By: R. Richard Cirilli, Jr.
Brunini, Grantham, Grower & Hewes, PLLC
Due to the changes in reimbursement proposed by the Patient Protection and Affordable Care Act (“PPACA”), hospitals are finding it necessary now more than ever to employ physicians to ensure the availability of quality care to the hospitals’ patients. Accordingly, the number of physician recruitment arrangements involving hospitals, physicians, and physician group practices is on the rise.
In general, there are two laws applicable to physician recruitment arrangements with which hospitals and physicians should be familiar when attempting to structure a recruitment agreement. These laws are the federal Stark Law and the federal Anti-kickback statute. The following is a summary of the requirements imposed by these laws and their accompanying regulations.
Most providers are familiar with the Stark Law in the context of a physician’s ordering for his or her patients certain “designated health services” from entities with which the physician or a member of the physician’s family has a financial interest (either ownership or compensation). However, Stark also regulates what a hospital or other provider is allowed to do in recruiting a new physician to its practice. Specifically, Stark provides an exception that permits a hospital to pay a physician to “relocate” to the hospital’s “geographic area” to become a member of the hospital’s medical staff. There are certain requirements that must be met for a recruitment arrangement to satisfy this Stark exception:
(1) the arrangement must be in writing and signed by the parties;
(2) the arrangement must not be conditioned on the physician’s referral of patients to the hospital;
(3) the amount of remuneration paid to the physician cannot be based, either directly or indirectly, on the volume or value of referrals the physician makes to the hospital; and,
(4) the physician cannot be prohibited from establishing staff privileges at another hospital.
In addition to these four requirements, the physician must “relocate” to the hospital’s “geographic area.” To meet the relocation requirement, the physician must relocate his or her practice a minimum of twenty-five miles from the former practice, or at least 75% of the physician’s revenues must come from care provided to new patients.
Of note, however, the relocation requirement only applies to physicians who have been practicing for more than one year. The Stark regulations provide special treatment to residents and “new” physicians (i.e., those who have been practicing for less than one year). These physicians are eligible for the Stark physician recruitment exception, regardless of whether they will actually be relocating their practices.
With respect to the requirement that the physician relocate to the hospital’s “geographic area,” the Stark regulations define the term “geographic area” as the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75% of its inpatients.
In addition to seeking to employ new physicians, a hospital may assist an existing physician group practice in recruiting a new physician to the hospital’s service area. Stark imposes additional requirements when the hospital makes payments to the recruited physician, either indirectly through a group practice or directly to the recruited physician. These additional requirements are:
(1) the arrangement is in writing and signed by the hospital, the physician, and the group practice;
(2) the remuneration is passed directly through to the recruited physician;
(3) if there is an income guarantee made by the hospital, any costs allocated by the group practice to the recruited physician may not exceed the actual additional incremental costs that are attributable to the new physician;
(4) the recruited physician must establish his or her practice in the hospital’s “geographic area” (see above for definition) and join the hospital’s medical staff;
(5) the agreement between the group practice and the recruited physician must be in writing and signed by the parties;
(6) the recruited physician must not be required to refer patients to the hospital and must not be prohibited from establishing staff privileges at other hospitals;
(7) the remuneration paid by the hospital must not be based on the volume or value of referrals by the recruited physician or the group practice;
(8) the group practice may not impose additional practice restrictions (for example, a non-compete agreement) on the recruited physician, but may impose conditions related solely to quality of care; and,
(9) the arrangement must not violate the federal Anti-kickback statute and must comply with all relevant billing laws and regulations.
In addition to the Stark Law, hospitals and physicians should be aware of the federal Anti-kickback statute when structuring a recruitment arrangement. The Anti-kickback statute prohibits parties from offering or receiving remuneration in return for referrals of patients if payment is made by a Federal health care program. The Anti-kickback statute provides both civil and criminal penalties, and unlike the Stark Law, it is an intent-based statute. That is, the parties to the arrangement must intend that “one purpose” of the arrangement is to provide unnecessary referrals. It is worth noting here that under PPACA, there is no longer a requirement that the Government prove that the parties intended to violate the Anti-kickback statute, only that the parties intended to induce unnecessary referrals.
Similar to the Stark Law, the Anti-kickback statute contains safe harbors that if satisfied, make the arrangement permissible. However, unlike Stark, the Anti-kickback physician recruitment safe harbor only applies to recruitment payments intended to induce a physician to relocate to a designated health professional shortage area (“HPSA”). Moreover, the following requirements must be met:
(1) the agreement must be in writing and signed by the parties and it must specify the benefits provided by the hospital (or other provider), the terms under which the benefits are to be provided, and the obligation of each party;
(2) for those physicians who have been in practice for more than one year, at least 75% of the revenues of the new practice must be generated from new patients not previously seen by the physician at his or her former practice;
(3) the benefits cannot exceed three years and the terms of the agreement cannot be renegotiated during this three-year period;
(4) there is no requirement that the physician make referrals to, be in a position to make or influence referrals to, or otherwise generate business for the hospital in order to receive the benefits; however, the hospital may require that the physician maintain staff privileges at the hospital;
(5) the physician must not be prohibited from establishing staff privileges at, referring any service to, or otherwise generating any business for another entity;
(6) the amount or value of the benefits provided by the hospital may not be tied to the volume or value of referrals or business otherwise generated for the hospital by the physician for which payment may be made in whole or in part by any Federal health care program;
(7) the physician must agree to treat patients receiving benefits or assistance under any Federal health care program in a nondiscriminatory manner;
(8) at least 75% of the revenues from the recruited physician’s new practice must come from patients residing in a HPSA or a Medically Underserved Area (“MUA”) or who are part of a Medically Underserved Population (“MUP”); and,
(9) the payment by the hospital may not directly or indirectly benefit any entity or person other than the recruited physician.
The Anti-kickback recruitment safe harbor outlined above is different than the related Stark exception in that failure to comply with the safe harbor does not make the arrangement per se illegal. The facts and circumstances of each recruitment arrangement are unique and the focus should be on the parties’ intent. However, even though the safe harbor only applies to payments made to recruit physicians to HPSAs, it would be prudent when structuring an arrangement to satisfy all of the non-HPSA requirements.
Hospitals and physicians attempting to structure recruitment arrangements should be mindful of the Stark and Anti-kickback laws during their negotiations. These laws are complex, and violations of the regulations carry severe penalties. Accordingly, the parties should seek the advice of an experienced health care attorney to ensure compliance with the exceptions and/or safe harbors and to obtain appropriate protections in the event the agreement is terminated.
 Additionally, although it is beyond the scope of this article, tax-exempt hospitals should consult applicable Internal Revenue Service guidelines relating to recruitment agreements.