Will this Stark workaround work?

August 4, 2006

The latest Stark rules make it riskier to hire new doctors. Here's how hospitals are helping groups reduce their exposure.

If you're thinking about bringing in another physician, or if you're looking for a job, you need to be aware of how the Stark II recruitment rules will affect you. By changing the rulebook for all groups that accept hospital recruitment subsidies, the Stark II regs that went into effect two years ago have fundamentally changed the dynamics of physician recruitment. But hospitals and groups have worked out ways around the most onerous aspects of those rules.

Here's what you need to know about the current hiring environment, whether you're an employer or a job candidate.

The rules shine light on a formerly gray area

The 2004 amendments to Stark II ended the confusion by specifically citing physician recruitment as one of the "exceptions" that doesn't violate the law. But the exception was defined in ways that have actually discouraged some groups from accepting hospital money.

The biggest problem, say attorneys and consultants, has been that Stark II prohibits groups that accept hospital recruitment subsidies from including restrictive covenants in employment contracts. Most employment contracts contain these "noncompete" clauses, which prevent an associate physician from leaving a group to go into competition with it. And consultants say groups would be crazy to bring in an associate physician without a restrictive covenant in states that uphold them.

Yet, notes Daniel Bernick, an attorney and vice president of The Health Care Group in Plymouth Meeting, PA, many small practices are willing to forgo the restrictive covenant if they need a hospital subsidy to bring in a new doctor.

That can be a big mistake.

For example, one expert tells of a Detroit physician who hired a female associate with a hospital's help. "She walked out of the practice and set up her own office in the same suite," recalls Indianapolis consultant Michael D. Brown. "The senior doctor decided not to challenge it, and he ended up losing half of his patients and two or three of the staff people."

Limits on overhead expenses also hurt

Under the old rules, hospitals also typically covered the pro-rata overhead expenses of a new associate. So if a practice had two physicians and brought in a third, the hospital would pay for one-third of all practice expenses. But the Stark II rules specify that hospitals can cover only the "incremental costs" attributable to a newly hired physician. While that includes the cost of renting and furnishing extra space, hiring a new medical assistant, and buying new equipment, it excludes current rent, utilities, and staff costs.

This limitation on overhead coverage can significantly reduce the value of a recruiting package, says Mark Smith, executive vice president of Merritt Hawkins & Associates, a physician placement firm based in Irving, TX. It can also be an issue for a practice that loses a partner and wants to replace him, Smith adds, citing the example of a physician who retires from a three-doctor group. Suddenly, the remaining partners are each shouldering half of the overhead, instead of one-third. If they bring in another doctor with hospital aid, the institution can't cover the extra overhead cost under Stark II.

This isn't necessarily a problem for practices, says Alice Gosfield. In an established practice, she points out, the new doctor will be generating revenue to help cover the overhead from Day One. Brian McCartie, a regional vice president of Cejka Search, a St. Louis-based recruiting firm, agrees. Groups that are replacing a physician, he says, don't usually need hospital aid.