By Melissa Meeker, Healthcare Consulting Group
Income guarantee agreements can be a helpful tool to reduce the cost of physician recruitment. Hospitals need to attract, hire and retain quality physicians, and can use these agreements to subsidize the income and some of the expenses incurred while a new physician builds his or her practice.
A hospital income guarantee agreement works like this:
- Physicians receive a monthly check equal to the amount of guaranteed income minus the actual income generated by the physician.
- As the physician builds a patient base, the monthly income he or she generates increases. Consequently, the monthly guarantee payment amount decreases.
- The “loan” to the physician is essentially worked off as the income generated increases.
While an income guarantee agreement can lessen the burden of physician salary and overhead expenses, there are some limits to what hospitals can do when negotiating them. Stark Laws, which govern physician self-referral and mitigate against conflict of interest, impose specific restrictions. To ensure compliance, consider the following when structuring a hospital income guarantee agreement:
1. Agreement Terms
Hospital income guarantee agreements are governed by two important time periods: the guarantee period and the forgiveness period. The guarantee period is the length of time that the hospital may offer assistance to the physician or physician group. While agreements can be structured over any length of time, they typically cover a 12-month period. When structuring an agreement, it is smart to consider:
- The specialty itself and the community’s need for it
- The expected length of time until the new physician becomes profitable
If the physician will become profitable in less than one year, consider establishing a shorter guarantee period so that no payback is required.
The forgiveness period is the number of years that the physician must remain in practice in the community. A typical forgiveness period can range from two to three years. It is called the forgiveness period because the subsidies provided to the physician during the guarantee period are essentially forgiven by the hospital.
2. Allowable vs. Unallowable Expenses
According to Stark Laws, reimbursable expenses are limited to only the incremental costs incurred by the practice as a result of hiring the new physician. Examples include increased malpractice insurance, additional staff hired specifically because of the new physician (such as a nurse) and Continuing Medical Education (CME). Most agreements state that expenses cannot be split on a pro-rata basis.
The Stark III regulations issued in 2007 allow a small exception to reimbursable expenses. Under Stark III, expenses can be split on a pro-rata basis up to 20% if the new physician is replacing a current physician who relocated, retired or died. To be effective, this exception must be written in the original agreement between the hospital and the practice.
3. Cash Flow
Let’s say you’ve carefully determined your guarantee and forgiveness period and you’ve crafted a realistic budget to help manage expenses. But what about cash flow? How is the practice prepared to handle the weeks or even months it may take to receive the funds from the hospital?
A crippled cash flow can harm your practice. That is why it is essential to build certain specific expenses into the contract. These could include things like a recruitment bonus, relocation expenses or any other expense that may be subject to further qualification (thus further delaying funds disbursement). A line of credit is also a wise move for physician groups as a backup when funding is delayed.
4. Moonlighting & Additional Income
It is not uncommon for new physicians to seek additional sources of income. On-call pay and other types of moonlighting can present an additional hurdle for the practice since most agreements require that all income received by the physician be reported. Consequently, when physicians are paid directly for moonlighting work, the amount that the practice receives as part of the income guarantee is reduced. This results in a loss for the practice.
Where hospital income guarantee agreements are in effect, practices are wise to ensure that all on-call pay and other moonlighting income be run through the practice. Under this arrangement the practice should address a compensation agreement with the income guarantee physician.
Keep in mind there are significant tax consequences related to hospital income guarantee agreements. Your tax adviser should be an integral part of your analysis and related strategy. Clark Schaefer Hackett healthcare experts can help you understand the details, as well as your organization’s responsibilities.