The Executive Suite: Physician recruitment agreements: 4 things to consider

Many young physicians I work with are excited to enter into recruitment agreements with hospitals and medical practices in rural and health care shortage areas. The incentives for such arrangements can include a hefty signing bonus, relocation allowance, student loan forgiveness, income support, and other benefits which collectively add up to hundreds of thousands of dollars.

However, recruitment agreements do not always work out well for every physician. Before you consider signing a recruitment agreement, consider the following and consult with counsel familiar with such arrangements:

1. Realize recruitment money is not “free.”

Many physicians are under the impression that they only need to stay for the forgiveness period and never repay a dime. In fact, arrangements set up to comply with federal law generally treat amounts paid to physicians as “loans.” Physicians may not pay tax on those amounts as received, but will report the income and pay tax on those dollars as they are forgiven.

For a physician being loaned large sums to entice them to the community, this can be a lot of extra dollars to pay in taxes. Imagine if the total of practice support, educational loan repayment, relocation dollars, and signing bonus adds up to $450,000 (plus interest). The loans are to be forgiven over a three-year period following the end of the support period. The physician is making $200,000 at the time forgiveness commences. This means that each year, for three years, the physician’s taxable income will be reported as approximately $350,000 (this is $200,000 salary plus one-third of the $450,000 loan plus interest) and not just $200,000.

Taxes on the extra funds can be substantial and hard to afford for many. Since repaying the debt/walking away from it are not viable options, physicians need to understand the arrangement they are walking into and accept only the support they require.

2. Complete due diligence before entering into a recruitment arrangement.

Some key questions include:
• Have other physicians been recruited to the particular hospital before?
• What happened in those situations? (If the physician is being recruited to join a physician’s practice with hospital support, this question can be especially important.)
• Does the practice owner really want a partner or is your specialty really needed?
• Have other physicians been unsuccessful in joining him or her in the past?
• Will the practice owner(s) be threatened by the new doctor coming into the community?

It can be an unpleasant surprise to be stuck in a practice and community where you are unwelcome.

3. Secure recruitment and income support agreements with the practice.

If a medical practice is involved in the recruitment arrangement, it is essential that such recruiting practice take an active responsibility in the arrangement. This includes meeting an affirmative commitment in the written recruitment documents to properly bill and collect for the recruited physician’s services and to provide monthly documentation of income and expenses. Recruitment/income support agreements are too often signed without involvement of the practice, which means the burden of default falls on the physician.

The income support portion of a recruitment arrangement generally requires a hospital to pay out the difference each month between the receipts generated by the physician and the established monthly promised amount (taking into account expected expenses). Whatever amounts the hospital pays out become part of the recruited physician’s loan. If amounts are not being properly billed and collected by the practice, the receipts from the physician’s services will be artificially low, and the physician will draw more on the hospital loan than necessary. If monthly reports are inaccurate and/or not provided to the hospital, this can cause a breach of the recruitment agreement and can trigger repayment of the loaned amounts. These types of failure should ideally be the responsibility of the practice and not the physician.

4. Understand termination stipulations.

Another significant issue in recruitment arrangements is the termination of the physician from the practice without cause when there are still loan amounts to be forgiven. Given the typical remote rural/healthcare shortage area, it can be impossible for a physician to remain in the community to practice and earn forgiveness following termination. This may be due to the cost of practicing in the area or the loyalty of referring physicians and patients to the existing practice.

For this reason, unless the physician has engaged in wrongful conduct, I advise my physician clients that the practice should bear some or all of the responsibility for the loan should the practice terminate a physician without cause or breach the arrangement. Keep in mind, as well, that if a physician is terminated and must for any reason remain in the community, it is essential that there either be no non-compete (or a very limited one) that reasonably allows the physician to continue to meet his or her obligations to earn loan forgiveness in the community.

Physicians may be eager for the financial rewards offered by recruitment deals, but they also need to understand that such enticements can become a tremendous burden. Recruitment agreements should be properly negotiated by physician counsel to obtain the best possible outcomes for all parties.