Understanding Physician Recruitment Agreements

Along with the many employment agreements I review at this time of year, there are more recruitment agreements than ever. Hospitals have been luring physicians to their service area in efforts to bring in new specialties or increase those areas where there is a provider shortage. 

Physicians, whether they have recently completed a residency/fellowship or are simply looking to relocate, should be aware of the reasons for a recruitment agreement and the manner in which such a recruitment offer operates. Recruitment agreements are typically structured to comply with federal Stark laws. Because the newly recruited physician will be in a position to generate federal in-patient and out-patient referrals (covered as designated health services or “DHS” under Stark) to the recruiting hospital, the financial relationship between the hospital and the newly recruited physician must comply with an exception to Stark. This recruitment exception places very strict requirements upon the parties which must be satisfied in the recruitment agreement.

Keep in mind the following:

1. Groups should be a party to the recruitment agreement. The group will want to be the one receiving the funds, providing the financial reports to the hospital, and otherwise staying on top of the physician meeting its obligations. Additionally, the physician is typically asked to sign a Promissory Note (“Note”) related to repayment of the support funds. This Note usually pledges the physician’s collections and/or accounts receivable to the hospital as security for the hospital’s support. Since such collection/accounts receivable are the group’s property, it’s appropriate for the group to be a party to the Note.

2. The documentation requirements are significant under a recruitment agreement. The group should make sure it understands how to collect and report the data to the hospital monthly.  For example, under a recruitment agreement, the group can only report the incremental expenses created by the new physician joining the group, such as an increase in the group’s malpractice premiums, the cost of additional personnel hired for the new physician, and other reasonable increases in costs. Hitting the new physician with an “equal” share of the costs is not legally compliant.

3. The support period provided under a recruitment agreement typically lasts for about 12 months, after which the physician hopefully is able to be financially independent. The loan is then forgiven over a period of years, the length of which usually depends on how large an amount was loaned.  The loan is forgiven on a pro rata basis and is most often reportable as compensation for tax purposes in the year it is forgiven. This is not always an optimal tax outcome for the group or physician, and it is advisable to seek tax advice for this purpose.

4. While it’s essential that physician work full-time and remain in the area during the support and forgiveness periods, this does not mean the physician cannot maintain staff privileges at other hospitals or take call/perform services at other locations; however most recruitment agreements will require income from all sources to be reported to the hospital for purposes of substantiating the need for physician support.

5. Recruitment agreements usually prohibit any type of covenant or prohibition on the physician that would prevent the physician from staying in the service area following termination of employment with the group. This does not mean that some protections cannot be included in the employment agreement, such as confidentiality and non-solicitation provisions, but you should always discuss these restrictions with legal counsel. Upon termination from the group, the parties should understand that the physician can remain and work in the service area until the debt is forgiven.

Hiring a physician identified as filling a need in the community can be a real boon to a medical group, but it’s important that both the incoming physician and the group seek counsel to obtain proper guidance on the legal issues in the recruitment process.

In a subsequent blog, I’ll discuss the physician employment agreement provisions which are impacted by recruitment, events that can accelerate repayment of the loaned amounts and provisions that can avoid a physician having to repay the loan.

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