When I started this blog a whopping six months ago, my first post was about physician employment contracts. I discussed some of the basics in that article, and now I want to get into one of the more complicated situations that physicians run into, which is a hospital guaranty.

In these situations, a hospital guarantees to a medical practice that a physician will earn a certain amount of revenue per month or that the physician will at least receive a certain salary per month based upon some formula.  If the revenue or income is not met in a given month, then the hospital will pay enough money to the practice employing the physician to make up the shortfall. The physician then owes that money back to the hospital with interest in the form of a promissory note, unless the physician stays in the area around the hospital and continues to provide medical services for a certain number of years, at which point the debt is forgiven without being paid. The forgiveness of the debt usually occurs annually, but monthly is preferred to reduce the physician’s risk. This arrangement, which is mostly used in rural areas where it is difficult to recruit physicians, presents a host of risks:

  1. The physician has a tremendous amount of liability. The amount owed to the hospital can easily exceed $200,000, and no young physician can reasonably afford to repay that amount if he or she has to leave town or stop working. The hospital is also required to attempt to collect the debt, even though these types of disputes are often settled for a much smaller amount.
  2. The physician ends up trapped at the job because of the liability. What I’ve seen happen is the physician gets a nice salary under the guaranty, but when it expires, the physician’s salary drops drastically because the practice just isn’t very profitable. Unfortunately, the physician has to stay another two or more years to wait out the forgiveness period on the debt and can barely make ends meet.
  3. Double taxation has to be avoided. The hospital’s forgiveness of the promissory note is a taxable event, and the physician receives a 1099 for each year’s forgiven debt. If the physician receives a salary from employer, which is taxed as wages, and a 1099 from the hospital even though the hospital’s money went to the employer, then double taxation can occur. This can be avoided through careful planning on the front end or the use of a good CPA or tax attorney who is familiar with how to handle this situation.
  4. Serious conflicts can arise between the hospital’s guaranty contract and the employment contract. One is that the employer can fudge its numbers to grab more money from the hospital than is necessary, for which the physician is liable. Another is that the employer can try to force a non-compete or non-solicitation, which is in direct conflict with the hospital’s demand that the physician stay in the area during the forgiveness period. Two contract situations often take much longer to negotiate because of those conflicts.

Needless to say, these situations should be avoided if at all possible. Some alternatives, if you really want to work in the area that is trying to force a hospital guaranty, are to take a lower salary or work under a RVU model that helps protect the employer so that a guaranty isn’t necessary. If the physician is self-employed, then he or she may be able to get into a practice the old fashioned way by purchasing a retiring physician’s practice (using bank financing and/or seller financing) thereby receiving the benefit of lower cost equipment and instant cash flow from the existing patient base.

On the other hand, if you are moving back to your home town and a hospital guaranty is your only option, then make sure to carefully review the agreement with your attorney and consider the tax aspects with your CPA. Attempt to remove all conflicts between the hospital contract and the employer’s contract, maximize your ability to see the books and records of the employer so that you can make sure the amount loaned by the hospital is as little as possible, and perform some due diligence to make sure that the area can support a reasonable living after the guaranty expires.