What is a Stark Service Area? | Physician Recruitment Agreement

What is the stark service area definition? The definition is so that a physician can better understand the repercussions of signing a recruitment agreement. And whether they’re eligible to sign one as well. First, most recruitment agreements I find are for newer physicians. Either they’re just coming out of training or have been out for a year. The basis of the recruitment agreement. And lastly, the exception allows a hospital to supplement the medical practice with money to bring in the physician. I’ll just read what those are. 

Relocating to the Patient Origin

There must be a documented need in the zip code area for the physician specialty. It must be in writing.

The physician must relocate their medical practice to the patient area. What is the area itself? It must be the geographic region that the hospital serves. In this case. It is the lowest number of contiguous zip codes from which the hospital draws at least 75% of its patients. 

That means in the recruitment agreement. There will be an attachment. It will just have a bunch of zip codes. And depending upon where it’s at, it could be 40 different zip codes. In some bigger cities, it could just be a couple. What those zip codes mean is that the physician has to relocate their practice within those zip codes. Then they have to provide care to the people within them.

And that grants the exception of how a hospital can supplement the medical practice that the physician is joining. How do they supplement? Well, it’s generally through an income guarantee. The hospital will guarantee that the physician will receive a certain amount each month. They can reimburse overhead expenses, signing bonuses, relocation expenses, and student loan assistance. 

If the Physician Leaves the Medical Practice Within the Service Area

There are several ways to supplement a medical practice. But the service area and medical practice must be within those zip codes. I guess the main thing to consider is that suppose the physician decides to leave the medical practice. They can continue to stay within that stark service area and not have to pay anything back to the hospital. How the recruitment agreement works is they will provide a certain amount of money. And it’s generally the first year, the income guarantee period.

Then, as long as the physician stays within that service area for several years, it’s three or four years. Which is called the forgiveness period. If you stay within that community for that period, the employer will forgive what the hospital paid in year one. Usually, it’s a monthly fraction. So the hospital would forgive 1/36 of that loan monthly if it’s a three-year forgiveness period. Suppose the relationship goes south with the employer within those contiguous zip codes that serve 75% of the patients. 

Now, there are two exceptions. There are some exceptions for rural areas. And to residents who’ve been training within the area where this may not necessarily apply. They don’t have to move into the area, but I won’t get into that right now. If the physician wants to end the agreement and stay within the area, they don’t have to pay anything back. 

Stark Service Area Considerations When Staying 

There must be an analysis of a few things before a physician signs a recruitment and employment agreement simultaneously. One, there shouldn’t be a non-compete. Most recruitment agreements will list that there can’t be a non-compete between the employer and the physician. Let’s say there’s a broad non-compete. 30 miles from the primary practice location and all the zip codes are obviously within 30 miles of the hospital. The physician won’t have the opportunity to stay within the area. That’ll force them out. And they may be on the hook for having to pay back the amount that’s still left on the loan. First, the physician needs to make sure that there’s no non-compete. Or maybe a very reasonable and small non-compete where they’d have other opportunities. 

Another analysis we must do is, are there other opportunities in that area if the physician were to leave? In smaller communities and certain specialties, only one practice does that. So, if a physician wants to stay in that service area, is there another practice to go to? Do they have alternatives? The worst possible thing that can happen to a physician is when something happens with the original employer. They don’t have an opportunity to get a job within the service area. Then they owe hundreds of thousands of dollars to the hospital.

There should be joint and several liabilities between the medical practice and the physician. That’s another thing to also look at. Hopefully, that’s a good analysis of this stark service area. These are tricky. If the recruitment agreement is the sole reason why a job is available, certainly it’s an excellent opportunity. But these do not always end well. And they present some real challenges if the relationship goes south with the employer, so we need to be careful.

Other Blogs of Interest

• Contract Negotiation Tips for Resident Physicians
• What Are Restrictive Covenants in a Physician Contract?

What is the Stark Law Recruitment Exception?

Today, I will discuss recruitment agreements; the interplay between the employment agreement the physician will sign as a new job. What a recruitment agreement is, and the downsides and upsides. 

What is a recruitment agreement? The stark and anti-kickback laws allow a hospital to provide certain financial incentives to medical practice in their efforts to bring in a new physician into the area. What does that mean? If a physician is moving to a new job, either out of training or from somewhere else. Most of the time it’s with young physicians or people newly out of training. They will sign an employment agreement with the practice itself.

