Stark II: Physician Recruitment

By Ingrid Brydolf and Paul T. Smith
[May 2004]

The new Stark II “Phase II” regulations are likely to hamper the efforts of hospitals to recruit physicians to meet their service area needs. The Centers for Medicare and Medicaid Services (CMS) published the second and final phase of the Stark II final regulations on March 26, 2004.¹ Voicing concern that payments to established practices to support new recruits might be used improperly to pay for referrals from the existing practice, CMS has narrowly limited the support that hospitals can pay to host practices or to physicians that join them. In particular, the new regulations state that income guarantees for physicians joining established groups may take into account only the “actual additional incremental costs attributable to the recruited physician.” These regulations continue to limit the options available to hospitals in recruiting physicians necessary to fulfill community missions.

Contracts with Host Physician Groups

When a new physician “joins” a host physician or physician group, a hospital may pay the host group only the actual costs incurred in recruiting the new physician (for instance, the cost of a search firm). In addition, if the hospital pays an income guarantee, it may include only “actual additional incremental costs” attributable to the new physician. The hospital cannot pay the fully allocated overhead attributable to the physician. The only bright spot here is that the regulations clarify that income guarantees can be paid directly to the host group, and need not be funneled through the recruit.

There are other limits:

• The host group cannot bind the new physician with a non-compete agreement or impose other restrictions on the physician’s ability to practice within the community.
  
  
• If the host group receives payments from the hospital, it must sign the recruitment agreement.
  
  
• Records of actual recruitment costs and the dollars passed through to the new physician must be maintained for at least five years and be made available to the government upon request.

  Example: Hospital recruits Dr. DoMore to relocate his medical practice from another state to the hospital’s service area and become an employee of existing DoGood Medical Group. DoGood Medical Group has excess space in its office and will only need to hire a medical assistant, obtain additional professional liability insurance, and purchase some supplies, furniture and equipment for Dr. DoMore. DoGood Medical Group also pays for Dr. DoMore’s relocation expenses.

  In this example, the hospital can enter into contracts with Dr. DoMore and DoGood Medical Group to reimburse DoGood Medical Group for the moving expenses and to guarantee the income of Dr. DoMore for a reasonable start-up period. The guarantee can take into account the costs of the medical assistant, the additional insurance, supplies, furniture and equipment for Dr. DoMore, but not, for example, a share of DoGood Medical Group’s office rent. If, on the other hand, DoGood Medical Group had to lease new space for Dr. DoMore, that would presumably be an additional incremental cost, and could be included in the income guarantee.

Contracts with New Physician

If the new physician does not “join” a host physician or physician group, the hospital has more latitude to pay the full costs incurred by the new physician in starting a medical practice in the hospital’s service area.

Example: Rather than joining DoGood Medical Group, Dr. DoMore decides he will form his own medical practice. The hospital could enter into a contract with Dr. DoMore, reimburse his moving expenses and guarantee his income for a reasonable start-up period. And, unlike the example above, the expenses that could be covered by the hospital would include all of his actual practice overhead, such as rent, utilities, and staff.

Example: What if Dr. DoMore forms his own medical practice, but rents DoGood Medical Group’s vacant office for a fair-market rent, and contracts with DoGood Medical Group for a portion of shared expenses, such as office services? Arguably, Dr. DoMore is not “joining” DoGood Medical Group and the hospital would be able to cover the costs of the space and office services in Dr. DoMore’s income guarantee. However, situations like this would need to be carefully analyzed to ensure they do not run afoul of the Stark prohibition on circumvention schemes.

Who Can be Recruited?

Generally, recruitment assistance can only be paid by a hospital to a physician who is relocating to the hospital’s geographic service area. In the past, there was confusion whether a hospital could recruit a resident from a local residency program or whether a physician had to move her residence to “relocate.” The new regulations state:

• Residents and physicians in practice for one year or less are eligible for assistance and do not need to relocate.
  
  
• A physician has relocated his medical practice if he moves his practice at least 25 miles, or his new practice derives at least 75 percent of its revenues from professional services furnished to patients who were not seen or treated by the physician at his prior medical practice site during the preceding three years (measured by calendar or fiscal year).

The regulations also define the hospital’s geographic service area to which a physician must relocate as “the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75 percent of its inpatients.”

Don’t Forget

In crafting recruitment agreements, hospitals should remember:

• Signed, written agreements are required
  
  
• Remuneration cannot be based on the volume or value of referrals
  
  
• Generally, the recruited physician must be permitted to establish privileges at other hospitals and to refer patients to other hospitals

What You Can Do (Besides Bang Your Head Against the Wall)

These interim final regulations are effective July 26, 2004. However, CMS is accepting comments from the public through June 24, 2004. In anticipation of the July effective date, we recommend that our hospital and physician clients:

• Locate and review all active physician recruitment agreements;
  
  
• Because the new rules affect current contracts, ask your attorney whether the agreements may violate the new rules and, if so, prepare a strategy for renegotiating and amending non-complying contracts;
  
  
• Review and update physician recruitment plans and policies to ensure they are consistent with the new standards;
  
  
• Consider submitting comments to CMS describing the “real world” problems that you see with these rules; and
  
  
• Be prepared to continue dealing with complex, hard-to-explain physician recruitment agreements.

Unfortunately, a result of CMS’s new regulations is that host groups will become increasingly concerned about the time it takes for a new recruit to reach profitability, which is often at odds with community need. Ironically, hospitals may be required to place recruits in sole office practice, where overhead costs will be greater, and the prospects for success and service to the community become increasingly diminished.

FOOTNOTES

1 Unless an exception, such as the physician recruitment exception, applies, the Stark law prohibits (a) a physician with a financial relationship with a hospital from making Medicare patient referrals to the hospital, and (b) the hospital from billing Medicare for the referred services.

For further information, contact:

Ingrid Brydolf, Portland, (503) 276-5804, ingridbrydolf@dwt.com
Paul T. Smith, San Francisco, (415) 276-6532, paulsmith@dwt.com
Robert G. Homchick, Seattle, (206) 628-7676, roberthomchick@dwt.com
Thomas E. Jeffry, Jr., Los Angeles, (213) 633-6882, tomjeffry@dwt.com
M. Steven Lipton, San Francisco, (415) 276-6550, stevelipton@dwt.com

This Health Law Advisory is a publication of the Health Law Group of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of developments in health care law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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