What is the Stark Law Recruitment Exception?
Today, I will discuss recruitment agreements; the interplay between the employment agreement the physician will sign as a new job. What a recruitment agreement is, and the downsides and upsides.
What is a recruitment agreement? The stark and anti-kickback laws allow hospitals to provide certain financial incentives to medical practice in their efforts to bring in a new physician into the area. What does that mean? If a physician is moving to a new job, either out of training or from somewhere else. Most of the time, it’s with young physicians or people newly out of training. They will sign an employment agreement with the physician practice itself.
Income Guarantee in Medical Practice
However, there are also some opportunities for a hospital to supplement that physician’s income for the first year. And provide some other incentives too. So, you could have a recruitment agreement with an income guarantee. They will essentially pay the medical practice a certain amount to supplement the physician’s salary. They can provide moving expenses, signing bonuses, and student loan repayment. Or they could also cover costs from the practice associated with bringing the physician in, most likely through overhead. There are a lot of opportunities for a hospital to supplement a medical practice. Why do they do this? Well, it’s possible that medical practice could not financially afford to bring in a physician without these supplements. Or it’s also just a smart way for a practice not to pay as much money as they usually would.
In most of the specialty services, it would be someone who must build up a practice. Most physicians moving into a new job are not very profitable for the first year or two. Once again, kind of specialty-dependent and practice-dependent. Are they replacing somebody? Are they coming in from the cold? Do they have any ties to the community? All those things kind of factor in. It usually takes 12 to 18 months for practice to reach maturity. If you’re in family care and joining a physician practice, you’d continue seeing more volume for the first 12-18 months.
Rules of What Hospitals Can Do
What are the rules that dictate what a hospital can do? The conditions that need to be there? I’m just going to go through the list.
One, there must be a documented need in the area for the physician specialty. It needs to be in writing. The hospital will give a contract to the physician and the qualified health center, and they will both sign it. The physician must relocate their medical practice to the area. They must move into the geographic area served by the hospital. What is the geographic area? Mostly, it’s the lowest number of contiguous zip codes from which the hospital draws at least 75% of its patients. So, there will be an attachment at the back of every recruitment agreement that lists zip codes. The physician must serve those zip codes. For the recruitment agreement, the physician must move at least 25 miles from 25 miles into the geographic area.
Recruitment Exception
There are also some exceptions for rural communities and residents who’ve been in training and want to stay in the area. A few minor exceptions exist. But for the most part, the things I mentioned dictate whether a hospital can provide the recruitment agreement. What does the recruitment agreement look like? It’s a contract like an employment contract and dictates the terms of what they offer. And most importantly, what the forgiveness period is. The hospital does this so they can bring in specialty health services.
Down the road, I guess initially. They will get downstream revenue from referrals from this physician. I mean, that’s the whole point of bringing them in. Even though they provide an income guarantee, a signing bonus, and overhead expenses for the first year, which is standard.
Forgiveness Period for the Health Physician
Well, they will require a forgiveness period, meaning the physician must stay in the area for several years. It’s usually three, sometimes four. Then each month they’re in that area providing care, the hospital will deduct a fraction from the overall loan amount. Let’s say a hospital sends 200,000 to the medical practice. That 200,000 amount, after the first income guarantee period, usually one year, will be three-month forgiveness. So, the hospital will forgive 1/36 of that 200,000 every month. And this means that no one must pay it back if the physician stays for the forgiveness period. In this case, if it were three years, no one would owe any money back to the hospital.
The hospital, as I said, will hopefully gain more by having that physician in the community and utilizing the downstream revenue from recruiting referrals into the network, which should more than cover whatever they paid out to bring the physician into the community.
Downside
The downside to the physician. Depending upon the agreement’s language, they’re responsible for that amount of money if they leave the area. Usually, it would be a joint responsibility between the practice and the physician. But for the most part, if the physician leaves early, they will have to pay back that money.
