Physician Recruitment Agreements
In this article I discuss physician recruitment agreements and their package of documents. A recruitment agreement allows a hospital to loan money to a physician or to a group practice in exchange for the physician’s promise to practice in a certain geographic area. Recruitment agreement packages frequently reach 100 pages of mind-numbing prolixity and obscure complexity.
The basic idea is this: the hospital loans money to the physician so that the physician’s salary is stable during the first years of practice while he or she is building up collections. This is called the income guaranty, because the physician’s monthly income is fixed.
Loan = income guaranty minus collections
The loan is the amount that the hospital pays toward the physician’s salary + any other money the hospital pays for the physician (e.g. the physician’s malpractice insurance premiums, moving expenses or housing allowances).
Notice in the example below that as collections increase, the loan decreases. If collections reach the income guaranty in a particular month, the hospital doesn’t loan money in that month.
Monthly Collections Loan Physician Income Guaranty
1 $0 $15,000 $15,000
2 $5,000 $10,000 $15,000
3 $10,000 $5,000 $15,000
4 $15,000 $0 $15,000
5 $13,000 $2,000 $15,000
6 $20,000 $0 $15,000
Physician is obligor on loan
The physician signs a promissory note in favor of the hospital for the loan. Usually the hospital reduces the amount owed on the loan over time, for example, the loan might reduce 1/3 each year starting at the end of the first year. By this example, the loan goes away after 4 years.
Group is guarantor on loan
If the physician works for a group medical practice, the group usually guaranties the loan. If the physician quits or otherwise breaches the recruitment agreement (see below), the physician (primarily) and the group (secondarily) must repay the loan. The group should consider limiting the term of the guaranty, for example, the guaranty can automatically terminate after 2 years, or it can automatically terminate when there is no amount outstanding on the loan after year 1.
Who gets the excess collections, that is, collections over the income guaranty amount? In month 6 of the example above, collections exceed the income guaranty by $5,000. The hospital usually demands the excess collections to pay down outstanding amounts on the loan. Once the loan is paid off, either the physician or group keeps the excess collections.
The hospital usually gives itself the right to terminate the recruitment agreement with or without cause. If the hospital terminates for cause, it usually can accelerate the loan (and the guaranty) and demand immediate repayment. Cause can include many failings, but the most important is the physician leaving the hospital’s geographic area. Physicians should pay attention to the triggers for acceleration, and perhaps get a payment plan for the loan in the event of acceleration.
Stark and Anti-Kickback legal compliance
Recruitment agreements must comply with the Stark and Anti-Kickback laws. This is a joyous circumstance for us lawyers given the inscrutability of said laws. One interesting item of note is that the Stark law restricts non-competition covenants in the physician’s employment agreement with the group. The group that employs the physician must understand that the physician can remain and work in the service area until the loan is forgiven.
For more on the employment agreement for the physician, see Physician employment and independent contractor agreements and also Termination clauses in physician employment and contractor agreements. Remember this is complex stuff. Before you do anything, get competent legal counsel to help you.
ABOUT THE AUTHOR: Matt Dickstein, Business Attorney
Matt Dickstein, Business Attorney, provides business legal services in the San Francisco Bay Area and the Silicon Valley, California, including San Jose, Palo Alto, San Francisco, Oakland, Hayward, Fremont, Walnut Creek, Pleasanton and Sacramento.
Since 1994, I have been representing businesses of all types, big and small. I handle business transactions, corporations & LLCs, real estate ventures, professional practices, and franchises.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.