Dickinson Wright

Hospitals play a vital role in ensuring the well-being of communities by recruiting and employing skilled physicians. However, physician recruitment in compliance with the Stark Law can be a complex task for hospital administrators, especially as hospitals and medical practices face an average 7.6% annual physician turnover rate.[1]

The Stark Law, which was enacted to prevent potential conflicts of interest and ensure the integrity of physician referrals, prohibits physicians from referring patients for designated health services to entities in which they have a financial interest unless an exception applies. At face value, physician recruitment arrangements present potential Stark Law violations if hospitals expect referrals from physicians or hope to gain financial benefits from relationships with the physicians.

An important Stark Law exception is the physician recruitment exception, which applies to hospitals, federally qualified health centers, rural health clinics/hospitals, and physicians joining established medical groups.[2] The recruitment exception allows for a hospital to pay a physician to relocate to the geographic area served by the hospital and join the hospital’s medical staff.[3] This geographic area served is the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75% of its inpatients.[4] Incentives for physicians may include recruitment agreements with income guarantees, moving expenses, tail malpractice insurance covering the physician’s prior practice, signing bonuses, student loan repayment, and more. Hospitals and physician groups must be wary of the regulatory hurdles in the physician self-referral laws for physician recruitment.

Five Compliance Considerations

1.               Needs-Based Recruitment. Hospitals and physician groups must be able to demonstrate that the recruitment of a physician aims to address specific healthcare challenges, such as the unmet need for a specialized physician. A community needs assessment from a third-party consultant may help prove that the recruited physician is relocating to a geographic area that is medically underserved, where there is a health professional shortage, and that has considerably long wait times. Other factors to consider to demonstrate the necessity of recruitment may include patient demographics, the number of physicians in various specialties, and access to care.

2.               Recruitment Agreements. To comply with the recruitment exception, hospitals must enter into a written agreement with recruited physicians with the terms of the arrangement, including the services to be provided, compensation arrangements, and the duration of the agreement. The agreement must also be signed by the physician practice if the money will be paid to the physician practice and the practice will retain any of it. Once the agreement is executed, the parties cannot provide additional compensation post hoc, as any additional compensation thereafter would not serve as “recruitment” at that point. Recruitment agreements should be limited to a term of no more than three years, excluding any initial period required for the physician to establish his/her practice. By setting a reasonable time frame, hospitals can demonstrate that recruitment is driven by legitimate needs.

3.               Compensation. Under the exception, the compensation cannot take into account the volume or value of actual or anticipated referrals or other business generated by the practice for the hospital. Objective valuation methodologies should be used to determine reasonable compensation, considering factors such as the physician’s specialty, experience, geographic location, and prevailing market rates. Engaging an independent valuation expert provides support in meeting fair market value requirements. Additionally, any income guarantees made by the hospital to a recruited physician joining a practice cannot exceed the actual additional incremental costs associated with the recruitment of the physician. The physician practice may only keep reimbursement for actual costs incurred by it in recruiting the new physician; otherwise, all recruitment money must be passed on to the physician. These costs may include salary, benefits, insurance, recruiters’ fees, and other costs required to solely support the recruit such as added personnel, equipment, or office space.

4.               Services and Privileges. Per the exception, hospitals cannot unreasonably restrict the physician’s ability to practice medicine in the geographic service area; the recruited physician must be permitted to establish staff privileges at other hospitals.[5] However, hospitals may establish reasonable volume or clinical activity standards that physicians must meet to qualify for financial benefits under the recruitment arrangement. A categorical prohibition on non-competition provisions from recruitment arrangements would likely complicate physician recruitment, as practices may be unable to hire physicians despite receiving the hospital’s financial assistance. Accordingly, CMS has acknowledged that non-competition agreements in recruitment arrangements are permissible so long as they are not unreasonably restrictive.[6]

5.               Documentation and Record Keeping. For at least six years following the start of the recruitment period, the hospital, the practice, or both must maintain records of the actual costs incurred and the passed-through amounts it has subsidized to ensure that the funds are appropriately handled. Maintain meticulous records documenting the recruitment process, including evidence of the community need, recruitment efforts, and the justification for financial arrangements. Keep track of all relevant correspondence, agreements, and any funds exchanged during the recruitment period. Regular review of documentation ensures compliance and provides evidence of good faith efforts.

Compliance with the Stark Law’s requirements when recruiting physicians is essential for hospitals and practices to maintain ethical practices and avoid potential penalties. Because the Stark Law is a strict liability statute, failure to comply with the recruitment exception can result in millions of dollars of civil monetary penalties. Internal audits and proactive compliance plans are useful tactics for continuing compliant recruitment methods.

[1] Bond AM, Casalino LP, Tai-Seale M, Unruh MA, Zhang M, Qian Y, Kronick R. Physician Turnover in the United States. Ann Intern Med. 2023 Jul; 176(7):896-903. doi: 10.7326/M22-2504. Epub 2023 Jul 11. PMID: 37429029.

[2]  42 U.S.C.S. § 1395nn(e)(5); 42 C.F.R. § 411.357(e).

[3] Social Security Act, § 1877(e)(5); 42 C.F.R. § 411.357(e).

[4] 42 C.F.R. § 411.357(e)(2).

[5] 42 C.F.R. § 411.357(e)(1).

[6] Advisory Opinion No. CMS-AO-2011-01.