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A Better Partnership


Jul 2004
July 01, 2004

Health Law Alert

Physician Recruiting: How the New
Stark II Regulations Affect You

On March 26, 2004, the Centers for Medicare and Medicaid Services published new Stark II regulations. Known as Phase II regulations, the new regulations go into effect on July 26, 2004.

You can view a copy of these regulations at

Physician Recruitment. One key issue for hospitals and physician groups under the new regulations concerns income guarantees that a hospital may offer on behalf of a physician recruit who is joining an existing medical practice. The new regulations allow a hospital to offer an income guarantee to a physician joining a physician group, but only on certain conditions. The general principle is that the hospital's support for a new physician may not financially benefit physicians who are already part of the existing practice.

  • The hospital's guarantee payments must be passed directly to the recruited physician.

  • In calculating a hospital's income guarantee payments with respect to a new physician, allowable costs allocated to the new physician may not exceed actual incremental (marginal) costs directly attributable to the recruited physician. In other words, none of a practice's general overhead costs may be allocated to the recruited physician.

  • The group may not impose practice restrictions, such as noncompete covenants, on the new physician.

Existing recruitment agreements that do not comply with these requirements must be amended before the new regulations' effective date (July 26). Otherwise, the physician group must stop making referrals to the hospital as of that date.

Other Changes. The new regulations make several changes that are helpful to hospitals and physicians:

  • Same Building Rules. The regulations make it easier for services rendered by a physician's practice but outside the normal practice office to qualify as lawful "in-office ancillary services."

  • Joint Ventures. The regulations clarify a previously confusing provision concerning joint ventures, where the venture's co-owners make referrals to each other. Under the new regulations, mere venture co-ownership does not itself create an unlawful relationship precluding referrals.

  • Early Termination. The regulations explicitly allow for early termination of leases and personal service arrangements, even without cause, so long as the parties do not enter a similar arrangement during the first year of the original term.

  • Professional Courtesy. The regulations allow professional courtesy services–free or discounted health care provided to physicians, immediate family members, and office staff–subject to some requirements. To qualify, services must be offered to all physicians on the medical staff, the services must be of the type routinely offered by the entity, and a written professional courtesy policy must be approved in advance by the entity's governing body.

  • Temporary Noncompliance. The new regulations create a temporary noncompliance exception applicable where a physician falls out of compliance. To benefit from this exception, the physician must have fully complied with the Stark II regulations for 180 days prior to the noncompliance, fallen out of compliance for reasons beyond his or her control, and taken steps to fix the noncompliance. This temporary exception applies only for a temporary period not to exceed 90 days. Furthermore, this exception may be used by any referring physician only once every 3 years.

The Stark II regulations require careful review and attention to ensure compliance. If you have any questions about these regulations or how they affect you, please call Richard Bouma (616.752.2159,

New Michigan Medical Records Law -
Which Applies:  State Act or HIPAA?

On April 1, Michigan's new Medical Records Access Act went into effect. You can access this statute at

The statute guarantees patients a right to examine and get copies of their medical records, subject to exceptions. In many ways, the statute parallels HIPAA's provisions concerning a patient's right to access his or her medical records.

There are significant differences. Here are some examples:

  • If a physician determines that releasing certain information in a patient's file would be detrimental to the patient, HIPAA allows the physician to withhold that information. The new state statute, though, requires that the physician release that information to another health care provider or attorney designated by the patient.

  • If a physician or hospital determines that there is information in the file that would endanger the life or safety of a person other than the patient, HIPAA permits that information to be withheld from the patient. The new Michigan statute, though, would require that such information be released to the patient.

  • HIPAA permits a physician engaged in research to withhold information from a patient that is enrolled in a medical research study. However, the state statute requires that such information be provided to the patient.

In all these cases, interestingly, it may be the state statute rather than HIPAA that ultimately governs, meaning that the information must be disclosed.

The statute also prescribes fees that health facilities and individual providers may charge for producing copies of medical records. In general, the allowable charge for paper copies is $1 per page for the first 20 pages, $.50 per page for pages 21 through 50, and $.20 per page for pages 51 and over. Indigent patients are entitled to receive one free copy of their medical records.

If you have any questions about this new statute or how it affects you, please call Richard Bouma (616.752.2159,

Indemnity Blues: What About Insurance?

Indemnity clauses in employment or service contracts continue to cause confusion and problems when they are not properly understood.

Often, for example, a service agreement between a hospital and a physician group will provide for reciprocal indemnity. The physician group agrees that it will indemnify the hospital for liability that the hospital incurs as a result of negligence by the physician group; reciprocally, the hospital agrees that it will indemnify the physician group for liability incurred by the physician group as a result of a hospital employee's negligence.

It is important to remember, though, that a physician group's professional malpractice insurance policy almost always excludes coverage for indemnity that arises by virtue of a contract.

This situation can cause significant problems. Suppose a hospital has a service agreement with the physician group with the typical reciprocal indemnity provisions described above. A malpractice case arises. The physician group thinks that a hospital employee created the problem. The hospital thinks that the physician created the problem. Eventually, the hospital and physician settle with the plaintiff, each contributing $150,000 for a total settlement of $300,000. The physician's share of the settlement comes from malpractice insurance, and the hospital's share comes from its self-insurance fund.

Next, the hospital brings a new claim against the physician group for the $150,000 that the hospital paid to the plaintiff, asserting that the physician group owes the money pursuant to the indemnity provision in the service contract.

Here's the rub:  Does the physician group have malpractice coverage for this hospital claim? In several recent cases, physician malpractice insurers have said "no." This second claim arises under the terms of a contract, so the malpractice insurer or carrier asserts that there is no coverage, even if the underlying claim began as a covered professional malpractice action.

The lesson here is that all parties must be fully aware of the implications of the indemnity provisions of agreements that they sign. Before settling a lawsuit in a situation like this, parties should consult with their counsel to make sure that they successfully deal with the risk of a subsequent indemnity claim.

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