Physician Recruitment Arrangements: Practical Considerations
Published March 12, 2024

Physician Recruitment Arrangements: Practical Considerations

Are you a hospital contemplating assisting a physician practice with the recruitment of a new physician into your local community? If so, this article summarizes some practical operational and Stark Law considerations for a hospital to analyze before signing a recruitment agreement with a physician practice.

Per the Federal Physician Self-Referral Statute and Regulations (commonly known as the Stark Law), a physician cannot refer a patient to any entity with which they have a financial relationship if designated health services are involved unless a statutory/regulatory exception is met. One such financial relationship is the exception for physician recruitment in 42 C.F.R. §411.357€. This exception provides specific guidelines that must be met for a hospital to provide recruitment assistance to a physician practice. This article includes some but not all of the guidelines outlined in the physician recruitment exception.

Tips for Hospitals Considering a Physician Recruitment Arrangement

  • Confirm a documented community need exists that meets the physician recruitment exception guidelines. The physician recruitment exception provides specific guidance on this topic and how a geographic service area is defined. A properly prepared provider needs assessment will assist with documenting the community need for a particular physician specialty and include the hospital’s geographic service area.
  • The arrangement must be put in writing and signed by both parties and in some instances also signed by the physician practice. A best practice is to have all parties involved sign the written agreement.
  • Neither the arrangement nor the compensation can be conditioned on the physician’s referral of patients to the hospital.
  • Generally, the recruiting hospital cannot restrict the physician from establishing medical staff privileges at any other hospital(s) or referring business to any other entities.
  • A physician is considered to have relocated his or her medical practice if the medical practice was located outside the geographic area served by the recruiting hospital and the practice is moved at least 25 miles and into the geographic area served by the recruiting hospital. The physician may also be considered to have relocated his or her practice if certain revenue tests are met.
  • Residents or physicians who have been in practice for one year or less are not typically subject to the same relocation requirements.
  • Residents or physicians who have been employed for at least two years immediately prior to the relocation by a federal or state bureau of prisons, the Dept. of Defense, the Dept. of Veterans Affairs, or a facility of the Indian Health Service are not generally subject to the same relocation requirements.
  • Special rules for physician recruitment arrangements exist for
    • Rural hospitals and hospitals located in health provider shortage areas.
    • Non-physician practitioners including limits on how much remuneration can be paid. These rules can be found in the assistance to compensate a non-physician practitioner exception in 42 C.F.R. §411.357(x).
  • Not all recruitment agreements are structured the same. Collection guarantees (guarantees of a predetermined level of professional collections) and income guarantees (guaranteed levels of a predetermined amount of income/physician compensation) are common structures of recruitment agreements. Generally, a physician entering a new market will require two or three years to fully build their practice to a self-sustaining level.
  • In the case of an income/compensation guarantee, the costs allocated by the physician practice to the recruited physician cannot exceed the actual additional incremental costs attributable to the recruited physician. Further, certain expenses cannot be allocated to the recruited physician.
    • Examples of incremental costs that may be incurred by the physician practice on behalf of the recruited physician include the physician’s payroll taxes, health insurance, and professional liability insurance as well as any technology or equipment for the physician’s sole use.
    • An example of a non-incremental cost would be an allocation of existing support staff salaries or the existing space lease (assuming these costs did not increase because of recruiting the new physician).
  • Any portion of compensation passed through to the physician practice must be for actual costs incurred by the physician practice in recruiting the new physician (recruiting expenses, relocation expenses, sign-on bonus, etc.). The remaining amounts must be directly passed through to the recruited physician.
  • Regardless of the type of physician recruitment arrangement, you should document how the amount of recruiting assistance was determined, how fair market value and commercial reasonableness were evaluated, and how any ongoing payments will be reconciled for compliance. In fact, the physician recruitment exception requires records of the actual costs, and the passed-through amounts should be maintained for at least six years.
  • Finally, as with any physician agreement, ensure legal counsel experienced in healthcare regulatory matters has reviewed the proposed agreement terms.

If you are considering a physician recruitment agreement and need help determining fair market value and commercial reasonableness, or your provider needs assessment requires an update, PYA can help. One of our executives would be happy to assist. You may contact them via email or by calling (800) 270-9629.

Learn more about PYA’s Provider Needs Assessment services.


Chase Bristow

Executive Contacts

Interested in Learning More?

Sign Up for Our Latest Thought Leadership!

    Select Your Subscriptions