Hospital-physician recruitment arrangements

By Jeffrey B. Miller, Esq.

Some physicians describe our current health care environment as the “perfect storm.” Just as the Andrea Gail left port in Gloucester, Massachusetts on the fateful day in 1991, so many physicians venture into their offices, surgery centers and hospitals each day into financially uncertain and sometimes difficult circumstances. Steeply rising malpractice premiums wear away already declining profits, exacerbated by ever sinking payment and reimbursement rates, combined with enhanced government oversight that significantly increases administrative costs and overhead. For some physicians this has become an almost apocalyptic scenario. The most strongly affected are reacting by limiting the services that they provide, or by moving their practices into other, more hospitable service areas. Some are retiring from the practice of medicine altogether.

The prevailing winds of this storm carry well beyond individual physicians. Some communities and their hospitals are also suffering ill effects, including the loss of physician services as physicians depart from their service areas for safer ports beyond. Responding to these gale wind forces, some hospitals may offer their local physicians financial incentives or arrangements that help to alleviate physicians’ concerns. These arrangements may include traditional opportunities, such as offers of employment or contracts for administrative, supervisory, teaching or on-call/coverage services. Other arrangements may include offering physician practices administrative or practice management assistance, assistance with billing and collection, or leasing arrangements for space, equipment or even employees. Some hospitals may even offer physicians opportunities to joint venture with them in businesses that involve hundreds of thousands (if not millions) of dollars. All of these arrangements can help advance the cause of hospitals, physicians and their communities when legally structured and diligently pursued, and provide a buffer against the “perfect storm.”

In addition these arrangements, some hospitals may venture farther into the tempest by offering physicians financial inducements to relocate to the hospitals’ primary service areas and to join their medical staffs, or to simply remain in the hospitals’ services areas and remain members of their medical staffs. Frequently referred to as physician recruitment or retention agreements, while these arrangements may help to alleviate the harmful effects of this “perfect storm.” However, they can also be fraught with serious dangers of their own. These arrangements are governed by a variety of significant laws and regulations, and the failure to comply with these standards can result in serious criminal and civil liability, and possibly even exclusion from participation in government funded programs. As a result, physicians presented with such opportunities should make every effort to understand their financial and legal implications. No matter how advantageous these arrangements initially appear, they should never be entered into lightly.

The two laws cited most frequently for these arrangements are the federal Anti-kickback Statute and the federal Ethics in Patient Referrals Act (a.k.a. “Stark”). In essence, the federal Anti-kickback Statute prohibits physicians (and hospitals) from knowingly and willfully offering, paying, soliciting or receiving anything of value with the intent to influence referrals. The base line test is whether one purpose of the benefit provided is to materially influence the physician’s choice of providers (in some jurisdictions this purpose does not even have to be the primary purpose). Violating the federal Anti-kickback Statute is a criminal offense (a felony), and can result in significant criminal and civil penalties, as well as exclusion from participation in government funded programs.

The Stark law prohibits physicians from referring Medicare or Medicaid patients to hospitals (and other entities) for inpatient or outpatient care (among other statutorily defined health services) where those physicians or their immediate family members have financial relationships with the hospitals, unless a specific Stark exception applies. While this prohibition is extremely broad, by fitting into Stark’s exceptions a great variety of hospital-physician relationships are possible. Moreover, because Stark’s definitions exclude certain types of activities from the definition of “referral,” there is some leeway for additional specific types of activities. Violation of Stark is a civil offense, requiring repayment of the claims and fines of up to $15,000 per violation, and possibly resulting in exclusion from participation in government funded programs, as well as other penalties.

Less frequently discussed are federal conditions of participation in government funded programs, along with individual state laws and regulations. For not-for-profit organizations, the Internal Revenue Code has its own requirements. Because these laws vary in scope and requirement, separate analysis by legal counsel is desirable.

While this article cannot adequate address all of the concerns raised in these legally complex arrangements, and is certainly no substitute for quality legal counsel, physicians who are considering recruitment or retention arrangements should consider the following.

Arrangements that provide fair market value in return for the recruitment or retention benefits, whether in payment or services, are generally considered the legally safest arrangements. These arrangements can be structured to fit cleanly into the federal Anti-kickback Statute’s safe harbors and Stark’s exceptions. Of course, physicians who are most in need of recruitment or retention assistance may not find these types of arrangements amenable as they may be unable to provide either payment or services in return.

Hospitals’ offers of administrative or practice management services, or assistance with billing and collection, can also be valuable. However, moving these activities outside the practice or switching service vendors may not worthwhile unless these hospitals’ services are at least as high a quality as the current services used by the physicians. Moreover, the above laws require that physicians return fair market value for any such services. While fair market value is a range and not one particular number, reasonable compensation that does not take into account the volume or value of referrals that may be at stake must be provided for the services. As a result, individual circumstances may make these arrangements limited in value.

Hospitals’ offers of leasing arrangements for space, equipment or employees can provide value to both hospital-lessors and physician-lessees. This is particularly true for leased employees, where the hospitals may enjoy the control they obtain through the employment relationships, and may be better able to incur the costs of employee recruitment, training and benefits. In some circumstances equipment leasing arrangements that are designed to facilitate physicians’ capture of revenues from in-office ancillary services could also be particularly advantageous. However, in addition to a reduction in control over the equipment or employee, practices are required to provide fair market value in return. As a result, physicians should carefully analyze their circumstances and needs prior to agreeing to these arrangements.

Physicians could consider financing arrangements for any recruitment or retention arrangements. Where fair market value is provided in exchange for recruitment or retention benefits the payments or services provided in return may be provided over a reasonable period of time. Any such arrangements, however, should be set forth in writing, and should include commercially reasonable terms, such as adequate security and a reasonable rate of interest.

Joint ventures, while potentially profitable, would most likely require significant financial contributions at the outset, and potentially ongoing financial support. While intriguing and ripe with potential, these arrangements involve more risk than other types of arrangements, and are legally and financially complex. Physicians should obtain quality financial and legal advice prior to agreeing to any such arrangements.

Physicians who are willing to relocate to federally recognized Health Professional Shortage Areas (HPSA) and who practice in specialties that are governed by the HPSA regulations (doctors of medicine or osteopathy who practice primarily in general or family practice, general internal medicine, pediatrics or obstetrics and gynecology, dental, mental health, vision care or podiatric) have particular advantages. These physicians may be able to qualify for hospital generated financial subsidies by satisfying the requirements of federal Anti-kickback Statute’s safe harbor and Stark’s exception for physician recruitment arrangements. If the physicians do not practice in specialties that are governed by the HPSA regulations, satisfaction of the safe harbor and exception may still be possible so long as the new practice is located in an area with a demonstrable community need for the physician’s services.

Physicians who practice obstetrics in HPSAs, or in federally recognized Medically Underserved Areas or with federally recognized Medically Underserved Populations may be able to qualify for hospital subsidies for their malpractice insurance through satisfying the federal Anti-kickback Statute’s safe harbor for obstetrical malpractice insurance subsidies and Stark’s physician recruitment exception.

Some physicians describe our current health care environment as the “perfect storm.” While difficult, our current environment is not without its opportunities. Physicians who are interested in these opportunities can make headway, and should carefully navigate them with the advice and assistance of experienced legal and/or financial advisors.

Jeffrey B. Miller, Esq., is Associate Corporate Counsel, Mercy Health System of Southeastern Pennsylvania.