Recently, the Centers for Medicare and Medicaid Services (CMS) issued an advisory opinion (No. 2011-01) approving under the federal Physician Self-Referral statute (commonly referred to as the Stark Law) a physician recruitment arrangement that included a noncompetition clause.

CMS is the agency that issues advisory opinions regarding proposed transactions and whether they are in compliance with the Stark Law. Advisory opinions on the Stark Law are less common than those issued for the federal Anti-Kickback statute. Advisory opinions relative to the federal Anti-Kickback statute are issued by the U.S. Department of Health and Human Services Office of Inspector General.

The question specifically posed in this opinion was whether the proposed arrangement met the requirements of the physician recruitment exception to the Stark Law and its regulations, specifically 42 C.F.R. §411.357(e), if the transaction documents included a noncompete provision.

Proposed Transaction

The situation at hand involved a proposed physician recruitment agreement involving a hospital and a physician practice in order to induce a pediatric orthopedic surgeon to relocate to the hospital’s geographic service area. Names and locations are not identified in advisory opinions.

It is common for a hospital or health system to lend financial assistance to a physician practice in order to induce a physician of a particular specialty to relocate to the area. The Stark Law has specific exceptions for physician recruitment arrangements. The hospital (who was the requestor of the opinion) certified there was a documented need for a pediatric orthopedic surgeon.

The arrangement would include an income guarantee loan for the physician and a moving expense loan, each with repayment and forgiveness provisions. The transaction is designed to induce the physician to relocate to the hospital’s geographic area to service the community need for pediatric orthopedic surgeon services.

As part of the proposed transaction, the physician group wants to require a non-competition provision that would prevent the physician from “establishing, operating, or providing professional medical services at any medical office, clinic, or other health care facility at any location within a 25-mile radius of the Hospital for a period of one year following the earlier of the termination or expiration of the Proposed Arrangement.”

The group certified to CMS that the practice regularly imposes noncompete provisions on its employed doctors. The physician group further stated that it would not be willing to recruit a physician without such a noncompete provision. The practice determined that a 25-mile restriction is reasonable and appropriate in order to “protect its investment in new physicians and to appropriately incentivize a recruited physician to stay employed with the practice.” The parties further certified that the proposed noncompete met all state law requirements to be legally enforceable.

The resultant effect of the noncompete provision would be that it would prevent the physician from practicing at five hospitals in the protected geographic range. He would not be prohibited from practicing at one hospital within the requesting hospital’s geographic service area, but which is greater than 25 miles away. According to the opinion, there are also at least three other hospitals approximately 35 to 60 miles away from the hospital.

CMS Analysis

CMS first reviewed the basic principle of the Stark Law, which is that a physician may not refer a Medicare patient for certain designated health services to an entity with which the physician (or his or her immediate family member) has a financial relationship, unless an exception applies. Unlike the federal Anti-Kickback statute, which is intent-based, the Stark Law is a strict liability law. If an arrangement does not fit within an exception, the physician is in violation.

The Stark Law and its regulations contain exceptions for recruitment arrangements. These include an exception for remuneration paid by a hospital to induce a physician to relocate to the geographic area served by the hospital in order to become a member of the hospital’s medical staff. Regulations specific to hospital-physician recruitment arrangements are found at 42 C.F.R. §411.357(e).

Some of the requirements include the following:

• There must be a written agreement signed by the hospital, physician and the physician group practice.

• The remuneration must pass directly to the recruited physician, except any actual costs incurred by the group in recruiting the doctor.

• Records of actual costs and remuneration must be maintained for five years for possible disclosure to HHS.

• The arrangement must not violate the federal Anti-Kickback statute or any other federal or state law governing billing or claims submissions.

In addition, one such specific requirement, found at 411.357(e)(4)(vi) is that, “The physician practice may not impose on the recruited physician practice restrictions that unreasonably restrict physician’s ability to practice medicine in the geographic area served by the hospital.” This is the specific provision about which the requestor of the opinion was inquiring. Would the proposed noncompete clause violate this provision?

CMS then reviewed the history on its own thinking on this specific topic. When Stark Phase II regulations were promulgated, CMS included in the preamble that it had concluded that a noncompetition provision may not be placed on a recruited physician.

Because of the response it received on this position, CMS reversed course in its Stark Phase III rulemaking. In the preamble to the Phase III regulations, CMS stated that it learned that disallowing a noncompete provision made it more difficult for hospitals to recruit physicians. CMS became aware that physician practices and individual physicians may be unable or reluctant to hire an additional physician unless they were able to impose a reasonable noncompete clause on the new doctor. Therefore, it was revising the regulations in this regard “to state that physicians and physician practices, may not impose on the recruited physician any practice restrictions that unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital.”

Turning to the proposed transaction, CMS stated it evaluated several factors to determine whether or not the proposed noncompete clause placed unreasonable restrictions on the physician’s ability to practice medicine in the hospital’s geographic area. First, it concluded that a one-year restriction was reasonable. Next, based on the geographic area served by this hospital, it concluded that the 25-mile radius was reasonable. CMS said that even with the restrictions in place, the physician would still be able to work at hospitals within and outside of this hospital’s geographic service area during the one year restriction time.

Lastly, CMS noted that it considered the certification that the noncompete clause complies with federal and state laws. Therefore, CMS concluded, “based on the totality of these evaluated factors, we conclude that this noncompetition provision does not unreasonably restrict he physician’s ability to practice medicine.”

Understanding CMS’s view of unfair restraints

Like the OIG’s advisory opinions on the Anti-Kickback statute, the opinion is issued only to the actual requestor of the opinion and may not be used or relied upon by anyone else. Likewise, the opinion does not reflect CMS’s opinion as to the legality of the proposed transaction under any other federal or state law, including the federal Anti-Kickback statute.

However, the opinion is useful in order to gain an understanding of CMS’s thinking as to what may be unfair restraints on a recruited physician when contemplating a recruitment arrangement. Of course, individual circumstances for each particular noncompete clause and transaction need to be considered. A noncompete clause of equal duration and range may be nonprohibitive in one setting and transaction (such as a rural area) but unreasonable in another (such as an urban setting).

The opinion may be found on CMS’s Physician Self-Referral website at http://www.cms.gov/PhysicianSelfReferral/95_advisory_opinions.asp#TopOfPage. •

Vasilios J. Kalogredis is the president and founder of Kalogredis Sansweet Dearden & Burke, a health care law firm, and Professional Practice Consulting Inc., a health care consulting firm, in Wayne, Pa. Among his areas of expertise are group practice arrangements, practice sales and mergers, doctor contract drafting and negotiation, tax and retirement planning for physicians, joint ventures, fraud and abuse matters, and evaluation of practice options for physicians. He can be contacted at
800-688-8314 or by e-mail at BKalogredis@KSDBHealthlaw.com.

Karilynn Bayus is an associate at the firm. Her practice involves both litigation of health care related matters, including representation of licensees before the professional boards, and representing clients in health care transactions. Bayus graduated from Temple University’s Beasley School of Law in 2006. She may be reached at KBayus@KSDBhealthlaw.com