Stark II Physician Recruiting Exceptions: Benefits and Challenges
January – February 2005
Until the mid- to late 1980s, physician recruitment in the United States was a largely unregulated activity. That is not the case today, however. The IRS, the HHS, and the Stark Laws all have imposed regulations governing how physician recruitment must be conducted and the conditions under which recruiting incentives may be offered.
Stark Law II, which was passed into law in 1995, stipulates that physicians cannot refer Medicare and Medicaid patients to hospitals in which they have a financial interest. Such interest may include ownership of the hospital or compensation provided by a hospital to a recruited physician. Stark Law II creates an exception to this rule in the case of physician recruitment if the following are true:
- The recruitment arrangement and its terms are in writing and signed by both parties.
- The physician is not required to refer patients to the hospital.
- The amount of financial assistance is not tied to the volume or value of any patient referrals the physician may make to the hospital.
- The physician is not barred from establishing privileges at another hospital or from referring to another hospital.
These rules parallel recruiting regulations laid out by both the IRS and HHS, and most physician recruiters are, or should be, familiar with them. On July 26, 2004, however, amendments to Stark II went into effect that include several new physician-recruiting regulations. The new regulations state the following:
- Medical groups recruiting physicians with the assistance of a hospital may not impose a non-compete agreement on the incoming physician. The rationale for this rule is that the hospital is assisting in recruitment in order to provide medical services needed in the community. If the recruited physician is subsequently required to leave the area due to a non-compete, community need is not being met. Need in the community trumps any business arrangement within the medical group.
- Hospitals funding recruitment to an existing group must restrict benefits to the new physician alone, and benefits must be paid directly to the incoming physician.
- A hospital funding recruitment to an existing group can only pay for “additional incremental expenses” that accrue to the group because of the new physician. It cannot pay for a prorated share of the group’s fixed overhead expenses, such as office rent, equipment, or personnel, unless such expenses are a direct result of the new physician joining the group.
- Groups must maintain and provide evidence for five years of incidental expenses resulting from the presence of the new physician.
- Incoming physicians must come from outside the hospital’s service area, which is defined as the lowest number of contiguous postal zip codes from which the hospital draws 75% of its inpatients.
- The physician must relocate his practice (not his home) 25 miles, or derive at least 75% of revenues in the new practice from new patients. An exception is made for physicians coming out of residency or for those who have participated in their specialties for less than one year.
One Step Forward, Two Back
For hospital-based physician recruiters, the rule banning non-compete clauses provides a benefit. Non-competes traditionally have been a stumbling block for physicians considering relocation. Now that physician candidates no longer have to accept non-competes, they may be more amenable to relocation, knowing that if something should go wrong they will not be obligated to leave their new communities. In addition, the Stark II amendments define more clearly what constitutes a hospital’s service area — a matter that has been vague in the past.
Unfortunately, the regulation limiting hospitals to providing only “additional incremental expenses” presents serious challenges for many hospital-based recruiters. The rule is intended to eliminate any financial benefit that physicians who are already established in a community may gain when a hospital assists them in recruiting physicians. In discussions our firm has had with Center for Medicare Services (CMS) officials, it is clear this rule was implemented to prevent physician-recruiting abuses.
A problem arises, however, when an existing group loses a physician. In the past, a hospital could assist an established medical practice in finding a new physician by providing a salary or guaranteed income to the incoming physician, and by allocating to the new physician for one year a pro rata share of existing office space, equipment, personnel, and other expenses associated with the new physician’s practice.
Now, an established group or physician that loses a partner due to death, retirement, or relocation will see overhead increase by as much as 50 percent, and can get no relief from the hospital. The hospital is virtually obliged in such instances to recruit a new physician into a solo practice setting, in which case it could assist the new doctor with expenses such as office space rental, personnel, and equipment. Since very few physicians are willing to work solo, particularly in smaller or rural communities, the new rules make recruitment that much more difficult and do not reflect the realities of physician recruitment today.
What to Do
In light of the new rules, our legal counsel, the law firm Vinson & Elkins, suggests the following:
- Eliminate all non-competes from recruiting contracts where the hospital is assisting an established group to recruit.
- Should a physician practicing in an existing group in the hospital’s service area relocate, retire, or pass away, the group should immediately reduce clinical and administrative staff. Such staff may be rehired in the event that a new physician is added who requires the presence of more staff.
- When a newly recruited physician arrives, he or she should obtain their own health, malpractice, and disability insurance; hire their own staff, purchase their own equipment, and contract with outsourcing services for billing and related functions. This demonstrates that additional expenses are directly attributable to the presence of the new physician.
- Recruit residents, physicians who have been in practice less than one year, or physicians from outside the hospital’s service area. Since residents and new physicians do not have an established patient base, they cannot be induced to refer patients to the hospital, unlike established physicians in the community who do have a patient base.
- Follow all the other federal rules pertaining to physician recruitment. These include demonstrating a need in the community for a new physician, paying a salary or income guarantee that is “reasonable,” ensuring the agreement is in writing and is approved by the hospital board, allowing the physician to obtain privileges at other hospitals, requiring that the physician see Medicare patients, limiting the benefits period to three years or less, and offering incentives without any requirement that the physician refer patients to the hospital.
Of all these rules, the most problematic is the new one limiting what hospitals can do to help existing groups to recruit. Our firm and many other organizations, including the AHA, the MGMA, and multiple state hospital associations have written to CMS asking for an exemption to this rule in cases where the hospital is assisting an established group that has lost a physician due to death, relocation, or retirement. We are calling this a succession exemption. If you are concerned about the Stark II recruiting regulations and would like more information, or you would like to comment on the regulations, write to Herb Kuhn, Director, CMS, Mail Stop C5-15-12, 5700 Security Blvd., Baltimore, MD 2144-1850.
Source: Joseph Hawkins is chief executive officer of Merritt, Hawkins & Associates, a national physician search and consulting firm based in Irving, Texas. He may be reached a jhawkins@mhagroup.com.
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