Recruiting new physicians is one of the biggest challenges that rural family practices face. The typical rural family practice group can afford neither the cost of hiring a national recruiting firm nor the time required to recruit a new physician by itself. A rural group also may find it difficult to compete with large health care organizations offering highly competitive salary and benefit packages, urban and suburban practice locations and sophisticated practice management services.

One particularly attractive benefit that many large organizations offer is assumption of their recruits' often sizable debts from student loans. The attraction is easy to understand: The median cumulative debt for family practice residency graduates in 1995 was $69,038.¹ Assuming a combined federal and state tax rate of 43 percent, that's roughly equivalent to the take-home pay from a year's pretax income of about $121,000. Many rural practices would find it difficult even to meet that salary expectation, and assuming the debt in addition to paying enough salary to live on would be out of the question.

Or would it? A little-known section of the federal tax code actually makes loan abatement a possibility for some rural practices. ² In effect, the law allows others to repay the borrower's student loans, and it excludes the repayment from the borrower's gross taxable income if he or she works in medicine, nursing or teaching for a certain period of time. The law applies to a broad class of employers. In fact, many physician practice management companies have already discovered this technique and are using it to attract physicians to rural practices.

For a physician to qualify, he or she must work in a documented area of public need — generally in an area the U.S. Public Health Service has designated as a health professional shortage area or a medically underserved area, or in a federally qualified health clinic in a documented health care shortage area.³

Loans that qualify are any obtained and used to help the borrower attend public or private preparatory, undergraduate or postgraduate educational institutions. The debt must be substantiated by a valid loan, such as a promissory note or demand loan; contributions from family and friends may not be repaid in this manner.

Who pays the loans?

Here's how the system works: The recruiting practice typically finds a sponsor in the community who pays the physician's student loans and assumes the physician's debt as a lender. That sponsor may be the U.S. government or its instrumentality or agency; a state, territory or possession of the United States, the District of Columbia, or any political subdivision of these entities; or a tax-exempt public-benefit corporation that has assumed control over a state, county or municipal hospital and whose employees are considered public employees under state law.

For example, Rural Family Medicine, a small group, enters into a three-year employment agreement with Dr. New, a licensed physician completing a family practice residency. Dr. New will join Rural Family Medicine immediately after graduation with total annual compensation of $110,000. Rural Family Medicine will issue a yearly W-2 form showing $110,000, and Dr. New will report this amount as income.

All physicians at Rural Family Medicine serve on the active admitting staff of the nonprofit Rural Community Hospital. The hospital, whose staff are legally considered public employees, sponsors a separate agreement for the assumption of Dr. New's student loans, which total $72,000. The hospital will pay off the loans while simultaneously issuing a separate three-year loan to Dr. New, which will be forgiven in $2,000 monthly increments in return for Dr. New's maintaining active admitting staff privileges at the hospital for three years. The hospital won't issue a Form 1099 or W-2 for the amounts of its loan forgiveness, and Dr. New won't report the economic benefit of the loan forgiveness as income.

A word of caution: These arrangements entail considerable risk of violating anti-kickback laws. Rural practices and the institutions they enlist as sponsors should consult attorneys, accountants and specialists in health care compensation to ensure that their transactions meet the goals of all involved. But executed properly, this technique can sweeten a community's recruitment package, or it can allow a community to match its needs with those of a particularly worthy medical resident. For a rural community in which one physician can have an economic impact conservatively estimated at $2 million a year, it's money well-spent.⁴