Understanding and Applying Stark Laws to Physician Recruitment

by Karen Summerlin, Esq., Reinhardt, Whitley, Wilmot, Summerlin & Pittman, P.C. and Wendy Abdo, Staff Writer, Pinnacle Health Group

Unless an exception applies, a physician is prohibited by the Stark Law from referring Medicare patients for specified “designated health services” (“DHS”) to entities with which the physician (or his or her immediate family) has a financial relationship. Such relationships include employment, personal services and recruitment incentive relationships between physicians and hospitals.

Over the past ten (10) years, the Centers for Medicare and Medicaid Services (“CMS”) has issued regulations to implement the Stark Law, most recently in July 2004. Some medical organizations complain that Stark regulations are too vague. Many medical administrators have different interpretations and many more, in an effort to ensure compliance, have interpreted Stark too strictly. If this sounds familiar, it may help to understand some key concepts of Stark that relate to physician recruitment.

What does the Stark Law prohibit?

The Stark Law prohibits the referral of Medicare patients for “designated health services” (DHS) to any entity with which the physician has a financial relationship unless a statutory exception applies. The following are included in the Stark definition of “designated health services”:

• Clinical Labs
• Physical Therapy
• Occupational Therapy
• Radiology (MRI/CAT Scan/Ultrasound)
• Radiation Therapy/Supplies
• DME and Supplies
• Parenteral/Enteral Nutrients, Equipment/Supplies
• Prosthetics
• Orthotics
• Prosthetic Devices/Supplies
• Home Health Services
• Outpatient Prescription Drugs
• Inpatient/Outpatient Hospitalization Services

Thus, if a physician has a financial relationship with a hospital (and no exception applies), the physician could not refer a Medicare patient to the hospital without violating Stark. Financial relationships include the following types of relationships commonly associated with a physician relocating to another community: recruitment arrangements; employment agreements; and personal services agreements.

The penalties for violating the Stark Law apply to both the physician and the hospital. Any person that submits a bill or claim for a service that the person knows or should know violates the Stark Law is subject to a civil monetary penalty of $15,000 per service. Any person or entity that enters into an arrangement or scheme by which the physician or entity knows or should know has a principle purpose of assuring referrals by the physician to the entity is subject to a civil money penalty of not more than $100,000 for each arrangement or scheme.

Given the stiff penalties involved with a violation of the Stark Law, it is important to make sure that all elements of an exception are met when considering a relocation offer that involves a financial arrangement between a physician and a hospital.

Physician Recruitment

Recruitment of Physician not joining an Existing Practice

Remuneration provided by a hospital to recruit a physician that is paid directly to the physician and that is intended to induce the physician to relocate his/her medical practice to the geographic area served by the hospital in order to become a member of the medical staff does not violate the Stark Law if all of the following conditions are met:

1. Each arrangement is set out in writing, signed by the parties and specifies the services covered by the arrangement;
2. The arrangement is not conditioned on the physician’s referral of patients to the hospital ;
3. The hospital does not determine the amount of the remuneration to the physician based on the volume or value of any actual or anticipated referrals by the physician or other business generated between the parties; and
4. The physician is allowed to establish staff privileges at any other hospital(s) and to refer business to any other entities except as may be restricted under separate contract.

The geographic service area of the hospital is the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75% of its in-patients. A physician is considered to have relocated if the physician moves his/her medical practice at least 25 miles or the new medical practice derives at least 75% of its revenues from professional services furnished to patients not seen or treated by the physician at his/her prior medical practice site during the past 3 years. Physicians who have been in practice one year or less are not subject to the relocation requirement, except that the recruited physician must establish his/her medical practice within the hospital’s geographic service area.

Recruitment of a Physician Joining an Existing Practice

If the recruited physician will join a physician or physician practice already located in the geographic area served by the hospital, the following additional conditions apply:

1. The written agreement is also signed by the party to whom the payments are directly made, i.e., the existing physician or physician group;
2. Except for actual costs incurred by the physician or physician practice in recruiting the recruited physician, the remuneration received from the hospital is passed directly through or remains with the recruited physician;
3. In the case of an income guarantee, the costs allocated by the physician or physician practice to the recruited physician do not exceed the actual additional incremental costs attributable to the recruited physician. Records of the actual cost and the passed through amounts are maintained for at least five (5) years and made available to the government upon request; and
4. The physician or physician practice may not impose practice restrictions on the recruited physician (covenants not to compete) other than conditions related to quality of care.

