Trends and Issues in Physician Recruitment

1. Trends and Issues in Physician Recruitment An Overview of Current Trends Affecting Physician Recruitment, and Selected Legal Issues of Importance to Individuals Involved in Physician Recruitment Activities Presented by: Robert L. Wilson, Jr. Smith Moore Leatherwood LLP 434 Fayetteville Street, Suite 2800, Raleigh, North Carolina 27601 T: 919.755.8823 F: 919.838.3130 To ask a question during the presentation, click the Q&A menu at the top of this window, type your question in the Q&A text box, and then click “Ask.” After you click Ask, the button name will change to “Edit.” Questions will be queued and most will be answered at the end of the meeting as time allows.

2. Introduction and Overview • Welcome to Smith Moore Leatherwood’s continuing series of health care webinars. • Today’s discussion is an overview of current trends affecting physician recruitment, and selected legal issues of importance to individuals involved in physician recruitment activities.

3. Introduction and Overview • Questions will be answered during the question and answer period following the end of the presentation. • Please forward any questions that cannot be reached during the allotted time today via e-mail to: bob.wilson@smithmoorelaw.com.

4. Current Trends in Physician Recruitment • The concept of “physician recruitment” has been around as long as there have been physicians and hospitals in this country. • As a popular topic, physician recruitment has even spawned television dramas, i.e. “Marcus Welby, M.D.” and “Northern Exposure.”

5. Current Trends in Physician Recruitment • Probably 40% of physicians today are fifty years of age or older. • Frustrations over the demands of modern health care are propelling the number of retirement decisions skyward. • While in the old days physicians sought no assistance in replacing themselves or in growing their practices, it is, of course, commonplace today with modern examples of physician recruitment by hospitals.

6. Current Trends in Physician Recruitment • When physician recruitment by hospitals initially became a popular method to grow medical staffs, there was much effort involved in “seeding” and growing new practices. • Assistance to “seed” these practices had to be regulated under the then (and now) growing regulatory schemes from the federal government affecting how and for what reason hospitals paid money to physicians.

7. Current Trends in Physician Recruitment • The regulatory requirements underpinning physician recruitment were developed first under the federal Antikickback Statute, and then the Stark law. • For tax-exempt hospitals, there also are tax considerations regarding the use of monies from hospitals that enjoy tax-exempt status. • These three “silos” of rules now form the basis of the legal principles of physician recruitment.

8. Current Trends in Physician Recruitment • Physician recruitment largely (but not exclusively) is being funneled into two areas: • recruitment into existing practices; and • employment of physicians by hospitals or hospital-affiliated physician practices.

9. Current Trends in Physician Recruitment • These recruitment end-points seem to be addressing the needs of young physicians who want to choose their location and the nature of their private practice, as well as to manage their “lifestyle” choices.

10. Current Trends in Physician Recruitment • The opportunity to make these choices is, however, creating problems in many areas. For example, there are chronic shortages of: • primary care physicians, obstetrics and gynecology physicians, and other specialties and subspecialties that require an extensive commitment of hours and call responsibilities; and • all types of physicians in more urban areas, as newly minted physicians are choosing to head to the suburbs, or in rural areas that often are overlooked by those individuals seeking more idyllic settings for their practices.

11. Current Trends in Physician Recruitment • While the needs of these new physicians are being addressed by many practices in many areas, there often are not enough physician practices recruiting to meet the needs of a community, so hospitals step in. • The concept of hospitals employing physicians does not make some community medical practices comfortable, but it is becoming a way of life in many medical communities.

12. Current Trends in Physician Recruitment • The key is to address these community needs in a meaningful way as part of an overall strategy to: • have an active and successful physician recruitment program in place for the community practices who wish to grow; and • selectively and carefully build an employment model where community physicians cannot address critical needs.

