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Physician income agreements after Stark

By Joan M. Roediger, J.D.

Finding the perfect position is difficult at best. No matter how thoroughly you search for a position and research your various opportunities, odds are that you will change jobs at least once in your career, if not more. Choosing the right opportunity at times seems like an impossibility, especially when faced with the many different types of opportunities that exist.

Out of the many different types of opportunities that you may encounter on the job search, you may run across the opportunity to working for an established private practice with a hospital’s financial assistance. If you are hired by a practice that is receiving hospital assistance, you may be asked to sign a hospital assistance agreement. This article will address the significant legal and financial complexities you will encounter with hospital assistance agreements commonly called Income Guarantee Agreements. Note these are frequently called many other things: Recruiting Agreements, Subsidy Agreements, Loan Agreements, and Hospital Assistance Agreements. For simplicity purposes, in this article, I will refer to this type of agreement as a “Guarantee Agreement.”

Lack of Uniformity

One of the great complexities of the Guarantee Agreement is that they are structured differently from hospital to hospital. The underlying goal of these agreements is to offer assistance to existing medical practices in recruiting needed physicians in specialties for which the hospital has a documented medical need. Depending on the hospital system, the Guarantee Agreement may offer assistance anywhere from one to three years. This is typically referred to as the “Guarantee Period.”

The type of assistance which can be provided by hospitals has changed dramatically over time. Initially, hospitals routinely would guarantee not only the recruited physician’s salary, benefits and related direct expenses such as continuing medical education, malpractice, moving expenses, signing bonus and the like, but also would guarantee a pro rata portion of the existing medical practice’s general overhead expenses. In 2004, however, with the passage of the Stark II regs, the amount of overhead expenses was sharply curtailed by CMS and limited to only the additional incremental costs to the practice in hiring the new physician. Thus, post-Stark II regs, hospitals could still guarantee the recruit’s salary, benefits and related direct expenses, but only additional incremental overhead expenses such as the hiring of additional staff, purchase of new equipment or lease of new space could be included in the calculation of the subsidy. The most recent Stark III regs issued in 2007 changed the rules again and provided a very limited exception to permit hospitals to include partial overhead allocation in calculating the subsidy payment in situations where the existing medical practice is replacing a physician within 12 months of a physician who has retired, relocated or died. Under this new very limited exception, the amount of overhead which can be attributed to the new physician is limited to the lesser of the pro rata amount of overhead of the group or 20 percent of the aggregate overhead costs of the existing practice.

Structuring the Agreement

Before the practice has even advertised the position, it has most likely met with the hospital regarding the Guarantee Agreement. If hired by the practice, in addition to your Employment Agreement with the practice, you will be asked to sign a Guarantee Agreement with the hospital. To be properly structured as required under the Stark III regs, this agreement should be a three-way agreement between you, the practice and the hospital. The agreement will provide a mechanism for calculating the subsidy amounts and when payments are made. As part of the Guarantee Agreement, or in addition to the Guarantee Agreement, the agreement will require that interest accrue on amounts which are paid. I tend to refer to this amount as “phantom” interest, as it does not really exist. Read the agreement very carefully to see when the interest starts to accrue. Chances are, the interest starts to accrue the date the first payment (your signing bonus, for instance) is made.

Typically, after the Guarantee Period, most hospitals offer forgiveness on the amount of subsidy provided under the Guarantee Agreement if the recruited physician remains in the community for a period of time after the Guarantee Period. This is usually called the “forgiveness period.” Again, every hospital has its own way of determining the length of time necessary for the forgiveness of the subsidy amount. When these agreements first started popping up, it was common to see one year of service to the community for each year of the Guarantee Period. As time wore on, and these agreements grew in popularity, and the amounts provided under these agreements grew, many hospitals started requiring longer periods of time for the forgiveness period, some as long as four years or more for a one year Guarantee Period (!), although most commonly, hospitals require a two year forgiveness period for a one year Guarantee Period.