Income Guarantee 

However, there are also some opportunities for a hospital to supplement that physician’s income for the first year. And provide some other incentives too. So, you could have a recruitment agreement with an income guarantee. They will essentially pay the medical practice a certain amount to supplement the physician’s salary. They can provide moving expenses, signing bonuses, and student loan repayment. Or they could also cover costs from the practice associated with bringing the physician in, most likely through overhead. There are a lot of opportunities for a hospital to supplement a medical practice. Why do they do this? Well, it’s possible that medical practice could not financially afford to bring in a physician without these supplements. Or it’s also just a smart way for a practice not to pay as much money as they usually would.

In most of the specialty services, it would be someone who must build up a practice. Most physicians moving into a new job are not very profitable for the first year or two. Once again, kind of specialty-dependent and practice-dependent. Are they replacing somebody? Are they coming in from the cold? Do they have any ties to the community? All those things kind of factor in. It usually takes 12 to 18 months for practice to reach maturity. If you’re in family care and joining a practice, you’d continue seeing more volume for the first 12-18 months. 

Rules of What Hospitals Can Do

What are the rules that dictate what a hospital can do? The conditions that need to be there? I’m just going to go through the list. 

One, there must be a documented need in the area for the physician specialty. It needs to be in writing. The hospital will give a contract to the physician and the qualified health center, and they will both sign it. The physician must relocate their medical practice to the area. They must move into the geographic area served by the hospital. What is the geographic area? Mostly, it’s the lowest number of contiguous zip codes from which the hospital draws at least 75% of its patients. So, there will be an attachment at the back of every recruitment agreement that lists zip codes. Basically, the physician must serve those zip codes. For the recruitment agreement, the physician must move at least 25 miles from 25 miles into the geographic area.

There are also some exceptions for rural communities and residents who’ve been in training and want to stay in the area. A few minor exceptions exist. But for the most part, the things I mentioned dictate whether a hospital can provide the recruitment agreement. What does the recruitment agreement look like? It’s a contract like an employment contract and dictates the terms of what they offer. And most importantly, what the forgiveness period is. The hospital does this so they can bring in specialty health services. 

Down the road, I guess initially, they will get downstream revenue from referrals from this physician. I mean, that’s the whole point of bringing them in. Even though they provide an income guarantee, a signing bonus, and overhead expenses for the first year, which is standard.

Forgiveness Period for the Health Physician 

Well, they will require a forgiveness period, meaning the physician must stay in the area for several years. It’s usually three, sometimes four. Then each month they’re in that area providing care, the hospital will deduct a fraction from the overall loan amount. Let’s say a hospital sends 200,000 to the medical practice. That 200,000 amount, after the first income guarantee period, which is usually one year, will then be three-month forgiveness. So, the hospital will forgive 1/36 of that 200,000 every month. And this means that no one must pay it back if the physician stays for the forgiveness period. In this case, if it was three years, no one would owe any money back to the hospital.

The hospital, as I said, will hopefully gain more by having that physician in the community and utilizing the downstream revenue from recruiting referrals into the network, which should more than cover whatever they paid out to bring the physician into the community. 

Downside

The downside to the physician. Depending upon the agreement’s language, if they leave the area, they’re responsible for that amount of money.  Usually, it would be a joint responsibility between the practice and the physician. But for the most part, if the physician leaves early, they will have to pay back that money. 

For some physicians and some health specialties, it can be a significant amount of money. I’ve seen up to 500,000 after the first year, not that it’s specialty-dependent. But it could be a lot of money. Let’s say the relationship goes sour with whoever the employer is. Maybe there aren’t opportunities in the area to switch to a new group and continue in the geographic region. It can be a big problem. 

Benefits

The benefits of a recruitment agreement. One, if the job couldn’t exist, the medical practice couldn’t afford to bring in a new physician into the area. Then clearly, the recruitment agreement is creating the job opportunity for the physician. So, it may be necessary. I mean, it’s a no-brainer for medical practice. They essentially can have an entire year of physicians’ salary supplemented by a hospital. They would take advantage of that if they could, and some practices are savvier than others. 

Some of those agreements will require that, and they should, there’ll be no non-compete. If the physician must stay within a certain area to not violate the agreement. And the contract is terminated with the original employer. Still, there’s a non-compete that forces them out of that area, well, that is a massive problem for the physician. Most recruitment agreements will prohibit the employer from placing a non-compete into the agreement. That’s one thing to look for. 

So, that was a little breakdown of recruitment agreements, stark law, and anti-kickback statute. It could be a valuable tool for a physician. But it could also be a disaster if not worded properly. Or if the employer has thought of all the permutations if the physician leaves the practice.