13. Selected Legal Issues of Importance • Physician Recruitment Legal Issues • Post-Relocation Amendments to Physician Recruitment Agreements • Non-competition Covenants in Recruited Physicians’ Employment Agreements • Stark II, Phase III Changes Add Flexibility for Physician Recruitment by Rural Hospitals • Litigation Issues in Physician Recruitment

14. Selected Legal Issues of Importance • Post-Relocation Amendments • In Advisory Opinion 2007-01, CMS confirmed that the purpose of the physician recruitment exception to the Stark Law is to permit certain compensation arrangements to induce a physician to relocate his or her medical practice to the geographic area served by a hospital in order for the physician to become a member of the hospital’s medical staff.

15. Selected Legal Issues of Importance • Post-Relocation Amendments • The opinion essentially closes the door on amendments to recruitment agreements which have the effect of increasing compensation following relocation. • As a result, the advisory opinion teaches us that physician recruitment agreements should be drafted initially to include enough flexibility to change the guaranty terms when the arrangement initially is drafted.

16. Selected Legal Issues of Importance • Non-competition Covenants in Recruited Physicians’ Employment Agreements • The Stark II, Phase II regulations initially stated that a permissible recruitment to an existing medical practice requires that the practice not impose a non-compete agreement on the recruited physician, although the practice may impose restrictions relating to the quality of care. • By the time that the Phase III rules were issued in 2007, a number of concerns had been expressed to CMS from around the country due to the impact of the original rule.

17. Selected Legal Issues of Importance • Non-competition Covenants in Recruited Physicians’ Employment Agreements • As a result of this review, in 2007 CMS amended the rule 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.

18. Selected Legal Issues of Importance • Non-competition Covenants in Recruited Physicians’ Employment Agreements • What is a “reasonable” restriction of the recruit’s ability to practice medicine in the hospital’s geographic area? • The concept of a liquidated damages provision in physician employment agreements is not a restrictive covenant in the sense that it is not a provision that requires an employee not to engage in competitive conduct with his or her employer after termination of employment.

19. Selected Legal Issues of Importance • Non-competition Covenants in Recruited Physicians’ Employment Agreements • Liquidated damages usually are considered to be a sum that a party to a contract agrees to pay if he or she breaks some promise, and which, having been arrived at by a good faith effort to estimate in advance the actual damage which would probably ensue from the breach, are legally recoverable if the breach occurs. • A properly formulated liquidated damages clause, as is a properly formulated non-compete restriction, should be permissible by CMS.

20. Selected Legal Issues of Importance • The Stark II, Phase III rules added changes to physician recruitment rules for rural hospitals: • Geographic area; • Relocation Requirement; and • Recruitment into Existing Practices.

21. Selected Legal Issues of Importance • Stark II, Phase III Changes Add Flexibility for Physician Recruitment by Rural Hospitals—Geographic Area • The physician recruitment exception is designed to protect remuneration by a hospital to induce a physician to relocate his or her practice to the hospital’s geographic service area. • Stark defines the hospital’s geographic service area as the lowest number of contiguous zip codes from which the hospital draws 75% of its inpatients.

22. Selected Legal Issues of Importance • Stark II, Phase III Changes Add Flexibility for Physician Recruitment by Rural Hospitals—Geographic Area • Phase III clarified this definition of service area by saying that a hospital that is drawing fewer than 75% of its inpatients from all of the contiguous zip codes from which it draws inpatients will be deemed to serve a geographic area composed of all of the contiguous zip codes from which the hospital draws inpatients.

23. Selected Legal Issues of Importance • Stark II, Phase III Changes Add Flexibility for Physician Recruitment by Rural Hospitals—Geographic Area • A rural hospital has the option of determining its service area: • by using the lowest number of contiguous zip codes from which the hospital draws at least 90% of its inpatients; and • if the hospital draws fewer than 90% of its inpatients from all of the contiguous zip codes from which it draws inpatients, the geographic service area may include certain non-contiguous zip codes.

