March 18, 2021

QUESTION:       I noticed that the first case in this week’s HLE discussed a Residency Assistance Agreement.  Does the Stark law permit a hospital to enter into such an agreement?  What are the practical and legal risks associated with such an agreement?

ANSWER:           Yes.  The Stark law permits hospitals to enter into a wide range of physician recruitment arrangements, either with the recruit or with a group that will employ the recruit.  A properly drafted recruitment agreement will comply with the Stark law, the Medicare anti-kickback statute and the IRS pronouncements on physician recruitment.

One unique form of recruitment agreement is to assist a physician financially during their residency program.  Such an agreement can be structured to comply with all legal requirements.  However, residency programs can last anywhere from three to seven years (as in the case discussed this week) and you are requiring a physician who is just beginning this training to make commitments that will extend for years after the training program has been completed.  As a result, inherent in this type of recruitment agreement are certain practical risks that often give rise to litigation.

A resident assistance agreement is typically an annual payment (usually a loan) that will be paid while the resident is in training but will then be forgiven if the physician returns and practices in the geographic area served by the hospital in the specialty described in the agreement for a certain period of time.

The situation in the case is not unusual.  There the physician entered into a five-year general surgery residency program.  The hospital agreed to pay her $25,000/year during the residency program.  While not stated in the case, this payment is typically a loan.  The physician agreed to return to the geographic area served by the hospital after the completion of the residency program, practice general surgery for a certain period of time (four years in the case) and if the physician practices in the manner described in the agreement for the full four years, the entire principal and interest will be forgiven.  Straightforward right – Not so fast.

Residents can change their mind – that is what happened in the case described in this week’s HLE.  There the physician wanted to pursue additional fellowship training as a thoracic surgeon.  However, not all hospitals need, or can support, such a subspecialist.  Besides, that is not what the hospital bargained for – they wanted a general surgeon.  Apparently, the hospital did not want to prevent the physician from obtaining the additional thoracic training but did not discuss the effect of her doing so on her commitment to the hospital.  Nor did they amend the agreement at the end of the general surgery residency program to address the change in circumstances.

So, they had an agreement that did not address the additional training.  As such, per its terms, the agreement stated that the physician would be in default if she did not practice general surgery for at least four years.  Apparently, that was not the physician’s understanding and she did not want to practice general surgery after obtaining additional training as a thoracic surgeon.  The result of this misunderstanding was litigation – which is still ongoing.  No general surgeon and legal fees-not the result that either party bargained for when they entered into the agreement.

Another issue that often arises in this kind of arrangement that often leads to litigation is how will the physician practice once they return.  If an employee what will their salary be and how will that salary be determined so far in the future?  If they are not offered employment by the health system, where will they practice and again under what terms?  The reality is that the physician has no idea of their market value before they start training but often become acutely aware as headhunters contact them as the training period ends – that complicates these employment-related issues.

We have also seen instances where a physician gets married during the residency program and their spouse either cannot find a job or does not want to live in the committed area.  Other issues arise if the hospital is sold, if demographic shifts have occurred so that the hospital can no longer support the physician’s specialty (even if the physician did not change or obtain additional training), or if unforeseen circumstances arise such as COVID.

Adding to this problem is that the amount of interest that accrues over the period of a lengthy residency program can be significant and can approach the amount of the principal – another fact that the physician did not realize when they signed the agreement.

So, what is a hospital to do?  Despite these issues, we continue to believe that a residency training assistance agreement is an excellent means for a hospital to recruit a new physician. It allows the hospital to recruit a physician in a needed service, although that need won’t be addressed until after the residency program is over.  It also allows the resident to concentrate on their training, eliminating the need to worry about whether there will be a position at the end of their training program.  It also assists the resident financially at a time when they often need the assistance.  But you need to appreciate the unique risks presented by this type of agreement, have an agreement that anticipates as many of those risks as possible, and if changes do occur during the course of the relationship, make sure that you memorialize those changes and their effect on the terms of the agreement in writing.

February 11, 2021

QUESTION:        I hear that the new Stark regulations have a way that Stark violations can be corrected without penalty.  Is that so?

ANSWER:           Yes, within limits.  CMS has now given hospitals and doctors a new way to correct noncompliance with the Stark law without having to make a self-disclosure.  The regulations, which became effective on January 19, 2021, contain a new regulation at 42 CFR §411.357(h) that allows parties to a compensation arrangement to reconcile all discrepancies while a contract is in effect or up to 90 days after it terminates so long as after the reconciliation the arrangement fully complies with all elements of the applicable exception.

For example:  say a hospital contract with a medical director calls for payment at $140 per hour but the doctor is paid $150 per hour.  If $150 still is within FMV range, all that is necessary is to reflect that in amendment going forward.  If the amount actually paid exceeds fair market value, the contract can be amended to recoup payments in excess of FMV via an offset against amounts due in the future (e.g., a payroll deduction) while the relationship is in effect, but the entire amount of the excess must be recouped within 90 days after the contract ends.

