Physician Income Guarantee Arrangements
- December 1, 2020
Physician income guarantees can be valuable to help meet the health needs of the community. We typically do not see income guarantees offered to hospital-based physicians, such as hospitalists or internists, but rather for specialty care services, such as gastroenterology, cardiology, or other specialties where there is a high demand for a service. Our experience indicates substantial savings to hospitals and health systems engaging in short-term income guarantees rather than sustaining long-term employed physician losses typical for many physician specialties. Communities often benefit from the physician’s services through improved patient access and higher quality care.
How Physician Income Guarantees Work
Hospitals and health systems can use physician income guarantee arrangements to subsidize the income and certain qualifying expenses incurred while a new physician establishes his/her practice in the community. These arrangements help physicians join an existing practice expanding its services, or establishing a new practice in the community.
Under an income guarantee arrangement, the hospital or health system provides income support for the physician, typically as a monthly salary, equal to the amount of guaranteed income, less the actual income generated by the physician. As the physician builds the practice and generates more income, the guaranteed payment amount will decrease.
The duration of time for making guarantee payments (i.e., the Guarantee Period) is typically 12 to 24 months. Following the Guarantee Period is the Forgiveness Period. The guarantee payments (considered a loan) are forgiven as long as the physician continues practicing in the community. The Forgiveness Period is typically two years for a one-year guarantee or four years for a two-year guarantee.
Important Note: The Stark Law limits the expenses that may be considered in the income guarantee to the incremental costs incurred by the practice due to hiring a new physician.
How to Support a Physician Income Guarantee
Establish the Existence of a Community Need for Physicians
Before determining a particular income guarantee’s specifics, it is critical to establish whether a community need for that specialty exists. A strong physician community needs assessment (CNA), typically completed every two to three years by an objective party, is central to any effort to comply with IRS, HHS, and Stark-related physician recruiting regulations.
The CNA also serves a vital role in documenting the commercial reasonableness of entering into an income guarantee arrangement. The CNA will provide insight and documentation related to shortages in a specialty, age or potential retirement concerns, and even outmigration or referral issues in a specialty. Once the CNA is complete, hospital leadership can develop recruitment policies and procedures for future needs that may arise to retain physicians in the hospital’s service area.
Provide Fair Market Value (FMV)/Commercial Reasonableness (CR) Guidance
Once the community need is established, we recommend obtaining an independent FMV analysis to verify the support payments’ FMV range. A hospital or health system that enters into an income guarantee arrangement without an FMV opinion may unknowingly overpay the physician practice and facilitate above-market physician compensation. Such payments could increase the risk of regulatory concerns, including violations of the Stark Law, Anti-Kickback Statute, and IRS private benefit guidance (applicable to non-profit, tax-exempt entities).
Additionally, an FMV/CR analysis further documents the market need and physician retention strategies to help health systems and hospitals keep qualified physicians in the market.
Coker Group has a wealth of experience in assisting hospitals and health systems with complex physician matters. If you need help structuring a physician income guarantee or developing the supporting documentation, contact us today to learn more about how Coker Group can help.
Originally published November 6, 2018. Updated December 1, 2020.
Matthew Jensen, ASA