Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

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Executive Summary New physicians looking to start their practice face many challenges. The need to earn a living and the desire to pay off loans require more than just the ability to diagnose and treat patients. There is a business side to the practice that commands attention, and the first business decisions that most physicians make involve deciding where to work and for whom. Established practitioners also face career decisions. Many hospitals in medically underserved areas can make offers to new and established physicians that sound tempting on the surface. Indeed, recruitment offers include such practice support as collections guarantees, payment of student loans, the arrangement of employment with a local practice group, and other perks. With any such offer, strings are attached. Given the nature of these practice support agreements and the laws affecting recruitment arrangements, it is important for new physicians to understand their agreements and the legal constraints relating to them. Certainly, making mistakes with practice service agreements can have serious long-term effects on a physician’s career and finances.

Mistake 1        Failing to Involve Legal Counsel Given the importance of practice support agreements, which can determine the course of a physician’s career for at least three years, it is important to involve legal counsel. Many contractual terms may be new to young physicians, and there is not a single term that can be left misunderstood. Moreover, given the consequences of violating applicable laws relating to recruitment and the complexity of those laws, involvement of counsel from the outset is vital. 

Action Step     Before initiating negotiation on a practice support agreement, and throughout the negotiation, physicians should consult legal counsel. 

Mistake 2        Failing to Research Each Potential Employer A recruiting hospital may arrange for the physician to meet with representatives of an existing practice in the hospital’s service area and negotiate employment. However, the physician need not become employed with a specific group and should consider multiple employment opportunities if they are available. Before agreeing to employment, the physician should research potential employers carefully, including credentials and reputations of personnel, quality of facilities, opportunities to become a partner, compensation and bonuses over time, turnover of physicians, malpractice claims, the appropriateness of the environment for the physician’s personality, and the employer’s commitment to adhering to applicable law. 

Action Step     Physicians should conduct appropriate due diligence reviews on each practice under consideration before entering into an agreement. 

Mistake 3        Failing to Grasp the Ramifications of Certain Commitments A practice support agreement demands certain commitments from the physician. After all, the whole point of a recruitment benefits package is to obtain the services of a doctor for a given period of time, typically three years. A physician cannot enter into any such agreement lightly, since the failure to honor the commitment can lead to the forfeiture of any future benefits, as well as the requirement to repay amounts advanced to the physician for cash collection guarantees, malpractice insurance, living and moving expense stipends, license fees, and even loan repayments. If a physician decides that the employment situation is not a good one, the price of resigning and moving on can be very high. 

Action Step     When negotiating a practice support agreement, physicians should understand their legal and business obligations and all costs associated with the failure to honor the obligations of the agreement. 

Mistake 4        Accepting Boilerplate Language in Contracts Often, a hospital or a physician group will put a “standard” contract in front of a physician and ask for a signature. But not all practice support arrangements are created equal. A practice support agreement should fit the physician’s situation, reflecting the actual deal negotiated. The compensation and benefits should be appropriate for the demand for the physician’s services. The descriptions of the physician’s duties and of the benefits should address any nuance in the particular physician’s situation. 

Action Step     Physicians should not accept boilerplate language as necessarily appropriate for their situation. They should negotiate and make the agreement fit the circumstances contemplated. Again, consulting legal counsel in this situation is imperative, because a skilled lawyer will be able to help the physician understand the consequences of accepting boilerplate language. 

Mistake 5        Being Fearful of Negotiation Young physicians may feel that they will lose a deal if they try to negotiate. However, there is nothing wrong with asking for something they want. This is business, and the physician will have to live with the terms of the agreement, so it should reflect a fully negotiated deal. The party on the other side of any deal will not hesitate to seek commitments and concessions; accordingly, physicians should not hesitate either. 

Action Step     Physicians should not be afraid to ask for additional benefits or concessions. They should go into the negotiations knowing what they want, understanding that there is an ideal result as well as lesser acceptable results. 

Mistake 6        Failing to Negotiate the Details A young physician may have an idea about how a deal will work, but may be disappointed with reality. Only if the details are ironed out in the written agreement, both with the hospital and with the physician’s employer, can there be real confidence that the experience will turn out as envisioned. Does the agreement require publicity upon the physician’s arrival? If so, it should be specified what that publicity will entail and when it will take place, otherwise the physician should be ready for “publicity” to feature only an ad in the yellow pages. Will the new office have room for the newly hired physician? The contract should discuss office space and equipment, or the physician could find himself or herself sharing space in a storage room. Will there be business cards and a pager waiting on the physician’s start date? These factors should be spelled out in the employment agreement. If the practice support benefits are to be assigned to the physician’s new group practice, have there been promises made regarding, for example, the hiring of new support personnel? If so, they should be included in the agreement. 

Action Step     Physicians should consider every term in the agreement and make sure that all issues are resolved such that they are understood and operate to the physicians’ satisfaction.

