It is also important to note that the recruiting exception is designed to promote true recruiting, not simply to entice an established physician in the community to move her practice to a competing hospital. Consequently, the recruiting exception does not apply unless the recruited physician will either move her practice at least 25 miles or generate 75% of her revenues from new patients.
Anti-Kickback Statute
The anti-kickback statute prohibits healthcare providers or entities from knowingly offering or accepting remuneration to induce or reward referrals. Federal regulations create “safe harbors” outlining criteria that, if met, shield providers and entities from anti-kickback liability. The recruitment safe harbor requires a recruited physician leaving an existing medical practice to relocate at least 100 miles away and to generate 85% of new practice revenues from patients not seen at the former practice. Further, the recruited physician must agree to treat Medicare and Medicaid patients.
Internal Revenue Code
Any tax-exempt entity and its physician recruits must carefully structure recruiting arrangements to avoid jeopardizing the entity’s tax-exempt status. Moreover, certain recruitment incentives have tax consequences for an individual recruit.
Tax-exempt entities: Generally, a tax-exempt entity’s earnings may not benefit private individuals. If an improper benefit is found, both the entity and the individual are subject to penalties, including the potential loss of the entity’s tax-exempt status. Thus, physician-recruiting payments by tax-exempt hospitals must fit within IRS requirements.
Specifically, when a tax-exempt hospital recruits a physician to provide service on behalf of the organization, the arrangement must meet an “operational test.” The operational test requires the hospital to account for all of the physician’s services and demonstrate that it is paying reasonable compensation. Consequently, when a tax-exempt hospital recruits a physician to provide services not just for the hospital but also for the surrounding community, it must ensure that all conduct is consistent with the facility’s tax-exempt purpose. Thus, for example, a tax-exempt hospital that has a charitable purpose may be able to justify a recruiting arrangement that allows a physician to provide services that promote the health of the surrounding community.
Ultimately, the IRS is responsible for determining that a tax-exempt hospital is not using its funds solely to promote the physician’s personal interests. Consequently, a tax-exempt hospital should be prepared to demonstrate the reasons the physician was recruited, the need the recruited physician fills, ways in which the recruitment furthers the hospital’s purpose, evidence that the recruiting agreement was negotiated in good faith, and proof that none of the participants in the negotiation suffered from a conflict of interest.
Tax consequences to recruits: Notably, recruiting packages may offer incentives to the recruit that the IRS may consider taxable income. For example, many recruiting arrangements include loans to guarantee a certain level of income and cover the costs associated with starting up a new practice or adding a physician to an existing practice. These loans may be forgiven over time if the recruited physician continues practicing in the community. Generally, proceeds of a loan do not constitute taxable income because the benefit is offset by an obligation to repay. When a loan is subject to forgiveness, however, the forgiven portion may be taxable. Consequently, recruits should evaluate any recruitment incentives in the context of their long-term tax consequences.
Conclusion
Federal law recognizes that communities benefit when hospitals recruit physicians to meet a particular need, but the law does not allow hospitals or physicians to abuse the recruiting relationship.
In evaluating a hospital’s recruiting agreement, physicians should ensure that the agreement does not require them to refer patients to a particular facility, does not calculate their remuneration based upon the number or value of referrals, meets the requirements of relocation or establishment of a new patient base, is consistent with the hospital’s tax status, and does not expose the physician to unintended tax liabilities. TH