It is important to note that the recruitment exception does not include a reference to “fair market value”- the amount of remuneration paid simply must not be based on the volume or value of any actual or anticipated referrals by the physician or other business generated between the parties.

Employment Exception

An employment arrangement between a physician and a hospital fall within an exception to the Stark Law if it meets all of the following:

1. The employment must be for identifiable services;
2. Payment for services should reflect fair market value and not be determined in a manner that takes into account (directly or indirectly) the volume or value of referrals by the referring physician;
3. The agreement would be commercially reasonable in the absence of referrals to the employer; and
4. The employment meets other requirements established to protect against federal program or patient abuse.

The employment arrangement exception does not prohibit payment of compensation (productivity bonus) based on personally performed services only, i.e., not based on DHS provided “incident to” the physician’s services and not based on generation of referrals for DHS performed by others.

With regard to employment, “fair market value” is defined as the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party.

Personal Services Exception

Arrangements between a physician and a hospital whereby the physician provides personal services on behalf of the hospital do not violate the Stark Law if all of the following exceptions are met:

1. Each arrangement is set out in writing, signed by the parties and specifies the services covered by the arrangement;
2. The arrangement covers all of the services to be furnished by the physician to the entity and this requirement will be met if all separate arrangements between the parties incorporate each other by reference or if they cross-reference a master list of contracts that is maintained by the entity;
3. The aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangements;
4. The term of the arrangement is for at least one year;
5. The compensation is set in advance and does not exceed fair market value; and
6. The services to be furnished do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.

With regard to personal services, an hourly payment for a physician’s personal services is defined by Stark as fair market value if the hourly payment is established using:

1. The hourly rate is less than or equal to the average hourly rate for emergency room physician services in the relevant physician market if there are at least 3 hospitals providing ER services in the market; or
2. The hourly rate is determined by averaging the 50th percentile national compensation level for physicians with the same physician specialty in at least 4 of 6 listed surveys and then dividing by 2,000 hours.

Fair Market Value

Many medical organizations misunderstand the definition of “fair market value” and believe that the Stark Law requires determining a fair market value hourly rate in order to determine a fair amount for recruitment, to determine a physician’s salary, as well as to compensate physicians for personal services. However, as discussed above, this hourly computation is only required if that method of calculation is selected under the personal services exception. Otherwise, fair market value involves arms length negotiations, during which the parties should document the negotiation process. This means they should leave a well-developed paper trail of their progress. Perhaps the best way to demonstrate this is to give a real world example:

A hospital is looking for an Oncologist and has referenced the surveys listed in Stark. The hospital offers the average yearly salary ($200,000) based on the average yearly salary listed in one of the surveys listed in the final Stark regulations. However, after several months, the hospital has not located a physician willing to accept this offer and thus, it raises the offered annual salary to $300,000. The hospital interviews several candidates, but is not successful in locating an Oncologist with the unique set of training and skills desired by the hospital. After much searching, a physician with the training and skills needed is located, but s/he has an outstanding employment offer of $400,000 a year. In order not to lose this hard-to-find candidate, the hospital offers the physician $420,000, and the physician accepts it.

This case illustrates the process involved in determining fair market value. Although the hospital’s offer more than doubled, if the paper-trail of the search and negation process is properly maintained, the hospital can establish that, in this particular case, arms-length negotiations and the state of the market necessitated payment of $420,000. Red flags are instantly raised when a hospital cannot prove why they offered a physician $750,000 a year when the going rate was only $350,000. By keeping accurate and contemporaneous notes and documents regarding the negotiation process, potential difficult questions could be avoided.

In Conclusion

It is important for physicians and hospitals to take the necessary steps to comply with the Stark Law. While this article does not cover entirely every topic covered by the Stark Law, we have briefly discussed some important aspects that relate specifically to physician compensation and recruitment. If you or your organization is considering recruiting or employing a physician, prior to beginning the search you should:

1. Understand the concepts of “fair market value” and “arms length negotiations” in order to comply with the Stark Law when planning your physician compensation and negotiation strategies;
2. Be aware of how Stark works in allotting incremental costs of an existing practice to a recruited physician; and
3. Weigh all advantages and disadvantages Stark presents before deciding whether to advertise your opening as an employed position or an opportunity to join a practice.