Know details before taking a hospital loan

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted March 1, 2004.

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Hospitals seeking to attract physicians to specific service areas might be willing to loan money to those physicians as a carrot. Hospitals use professional support and service agreements to entice physicians with certain specialties to its service area and to secure medical care for an underserved community.

It is important to remember that a professional support and service agreement is not an employment, independent contractor or medical director agreement. A professional support and service agreement is for practice support with the hospital guaranteeing monthly payments to the physician as a practice loan to locate to an area and provide certain services.

Most professional support and service agreements include a computation of operating expenses for the physician and a "work-off" program that enables the physician to provide community and hospital services with the value of those services credited against the outstanding balance of the loan. The hospital will forgive portions of the loan balance based on services provided under the work-off program and extend the repayment.

Most professional support service agreements contain standard language hospitals use for all such arrangements. To avoid pitfalls, make sure you understand the business terms, including how the loan and operating expenses are calculated in relation to repayment of the loan. Key issues you need to be aware of as you negotiate and sign a professional support and service agreement include managed care responsibilities, computation of operating expenses, repayment of the loan, the work-off program and practice limitations.

Managed care responsibilities

Often a continuing requirement for receipt of the practice loan and your participation in the work-off program is your obligation to apply for membership in the hospital's independent practice association and to function as a participant and provider.

You will be required to comply with the IPA's credentialing process, and upon your approval you will be required to use your best efforts to identify and participate in those managed care programs in which significant numbers of patients in the community are beneficiaries.

Hospitals often include a contract provision that treats your failure to meet these requirements as a breach of the agreement.

Make sure that the hospital cannot immediately terminate your agreement based upon managed care credentialing and participation. You should negotiate a reasonable period of time to cure such a breach before the contract can be terminated by the hospital.

Computation of operating expenses

The hospital will agree to pay you a set amount for allowed operating expenses. Clearly define the allowed operating expenses in your agreement.

The term "operating expense" should include all of the reasonable expenses incurred during the operation of your practice at the office and expenses directly related to rendering medical services. Make sure excluded expenses are also defined. You do not want to be blindsided with unplanned and unpaid expenses once you sign the agreement. Make sure you reserve the right to verify these expenses for purposes of calculating the adjustment to the base monthly amount.

Repayment of loan

You should be able to repay the loan either in cash or by means of credits earned in the work-off program. Ensure that you can repay the outstanding balance at any time. Make sure you also have the ability to remit monthly installments to the hospital during the term of the agreement and for a specified time after the agreement terminates or expires. Hospitals often include provisions where the total amount of the loan is immediately payable upon termination of the agreement for certain reasons, including resignation from the hospital's medical staff or breach of confidentiality. Make sure you do not have an accelerated-payment provision upon termination of your agreement.

The work-off program

During the agreement, you will be able to participate in the work-off program as approved by the hospital. Typically, all work-off activity must substantially benefit or promote the hospital's mission or the members of the community served by the hospital. You will be able to provide community and hospital services, and the value of those services shall be credited against the outstanding balance of the loan made by the hospital.

The services you provide and the amounts to be credited for approved service must be set forth in the agreement. Carefully review all of the listed activities that qualify for work-off credit. Make sure that you have the appropriate licensure and credentialing to provide such services. The hospital probably will reserve the right to modify the work-off program. But you should get credit for all services provided before any modifications, and amounts to be credited should not be changed without prior notification from the hospital.

Unless the hospital agrees to another arrangement, the work-off program will be used exclusively as an offset against the amounts loaned and the accrued interest, and cannot be used as a basis for any claim by you for additional compensation. The hospital most likely will include a provision that you agree not to provide services in excess of your loan repayment obligations.

Continuing work-off right

As an alternative to cash repayment, you should negotiate for the right to continue to provide work-off services for an additional time period. For example, if you have the right to continue providing work-off services for an additional two years, then any amount remaining to be paid at the conclusion of the two-year period can be paid in a lump sum within 30 days of the conclusion of the extended time period. This expands your ability to repay the loan through the work-off program.

Practice limitations

Ensure that the conduct of your medical practice is not in violation of any restrictive covenant or limitation on your practice. The hospital should clearly define what activities you are prohibited from doing during the term of the contract. Make sure the hospital's service area, and inpatient and outpatient services, are clearly identified and defined. Often this provision is vague or overbroad. It is imperative that the service area and hospital services are specifically defined so that you are not competing against the hospital in violation of the agreement.

Hospitals will ask you to acknowledge that your participation in the work-off program will expose you to certain confidential information regarding the strategic plans of the hospital. Make sure that any confidentiality provisions are mutual obligations by both parties.

The hospital also will ask you to acknowledge that your participation in certain clinical programs as a result of the work-off program will result in your introduction to treat certain patients of the hospital whom you might not otherwise treat.

To protect any confidential information that might be obtained by you because of involvement in the work-off program, and to maintain the underlying relationship between patients and hospital, the hospital most likely will ask you to agree to the following restrictions:

  • Limit your practice to the office that has been established and is supported by the loan until your outstanding loan has been fully paid.
  • Abstain from contracting with other health care institutions for a similar loan or practice support, providing certain other services without the written consent of the hospital or entering into any lease agreement for another medical office facility.
  • Refrain from investing in or otherwise supporting any venture that competes with programs of the hospital or its affiliates until such time as the loan amount has been fully paid.
  • Do not disclose to third parties any confidential information, strategic plans or marketing information of the hospital.
  • Agree not to participate in any medical practice, venture or program in any capacity that competes with the services provided by the hospital, within a certain geographic radius of either the hospital or your office, until the loan has been fully paid.
  • Refrain from soliciting or diverting hospital employees or patients.

Make sure you understand all of these issues and how they impact your practice and its future growth before signing a professional support and service agreement.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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