Physician recruitment agreements are only appropriate and legally permissible in certain circumstances. Key requirements and conditions must be met in order to ensure compliance with Stark Law (Ethics in Patient Referrals Act) and the Anti-Kickback Statute (AKS). Then, if the conditions allow and a recruitment arrangement ensues, there are a number of key issues affecting the rights and obligations of each party and this post will focus on the important considerations that the physician should keep in mind. To begin with, Stark only allows hospitals to provide benefits for the recruitment of a physician if the physician is relocating into the hospital’s service area from at least 25 miles away. There are limited exceptions to this rule, but in general, the physician must genuinely be a new addition to the hospital’s service area. Further, the hospital must demonstrate a legitimate need for the physician (and whatever her specialty is) in the area.
Stark also requires that the arrangement is memorialized in a written agreement - to be signed by all three parties - and that the agreement contain certain provisions. Among those provisions is acknowledgement that the hospital’s remuneration paid to the physician is not conditioned on the volume or value of referrals the physician might generate for the hospital. Accordingly, the remuneration to be paid by the hospital must be set out from the beginning, not to be amended at a later date, and the payment must remain with the recruited physician (not the practice).
These technical matters and compliance with applicable laws are concerns that rightfully should lie with the hospital and the employing practice, after all, it is their attorneys who will draft the agreement. Therefore a physician presented with a recruitment arrangement should not be the one ensuring compliance with the law. However, there are many aspects of a recruitment agreement that the physician can and should have input on. People often think that recruitment agreements are non-negotiable, but this is largely a misconception.
There are various aspects relevant to the physician’s guarantee that can end up being very impactful and are often negotiable on the physician’s end. The first is the issue of reconciliation between the physician’s collections and her guarantee. While the hospital is bound to pay the physician the difference of any shortfall between her collections and the guarantee, what happens if the physician actually collects more than the guarantee? Is she allowed to keep the “surplus,” or is she required to pay it to the hospital? And who is responsible for the accounting associated with the physician’s collections and payment – the practice or the physician herself? Another question to consider is what happens with any income that the physician may earn from outside activities, such as moonlighting during her free time? Will that income be considered the physician’s property, the practice’s, or the hospital’s? Finally, if a signing bonus is offered, will the amount of that bonus be included in the outstanding loan amount reflected in the promissory note? In other words, is the bonus a true bonus and therefore the physician’s property regardless of what happens, or is the bonus attached to the guarantee and therefore potentially subject to repayment by the physician? Each of these matters can have huge impacts on a physician’s income and potential liability, and may be addressed in a variety of ways depending on the applicable recruitment agreement.
Looking at the bigger picture, one of the most important terms for a physician to consider is the “Guarantee vs. Commitment Ratio.” As noted in our previous blog, the guarantee is the amount of compensation the physician is guaranteed to earn over a period of time. Then, the commitment period is the length of time the physician is required to remain practicing her specialty on a full-time basis in the hospital’s service area. Therefore, the Guarantee vs. Commitment Ratio is a comparison between how long the physician will earn her guaranteed compensation to how long she is required to stay working in the area. If a physician’s salary is guaranteed for one year and her commitment period is two years, the ratio is 1:2. This is a very favorable ratio for the physician. Conversely, if the physician’s salary was guaranteed for one year but her commitment was four years, the ratio would be 1:4, and this would be less favorable due to the length of time she’ll have to remain after the guarantee is over. Once the guarantee is over (i.e. the hospital stops paying the physician’s salary), the physician will only earn as much as she brings in. If business in the area turns out to be slow, then she may be in a position of earning very little. This situation can turn out to be quite dire in that she will not have the option of relocating because she is still bound by the commitment period. In other words, the physician may have to remain working in an area that is simply not generating enough income, unable to move out of the area or else be in violation of her contract. Breaching the terms of a recruitment agreement is no small matter, as breach triggers the repayment obligation inherent in every recruitment agreement. As touched on in our previous post, recruitment agreements always contain a Promissory Note that holds the recruited physician liable for the amount of the guarantee paid by the hospital. The guarantee is structured as a forgivable loan that is forgiven over time, such that once the physician has worked in the service area for the entire commitment period, the loan/guarantee is entirely forgiven. If the physician leaves the area early and therefore breaches the commitment requirement, the physician will be liable to pay back a pro-rata portion of the guarantee.
An important issue coinciding with the question of commitment periods and liabilities in the event of breach is whether the physician is bound by a non-compete agreement pursuant to her employment agreement with the practice* (*in recruitment arrangements, the physician will also have a separate employment contract directly with the employing practice, to which the hospital is not a party). If the physician is terminated by the practice or decides to leave the practice voluntarily, the physician will have to remain practicing in the hospital’s service area or else be in breach of the recruitment agreement. This can be a potential nightmare if the physician is bound by the practice’s non-compete agreement, thereby essentially having to choose which contract to breach – she can either violate the non-compete covenant and face those consequences, or she can violate the commitment requirement and face liability for repayment. For this reason, a physician will ideally not be subject to a non-compete covenant pursuant to the employment agreement and this is a matter that is often negotiable by the parties. A common misconception is that non-compete covenant are prohibited in physician recruitment arrangements; however, that is not the case. A reasonable non-compete covenant can be allowed.
Click here to read our next installment in our Physician Recruitment Agreement blog series. For more information about physician recruitment agreements and whether your employment relationship is compliant with the Stark law, call Leigh Ann O'Neill at 317-989-4833, or email at loneill@lauthoneill.com.
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