It can be a significant amount of money for some physicians and some health specialties. I’ve seen up to 500,000 after the first year, not that it’s specialty-dependent. But it could be a lot of money. Let’s say the relationship goes sour with whoever the employer is. Maybe there aren’t opportunities in the area to switch to a new group and continue in the geographic region. It can be a big problem.
Benefits
The benefits of a recruitment agreement. One, if the job couldn’t exist, the medical practice couldn’t afford to bring in a new physician into the area. Then clearly, the recruitment agreement creates a job opportunity for the physician. So, it may be necessary. I mean, it’s a no-brainer for a hospital medical practice. They essentially can have an entire year of physicians’ salary supplemented by a hospital. They would take advantage of that if they could, and some practices are savvier than others.
Some of those agreements will require that, and they should. There’ll be no non-compete. If the physician must stay within a certain area to not violate the agreement. And the contract is terminated with the original employer. Still, there’s a non-compete that forces them out of that area. Well, that is a massive problem for the physician. Most recruitment agreements will prohibit the employer from placing a non-compete into the agreement. That’s one thing to look for.
So, that was a little breakdown of physician recruitment agreements, stark law, and anti-kickback statute. It could be a valuable tool for a physician. But it could also be a disaster if not worded properly. Or if the employer has thought of all the permutations if the physician leaves the practice.
Other Blogs of Interest
What is a Stark Service Area?
What is the stark service area definition? The definition is so that a physician can better understand the repercussions of signing a recruitment agreement. And whether they’re eligible to sign one as well. First, most recruitment agreements I find are for newer physicians. Either they’re just coming out of training or have been out for a year. The basis of the recruitment agreement. And lastly, the exception allows a hospital to supplement the medical practice with money to bring in the physician. I’ll just read what those are.
Relocating to the Patient Origin
There must be a documented need for the physician specialty in the zip code area. It must be in writing.
The physician must relocate their medical practice to the patient area. What is the area itself? It must be the geographic region that the hospital provides services. In this case, the lowest number of contiguous zip codes from which the hospital draws at least 75% of its patients.
That means there will be an attachment in the recruitment agreement containing a bunch of zip codes. Depending upon where it’s at, it could be 40 different zip codes. In some bigger cities, it could just be a couple. Those zip codes mean that the physician must relocate their practice within them. Then they have to provide health care services to the people within them.
And that grants the exception of how a hospital can supplement the medical practice that the physician is joining. How do they supplement? Well, it’s generally through an income guarantee. The hospital will guarantee that the physician will receive a certain amount each month. They can reimburse overhead expenses, signing bonuses, relocation expenses, and student loan assistance.
How the Recruitment Agreement Works
There are several ways to supplement a medical practice. But the service area and medical practice must be within those zip codes. The main thing to consider is that suppose the physician decides to leave the medical practice. They can stay within that stark service area and not have to pay anything back to the hospital. How the recruitment agreement works is they will provide a certain amount of money. And it’s generally the first year, the income guarantee period.
Then, as long as the physician stays within that service area for several years, it’s three or four years. Which is called the forgiveness period. If you stay within that community for that period, the employer will forgive what the hospital paid in year one. Usually, it’s a monthly fraction. So the hospital would forgive 1/36 of that loan monthly if it’s a three-year forgiveness period. Suppose the relationship goes south with the employer within those contiguous zip codes that serve 75% of the patients.
Stark Law Exception
Now, there are two exceptions. There are some exceptions for rural areas. And to residents who’ve been training within the place where this may not necessarily apply. They don’t have to move into the area, but I won’t get into that right now. If the physician wants to end the agreement and stay within site, they don’t have to pay anything back.
Stark Service Area Considerations When Staying
A physician must analyze a few things before simultaneously signing a recruitment and employment agreement. One, there shouldn’t be a non-compete. Most physician recruitment agreements will list that there can’t be a non-compete between the employer and the physician. Let’s say there’s a broad non-compete. Thirty miles from the primary practice location, and all the zip codes are within 30 miles of the hospital. The physician won’t have the opportunity to stay within the area. That’ll force them out. And they may be on the hook for having to pay back the amount that’s still left on the loan. First, the physician needs to make sure that there’s no non-compete. Or maybe a very reasonable and small non-compete where they’d have other opportunities.