Understand that, as amounts are forgiven, tax consequences are triggered and the hospital is obligated to issue a 1099 tax form, not only on the forgiven subsidy amount, but also on the forgiven “phantom” interest. Who should pay the taxes on these amounts? Remember, the subsidy amount included your salary which you already paid taxes on once, plus your direct personal expenses, and expenses of the practice. This creates a royal mess for you and your accountant if your Guarantee Agreement is not properly drafted and crystal clear who gets the 1099. If you were required to turn over the amount of subsidy under the agreement to the practice, then the practice should receive the 1099, no questions asked.

Of even greater importance is determining who will bear the financial responsibility to repay the hospital if you do not remain in the community the entire length of the forgiveness period. If the Guarantee Agreement is not properly structured, you will be on the hook to repay the entire subsidy amount and accrued “phantom” interest. Most of these agreements, by the time you add the various amounts being guaranteed, and the “phantom” interest, end up being well in excess of six figures, and in many cases, in the upper six figures. Consider the consequences. If you are required to repay these amounts, you would in essence end up repaying not only your salary and benefits, but also the permitted practice’s office overhead, and very likely, the practice would keep all of your accounts receivable and any assets purchased with the hospital’s assistance through the benefit of the Guarantee Agreement. It would actually cost you money to work in your new job, and the practice would get a free employee and part of its overhead subsidized. You can see the need to make sure that your agreement is carefully crafted and very clear with regard to the responsibility of the practice to repay the amounts related to your recruitment.

The 2007 Stark III regs bounce back and forth between suggesting that a practice is permitted to guarantee repayment under the Guarantee Agreement, provided the hospital collects the amounts owed under the agreement, and then suggests that such indemnification is potentially problematic (while ignoring the direct benefit the practice will receive if the physician pays back all amounts including practice overhead under the Guarantee Agreement). However, in the absence of such indemnification, there is no incentive for the recruited physician to sign the agreement and to put his or her finances at risk.

Implications

Keep in mind that the length of the contract may also be significant, in that the hospital may also require other conditions in return for giving the recruitment assistance – for instance: free emergency room coverage, mandatory participation in every third party payor contract identified by the hospital, unlimited indigent care, not to mention a prohibition upon you and members of your practice from investing in any ambulatory surgery centers, imaging centers and the like. Some of the “strings” that come attached to these contracts may be objectionable, not to mention economically harmful to you and your practice.

Perhaps the most chilling of the Stark III regs on this area of Physician Recruitment are the new restrictions that can be imposed on recruited physicians. Prior to the Stark III regs, one of the few “perks” of the Guarantee Agreements was that it precluded an existing physician practice from contractually imposing any practice restrictions upon the recruit unless the contractual restrictions were related to quality of care. Restrictive covenants were forbidden even in states which permitted restrictive covenants and non-solicitation covenants were routinely held also to be impermissible restrictions. However, the Stark III regs allow, for the first time, practices to introduce additional practice restrictions including restrictive covenants outside the hospital’s (note – not the practice’s) geographic service area, allowing non-solicitation clauses, restrictions on moonlighting, requiring confidentiality and proprietary information clauses, and requiring the physician to pay “reasonable” liquidated damages if the physician remains in the community. If possible, the new Stark III regs somehow managed to make these agreements more unattractive to physicians looking to join existing practices.

For the new physician leaving his or her training program with student loans (or even a candidate without student loans), if presented with the choice of a Guarantee Agreement in order to accept a position with a medical practice versus accepting a position with another practice with no Guarantee Agreement, the recruit would be likely to accept the position without the risk associated with the complex Guarantee Agreement. With the availability of positions which do not require physicians to repay their salary, overhead expenses, moving expenses, signing bonus, and other expenses should they not remain in the community for a prolonged period of time, presenting a physician with this agreement serves as a deterrent to the recruitment process. To ensure that this agreement does not scare off your candidates, you need to draft something which is fair to all parties to the transaction.

Joan M. Roediger, J.D., L.L.M. is a partner with the law firm Obermayer Rebmann Maxwell & Hippel LLP in Philadelphia, and is a Member of Obermayer’s Health Law Department.

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