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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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