Recent studies, published in mass media and professional publications alike, warn of a physician shortage expected to worsen progressively during the next 15 years and to peak around 2020. The predicted scope of the national deficit ranges from 85,000 to 200,000 physicians. Analyses of the causes of the shortage conclude that the rate of population growth will exceed growth in the number of physicians, while demand for physician services continues to expand. The projected shortage of physicians is likely to have the greatest effect on underserved and poorer communities that have historically had the most difficulty recruiting and retaining physicians.
In response, hospitals are implementing, expanding, or refining recruitment and retention programs. Practices are increasingly offering part-time work, flex-time, and job-sharing arrangements. In addition to flexible schedules, physician recruitment packages may include sign-on bonuses, relocation allowances, student loan repayment, income guarantees, favorable loans, and other incentives. Additional incentives are available to physicians willing to practice in federally recognized Health Professional Shortage Areas (HPSA) and to those who practice in specialties governed by HPSA regulations, such as family practice, internal medicine, pediatrics, obstetrics and gynecology, oral surgery, mental health, vision care, and podiatry.
These recruiting arrangements are governed by a variety of laws and regulations. Because of the infinite number of factors affecting any given recruitment arrangement, a comprehensive discussion of all the legal implications in recruitment arrangements is beyond the scope of this article. We will, however, provide an overview of three key legal concepts that physicians should consider when evaluating a hospital’s recruiting package. We’ll address recruiting packages offered by medical practices in a later article.
Unless an express exception applies, federal legislation prohibits physicians from making referrals for “designated health services” to entities with which the physician (or an immediate family member) has a “financial relationship.” The law also prohibits entities from submitting claims for services provided in the course of making a prohibited referral.
The Stark legislation broadly defines “financial relationships” as including direct ownership, indirect ownership, investment interests, and compensation arrangements. Similarly, the law broadly defines “designated health services” to include clinical laboratory, physical therapy, occupational therapy, speech pathology, radiology, radiation therapy, home health, and inpatient and outpatient hospital services. “Designated health services” are not limited purely to services rendered and include the provision of radiation therapy supplies, durable medical equipment and supplies, certain nutrients, prosthetics, orthotics, and prescription drugs. A classic example of an arrangement that would violate the Stark legislation is an orthopedic surgeon who refers patients to a physical therapy facility in which he owns a controlling interest.
In general, physicians should be wary of any relationship that involves referring patients to entities in which they have any financial interest, but there are a number of exceptions within the Stark legislation. The Stark law is a strict liability statute; thus, unless an express exception applies, a violation of the statute subjects the provider and entity to liability. For this article, we are concerned with only one of the exceptions, which applies when hospitals and Federally Qualified Health Centers recruit physicians to their geographic service areas.
Specifically, these entities may offer remuneration to induce physicians to relocate and join the medical staff as long as the recruited physicians are not required to refer patients to the facility and provided that the amount of any physician remuneration does not take into account the volume or value of patient referrals. In other words, although the hospital may recruit a physician, it cannot use the recruiting contract to require the physician to make a certain number of referrals or generate a certain amount of revenue.
It is also important to note that the recruiting exception is designed to promote true recruiting, not simply to entice an established physician in the community to move her practice to a competing hospital. Consequently, the recruiting exception does not apply unless the recruited physician will either move her practice at least 25 miles or generate 75% of her revenues from new patients.
The anti-kickback statute prohibits healthcare providers or entities from knowingly offering or accepting remuneration to induce or reward referrals. Federal regulations create “safe harbors” outlining criteria that, if met, shield providers and entities from anti-kickback liability. The recruitment safe harbor requires a recruited physician leaving an existing medical practice to relocate at least 100 miles away and to generate 85% of new practice revenues from patients not seen at the former practice. Further, the recruited physician must agree to treat Medicare and Medicaid patients.
Internal Revenue Code
Any tax-exempt entity and its physician recruits must carefully structure recruiting arrangements to avoid jeopardizing the entity’s tax-exempt status. Moreover, certain recruitment incentives have tax consequences for an individual recruit.
Tax-exempt entities: Generally, a tax-exempt entity’s earnings may not benefit private individuals. If an improper benefit is found, both the entity and the individual are subject to penalties, including the potential loss of the entity’s tax-exempt status. Thus, physician-recruiting payments by tax-exempt hospitals must fit within IRS requirements.
Specifically, when a tax-exempt hospital recruits a physician to provide service on behalf of the organization, the arrangement must meet an “operational test.” The operational test requires the hospital to account for all of the physician’s services and demonstrate that it is paying reasonable compensation. Consequently, when a tax-exempt hospital recruits a physician to provide services not just for the hospital but also for the surrounding community, it must ensure that all conduct is consistent with the facility’s tax-exempt purpose. Thus, for example, a tax-exempt hospital that has a charitable purpose may be able to justify a recruiting arrangement that allows a physician to provide services that promote the health of the surrounding community.
Ultimately, the IRS is responsible for determining that a tax-exempt hospital is not using its funds solely to promote the physician’s personal interests. Consequently, a tax-exempt hospital should be prepared to demonstrate the reasons the physician was recruited, the need the recruited physician fills, ways in which the recruitment furthers the hospital’s purpose, evidence that the recruiting agreement was negotiated in good faith, and proof that none of the participants in the negotiation suffered from a conflict of interest.
Tax consequences to recruits: Notably, recruiting packages may offer incentives to the recruit that the IRS may consider taxable income. For example, many recruiting arrangements include loans to guarantee a certain level of income and cover the costs associated with starting up a new practice or adding a physician to an existing practice. These loans may be forgiven over time if the recruited physician continues practicing in the community. Generally, proceeds of a loan do not constitute taxable income because the benefit is offset by an obligation to repay. When a loan is subject to forgiveness, however, the forgiven portion may be taxable. Consequently, recruits should evaluate any recruitment incentives in the context of their long-term tax consequences.
Federal law recognizes that communities benefit when hospitals recruit physicians to meet a particular need, but the law does not allow hospitals or physicians to abuse the recruiting relationship.
In evaluating a hospital’s recruiting agreement, physicians should ensure that the agreement does not require them to refer patients to a particular facility, does not calculate their remuneration based upon the number or value of referrals, meets the requirements of relocation or establishment of a new patient base, is consistent with the hospital’s tax status, and does not expose the physician to unintended tax liabilities. TH
O’Rourke works in the Office of University Counsel, Department of Litigation, Denver.