A risky move: The new rules of relocation

The murky waters of physician recruitment recently became a little clearer as new federal law cast more light on precisely what is and what is not allowed with physician relocation agreements.

The second phase of the updated Stark II regulations took effect in July, shaping rules about deals involving existing medical groups, noncompete clauses in contracts, and recruitment payments, among other things.

Some observers say the new rules, combined with some indications that federal prosecutors are more closely examining physician recruitment, could result in hospitals and medical groups being more conservative or careful in which relocation incentives they offer and being more strict about enforcing all terms of contracts once they are signed.

"Hospitals are now going to be much more concerned with enforcing their agreements," said Jeremy Miller, a health care attorney with Miller Health Law Group in Los Angeles. "Even though in the past they said they would let things slide, now they are feeling that they can't give anyone breaks because it could be misconstrued as not being compliant with the law."

"So that's another reason physicians need to be careful with what they find," he added.

The updated Stark law did not reduce or increase the amount of compensation or total value that can be offered in recruitment packages, said Mark E. Smith, executive vice president of Merritt, Hawkins & Associates, the Irving, Texas-based physician recruitment firm. But it did make some significant changes to the rules affecting physician recruitment into established practices.

He said the new rules say that recruitment agreements cannot help pay for costs that existed before the new physician's arrival. That includes a portion of rent on an office building or costs for personnel or equipment that were already being used by the practice before the new doctor joined.

In the past, when a doctor joined a group, overhead expenses would often be allocated to that physician on a pro rata basis per month, said Donna Clark, a health law attorney at Vinson & Elkins, LLP, in Houston. But she said the law was changed because regulators were concerned that without the restrictions, some of the money paid by the hospital would end up benefiting the existing physicians in the group.

"The problem is that the new rules significantly limit the expenses that a hospital can reimburse for new doctors," she said.

Ultimately, that could result in fewer medical groups being willing to take on a recruited physician because they can't get a share of their overhead allocated as they could previously, said Miller.

But on the contrary, Smith believes that the updated Stark law may result in more recruitment deals because there is more regulatory clarity now than ever before.

Business as usual

For hospitals like those comprising River Oaks Health System in Jackson, Miss., the new law did little to change physician recruitment. Maggie Cravey, director of physician recruitment, said she will still recruit about six or seven physicians annually to each of three hospitals.

The health system's recruiting policies have always been conservative, so they didn't need to be altered much when Stark law changed, she explained. "We don't typically give doctors extraordinary packages to get them to come to Mississippi," she said. "We've always been very competitive."

Under the new regulations, payments have to be passed directly to and through the recruited doctor except for actual incremental costs to the medical group involved, such as costs for any additional staff support or office space that was needed to support the new physician, said Mary Antoine, a health care attorney with Nossaman, Guthner, Knox & Elliott in Sacramento, Calif.

"Those have to be reasonably identifiable costs rather than just a guess. So the practice's accountant should be consulted to help break out those additional costs," she said.

The recent Stark update also prohibited group practices from including noncompete clauses in their contracts with recruited physicians, Clark said. "If the group is going to accept recruitment benefits from a hospital, they can't accept a noncompete from the doctor," she said.

Other provisions of the new Stark rules require that the agreements are written and signed by both parties; the recruitment payment cannot be linked to the volume or amount of referrals to a hospital; the contract cannot violate anti-kickback statutes or other fraud or abuse laws; and the agreement cannot prohibit the doctor from practicing at another hospital.

Additionally, Miller said the regulations stipulate that to be appropriately recruited to the geographic area served by the hospital, recruited physicians either have to move their existing practices at least 25 miles or ensure that 75% of the income from their new practices comes from new patients not served at the old site. However, Clark said that physicians in the hospital's geographic area who are in training or haven't yet established a practice can still receive assistance.

Clark said the government felt it had a good reason to tweak the Stark rules. "These significant restrictions were primarily intended to address the problem that the government saw with physician recruitment arrangements benefiting existing physicians," she said.

The Centers for Medicare & Medicaid Services has said that all recruiting arrangements -- even contracts that predated the updated Stark regulations -- had to be compliant with the new rules when they took effect last summer, meaning hospitals, medical groups and physicians should have their legal counsel review any contracts that were signed before the July 26 compliance deadline.

Recruiting practices can be problematic

Tenet Healthcare Corp. got into trouble for its recruiting practices prior to the new Stark rules. A series of subpoenas over the last couple years sought information about Tenet's relocation agreements involving hospitals in at least three states. And a Tenet subsidiary was scheduled to go on trial Oct. 14 on charges that the Alvarado Hospital Medical Center in San Diego paid illegal kickbacks to established physicians through its recruitment deals.

According to an indictment returned in July 2003, Alvarado Hospital and another Tenet subsidiary paid more than $10 million to fund more than 100 physician relocation agreements to recruit medical services to the Alvarado service area between 1992 and 2002. But the indictment said a "substantial portion" of the money went to established doctors to induce them to make referrals to Alvarado.

Tenet said the indictment was a broad attack on "a well-established, lawful and common means by which U.S. hospitals attract needed physicians to their communities." The company said it would stand by its recruiting policies and vigorously defend itself.

The scrutiny of Tenet's deals has caught the attention of some observers who say that there appears to be increased regulatory scrutiny of such deals, which could affect the willingness of hospitals and medical groups to enter into them.

"Because of the Tenet situation, hospitals and groups are now being more cautious of how they are entering into these agreements," said Miller. "And there is a greater level of concern among physicians and their hospitals that things are being done within the law."

If nothing else, Antoine said the increased scrutiny of relocation agreements is prompting physicians to have more awareness about the deals. "Physicians' consciousness is being raised on these issues, and they're asking better questions," she said.

John D. Zelem, MD, had one main question on his mind when he looked into relocating. The general surgeon from Bethany, Conn., was concerned about relieving some of the burden he was feeling from his medical liability insurance premiums, which were jumping from $65,000 to $91,500.

Dr. Zelem accepted an offer to start working this month at a 100-bed hospital, which he declined to name, in a rural community near Tupelo, Miss. The hospital agreed to pay a "reasonable" salary and his liability insurance premiums.

Dr. Zelem said he had help from recruiters going over the fine details of the deal. "And the hospital had concerns about making sure nothing they did was illegal," he said.

Indeed, Antoine said hospitals can be a resource for some guidance with recruitment contracts because as an involved party they have good reason to ensure that the agreement is legally sound. But she said some hospitals don't have a good grasp of the complexities of the regulations. That's why she said physicians should seek legal advice and look for red flags that can signal a bum deal.

For instance, she said if the physician is being recruited to an area where there doesn't seem to be a compelling need for his or her services, then that physician should be concerned that there may be other motivations behind the agreement and that it could be scrutinized.

"If you're involved with a deal that just smells bad or you think that the parties involved have ulterior motives, you need to be careful about going forward with that agreement and make sure you check it out very carefully," Antoine said.

She also recommends examining all of the involved parties and considering whether there could be any conflicts of interests.

Clark said deals that offer really big compensation may signal that the recruiting hospital is trying to buy referrals. "You can strike a good deal, but it should be overall reasonable in scope compared to what everyone else is getting," she said.

Miller said that if there are provisions of the agreement that are tied to the individual's collections, the physician should make sure he or she has access to information showing exactly what those collections are on a periodic basis.

He also said that physicians should try to negotiate a forgiveness period in case the opportunity doesn't live up to expectations. But Smith said a forgiveness period of anything less than two years could look suspicious.

Finally, all of the experts warned that agreements that tie anything to patient referrals should be off limits because they could portend legal violations.