Physician demand calls for aggressive recruiting

Hospitals forget lessons of Herman Hospital

In late 1994, the medical world was rocked by the news that Hermann Hospital in Houston was being fined $1 million for breaching federal law through its recruiting policies. Its practices included offering signing bonuses to physicians it was trying to attract. As a result, many facilities backed off on offering physicians the bonuses, as well as other perks such as breaks on office rent and interest-free loans.

But a new study by Cejka & Company, a St. Louis-based healthcare consulting and search firm, shows that hospitals are not as scared of the Internal Revenue Service (IRS) anymore and are willing to make such offers in order to bring physicians to their organizations.

"A year after Hermann, people realized there wasn’t going to be a change in enforcement," says Brian Andrew, JD, MA, an attorney specializing in health care with Polsinelli, White, Vardeman & Shalton in St. Louis. "They saw Hermann as an egregious situation. Lawyers like us advised our clients to back off. But when we saw nothing was changing in enforcement, our advice changed."

There have been other legal changes that have affected hospital recruiting policies, as well, says Andrew. In April 1995, the IRS proposed liberalizing many of its revenue rulings. For example, before there had been strict interpretations of rules allowing a hospital to financially assist an existing medical group, but now the IRS proposes loosening those rules.

Market pressures recognized

Similarly, if a physician is at one hospital in a community, the IRS had said that another in the same community could not offer an incentive to that physician to move. "That doctor was still helping in the community," Andrew explains. "Now they may allow it. They recognize that there are market pressures to start certain programs, even in urban areas where such programs may already exist in other facilities." (For survey results on the types of inducements being offered, see charts, above and p. 21.)

While some of these changes have allowed hospitals more leeway in their recruiting, there have been other legal alterations that could keep hospitals in check, says Bruce Johnson, JD, MPA, a consultant in Longmont, CO, who works with the Englewood, CO-based Medical Group Management Association.

Last summer, says Johnson, the government enacted a set of intermediate sanctions. Rather than threatening a hospital with removing its tax-exempt status for violations, now they can fine the hospital, its officers and directors, and even physicians. "This means that now the physicians are going to be at risk," Johnson says. "They may be less willing to accept a sweetheart deal they know is not legal."

Despite less fear of investigation, Johnson says "a rash of Hermann Hospitals is unlikely. They did some really stupid things and then called the IRS to ask if they were okay," he explains. "They revealed themselves to the IRS." That is not as likely to happen now.

What is more likely is that any illegal activity will be found as part of other investigations. Both Johnson and Andrew say there is more cooperation among government organizations, such as the Department of Justice, the IRS, and the Health Care Financing Administration.

"If you see an audit, it will be a coordinated exam procedure," Andrew says. "You will have six auditors stay with you for years, not just one for a week or two. They will look at everything, at every contract you have ever signed. That is when they will find out if your recruiting policies are less than perfect."

Advice for recruiters

Andrew says it is important to remember that "the lines are flexible. No one knows what is going to be acceptable and what will raise eyebrows." However, he and Johnson say there are some basic guidelines you can follow.

1. Be able to justify your offer.

While the term "reasonable offer" is often used, it is a subjective phrase, says Andrew. "You have to be able to show someone that the entire package you offer — the salary, any loan forgiveness, any office rent reduction — is justified by the going rate for that kind of doctor in your community and a need in the community for another one of that type of physician."

2. Don’t be quick to go to the feds for advice.

While Andrew says you can still get private letter rulings — statements from the IRS on whether a particular action is acceptable — asking for one is an invitation to the government to look into your recruiting policies.

Johnson agrees. "If you feel safe in asking the question about what you are doing, then why bother?" he asks. "And if you don’t feel sure of yourself, then you shouldn’t expose yourself to enforcement action."

3. Conduct a risk benefit analysis.

What you should be doing, Johnson says, is involving your legal advisers in a discussion on the risks and benefits of an action. "You have to make a business decision on how far you can go," Johnson explains. "You have to ask yourself whether your need for a particular physician justifies doing something which, if uncovered, could get you, your hospital, and even the doctor you are recruiting into trouble."

The only long-term lesson to learn from Herman is "not getting caught," says Geoff Staub, director of marketing at Cejka. "I think that what hospitals are doing now and what they will continue to do, is to take a gamble. They need the docs, and they just hope they won’t get caught."