• CMS Rules that Non-Compete Provision Complies with Stark Law’s Physician Recruitment Exception
  • November 7, 2011 | Authors: I. Paul Mandelkern; Jason S. Rimes
  • Law Firm: Lowndes, Drosdick, Doster, Kantor & Reed Professional Association - Orlando Office
  • A non-compete provision, to be imposed by a group medical practice on a recruited physician, complies with the Stark Law physician recruitment exception, the Centers for Medicare & Medicaid (CMS) has decided.

    The favorable Stark Law Advisory Opinion by CMS represents a complete shift from CMS’ position in the interim final rule it issued in 2004, in which it stated that a non-compete provision in a recruited physician’s employment agreement could not meet the requirements of the physician recruitment exception.

    The new Advisory Opinion applies only to the party that requested the opinion and to its specific arrangement. Physicians’ groups and hospitals across the country, however, should recognize that this Advisory Opinion for the first time gives guidance as to how CMS will analyze a non-compete provision to determine if it unreasonably restricts a recruited physician’s ability to practice medicine in a hospital’s geographic service area and therefore is not in compliance with the Stark Law physician recruitment exception.

    Background

    In commentary to the final rule it issued in 2004, CMS specifically stated that imposing a non-compete agreement on a recruited physician would violate the Stark Law Rule’s physician recruitment exception’s requirement that a “physician or physician practice may not impose additional practice restrictions on the recruited physician other than conditions related to quality of care.”

    In 2007, after receiving numerous comments observing that non-compete provisions are a standard business practice that are allowed under most state laws, and that the inability to allow physician practices to impose non-compete provisions on recruited physicians would hinder hospitals’ ability to recruit physicians to their geographic service areas, CMS softened its stance. Recognizing that categorically prohibiting physician practices from imposing non-compete provisions on recruited physicians would have the unintended effect of making physician recruitment more difficult, CMS acknowledged that limited, reasonable non-compete provisions might be permissible. Accordingly, it changed the physician recruitment exception in the final rule to require that a physician practice not impose on a recruited physician “practice restrictions that unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital.”

    Since 2007, however, there has been uncertainty as to the scope of a non-compete provision that, in the view of CMS, would be a reasonable restriction on a recruited physician and therefore would satisfy the exception.

    The New Advisory Opinion

    The new CMS Advisory Opinion reveals that CMS will consider certain non-compete provisions as complying with the physician recruitment exception, and gives some indication of what CMS considers reasonable restrictions that can be included in a non-compete provision.

    As explained in the Advisory Opinion, a hospital and a group medical practice intend to enter into a physician recruitment agreement to induce a pediatric orthopedic surgeon to relocate to the “geographic service served by the hospital,” a term that is defined in the Stark Law Rule. The recruitment agreement is a typical three party arrangement, and it will provide the recruited surgeon with an income guarantee and a moving expense loan, each with repayment and forgiveness provisions. The surgeon's employment agreement with the group will contain a non-competition provision that will prohibit the recruited surgeon from providing professional medical services at any office, clinic, or other health care facility within a 25 mile radius of the hospital for one year following the termination or expiration of the recruitment agreement.

    The hospital requested the Advisory Opinion and certified that the proposed non-competition provision met all state law requirements for a legally enforceable non-competition provision. In addition, it certified that the proposed non-competition provision will not prohibit the recruited physician from practicing at one hospital that is within the hospital's geographic service area, but outside the 25 mile radius, and that there are at least three other hospitals located approximately 35 to 60 miles from the hospital and within a one hour drive from the hospital. The facts cited in the Advisory Opinion do not specify the distance of the hospital’s geographic service area, but presumably it is more than 25 miles.

    In ruling in favor of the hospital's request, CMS concluded that the proposed non-competition provision will not impose practice restrictions that unreasonably restrict the recruited physician's ability to practice medicine in the hospital's geographic service area. In reaching this conclusion, CMS evaluated several factors and determined that:

    • The time period of one year was reasonable;
    • The distance of 25 miles was reasonable based on the geographic area served by the hospital;
    • Even with the time period and distance restrictions, the recruited physician would still be permitted to practice at certain hospitals both within and outside of the hospital's geographic service area within the one year period; and
    • The hospital certified that the proposed non-competition provision complies with applicable state and local laws.