The Pitfalls of Physician Recruitment

By Alexander G. Bateman, Jr.
Criminal Law, Health Law

Hospitals and other health care entities oftentimes wish to offer incentives to physicians in order to attract them to the community served by that particular entity. When structuring these recruitment initiatives and incentive packages, hospitals which bill federal or state health care programs for their services should pay careful attention to the question of whether or not these arrangements violate federal laws concerning unlawful referrals and kickbacks.  Additionally, hospitals must be mindful of whether these arrangements violate the IRS regulations for tax-exempt organizations.  In recent years, enforcement efforts have been initiated, looking at the issue of fraud and abuse in physician recruitment arrangements and not-for-profit exempt status.

There are two federal statutes that hospitals and other entities must be cognizant of when considering these incentive initiatives.  The first is the Federal Anti-Kickback Statute.  The Anti-Kickback Statute prohibits individuals or entities from knowingly and willfully offering, paying for, soliciting, or receiving remuneration in order to induce business reimbursable under federal or state health care programs.  The term “remuneration” is very broad under the Statute and includes incentives that may not only be financial in nature.  Additionally, the Statute prohibits indirect, as well as direct, offers of remuneration.  A violation of the statute in its simplest form requires three elements, (i) knowledge and intent to receive, solicit, or offer; (ii) remuneration for patient referrals; and (iii) services or items that are reimbursable under federal or state health care programs.   It is not unusual that a hospital would find that these three factors are met when considering the details of an incentive package designed to entice a physician to practice in the area.  Nevertheless, the government acknowledges that such physician recruitment in some situations should be encouraged.  Therefore, they have created statutory exceptions known as “safe harbors” which allow hospitals and providers to enter into such recruitment arrangements in limited situations.  Although the “safe harbors” and regulations which describe them are complex and detailed, an entity must essentially show that the service area has a shortage of a type of medical care or that there are members of the population living in the service area whose medical needs are under-served.  If this shortage or need is able to be demonstrated, there are specific additional requirements to be satisfied when structuring the deal to avoid a violation of the statute.

The second statute to consider when contemplating physician recruitment incentives is the federal physician self-referral law, commonly referred to as the Stark Law.  Stark prohibits physicians from referring patients for certain designated health services paid by Medicare and Medicaid to entities with which the physician has a financial relationship and prohibits those entities from billing for those services.  Stark provides a specific exception for physician recruitment where the physician is relocating to the area.  These relocation exceptions, however, are detailed and compliance under your particular fact situation is critical to avoid potential prosecution.

Physicians may be recruited because there is, in fact, a real need in the community.  Nevertheless, it would be disingenuous for a hospital to say that they do not also anticipate referral of patients with the growth of the new practice.  Therefore, this is admittedly a complicated area of the law for administrators to deal with.  Nevertheless, it must be addressed to avoid scrutiny down the road.

In addition to considerations of violating the Anti-Kickback and Stark laws when offering recruitment/incentive packages to physicians, hospitals that are exempt from taxation as not-for-profit corporations pursuant to the Internal Revenue Code must give consideration to whether recruitment and incentive packages would jeopardize the tax exempt status of the hospital.  Laws covering tax exemptions for not-for-profit hospitals prohibit the use of charitable money to benefit private individuals.  Methods of recruitment in this type of situation often involve incentives such as loan forgiveness, income guarantees and signing bonuses A hospital will need to demonstrate to the IRS that they need the particular physicians sought and that by recruiting those doctors, who would need to relocate their practices, the hospital is meeting its charitable mission.

The IRS will issue what are known as private-letter rulings to corporations considering such incentive packages.  The IRS, in considering whether a particular proposal jeopardizes the tax-exempt status of the hospital, will look to whether they have demonstrated a need for hiring additional physicians and have developed reasonable recruitment incentives, narrowly tailored, to accomplish its objectives.  The IRS, in their rulings and opinions, gives helpful guidance concerning the facts that are relevant in determining whether a recruitment incentive is compatible with the requirements of exempt status.  Administrators, with the assistance of counsel, can look to them for guidance, whether or not they decide to seek advance approval from the government.

Arrangements which may satisfy a hospital’s requirements to maintain their tax exempt status may, for instance, not satisfy the “safe harbors” for anti-kickback concerns or exceptions under Stark or vice versa.  To avoid undue scrutiny and potential charges by the government, these arrangements should be given careful consideration and review before being finalized.
Alexander G. Bateman, Jr. is a partner in the Health Law Department at Ruskin Moscou Faltischek, P.C.  He can be reached at 516-663-6589 or