Establishing Objective Evidence for Physician Needs Assessments

Why do hospitals that are recruiting physicians need to use an objective third party to complete the physician needs assessment? Simple: there is risk involved.Beginning in 1986, the IRS issued guidance on how to structure permissible recruiting agreements. Reasonable recruitment incentives can be provided to physicians if the benefit is incidental to the benefits that physician will offer to the hospital’s community. The primary method of demonstrating community benefit is through an objective assessment.

References with guidance are available for hospitals that are recruiting physicians based on community need. The IRS and the OIG have both addressed community need with objective party documentation. The IRS and OIG have issued formal and informal guidelines requiring hospitals to demonstrate a community need for a physician before entering a recruitment arrangement. CMS has not yet incorporated similar requirements in the Stark Law. Because evidence of community need is required by at least two regulatory agencies, hospitals should establish objective evidence of a physician need in its community prior to entering a physician recruitment arrangement. Here are the guidelines currently in effect.

1. Revenue Ruling 97-21 (“Rev. Rul. 97-21”), issued in April 1997, was the first precedential guidance issued by the IRS specifically addressing the exemption implications of physician recruitment arrangements. Rev. Rul. 97-21, 1997-1 C.B. 121 was given in the context of five factual situations. It reinforced the IRS’ emphasis on documentation of a bona fide community benefit via a demonstrated community need for a particular physician or specialist.

2. Unpublished Private Letter Ruling on Physician Recruitment. The unpublished ruling noted that Rev. Rul. 73-313 recognized that “the demonstrated need for a physician to avert a real and substantial threat to the community” is relevant to determining whether recruitment incentives are compatible with the exempt status requirements. The ruling further noted that “[f] or the incentives to be offered by an organization to be consistent with its exempt status, objective evidence needs to be provided, in the form of a needs assessment, demonstrating a need for physicians in the service area.”

3. OIG Advisory Opinion No. 01-4. In May 2001, the OIG issued an advisory opinion in response to a hospital’s inquiry regarding a proposed recruitment arrangement. The hospital requesting the advisory opinion sought to recruit a new physician specializing in otolaryngology and head and neck surgery. The hospital certified that based upon a bona fide needs analysis conducted using objective criteria, a shortage of otolaryngologists and head and neck surgeons existed within the hospital’s service area. The opinion asserts that recruitment arrangements that implicate the Anti-Kickback Statute but do not qualify for safe harbor protection must be evaluated on a case-by-case basis. In evaluating the risks posed by a particular recruitment arrangement, the opinion notes that the OIG looks to a number of factors, including “whether there is documented evidence of an objective need for the practitioner’s services.”

4. The IRS also provided guidance on ways to demonstrate community benefit in its 1994 closing agreement with Hermann Hospital in Texas. Although such agreements only apply to the subject party, it nonetheless provides guidance for demonstrating community need. According to the terms of this agreement, one or more of the following must apply for a hospital to pay recruiting incentives based on community benefit:

• A calculated specialty deficiency based on supply and total market need, demonstrated through the application of industry benchmarks or ratios.
• Demand for a medical service in the community coupled with a documented lack of availability or long waiting periods.
• Federal designation as a Health Professional Shortage Area (HPSA).
• A demonstrated reluctance of physicians to relocate to a hospital due to location (including rural or economically disadvantaged areas).
• A reasonably expected reduction in number of physicians of a specialty serving the hospital’s service area due to anticipated retirements within the next three years; or,
• A documented lack of physicians serving indigent or Medicaid patients, provided the recruit commits to serve a “substantial number” of those patients.

IRS Audits are usually triggered from other audit areas or complaints. To be on the safe side, it is recommended that an objective third party prepare the physician needs assessment in order to ensure an unbiased opinion.

A physician needs assessment from Coker Group provides comprehensive objective documentation for hospitals recruiting physicians. Such analysis is updated every two to three years to remain current in reflecting changes in the hospital’s service area.

Next Steps

• Download our checklist to track documentation of physician need in a community
• Listen to a podcast on How to Determine Physician Needs and Maintain Compliance in Recruitment
• Download our comprehensive white paper The Significance of a Physician Needs Assessment

Are you ready to complete your Physician Needs Assessment? Contact us today and ask to speak with Sandy Champion to assess your service area.