Physician Recruitment Agreements – What You Need to Know

by Howard E. Bogard

Both the federal Anti-kickback Statute and the Stark Law allow a hospital to provide certain financial assistance to aid a medical practice in its efforts to recruit and hire a new physician. Financial assistance can take many forms, including a collection guarantee, net income guarantee and/or payments with respect to a physician’s moving expenses, school debt and marketing.  A recruitment agreement reflecting financial assistance is typically signed by the medical practice, physician and hospital and is structured as a loan that is forgivable as long as the physician practices medicine in the hospital’s service area for a defined time period. The amount of financial assistance cannot take into account past or future referrals from the recruited physician (or medical practice) to the hospital.

In order for a hospital to provide a medical practice financial assistance to recruit and hire a new physician, the hospital must first determine that there is a documented need in the community for the physician’s specialty.  Once confirmed, the arrangement must be in writing and the physician must “relocate his or her medical practice” to the “geographic area served by the hospital” to become a member of the hospital’s medical staff. With some exceptions for hospitals located in rural areas, the geographic area served by a hospital is the area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75 percent of its inpatients.  A physician will be considered to have relocated his or her medical practice if the physician moves his or her practice at least 25 miles and into the geographic area served by the hospital or the physician moves his or her practice into the geographic area served by the hospital and the physician derives at least 75 percent of revenues from patients not seen or treated by the physician at his or her prior medical practice site. There are also exceptions for residents or physicians who have been in practice one year or less or for physicians who meet other requirements.  The main point is that it is not permissible for a hospital to provide recruitment assistance with respect to a physician who is already working in the hospital’s service area.  

A common form of recruitment assistance is a collection or net income guarantee that runs for one or two years after the physician is first employed by the medical practice.   In either case, the recruitment agreement “guarantees” that the physician will generate a certain amount of revenue to satisfy a collection “target” or a net income “target”.  If the physician’s collections are not high enough in a particular month to meet the target amount, the hospital pays the difference.  With respect to a net income guarantee, the target is based on the physician’s collections after certain “direct expenses” are subtracted.  By law, direct expenses can only consist of new, incremental expenses incurred by the medical practice by virtue of the physician’s employment. Examples of new, direct expenses include the cost of the physician’s compensation and benefits, license fees and dues, malpractice insurance and other costs incurred by the medical practice to the extent that such expenses increase directly as a result of the physician’s employment.  Existing expenses, such as office rent and personnel costs, cannot be included as a direct expense. 

When reviewing a physician recruitment agreement, it is important to not only review the financial terms of the assistance but also to consider the following:

 Commitment Period – What is the length of time the recruited physician must practice in the hospital’s geographic service area for the recruitment assistance loan to be forgiven? The typical time period is one to three years after the financial assistance period ends.

   Repayment Obligations – It is important to review whether the medical practice, physician or both are obligated to repay the loan upon a default of the recruitment agreement.  Oftentimes, if the physician is the direct recipient of the loan proceeds, such as moving expense reimbursement and payments for student loans, the physician will be solely responsible. However, a collection or net income guarantee will often obligate both the physician and medical practice to repayment in the event of a default. A promissory note is often signed by the physician and sometimes the medical practice to secure the repayment of the loan.

Physician Obligations – While the physician will need to remain on the medical staff of the hospital during the term of the recruitment agreement, it is important to determine if other obligations are imposed on the physician.  Often, during the term of the recruitment agreement the physician will be obligated to certain hospital call obligations and restricted from having an ownership interest in a provider that competes with the hospital. 

Security Interest – To secure the recruitment agreement loan sometimes the hospital will want a security interest in the medical practice’s accounts receivable generated by the recruited physician. These provisions must be carefully reviewed since medical practices often pledge their accounts receivable as collateral to a bank or other financial institution.

A physician recruitment agreement can provide a medical practice significant financial assistance with the recruitment and hiring of a new physician. However, the agreement may also impose significant financial restrictions and penalties on both the medical practice and physician if the terms of the agreement are breached.  Any recruitment agreement should be carefully reviewed and negotiated.

Howard Bogard is a Partner at Burr & Forman LLP and chairs the firm’s Health Care Practice Group. He can be reached at 205-458-5416 or at hbogard@burr.com.