In a recently issued Advisory Opinion the Centers for Medicare and Medicaid Services (CMS) approved a physician noncompete agreement included in a hospital recruitment package that would restrict the physician from practicing at five hospitals located within a 25-mile radius from the hospital. The noncompete did not restrict the physician from practicing at one hospital that is within the hospital’s geographic service area, but outside of the 25-mile radius from the hospital, nor did it restrict the physician from practicing at several other hospitals located approximately 35 to 60 miles (approximately a one hour drive) from the hospital.

Among other things, CMS is charged with administering and enforcing compliance with the maze of regulatory provisions promulgated under the Stark Law – less commonly know by its official name, the Physician Self-Referral Act.  The basic principle of the Stark Law is that a physician may not refer a Medicare patient for designated health services to an entity with whom the physician (or immediate family member) has a financial relationship, or from whom the physician receives remuneration, unless a specific exception applies.  The Stark prohibitions impose strict liability on the physician if a covered arrangement does not fit within a specific exception. Among the specific exceptions to the Stark regulations is remuneration paid by a hospital to induce a physician to relocate to join the hospital’s medical staff. 

However, Section 411.357(e)(4)(vi) of the regulations also provides that:

The physician practice may not impose on the recruited physician practice restrictions that unreasonably restrict physician’s ability to practice medicine in the geographic area served by the hospital.

The CMS Advisory Opinion responded to a question asking whether a proposed physician noncompete provision, contained within a physician’s written recruitment agreement, would violate this regulation and remove the contemplated transaction from the exception for hospital-physician recruitment arrangements – rendering the physician potentially in violation of the Stark Law. 

In its Advisory Opinion, CMS first reviewed its own history with regard to the regulation at issue.  CMS noted that when Stark II regulations were promulgated, it had sought to impose a blanket prohibition on physician noncompete provisions included in physician recruitment agreements. CMS subsequently revisited its strict prohibition during Stark III rulemaking, and ultimately revised the regulation to the current limitation quoted above.  CMS noted that during the period between promulgation of Stark II regulations and Stark III rulemaking, the agency came to understand that hospitals and physician practices were unable or reluctant to recruit physicians in highly competitive specialties to practice in their locations unless they were also able to impose reasonable limitations on the new physician’s practice.  

The CMS Advisory Opinion then turned to the specifics of the recruitment agreement proposed by the requestor to determine the reasonableness of the limitations.  CMS considered that the proposed duration of the limitation was only for a one year period, and that the geographic footprint of the limitation was only 25 miles from the recruiting hospital.  CMS then considered the population density within and immediately beyond the 25 mile limitation and concluded that even during the one year restriction, the physician would be able to practice medicine within and outside the hospital’s service area.  Finally, CMS considered the requestor’s certification that the restrictive provision was not otherwise prohibited by state or federal laws.  Based upon these factors, CMS concluded that the noncompete restriction proposed by the requestor was not unreasonable and therefore was not outside the Stark exception for hospital-physician recruitment. 

It is important for all hospitals and physicians to remember when reading this, or any other CMS Advisory Opinion, that the agency’s opinion is offered only to the requestor, and may not be relied upon by any other person or entity as approving any other agreement or arrangement.  Nevertheless, like all regulatory agency opinions, this Advisory Opinion is very useful for understanding the agency’s current thinking on the issues presented – in this case, the scope of physician noncompete agreements that CMS considers “reasonable” under Stark Law regulation.  Remember, however, when considering physician noncompete provisions, as with any restrictive covenant, reasonableness is always determined under the totality of the circumstances; what may be reasonable in one case does not dictate what will be reasonable in another.

Photo credit: Christian Baitg