CMS also said that not every error will cause a financial relationship to be out of compliance with Stark nor must every mistake or error be corrected in order to maintain compliance.  Administrative and operational errors that are identified and rectified in a timely manner will not cause a relationship to be out of compliance.  In addition, CMS said that not all transfers of remuneration create compensation arrangements.  Examples include mistaken payments that are never identified, theft, use of office space not in lease, use of equipment beyond the expiration of the lease term or slight deviation from written agreement such as a one-time incorrect rental payment.

This new option is a great alternative to resorting to the Stark self-disclosure protocol.  To learn more about it, stay tuned for an upcoming Health Law Expressions podcast, where Horty Springer attorneys Josh Hodges and Dan Mulholland will discuss this new rule, or e-mail them at jhodges@hortyspringer.com or dmulholland@hortyspringer.com.

 

August 2, 2018

QUESTION:        I was just reviewing a contract to draft a second amendment and noticed that the original contract has the hospital as a party but the first amendment has the hospital’s physician group as a party.  What should I do?

ANSWER:            This doesn’t happen that often, but it does happen enough.  The good news is that it looks like you were watching the details when drafting the second amendment.

In any event, confirm which entity is to be the party in the contract.  It may be that the person who drafted the first amendment inserted the wrong party (or, conversely, the person who drafted the original contract had the wrong party).  Or, it may be that the contract was assigned by the hospital to the physician group, but you would not know that because the assignment was not included in the package of documents you were given to draft the second amendment.

The correct party is important for compliance reasons – for example, if the contract is supposed to be with an entity that qualifies as a “group practice” under Stark, but is with the hospital, and incentive bonuses include the group’s in-office ancillary services then the contract would violate Stark.

Also important is the issue of liability.  The hospital may set up a physician corporation, or limited liability company, to shield the hospital’s assets.  If the contract is with the hospital instead of that separate entity, the hospital’s assets are at risk.

Some other details to check are to make sure the entity on the first page is the entity listed in the signature block on the last page.  Again, having a different legal entity in the signature block does not happen that often, but it does happen and making sure the entities are the same can save much heartache.

Finally, make sure the employment contract is signed by both parties.  An unsigned employment contract could spell trouble from a Stark perspective.  For example, although the Stark employment exception does not require a written contract, if an employer wants to take advantage of certain things, such as directing referrals, the contract must be in writing and signed by the physician.

So, make sure to dot those “i”s and cross those “t”s when drafting or reviewing contracts.

September 14, 2017

QUESTION:        We just discovered that several leases between the hospital and physicians who are active members of our medical staff expired several years ago without being renewed in writing.  We understand that the Stark Law requires a written lease.  Do we have any alternative other than a self-disclosure?

ANSWER:           Yes.  On November 16, 2015, CMS provided some much needed relief from technical violations of the Stark Law such as the one that you have described.

The first thing that you must determine is that a lack of a writing is the only problem that you have.  Therefore, you need to document that each lease complied with the other requirements of the Stark rental of office space exception, especially that at all times the rent that was paid by each physician constituted fair market value, commercially reasonable rent that did not take into account or vary based on any referrals or other business generated by the physicians.

If so, then you should be aware that in the November 16, 2015 Federal Register, CMS stated that it has received numerous submissions similar to your question that related to potential violations caused by the writing requirement, including the “…failure to renew an arrangement that expired on its own terms after at least 1 year.”  80 FR 71314.

CMS then clarified the writing requirement, provided policy guidance, and also provided illustrative examples of the writing requirement, including “checks issued for items, services or rent” (80 FR 71316).  (Emphasis added.)  In all likelihood, each month each physician paid the physician’s rent with a check that was in writing and signed by each physician, and each month the hospital endorsed and deposited those checks.  If the rent was deposited electronically, then the Uniform Electronic Transaction Act will give an electronic transfer of funds the same force and effect as a written check.

Those rent checks/electronic transfers of rent will be found to constitute “contemporaneous documents (that is, documents that are contemporaneous with the arrangement) [that] would permit a reasonable person to verify compliance with the applicable exception at the time that a referral is made” (80 FR 71315) and, as such, satisfied the writing requirement set forth in 42 C.F.R. §411.357(a).

Since this is a policy clarification and not a new regulation, the fact that the leases expired prior to the date of the CMS guidance does not prohibit you from applying this guidance to your situation, even if those expired leases predate that guidance.

If the leases expired after January 1, 2016, then you can take advantage of a change to the Stark Rental of Office Space exception that went into effect on January 1, 2016, which provides that the lease will continue to comply with the Stark exception so long as the lease continues to satisfy the other requirements of the exception.  (See 42 C.F.R. §411.357(a)(7).