Pick apart recruitment deals before you sign

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 Dec. 5, 2005.

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Hospitals, and the physician practices that refer to them, often seek to recruit physicians with certain specialties to their communities to treat underserved patient populations. In exchange for the physician's agreement to relocate or establish his practice to the community and provide services for a specific length of time, the hospital can provide the physician with guaranteed income, equipment, office space, and access to additional hospital resources and patients.

A physician completing residency might be interested in signing a recruitment agreement if the guaranteed income is not tied to too many restrictions and assists in establishing a practice in the community. If the hospital is recruiting a more experienced physician from another area, this physician might view the hospital as having greater resources to cover relocation expenses and enable the physician to reduce financial risk.

But physicians must exercise some caution in looking over, and signing, such agreements. Key issues you should consider before signing a recruitment agreement include payment structure, type of support, length of support, and anti-kickback and Stark II regulatory issues.

It is important that you know what type of support you will receive from the hospital pursuant to the recruitment agreement.

The support amounts paid by the hospital can be separated into different categories. They include financial support for relocation and recruitment expense. They also include start-up expenses related to setting up the practice, including expenditures for new equipment and supplies. And they include salary support, which is made when revenues fall short of the ongoing physician's employment expense.

Make sure the income guarantee is spelled out. It is often structured as a set monthly installment to the physician, plus the payment for covered expenses for the immediate prior month less the practice's gross receipts from the prior month.

Covered expenses should be defined in the recruitment agreement to include the actual amounts expended by the physician in direct connection with the physician's full-time medical practice, money that is an ordinary and necessary business expense for which a tax deduction is permitted.

Covered expenses paid by a hospital pursuant to a recruitment agreement usually do not include contributions to a retirement or deferred compensation plan on behalf of the physician. Nor do they include federal, state and local taxes assessed on the physician's net income, professional dues, or interest and principal payments on the physician's debts related to educational loans and accrued interest under the recruitment agreement.

There also should be some flexibility regarding the length of support provided by the hospital. Generally, nonprofit hospitals seek to limit the support to one year. Physicians and practice groups typically seek to secure a longer commitment.

It is important to remember that all support payments made by the hospital to the physician or practice group are made in the form of a loan, where repayment is not due until the support period ends. But the hospital and physician often agree to some type of loan forgiveness upon the expiration of the initial term, whereby installments of principal and interest are forgiven as long as the physicians demonstrate an ongoing commitment to the community.

The hospital might impose community service obligations upon the physician in relation to the loan forgiveness, requiring the physician to remain in the area for three to five years after the initial support period ends. The obligations also might include treating Medicaid patients, providing community services such as community screenings and free medical care, and providing on-call services at the hospital.

The hospital also should recite and identify the community need for the physician's services in the recruitment agreement.

Anti-kickback and Stark II rules

When you review a proposed recruitment agreement, make sure that you understand the proposed relationship with the hospital and practice group, if applicable, and ensure that the contract includes all of the proposed business terms and is in compliance with the federal Anti-Kickback Statute and Stark II regulations.

Under the anti-kickback regulations, the recruitment arrangement and income guarantee cannot be tied to a doctor's patient referrals.

You also should ensure that the proposed recruitment agreement is in compliance with the Stark II rules, which regulate what is permitted by a hospital to recruit a physician to relocate to the hospital's geographic area and join that medical staff. Stark II defines geographic area as the area served by the hospital composed of the lowest number of contiguous ZIP codes from which the hospital draws at least 75% of its inpatients.

The Stark II regulations provide for different requirements depending on the status of the recruited physician. For a "new physician," defined by Stark II as a physician who has been in practice for less than one year, the recruitment arrangement must: be in writing and be signed by the parties; not be conditioned upon the recruited physician referring patients to the hospital; not have the remuneration based on the number of referrals or expected referrals from the recruited physician, or on other business generated between the parties; and allow the physician to establish privileges at other hospitals and refer to any other facilities.

If a hospital is recruiting a physician with an existing practice, the recruitment agreement must meet all of requirements for recruiting a new physician. The hospital also must show that the physician moved his or her practice 25 or more miles, or that at least 75% of the revenue from the new practice is generated from patients the physician did not see or treat at his or her old location.

If a doctor is being recruited to an existing practice group, Stark II regulations also mean that the existing practice must sign the recruitment agreement if it is receiving pay from the hospital. All remuneration must remain with or pass through to the recruited doctor except for "actual costs incurred" by the existing practice.

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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