Another analysis we must do is, are there other opportunities in that area if the physician were to leave? In smaller communities and certain specialties, only one practice does that. So, if a physician wants to stay in that service area, is there another physician practice to go to? Do they have alternatives? The worst possible thing that can happen to a physician is when something happens with the original employer. They don’t have an opportunity to get a job within the service area. Then they owe hundreds of thousands of dollars to the hospital.
There should be joint and several liabilities between the medical practice and the physician. That’s another thing to also look at. Hopefully, that’s a good analysis of this stark service area. These are tricky. If the recruitment agreement is the sole reason a job is available, it’s an excellent opportunity. But these do not always end well. And they present some real challenges if the relationship goes south with the employer, so we must be careful.
What is a Physician Recruitment Agreement?
For those emerging from training, it’s not uncommon to move into a new area and receive employment and recruitment agreement offers. Many questions I get are what is a physician recruitment agreement? At the basic level, some laws prohibit hospitals and healthcare networks from compensating physicians for referrals who are not employees. There are stark law exceptions that allow certain hospitals to provide compensation to physicians under certain circumstances. And then they do this through a contract, which is a recruitment agreement.
What’s in a Recruitment Agreement?
I don’t think I will get into all the specifics of what is necessary to bring in a physician. In this blog, I’ll focus more on what’s in the recruitment agreement itself. On the basic level, a physician will get a job with a physician practicing in an area. The hospital can supplement their income or give bonuses and overhead expenses by being in that area and practicing there. And assist the practice in employing the physician, offsetting that physician’s cost in the first year.
What do they usually offer? Well, the recruitment agreement could contain a signing bonus and relocation assistance. Typically, it would be an income guarantee. As I said before, they would set a number. Let’s say it’s a $20,000 signing bonus, a $10,000 relocation assistance, and a $200,000 income guarantee.
The hospital will provide the physician with bonuses and an income guarantee in that amount to the practice. Money that the practice uses to pass through to the physician. Now, it’s not free. The income guarantee will generally last a year. Then, the physician and the practice will sign the recruitment agreement. After the income guarantee period, there will be a forgiveness period. Let’s say they amassed $300,000 total in the income guarantee period. Typically, the physician would have to stay within that area for three years after the fact. It would be forgiven, usually monthly. Say it’s a three-year forgiveness period. 1/36 of that $300,000 the hospital would forgive until the entire amount clears.
Downsides
Some of the downsides of a recruitment agreement for a physician. Suppose things go south with the employer and the physician wants to leave or move away from the state. They could be on the hook for a significant amount of money. Also, most recruitment agreements would prohibit the employer from putting any non-compete in the contract. However, I see many employment contracts utilize both the employment agreement and recruitment agreement. The employment agreement contains a section with non-compete, which makes it very difficult for physicians to stay in the area. That means they would then be on the hook for whatever the outstanding amount.
Benefits
The benefits of recruitment agreement: lf the job could not exist without the hospital supplementing those things, that’s a benefit. It’s a no-brainer for a practice for a hospital to essentially give them money to pass through to the physician. The main reason is that a physician usually depends upon the situation. Are they replacing a physician? Is it a brand-new office? Or is it a new specialty they’re using? All those factors determine whether a physician is profitable in year one. But usually, it takes 12 to 18 months for a practice to reach maturity. So a physician will likely lose practice money during the first year. The supplement from the hospital assists the physician in practice, getting over the hump to when the physician is profitable.
Why does a hospital do this? The downstream revenue that they would receive from the referrals from that physician is the reason why they would. If a physician establishes referral patterns to a particular network or hospital, that hospital will reap the benefits of having those patients referred to them. Doing the financial calculations, they’d benefit over time with the referrals versus providing $200,000 to the physician’s first year.
