The Centers for Medicare & Medicaid Services (CMS) issued an advisory opinion on October 5, 2007 regarding the Physician Recruitment Exception to the federal physician self-referral prohibition, otherwise known as the Stark Law.  In this advisory opinion, CMS essentially concluded that a hospital could not amend an existing physician recruitment agreement to delete a provision requiring the physician to pay back monies under an income guarantee to the hospital during the financial guarantee period of the agreement.

The background to this recruitment agreement is that a hospital and a physician entered into a physician recruitment agreement just prior to the effective date of Phase II of the Stark Law final regulations. The recruitment agreement included three loans included an income guarantee. The agreement contained a fairly standard provision requiring the physician to pay the hospital an amount equal to the amount the physician’s professional services receipts exceeds the physician’s medical practice expenses in any given month up to the then-outstanding principal and accrued interest under the income guarantee loan. This requirement is referred to as the “excess receipts” provision.

Phase II of the Stark Law regulations, which were effective in July 2004, provided that an income guarantee offered by a hospital to a physician joining a physician practice could only include practice expenses that were actual additional incremental costs attributable to the recruited physician. In this case, because the physician had joined a physician practice, the parties amended the recruitment agreement to limit expenses that could be attributed to the physician under the income guarantee provision. As a result of this amendment to the recruitment agreement, the amount that the physician was obligated to repay to the hospital if his receipts exceeded the expenses and compensation guarantee amount increased and the allowed expenses decreased from $19,296 to $15,120 per month.

The hospital asked CMS whether the original recruitment agreement would have complied with the Stark Law had it not contained the excess receipts provision. CMS declined to answer this hypothetical question. The hospital requested this advisory opinion from CMS asking whether an amendment to delete the “excess receipts” provision would not be in compliance with the physician recruitment exception to the Stark Law.

CMS declined to answer whether the original recruitment agreement complied with the Stark Law. However, as to the hospital’s other question (and of significance to other hospitals considering a similar question), CMS concluded that an amendment to delete the “excess liability” provision would give the physician additional compensation because the effect would be to decrease the potential monthly liability of the physician to pay back the hospital on a monthly basis under the “excess receipts” provision. Thus, CMS considered such an amendment and the resulting effect post-relocation of the physician to not be in compliance with the physician recruitment exception and it might also result in compensation that directly or indirectly reflects the volume or value of the recruited physician’s actual or potential referrals.

A copy of this advisory opinion is located on the CMS web site at: