The Stark II, Phase II interim final rule issued last spring created a new, limited exception for retention payments to physicians in certain underserved areas. 69 Fed. Reg. 16,054 at 16,142 (Mar. 26, 2004), codified at 42 C.F.R. § 411.357(t). CMS intended to create an exception to assist rural hospitals in retaining qualified physicians while at the same time limiting the exception to prevent protecting payments to physicians in bidding wars between hospitals. The exception allows retention payments paid by a hospital directly to a physician on the hospital's medical staff to prevent the physician from relocating his or her medical practice at least 25 miles and outside the geographic area served by the hospital. However, the arrangement must meet certain conditions in order to qualify for protection.

The exception requires that the hospital's geographic area be in a Health Professional Shortage Area (HPSA) or an area with a demonstrated need for the physician, as determined by CMS in a Stark advisory opinion. The exception also requires that the parties have a signed, written agreement which is not conditioned on referrals by the physician or on other business generated between the parties. Further, the agreement must allow the physician to establish staff privileges at any other hospital and to refer patients to any entity. To establish the "bona fides" of the retention payment, the physician must have a bona fide firm, written recruitment offer from another hospital requiring the physician to relocate 25 miles. Finally, the retention payment must be limited to the lower of (1) the difference between the physician's current income from physician and related services and his/her income under the bona fide recruitment offer or (2) the reasonable recruiting costs that the hospital would incur to recruit a replacement physician.

It is important to note that the new exception is not available to assist medical practices attempting to retain employee physicians because the exception only protects payments made directly to the physician. According to the preamble to the Stark II, Phase II rule, "The new exception for retention payments does not protect payments made indirectly to a retained physician via another person or entity, including a physician practice." 69 Fed. Reg. at 16,097.

As noted above, the exception is limited only to hospitals located within a federally designated HPSA for any specialty. Therefore, any hospital outside of a HPSA must request a Stark advisory opinion from CMS to evaluate whether there is a demonstrated need for physicians within the hospital's service area. The preamble to the Stark II, Phase II rule explains that retention payments to physicians in underserved areas (which are not HPSAs) may be reviewed on a case-by-case basis; but CMS cautions that advisory opinions will be issued only in unusual and compelling circumstances. The time and resources required to obtain such an opinion further limits the usefulness of this exception.

A retention proposal that qualifies for the new Stark exception must also be analyzed under the federal antikickback statute. The federal antikickback statute generally prohibits kickbacks, rebates, or other remuneration in exchange for referring patients for the furnishing of items or services covered under Medicare, Medicaid, or other federal health care programs. However, unlike the Stark regulations, the antikickback regulations do not contain a direct safe harbor for retention arrangements.

The antikickback statute may be implicated in retention arrangements because the hospital provides remuneration to the physician, who is a referral source for the hospital. Therefore, the parties must carefully analyze the arrangement to ensure that no party's purpose is to induce referrals between the parties. Further, the parties may want to obtain a valuation by an independent third party to ensure that the terms of the arrangement represent fair market value and are negotiated at arms-length. Other safeguards against improper remuneration may include: (1) a written agreement which stipulates that the arrangement cannot be renegotiated during its term for at least one year; (2) ensuring that the arrangement is not conditioned on referrals or other business generated for the hospital; (3) allowing the physician to establish privileges and refer to other entities; and (4) ensuring that the retention payment does not vary based on the volume or value of the physician's referrals. Time permitting, the parties may also wish to seek an OIG advisory opinion to determine if the arrangement would result in prohibited remuneration.

In light of the costs and time constraints, hospitals may be fearful of offering such physician incentives and as a result, may lose physicians who are desperately needed within their communities. Without clear regulatory guidance, navigating the new exception may be cumbersome for providers. However, if properly structured, such arrangements may provide an opportunity for rural hospitals to provide an incentive to physicians to continue to serve the medical needs of the community.

Ms. Kass and Mr. Mathias gratefully acknowledge Meredith Melmed for her invaluable contribution to the writing of this article.