In CMS Advisory Opinion AO-2011-01, CMS has issued a favorable advisory opinion allowing the physician recruitment arrangement with a hospital and a physician practice which imposes a restrictive covenant upon the recruited physician.

Restrictive covenants and recruitment arrangements had initially been prohibited by the Stark Rules. However, bowing to industry comment, CMS amended the physician recruitment exception in 2007 to eliminate its prior categorical prohibition on restrictive covenants or non-compete provisions, by revising that to include a condition that states that the recruitment arrangement “may not impose on the recruiting physician any practice restrictions that unreasonably restrict the recruited physician’s ability to practice medicine in the geographic area served by the hospital.”

In the current situation, although the restrictive covenant was a basic one year and 25 mile prohibition, CMS basically concluded that the recruiting hospital’s market area was large enough that the restriction did not prevent the physician from continuing to practice in the hospital’s market area in the event of termination of the contract.

CMS relied upon the fact that the physician would not be restricted from practicing at one hospital that was within the hospital’s geographic service area, but outside the 25 mile radius of the restrictive covenant.