24. Selected Legal Issues of Importance • Stark II, Phase III Changes Add Flexibility for Physician Recruitment by Rural Hospitals—Relocation Requirement • The physician recruitment exception requires that: • the physician relocate his or her practice into the geographic area served by the hospital; and either the physician moves his or her practice at least twenty-five miles; or • the recruit’s new medical practice derives at least 75% of its professional fee revenues from services provided to new patients not previously seen or treated by the physician in a prior medical practice during the preceding three years.

25. Selected Legal Issues of Importance • Stark II, Phase III Changes Add Flexibility for Physician Recruitment by Rural Hospitals—Relocation Requirement • Under Stark II, Phase II, the physician recruitment exception excluded from the relocation requirement residents and physicians in practice for less than one year. • Under Phase III, the relocation requirement does not apply to a physician who was employed full-time for at least two years with a federal or state bureau of prisons, the U.S. Department of Defense, the U.S. Department of Veterans Affairs, or the Indian Health Services, so long as the physician did not maintain a private practice of medicine in addition to this full-time employment.

26. Selected Legal Issues of Importance • Recruitment into Existing Practices • Permissible recruitment incentives paid by a hospital to a relocated physician may be paid to the recruit or, for his or her benefit, paid to the practice that he or she joins. • The agreement must be in writing, and executed by both the practice and the recruited physician. • Except for out-of-pocket expenses incurred by the existing practice, the payments must be passed through to or remain with the recruited physician.

27. Selected Legal Issues of Importance • Recruitment into Existing Practices • Under Phase II, • A hospital only could provide limited overhead assistance to the practice under an income guarantee arrangement. • The costs allocated by the existing practice to the recruit under the income guarantee were limited to the actual, additional, incremental expenses attributed to the newly recruited physician’s practice.

28. Selected Legal Issues of Importance • Recruitment into Existing Practices • Now, under Phase III, • The cost allocated by the practice to the recruit cannot exceed the actual additional incremental costs attributable to the recruit, or the lower of a per capita allocation of the group’s overhead costs, or 20% of the aggregate overhead costs of the group.

29. Litigation Issues in Physician Recruitment • Why does litigation occur in physician recruitment situations? • Usually because a recruit does not fulfill his or her practice commitment in the community. • If a recruit breaches a physician recruitment agreement by leaving the community early, the hospital is under a regulatory responsibility to seek repayment from the physician. • This regulatory responsibility stems from the federal fraud and abuse laws.

30. Litigation Issues in Physician Recruitment • The key factor in the analysis of any hospital/physician financial relationship, such as a physician recruitment agreement, will be whether the totality of the association between the parties is such that one purpose of the financial arrangement is to influence the referral patterns of the physician that receives the economic benefit under the agreement. • Parties to physician recruitment agreements must assure that any financial arrangement is designed and conducted on “commercially reasonable” terms, with “reasonable compensation” principles and “fair market value” principles in mind.

31. Litigation Issues in Physician Recruitment • Physician recruitment agreements do get litigated. • Arkansas case summary illustrates that it is important for parties negotiating a recruitment arrangement to distinguish between representing facts versus opinions in the recruitment process.

32. Conclusion Presented by: Robert L. Wilson, Jr. Smith Moore Leatherwood LLP 434 Fayetteville Street Suite 2800 Raleigh, North Carolina 27601 T: 919.755.8823 F: 919.838.3130

33. ROBERT L. WILSON, JR. Smith Moore Leatherwood LLP 434 Fayetteville Street, Suite 2800 Raleigh, NC 27601 T: (919) 755-8823 F:(919) 838-3130 bob.wilson@SmithMooreLaw.com

34. Trends and Issues in Physician Recruitment An Overview of Current Trends Affecting Physician Recruitment, and Selected Legal Issues of Importance to Individuals Involved in Physician Recruitment Activities Presented by: Robert L. Wilson, Jr. Smith Moore Leatherwood LLP 434 Fayetteville Street Suite 2800 Raleigh, North Carolina 27601 T: 919.755.8823 F: 919.838.3130