On September 5, 2007, the Center for Medicare and Medicaid Services (CMS) published, in the Federal Register, the Phase III Final Rule (Phase III) to the Stark Law (Section 1877 of the Social Security Act). Stark prohibits a physician from referring Medicare patients for certain designated health services to entities with which the physician or his or her immediate family member have a financial relationship, unless an exception applies. The statute also prohibits an entity from billing for services provided pursuant to an improper referral. Phase III becomes effective on December 4, 2007.

In this alert, we will discuss the significant modifications made in Phase III to the physician recruitment exception.

Recruitment Arrangements Involving Group Practices
Phase III includes major changes to the Stark Law rules governing how a group practice may interact with a recruited physician. In commentary, CMS acknowledges that “categorically prohibiting physician practices from imposing non-compete provisions may have the unintended effect of making it more difficult for hospitals to recruit a physician.” CMS revised this exception by prohibiting practices from imposing on a recruited physician any practice restrictions that “unreasonably restrict” his or her ability to practice medicine in the geographic area served by a hospital. While CMS did not back off its prohibition of not allowing the employing group to have a restrictive covenant in its employment agreement with the physician, it did indicate that the following restrictions would not be viewed as having a substantial effect on the recruited physician’s ability to remain in the hospital’s geographic service area:

• restrictions on moonlighting;
• prohibitions on soliciting patients and/or employees of the physician practice;
• requiring that a recruited physician treat Medicaid and indigent patients;
• requiring that a recruited physician not use confidential or proprietary information of the practice;
• requiring that a recruited physician repay losses of his or her practice that are absorbed by the physician practice in excess of any hospital recruitment payment; and
• requiring the recruited physician to pay a predetermined amount of liquidated damages if he or she leaves the physician practice and remains in the community.

Income Guarantee
Phase III includes changes to the Stark Law’s income guarantee provisions that likely will not impact most hospitals’ recruitment practices. In an income guarantee provided to a physician group, rather than to the individual physician, the group may not allocate more than its actual, additional incremental costs attributable to the recruited physician under the guarantee. CMS refused to change the general rule. Instead, it created a narrow exception permitting a group practice to allocate the per capita allocation of a practice’s aggregate overhead and other expenses not to exceed 20 percent of the practice’s costs in those limited situations in which the recruited physician is replacing a deceased, retired or relocating physician in a rural area or Health Professional Shortage Area.

Who May Offer Recruitment Packages
Phase III expands the type of entities which may offer recruitment to include rural health clinics, in addition to federal qualified healthcare centers and hospitals.

Geographic Service Area
The Stark Law’s geographic service area provisions have been revised. CMS offered a number of “clarifications” regarding the geographic service area which must be composed of the lowest number of contiguous zip codes from which the hospital draws 75 percent of its inpatients. These clarifications provide that:

• contiguous zip code areas must be contiguous or next to each other, not to the zip code in which the recruiting hospital was located;
• a recruited physician may relocate his or her medical practice into a “hole” zip code area. (That is a zip code area not counted among the contiguous zip codes if that “hole” zip code area is surrounded by contiguous zip code areas from which the hospital derives 75 percent of its inpatients);
• in circumstances where the hospital draws fewer than 75 percent of its inpatients from all the contiguous zip codes from which it draws inpatients, the hospital’s geographic service area may be deemed to include all the contiguous zip codes from which it draws inpatients, even if the hospital does not draw 75 percent of its inpatients from those zip codes;
• the hospital may use different geographic service areas for different recruitment arrangements so long as the geographic service area is met on the date the hospital entered into a written recruitment agreement; and
• the hospital’s geographic service area is determined at the hospital, rather than the system level.

Physician Not Subject to Relocation Requirement
In very limited circumstances in Phase III, CMS expanded the range of physicians not subject to the relocation requirement to include physicians employed on a full-time basis for at least two years immediately prior to the recruitment arrangement by:

• a federal or state bureau of prisons;
• the U.S. Department of Defense or the U.S. Department of Veteran Affairs to serve active or veteran military personnel and their families;
• a facility of the Indian Health Services to serve patients who receive medical care exclusively through the Indian Health Service.

However, if these physicians maintain, and are employed full-time by, a private practice, the old relocation recruitment provisions apply.

Hinshaw & Culbertson LLP has prepared a summary of the significant changes and proposed changes to the Stark Regulations made in Phase III and the Proposed Rule which is available below. In the coming weeks, Hinshaw will release a series of alerts focusing on important aspects of Phase III, including changes affecting direct compensation arrangements (“Stand in the Shoes”), physician group practices, medical staffs, and rural providers. The impact of Phase III and the Proposed Rule will also be discussed at Hinshaw’s 2007 Healthcare Conference, which will be held on November 16, 2007 in Oak Brook, Illinois.

Hospitals are encouraged to review and monitor their recruitment practices to be consistent with these changes, which become effective in December 2007.

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For further information please contact Roy Bossen or your regular Hinshaw attorney.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.