions that unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital. Accordingly, non-compete and similar restrictions would now be permitted, provided such restrictions would not unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area serviced by the hospital. CMS has indicated that any practice restrictions or conditions that do not comply with applicable state or local law run a significant risk of being considered unreasonable. Additionally, in the preamble of the Phase III regulations, CMS provides that certain other restrictions, such as moonlighting, covenants on solicitation of patients and employees, confidentiality agreements and certain repayment obligations, including liquidated damages for breach of the recruitment agreement, would not be unreasonable.

· The arrangement may not violate the anti-kickback statute or any federal or state law or regulation governing billing or claims submission.

Recruitment of a physician by a hospital located in a rural area to an area outside the geographic area served by the hospital is also permitted if the Secretary determines in an advisory opinion that the area has a demonstrated need for the recruited physician and all other requirements of the safe harbor are satisfied.

Although some flexibility now exists under Stark’s physician recruitment safe harbor, parties will still need to structure these arrangements in accordance with the practitioner recruitment safe harbor of the federal Anti-Kickback Statute in order to be immune from liability under that statute. Additionally, tax exempt hospitals will need to consider how these recruitment arrangements continue to impact their tax exempt status and structure them accordingly.

John W. Jones, Esq. is a partner in the Health Care Services Group at Pepper Hamilton LLP in Philadelphia, Pennsylvania.

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