KATHRYN GILCHRIST AND DAVID DONNELL

Last month, we gave a general overview of the changes made in the final Stark Phase III regulations (introduced in September and effective this month). One area of change that may have the most positive benefits to hospitals and physician practices in Mississippi is found in the recruitment exception.

The recruitment exception allows a hospital to make recruitment payments to either a physician practice, which a recruited physician will join, or directly to a recruited physician so long as the physician is relocating to the hospital’s geographic area. These arrangements must be set out in writing and signed by the parties and not conditioned on the physician’s referral of patients to the hospital. Further, the hospital may not, directly or indirectly, determine the amount paid to the physician based on the volume or value of referrals. The physician must also be allowed to establish privileges at other hospitals and refer patients to such hospitals. Residents or those physicians in practice less than one year are still excluded from this requirement.

Under the new rule, hospitals have greater flexibility in defining their “geographic area” for purposes of relocating a physician because CMS has allowed some forgiveness to the former, rigid patient population calculations. Rural hospitals, or those that are not in Metropolitan Statistical Areas (MSAs), are given the most latitude and can recruit a physician into any contiguous zip code area in which the hospital receives 90 percent of its inpatients. This allows greater flexibility by allowing hospitals the ability to recruit physicians to some of its outlying areas within its market. Healthcare providers should note that CMS will now consider a physician’s medical practice “relocated” if the practice was outside of the area into which he/she is recruited or if the physician derives revenues from at least 75 percent of “new” patients in the geographic area. “New” patients must not have been seen by the physician the previous three years.

Equally important, hospitals may make recruitment payments to either the recruited physician or to the practice the physician is joining. Obviously, the hospital may not vary the payment based on the referrals generated by the physician practice. If made to the practice, the group is required to execute the agreement and be bound by the record keeping guidelines set forth in the regulations. Generally, actual recruiting costs may be maintained by the physician practice, but all incentive payments must be given directly to the recruit.

In cases of income guarantees, the rule requires that only actual incremental expenses of the group are assessed to the recruited physician. However, in some rural areas, Phase III will now allow major advantages, including: (1) the ability to account for some overhead in the incremental costs, and (2) the option to add reasonable practice restrictions, such as non-compete clauses. If the physician is recruited into certain rural areas and replaces a physician who retired, died or moved out of the geographic area in the previous 12 months, income guarantees may include the lower of a per physician overhead allocation or 20 percent of the practice’s aggregate overhead costs. This allows for real cost savings for the existing group practice members.

Next, while the physician practice may not impose “unreasonable” practice restrictions on the recruit, significant limitations are allowed. For instance, “reasonable” practice restrictions can include confidentiality terms, anti-solicitation clauses and moonlighting prohibitions. Of even more significance is CMS’s recognition that non-compete clauses are not per se unreasonable.

While historically considered “unreasonable restrictions,” CMS noted a few examples where non-competes could be “reasonable.” First, if the group restricts the physician from a certain area, but the physician is still able practice in the hospital’s “geographic area” without violating the agreement, the restriction could be reasonable. This would be useful if the hospital had a large “geographic area.” A non-compete could also be used if accompanied by a reasonable liquidated damage provision. These clauses generally require the physician to pay a fee to the practice to be able to remain in practice in the area. Reasonableness as to the liquidated damages would be a fact dependent calculation.

To be sure, the final Stark Phase III regulations have opened up physician recruiting to allow more flexibility and greater financial benefit to all parties involved. When your hospital or practice looks to add providers, be sure to carefully consider these new rules. You may be surprised at the flexibility now found in the Stark Law.


December 2007