Stark II exceptions for physician recruitment by hospitals

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted Aug. 2, 2004.

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The second phase of the updated Stark II regulations became effective July 26, and the government has indicated that it will focus its enforcement efforts on ensuring physician recruitment arrangements comply with the new regulations.

Stark II contains an exception for payments by a hospital to recruit physicians to relocate to the geographic area served by the hospital and to join the hospital's medical staff. Under the Stark II physician recruitment exception, a physician has relocated his or her practice to the hospital's geographic area if the physician has moved the site of the practice a minimum of 25 miles, or at least 75% of the physician's revenues (including services provided to hospital inpatients) are from services provided to new patients whom the physician did not treat at the old location.

The regulations define "geographic area" served by the hospital as the area composed of the lowest number of contiguous postal ZIP codes from which the hospital draws at least 75% of its inpatients.

Regarding their impact on existing and future physician recruitment agreements with hospitals, the new Stark II regulations:

  • Focus on relocation of the recruited physician's medical practice rather than the physician's residence.
  • Permit crosstown recruitment of physicians (including resident physicians) who have been in medical practice less than one year without regard to any change in the location of their practice.
  • Permit recruitment by federally qualified health centers in addition to hospitals. Physician recruitment exception is not extended to designated health service entities, such as home health agencies or nursing homes.
  • Permit recruitment payments by hospitals to existing medical groups that employ recruited physicians under certain conditions.
  • Enable physicians to maintain staff privileges at other hospitals while having a recruitment contract with a hospital. A physician recruitment agreement cannot restrict the recruited physician from either maintaining staff privileges at other hospitals or referring business to other entities who are not parties to the contract.

Under the Stark II recruitment exception, a hospital may make a recruitment payment directly to the recruited physician if the following conditions are met:

  • The recruited physician relocates the practice to the hospital's geographic area.
  • The arrangement is set out in writing and signed by the parties.
  • The arrangement is not conditioned on the physician's referral of patients to the hospital.
  • The amount of the recruitment payment is not determined (directly or indirectly) by the volume or value of actual or anticipated referrals.
  • The recruited physician is allowed to establish staff privileges at any other hospital and to refer business to any other entities, except as otherwise permitted under certain employment arrangements and services contracts.

The regulations also permit a hospital to provide financial support for recruitment through an existing medical group. For a hospital to make recruitment payments either indirectly through another physician or group practice, or directly to a physician to join an existing physician or group practice, the following additional conditions must be satisfied:

  • The written agreement must be signed by the party who is directly receiving the payments.
  • Remuneration must be passed directly through and remain with the recruited physician, except for actual costs incurred by the group practice in recruiting the new physician.
  • For income guarantee purposes, the costs allocated by the group practice to the recruited physician may not exceed the actual additional incremental costs attributable to the recruited physician. This new requirement not only poses accounting challenges, but it also changes how practices have historically allocated physician expenses evenly among existing physicians and the recruited physician when determining expenses for purposes of an income guarantee or compensation within the group.
  • The records of actual costs and passed-through amounts must be maintained for at least five years and made available to the Dept. of Health and Human Services upon request.
  • The remuneration may not take into account the volume or value of referrals by the recruited physician, the group practice or any physician in the group practice.
  • The physician or group practice cannot impose additional practice restrictions on the recruited physicians -- such as a noncompete agreement -- except those related to quality of care.
  • The arrangement may not violate the Stark anti-kickback statute.
  • The recruitment agreement cannot violate any federal or state law or regulation governing billing or claims submission.

The Stark II final regulations have dramatically changed requirements of recruitment contracts between physicians and hospitals. Make sure that your current and future recruitment contracts comply with these new requirements.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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