Physician recruitment guidelines.

The Service has required the public dissemination of its "Hospital Physician Recruitment Guidelines" as a condition of a closing agreement it reached with Hermann Hospital, a part of the Texas Medical Center at Houston. This is a highly unusual development, because most closing agreements are confidential.

Significantly, the agreement requires the hospital to "adopt verbatim and in its entirety" the recruitment guidelines developed by the IRS National Office. Pursuant to the closing agreement, the hospital agreed not to extend or modify any agreements it had with its physicians in any way other than in conformity with the "Hospital Physician Recruitment Guidelines," and to establish appropriate review of future physician service agreements. The hospital agreed to adopt and to follow the guidelines as of the date of the agreement.

The guidelines set forth comprehensive and detailed provisions relating to permissible and impermissible physician recruitment activities. Specifically, the guidelines provide that no retention incentives of any kind may be offered to existing physicians, defined as nonemployee physicians having medical staff privileges at the hospital. Incentives may be offered to "permissible recruits," defined as "physicians who either (i) [are] recent graduate[s] of a residency or fellowship program, whether or not in the Hospital's community, or (ii) [have] not previously practiced in the Hospital's community or been affiliated with another hospital serving all or part of the Hospital's community."

Permissible incentives are defined as provision of cash, credit, goods, services or other valuable rights to a physician in exchange for the physician's agreement to relocate into or remain with the hospital's community, but only if provided in an amount and manner that does not confer prohibited inurement or more than incidental private benefit on the physician. Such prohibited results are presumed unless any offered incentives conform to the guidelines. Recruitment incentives may be offered to a permissible recruit only if there is a demonstrable community need for the physician.

The actual incentives that may be offered are subject to significant limitations. Permissible incentives include loans, lines of credit and loan guarantees, but only if such items are documented and evidenced by executed promissory notes, adequately secured (such as by accounts receivable or office equipment), and bear interest at a reasonable rate reflecting market conditions. Any loan forgiveness must be conditioned on the physician's continued presence in practice in the community and must be ratable for a period of not less than four years.

Permissible incentives also include a reasonable income guarantee, but only if it is for a maximum of two years and is agreed to in advance in writing. It may not be modified over the life of the agreement. If periodic guarantee advances are made, they must be structured as loans. The guarantee must represent all or part of a compensation package that is reasonable in its entirety.

Incentives that are not permitted generally relate to a nonemployee physician's private practice. Prohibited incentives include payments for travel and education expenses related to the physician's private practice, payments for a private practice startup or assistance such as consulting services (when an income guarantee is provided to the physician), or subsidization of costs for support personnel in the physician's private practice. The payment of malpractice insurance for a physician's private practice is not permitted; however, if a physician provides services to the hospital as a medical director or in some other capacity distinct from a private practice, malpractice insurance may be provided with respect to those duties. Such "perks" as subsidized parking, telephone allowances, car allowances, health insurance or payment of medical association dues may be made only with respect to duties to the hospital distinct from a private practice. Appointment of a full- or part-time medical director may be made only on a legitimate and demonstrable business purpose for doing so. The guidelines further provide that signing bonuses or other bonus payments are not permissible incentives.

The Service's insistence on the publication of the closing agreement and the guidelines is an indication of its position. Current incentive arrangements should be evaluated in light of these guidelines and, when necessary, corrective measures taken.