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Sep 2007
05
September 05, 2007

The Stark Realities of Physician Recruiting

The Centers for Medicare & Medicaid Services (CMS) recently issued its long-anticipated Phase III amendments to the Stark II regulations. The new amendments, expected to become effective in December, relax some existing Stark II rules and tighten up others. You can find the new amendments here: New Amendments

On the tightening side, the new Phase III amendments end the "indirect compensation" discrepancy. The old rule had allowed some hospital financial arrangements for medical groups that were prohibited for individual physicians. The new Phase III amendments treat group medical practices and individual physicians the same way. Also on the tightening side, the new amendments eliminate an existing safe harbor for determining the hourly fair market value of physician services, meaning that more outside appraiser opinions are going to be necessary.

On the relaxation side, the new amendments are more flexible about nonmonetary benefits a hospital can offer to its medical staff members. Also, for the first time, the rules allow an unwritten six-month holdover extension of an existing lawful written physician service arrangement; previously, such unwritten extensions would have been per se unlawful.

Physician Recruiting

The relaxation changes we think will be of greatest interest to hospitals concern physician recruiting.

The new Phase III amendments liberalize two key rules that have made existing groups hesitate to recruit a new physician.

First, where a new physician is joining an existing medical group, the new amendments allow the group to impose practice restrictions on the new physician if the physician later leaves that practice. Under the current Stark II rule, such practice restrictions are generally prohibited, which has created a disincentive for existing groups to recruit. Under the new amendments, the group can impose reasonable post-termination restrictions so long as the restrictions do not "unreasonably restrict the recruited physician's ability to practice medicine in the geographic area served by the hospital." In other words, the group could require a new physician to move some distance away from the group's practice office, so long as the physician can still practice within the broader geographic area served by the hospital.

Second, in some cases, the new amendments allow a practice to allocate practice overhead to a new physician, for purposes of calculating the new physician's net income (thereby substantially increasing the hospital's payments to the group). Under the current Stark II rule, allocating such overhead is completely prohibited. Under the new amendments, it will be permissible to allocate up to 20% of a practice's aggregate overhead costs to a new physician, if the new physician is replacing a physician who has within the previous 12 months retired, died or left the hospital's service area.

Significantly, the new rule also expands the geographic zone that is considered the "geographic area served by the hospital." This is significant not only because of the noncompetition reason described above but also because the new definition expands the zone to which a hospital may recruit a new physician. Under the new rule, a rural hospital (that is, any hospital that is not classified as urban) will be able to support a new physician located anywhere within the closest ZIP codes from which the hospital draws 90% of its inpatients. And CMS says that with individual permission, it will allow a hospital to support a new physician who might be located even further away.

On the other hand, there is also a tightening of one Stark II recruiting rule. The new amendments close a perceived loophole that arguably limited the old rule's restrictions to "net income" guarantees, as opposed to other forms of guarantees (like "gross revenue" guarantees). Under the new amendments, Stark II's restrictions will apply to guarantees of any type. CMS's commentary to the amendments clarifies that this change is intended to extend Stark II requirements to revenue guarantees and all other forms of income guarantee.

Physician Retention Payments

The new amendments also permit most hospitals to pay a physician to stay in the hospital's service area, rather than move away for another position elsewhere. Unlike the current retention rule, the new amendments allow for such payments if the physician simply certifies to the hospital that he or she has a bona fide opportunity to serve another institution; there is no requirement under the new amendments that the physician show a written offer from the outside institution. Before making such retention payments, the hospital must take reasonable steps to verify that the outside opportunity is legitimate. Once that information is verified, the hospital is permitted to make a one-time payment to the physician of the lower of 25% of the physician's current income or the hospital's projected cost of finding a replacement for that physician.

More Changes Coming

These changes are not the last for Stark II enforcement. In early July, CMS signaled strongly that it intends to close what it regards as additional inadvertent loopholes.

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