QUESTION: I noticed that the first case in this week’s HLE discussed a Residency Assistance Agreement. Does the Stark law permit a hospital to enter into such an agreement? What are the practical and legal risks associated with such an agreement?
ANSWER: Yes. The Stark law permits hospitals to enter into a wide range of physician recruitment arrangements, either with the recruit or with a group that will employ the recruit. A properly drafted recruitment agreement will comply with the Stark law, the Medicare anti-kickback statute and the IRS pronouncements on physician recruitment.
One unique form of recruitment agreement is to assist a physician financially during their residency program. Such an agreement can be structured to comply with all legal requirements. However, residency programs can last anywhere from three to seven years (as in the case discussed this week) and you are requiring a physician who is just beginning this training to make commitments that will extend for years after the training program has been completed. As a result, inherent in this type of recruitment agreement are certain practical risks that often give rise to litigation.
A resident assistance agreement is typically an annual payment (usually a loan) that will be paid while the resident is in training but will then be forgiven if the physician returns and practices in the geographic area served by the hospital in the specialty described in the agreement for a certain period of time.
The situation in the case is not unusual. There the physician entered into a five-year general surgery residency program. The hospital agreed to pay her $25,000/year during the residency program. While not stated in the case, this payment is typically a loan. The physician agreed to return to the geographic area served by the hospital after the completion of the residency program, practice general surgery for a certain period of time (four years in the case) and if the physician practices in the manner described in the agreement for the full four years, the entire principal and interest will be forgiven. Straightforward right – Not so fast.
Residents can change their mind – that is what happened in the case described in this week’s HLE. There the physician wanted to pursue additional fellowship training as a thoracic surgeon. However, not all hospitals need, or can support, such a subspecialist. Besides, that is not what the hospital bargained for – they wanted a general surgeon. Apparently, the hospital did not want to prevent the physician from obtaining the additional thoracic training but did not discuss the effect of her doing so on her commitment to the hospital. Nor did they amend the agreement at the end of the general surgery residency program to address the change in circumstances.
So, they had an agreement that did not address the additional training. As such, per its terms, the agreement stated that the physician would be in default if she did not practice general surgery for at least four years. Apparently, that was not the physician’s understanding and she did not want to practice general surgery after obtaining additional training as a thoracic surgeon. The result of this misunderstanding was litigation – which is still ongoing. No general surgeon and legal fees-not the result that either party bargained for when they entered into the agreement.
Another issue that often arises in this kind of arrangement that often leads to litigation is how will the physician practice once they return. If an employee what will their salary be and how will that salary be determined so far in the future? If they are not offered employment by the health system, where will they practice and again under what terms? The reality is that the physician has no idea of their market value before they start training but often become acutely aware as headhunters contact them as the training period ends – that complicates these employment-related issues.
We have also seen instances where a physician gets married during the residency program and their spouse either cannot find a job or does not want to live in the committed area. Other issues arise if the hospital is sold, if demographic shifts have occurred so that the hospital can no longer support the physician’s specialty (even if the physician did not change or obtain additional training), or if unforeseen circumstances arise such as COVID.
Adding to this problem is that the amount of interest that accrues over the period of a lengthy residency program can be significant and can approach the amount of the principal – another fact that the physician did not realize when they signed the agreement.
So, what is a hospital to do? Despite these issues, we continue to believe that a residency training assistance agreement is an excellent means for a hospital to recruit a new physician. It allows the hospital to recruit a physician in a needed service, although that need won’t be addressed until after the residency program is over. It also allows the resident to concentrate on their training, eliminating the need to worry about whether there will be a position at the end of their training program. It also assists the resident financially at a time when they often need the assistance. But you need to appreciate the unique risks presented by this type of agreement, have an agreement that anticipates as many of those risks as possible, and if changes do occur during the course of the relationship, make sure that you memorialize those changes and their effect on the terms of the agreement in writing.