Mistake 7        Failing to Understand Antikickback Constraints The federal antikickback law (42 U.S.C. Section 1320a-7b(b)) makes it a crime to knowingly and willfully offer, pay, solicit, or receive remuneration to induce referrals of items or services reimbursable by a federal health care program. Parties on both sides of a transaction involving payment for referrals can be liable under the law. Penalties include fines, imprisonment, and exclusion from federal programs. On its face, an arrangement whereby a hospital pays recruitment benefits to a physician, including entering into a practice support agreement, would violate the antikickback law if the benefits were paid in exchange for future referrals. However, the law provides for certain “safe harbors” that protect specified activity from prosecution (if certain behavior falls outside the exact requirements of a safe harbor, liability is not automatic but depends on the circumstances and the likelihood that the behavior will lead to abuse). There is a safe harbor (42 C.F.R. Section 1001.952(n)) for physician recruitment activities that attract a physician to a health practitioner shortage area (HPSA), but the safe harbor will apply only if the arrangement meets certain criteria:

  • The physician cannot be required to make or influence referrals in exchange for the benefits, although the hospital may require that the physician maintain staff privileges.
  • The physician may not be restricted from establishing privileges at, or referring patients to, other hospitals.
  • The value of benefits provided may not be tied to the amount or volume of referrals made to the hospital.
  • The payment or exchange of value may not directly or indirectly benefit any person (other than the physician being recruited) or entity in a position to make or influence referrals to the hospital.
  • There is a written agreement, with a term of no more than three years, and there can be no renegotiation within the three-year term.
  • If the physician leaves an established practice, 75% of the revenue of the new practice must be from new patients.
  • At least 75% of the revenue of the new practice must be generated from patients who are living in an HPSA or a medically underserved area or who are part of a medically underserved population.
  • The physician agrees to treat federal health care program beneficiaries in a nondiscriminatory manner.
  • If a recruitment arrangement involving a practice support agreement does not fit squarely in the safe harbor, it could still pass muster if there is little danger of health care program fraud or abuse. The major factors considered are as follows:
  • Whether there is documented evidence of an objective need for the practitioner’s services (The government has made clear that recruitment into an area that is not designated an HPSA is not dispositive, and it will consider other evidence that indicates an area is deficient with respect to a particular specialty.)
  • Whether the physician has an existing stream of referrals within the hospital’s service area
  • Whether the benefit does not exceed what is reasonably necessary to recruit a practitioner
  • Whether the remuneration directly or indirectly benefits other referral sources (There is greater scrutiny when a hospital makes payments directly to a group practice when the practice recruits a physician.) 

Action Step     Physicians should be aware of the limitations on recruitment activities and practice support agreements as set forth in the federal antikickback statute. Legal counsel will be of significant help in this regard. Physicians should not sign an agreement that requires referrals to the hospital, bases benefits on the value of referrals, or prohibits acquiring staff privileges at competing hospitals. If necessary, a physician should acquire from the hospital documentary evidence demonstrating a need for the physician’s services. 

Mistake 8        Failing to Understand Stark Law Constraints The Stark law (42 U.S.C. Section 1395nn) is designed to prevent abusive self-referrals of patients whose treatment is covered by government health care programs. In other words, a physician may not refer such patients for certain “designated health services” to an entity in which the physician has a financial interest. Civil fines as well as exclusion from participation in government-funded programs can be imposed for violation of the Stark law. Compensation arrangements to physicians are covered by the law, and “designated health services” include hospital services. Consequently, a physician’s referral of patients to a hospital that pays the physician compensation is subject to the Stark law, absent an exception. An exception exists for recruitment arrangements that include practice support agreements. Requirements for meeting the exception include the physician not being required to refer patients to the hospital, and not being paid based on the volume or value of referrals. 

Action Step     Physicians should be aware of the limitations on recruitment activities and practice support agreements as set forth in the Stark law. Legal counsel that has significant health law training will be of help in this regard. 

Mistake 9        Failing to Understand the Stark Law’s Effect on Joining a Group Practice When a practice support agreement involves the recruited physician joining a group practice, the Stark law imposes specific requirements as set forth in recently promulgated regulations (effective July 24, 2004):

  • If payments are made by the hospital directly to the medical practice, the written agreement regarding recruitment benefits is signed by the group practice as well as the physician.
  • Benefits must be passed directly through to the physician except for actual costs incurred by the practice.
  • If the hospital provides a collections guarantee, costs allocated by the medical practice to the physician are limited to the actual additional incremental costs attributable to the physician.
  • If benefits are paid directly to the medical practice, the benefits cannot be determined based on the volume or value of any actual or anticipated referrals by the practice.
  • The medical practice cannot impose any additional restrictions, such as a covenant not to compete, on the recruited physician (other than restrictions based on quality of care). 

Action Step     In contemplating working with a group practice, physicians should consult legal counsel and be aware of the Stark law requirements. They should inquire as to the practice’s understanding of these requirements, and insist on compliance. 

Mistake 10      Failing to Understand IRS Constraints on Benefits Effective negotiation requires knowledge, and it is important to know that limits may exist on benefits. Nonprofit entities (such as hospitals) are constrained by the Internal Revenue Service as to the benefits that can be paid. Possibly acceptable incentives include income guarantees, moving expenses, payment of malpractice premiums, below-market rent, and a mortgage guarantee on a personal residence. The amounts are not specifically defined, but must be “reasonable,” taking into account the location of the hospital, its patient populations, etc. 

Action Step     Physicians should be aware that although IRS constraints on benefits exist, they are not specific. Alternative structures of benefit packages, with varying benefit types available, and varying payback schedules, can be of assistance in overcoming this issue. 

Conclusion Physicians who are being recruited and are considering a practice support agreement should take into account applicable legal restrictions and avoid these common negotiating mistakes in order to avoid future problems and achieve the best possible situation. 

Additional Resources

  • G. Anderson, What Is Legal in Recruitment Incentives, www.Docrates.com
  • Internal Revenue Service, Revenue Ruling 97-21
  • J. Miller, Hospital-physician Recruitment Arrangements, Physician’s News Digest (May 2003)
  • U.S. Department of Health and Human Services, Office of Inspector General, OIG Advisory Opinion 01-4 

Written by: Roger N. Morris, Esq.  Peer reviewed by: Roger D. Strode, Esq.

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