I think these, I mean recruitment agreements, can present some difficult and complicated problems. It helps if the hospital lists things the employer can’t do in the recruitment agreement. So, having the hospital state you cannot have a non-compete is helpful and provides some leverage for the physician. Ensuring that the practice and the physician are jointly and separately liable for that outstanding amount helps. Having a shorter forgiveness period is beneficial to the physician as well. So that they’re not stuck if they’re in an unhappy situation for a longer time.
Always Review the Contracts Being Offered
I would be meticulous if I’m coming out of training, I was presented with both which I must execute simultaneously. I mean, it’s self-serving for an attorney to say, yes, you should get it reviewed. You should check both if you’re a physician looking to get into this type of situation. I’ve had plenty of people call me after the fact and say, “I hate this job, there’s a $500,000 amount that must be forgiven. I have no options, what do I do?” That is a terrible situation for a physician to be in. So, be careful.
How Long is Physician Locum Tenens Agreements?
A couple of things to consider: one, just the nature of locum tenens positions, typically, it’s shorter. Most contracts last a year, maybe two at the most. But every contract a physician signs for a locum tenens opportunity will have without-cause termination. Without-cause termination, either party can terminate the agreement with a certain amount of notice to the other. For most locum contracts, it’s somewhere between 30 to 90 days. Let’s say the physician wasn’t unhappy or just didn’t want to pursue any other jobs with them. They would give written notice to the company saying, I’m not interested in taking any more positions with your company.
And then, if they had some scheduled shifts or a block assignment, they would work that out at the end of the notice period. In this case, let’s say it was 30 days. They’d work out the scheduled 30 days. And then after that, they could leave and move on to whatever in locums agreements. There are a couple of things to think about if the contract terminates. Sometimes, there will be language that penalizes the practitioner for leaving within a period. For instance, if that doctor doesn’t provide services for the entire year. Maybe the company says we want recoupment of recruitment fees, credentialing, privileging, licensure, those types of fees. Also, suppose the doctor ends up taking a long-term position at one of the hospitals they were placed at by the locums’ agency. In that case, there will always be a placement fee.
Who Pays for a Placement Fee?
And then usually, it will state the agencies are responsible for paying the fee. However, if they either don’t or refuse to pay, then it’s on the physician to pay that amount. We’d always try to get that removed from the contract. It doesn’t make sense that the physician would be required to pay that amount. It’s just a cost of doing business for the facility, and they should handle whatever that fee is. When there is without cause termination in any contract, it doesn’t matter how long the term is. So, even if, as I said before, a normal length of term for a locum agreement is one or two years. Suppose you can terminate the contract without-cause at any time, which goes for both parties. In that case, it’s as long as the notice period is for the without-cause termination.
It’s not like you must provide care for that company for the entire agreement’s term. If the physician is unhappy or they don’t like the compensation they’re getting for these different facilities they’re placed. It’s just a bad working relationship with the staffing company. In those scenarios, they don’t want to stick around. There are big opportunities for locum work for almost any type of physician. You can always find locum opportunities for any specialty that is working for a company that may be placing you in bad locations or isn’t paying as much. And if it’s not working out with the company, you don’t think they’re treating you fairly. Just give notice, move on, and find a better company. It’s just a normal way of handling these things. And no physicians should feel stuck in something they can’t get out of.
Negotiating Penalties Associated with a Particular Period
I mentioned this earlier. We make certain of this to negotiate the penalties associated if the physician leaves within a period. They should never have to pay for tail insurance. There should be no obligation to pay back any recruitment fees, credentialing, or privileging. As I said before, that’s just the cost of doing business. So, you need to pay attention to anyone who enters into a contract. They always have the best intentions. They think it will be great, and they’re super excited. And then, once they get into it, it can turn quickly. And maybe it’s just a much more disadvantageous position than what they were expecting. They always want the opportunity to get out of the contract.
So, make a certainty of without-cause termination and that the penalties associated with terminating the agreement early before the initial term ends are not prohibited. You don’t want to pay back $50,000 for a locum’s job. That makes absolutely no sense. Anyway, that’s how long a locum agreement normally lasts. But ultimately, it just matters how long the without-cause termination is.
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