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Physician recruitment agreements: Avoiding internal physician disagreement
Posted in General

When a new physician with a physician recruitment agreement joins an existing physician group practice, the group and the new physician need to document their understanding of the recruitment arrangement clearly and fully. A misunderstanding of the arrangement at the outset could drag the group and the new physician into litigation at the end.

In today’s competitive health care marketplace where physician shortages often exist, physician recruitment agreements have become a popular vehicle to attract new physicians to a community. Hospitals recruiting physicians into a community frequently seek to place them in local group practices. To facilitate placement, hospitals typically agree to pay the group practice for any revenue shortfall in meeting the salary paid to the recruited physician and a share of the actual overhead expenses attributable to the recruited physician for a specified period of time. Support payments are commonly reduced to a note obligation, which is then forgiven on a pro rata basis over a number of years, provided the recruited physician continues to practice in the community during the forgiveness period. Although required to practice in the community during the forgiveness period, the recruited physician is not required to remain with the group practice.

However, the recruited physician, on occasion, may decide to leave the community before the loan is forgiven. In this situation, the hospital will likely, and may be required to, sue the physician to recover the balance on the loan. Sometimes the existing group practice gets dragged into the resulting litigation. It is in such a circumstance that documentation evidencing a clear and full understanding between the group practice and the recruited physician can be critical in determining who must repay the balance on the loan.

For example, in a case concerning health care providers in Arkansas (not Kentucky), Baptist Health, d/b/a/ Baptist Health Medical Center v. Smith (8th Cir. 2007), the U.S. Court of Appeals for the Eighth Circuit ruled that a physician group practice in Arkansas was not required to indemnify a recruited physician for the costs of repaying a recruitment loan made by an Arkansas hospital.

In this case, Baptist Health, the hospital, and Central Arkansas Vascular Surgery (CAVS), the group practice, jointly recruited a physician to provide medical services at both institutions. As part of the recruitment loan agreement, Baptist Health agreed to provide the physician a loan to help start his practice. Baptist Health also agreed to forgive the loan if the physician practiced in Little Rock for six years. Under this arrangement, CAVS would hire the recruited physician pursuant to a separate employment agreement. However, prior to entering into the recruitment loan agreement, the physician expressed some concerns about the loan repayment provision. In response, the president and sole shareholder of CAVS (President) sent a letter to the recruited physician stating:

You will be an employee of Central Arkansas Vascular Surgery, with a beginning employment date of July 1, 2002. Your responsibility to Central Arkansas Vascular Surgery is the professional practice of vascular surgery. You will not be responsible for repayment of any loan to Baptist Health Center in any form or fashion.

After signing the recruitment loan agreement, the recruited physician practiced in Arkansas for two years and then left for Texas. Baptist Health then sued the recruited physician to recover the roughly $154,000 loaned to him. In turn, the recruited physician filed a third-party complaint against CAVS and its President, alleging the President’s letter was an agreement to indemnify the recruited physician against any repayment obligation owed to Baptist Health.

The district court entered summary judgment in favor of Baptist Health and ordered the recruited physician to repay the balance on the recruitment loan. The district court also entered summary judgment in favor of the recruited physician. Significantly, the district court concluded that the President’s letter to the recruited physician was an indemnity agreement, and thus ordered the President to indemnify the recruited physician against the Baptist Health judgment. The President appealed.

On appeal, the Eighth Circuit ruled that the letter was not an indemnity agreement. The focus of this appeal was a single sentence in the three sentence letter from the President to the recruited physician, which stated: “You will not be responsible for repayment of any loan to Baptist Health Center in any form or fashion.” The President argued that the district court erroneously interpreted this statement as a “clear expression of his intent to indemnify” the recruited physician “sufficient to constitute an enforceable indemnity agreement under Arkansas law.”

The Eighth Circuit agreed with the President’s argument and found that this sentence did not constitute a clear and unequivocal expression of the President’s intent to indemnify the recruited physician. The court explained that the “letter failed to spell out a promise by [the President] to pay [the recruited physician’s] debt in clear, equivocal, unmistakable terms.” Moreover, the Court noted that “[conspicuously absent is any reference to [the President] assuming responsibility for [the recruited physician’s] obligation.”

Under the recruitment loan agreement, the court reasoned that “providing medical services in Little Rock constituted repayment by [the recruited physician].” Instead of serving as an indemnity agreement, the letter “merely states that [the recruited physician] will not have to repay any loan from Baptist Health.” As explained by the court, the “disputed sentence reasonably could be understood as [the President’s] prediction about whether Baptist Health would hold [the recruited physician] responsible for repayment of the loan, or it could simply be a misstatement by [the President] of the terms of the agreement.” Either way, the recruited physician “must show more than the possibility that the letter was an agreement to indemnify; the terms must be unmistakable.”

Here, the Eighth Circuit construed the letter as nothing more than a “mere articulation” of the President’s understanding of the terms of the agreement. Accordingly, the appeals court vacated the district court’s grant of summary judgment in favor of the recruited physician on the indemnification claim.

This case is a good illustration of why recruitment arrangements should be carefully reviewed by counsel for both the recruited physician and for the group practice to assure clear and complete mutual understanding.

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...

  • Partner

    Peter Thurman has more than 10 years of corporate law experience where he concentrates his practice in the areas of health care and insurance law. He regularly represents a variety of public and private companies, primarily health ...

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