Summary of CMS Advisory Opinion AO-2011-01 

Issued May 2011

Written by Claire Turcotte, Reviewed by Julie Kass*

In CMS Advisory Opinion AO-2011-01, Centers for Medicare & Medicaid Services (CMS) issued a favorable advisory opinion finding that a proposed physician recruitment arrangement including a non-competition provision (Proposed Arrangement) meets the requirements of the physician recruitment exception under the Stark law.

Under the Proposed Arrangement, a hospital (Requestor) and a physician practice (Practice) plan to execute a physician recruitment agreement to induce a physician specializing in pediatric orthopedic surgery (Physician) to relocate to the Requestor's service area. The Proposed Arrangement provides Physician with an income guarantee loan and moving expense loan, both with repayment and forgiveness provisions, as well as a non-competition provision. The non-competition provision restricts the Physician from establishing, operating, or providing professional medical services at any location within a twenty-five-mile radius from the Hospital for one year following the earlier of the termination or expiration of the Proposed Arrangement.

Practice regularly imposes non-competition provisions on its employed physicians and would not be willing to recruit a physician without a non-competition provision. Practice concluded that a twenty-five-mile radius is reasonable and appropriate to protect its interests. Requestor certified that this non-competition provision would restrict Physician from practicing at five hospitals located within the twenty-five-mile radius, but would not restrict the Physician from practicing at one hospital that is within Requestor's geographic area, but outside the twenty-five-mile radius. In addition, there are at least three other hospitals located approximately thirty-five to sixty miles from Requestor that require approximately one hour of travel time via car where Physician could provide services. In addition, Requestor certified that the parties have met all state law requirements for a non-competition provision to be legally enforceable. CMS noted, however, that it did not assess the non-competition provision for state or local law requirements.

In its analysis, CMS noted that the Stark physician recruitment exception currently requires that a physician practice not impose additional practice restrictions on the recruited physician other than conditions related to quality of care. CMS cited to its prior commentary in which it stated that non-competition provisions should not be categorically prohibited from recruitment arrangements because doing so may make it more difficult for practices to recruit physicians. For example, practices may be unable or reluctant to hire physicians without imposing reasonable non-compete clauses despite receiving a hospital's financial assistance in compliance with the Stark physician recruitment exception.¹ For these reasons, CMS amended the physician recruitment exception to eliminate the prior categorical prohibition on non-compete provisions in 2007.

CMS identified several factors to determine whether the non-competition provision in the Proposed Arrangement imposes practice restrictions that unreasonably restrict Physician's ability to practice medicine in the geographic service area served by Requestor as follows:

*The Fraud and Abuse Practice Group leadership would like to thank Advisory Opinion Task Force Members Claire Turcotte, Esquire (Bricker & Eckler LLP, Cincinnati-Dayton, OH) and Julie E. Kass, Esquire (Ober Kaler, Baltimore, MD) for drafting and reviewing, respectively, this summary.