Mid-Atlantic Health Law TOPICS

A version of this article was published in The Daily Record on October 23, 2012.

While hospitals are "employing" physicians in record numbers, it should be remembered that there are other ways to attract a new physician to relocate to a hospital's catchment area. In fact, there are at least four ways for a hospital to subsidize the recruitment of a new physician to join an established private group that already serves the hospital, without violating the various self-referral laws that prohibit hospitals from making payments to physicians who refer to the hospital.

This article describes those four models, as well as the advantages and disadvantages of each.

A. Payment to the Recruited Physician

The self-referral laws allow a hospital to pay an incentive to a recruited physician whose current practice is at least 25 miles from the hospital to induce the recruited physician to join a private practice that serves the hospital. The incentive may be, for example, an upfront cash payment, a cash payment over time terminable if the recruited physician leaves the area, or a loan subject to forgiveness after the recruited physician has stayed in the area for a certain time. This option is subject to seven conditions:

First, the hospital must show that the area it serves has a need for the recruited physician, and that it has had difficulty in recruiting such a physician. The law does not spell out the level of need or effort required, but the hospital must show some evidence of trying and failing at an incentive-free recruitment.
Second, the hospital must pay the incentive to the recruited physician directly.

Third, the incentive cannot be conditioned in any way on the recruited physician referring patients to the hospital. However, the payment may incrementally "step up" over time (vs. a full upfront payment), or otherwise be conditioned in whole or in part on the recruited physician staying in the area.

Fourth, the practice that the recruited physician is joining cannot impose "restrictions that unreasonably restrict the recruited physician's ability to practice medicine in the geographic area served by the hospital." A geographic non-compete is out of the question, but a restriction on soliciting the practice's patients should the recruited physician ever leave the practice is not an "unreasonable" restriction.

Arguably, a different rule applies if the recruited physician acquires equity in the practice at once or over time: the practice may be able to subject its shareholders to non-compete covenants independent of the physician recruitment incentive.

Fifth, the practice must be located in the hospital's service area. Generally, the relevant service area is composed of the lowest number of contiguous zip codes from which a hospital draws at least 75 percent of its inpatients.

Sixth, the hospital must grant the recruited physician staff privileges.

Seventh, a written incentive agreement complying with these rules must be signed by the hospital and the recruited physician.

B. Payment to the Practice

Alternatively, the self-referral laws allow a hospital to pay an incentive directly to the practice to induce the practice to take on the recruited physician. This option is subject to all the conditions otherwise applicable to a direct incentive payment to the recruited physician, plus the following:

First, the practice, the recruited physician, and the hospital must all sign a written incentive agreement complying with these conditions.

Second, generally, the practice must give the recruited physician any portion of the incentive payment exceeding the actual costs of recruitment. If the hospital guarantees the recruited physician's income, then these actual costs must equal the recruited physician's actual additional incremental costs to the practice.

Third, the practice must keep an account of the receipt and disposition of the incentive payment for at least five years.

Fourth, the incentive cannot be conditioned in any way upon referrals to the hospital by the practice or the recruited physician.

A disadvantage of this alternative is that it must be shoehorned into the Maryland self-referral law's exemption for physician relocation incentive payments. Maryland law specifies that the compensation must be "provided by a health care entity to a health care practitioner." Although it is arguable that incentive payments to the practice count as payments indirectly "provided to" the recruited physician, a regulator might take the position that only direct payments count.

C. Leased Employee

The hospital could enter into an arrangement whereby it hires the recruited physician on the hospital's payroll. The hospital would assign the recruited physician hospital duties, and then "lease" or "loan" the recruited physician to the practice at other times. The hospital would bill for the recruited physician when the recruited physician is on duty for the hospital, while the practice would bill for the recruited physician when the recruited physician is on duty for the practice. This arrangement must satisfy four conditions:

First, the practice must pay the hospital fair market value for the recruited physician's services, meaning a proportional share of the amount the hospital pays the recruited physician, plus a fee to the hospital analogous to a fee paid to a temp agency.

However, the premium that the practice must pay for the recruited physician's part-time services could perhaps be mitigated if the hospital agrees to receive payment from the practice at a lagging pace (say, 30 - 90 days). A lagging payment would allow the practice to bill and collect from payers before having to pay the hospital.

Second, the hospital and the practice both must have at least some need for the recruited physician. For example, the hospital cannot hire the recruited physician just to be "on call" if the hospital does not have a need for the recruited physician on call.

Third, because the hospital will lend the recruited physician to the practice on a part time basis, the hospital must agree in advance to a precise schedule of times the recruited physician will work for the practice, and the payment allocated for each of those times.

Fourth, the agreement memorializing this arrangement must be in writing and must have a term of at least one year, though it may be terminable within that year.

An advantage of this model is that it decreases the burden on the practice if the practice needs a new part time physician, rather than a full time one, while still allowing the practice to bill for the recruited physician. Importantly, the practice could attach both non-compete and non-solicitation restrictions to this arrangement.

D. Office Sharing

The hospital could hire the recruited physician itself and locate the recruited physician in the practice's space. The hospital would pay the practice to lease or sublease the space, plus perhaps an amount for supplies, administrative support, or (if necessary) billing support, and like items. This arrangement also comes with a number of conditions.

First, the lease must identify the particular space leased, be set out in writing, set the exact rent, extend for at least a year (though it may be terminable within the year), and must be signed by the practice and the hospital before the lease commences.

Second, if the space is leased on a part time basis, then the lease must specify in advance the exact schedule of leased time and the exact rent for such time.

Third, the space leased (other than common areas) must be used exclusively by the recruited physician or the hospital during the time it is leased.

Fourth, the rent charged must be fair market value for comparable commercial real estate, and cannot take into account referrals or proximity to referral sources, plus the fair market value of the other services being provided by the practice to the hospital.

An advantage of this alternative is that it allows the practice to spread its overhead costs across an additional physician, without the practice having to take on the risk of paying an additional physician.