BASIC CONTRACT ISSUES FOR NEW PHYSICIAN CONTRACTS

INTRODUCTION

When physicians have finally completed the medical education journey, many are confronted with a “physician employment contract,” usually from a hospital or medical practice, which could define the essential terms of their professional relationship for many years to come.  If the parties live happily ever after, neither may ever read the contract again.  However, if a problem arises, the scramble to find and read the contract begins.

New physicians are always at a significant disadvantage in this process.  The “Employer,” whether hospital or medical practice, has invested significant resources into designing a contract which gives emphatic attention to the key terms upon which the physician was focused at signing (money, time, vacation, employee benefits) but is otherwise a fairly one-sided agreement; perhaps it is even presented as the “form contract we give to all the doctors.”  Residents and fellows may be pulled a little deeper into that dilemma if they remain with the teaching institution at which they completed their studies because the new contract may not appear to be that much different from the prior “student” contract.

Since this contract will basically control your professional life, by not only defining how you must work and for how much, but also by controlling where you might practice when the contract ends though “restrictive covenants,” you are well advised to read it carefully and consult an experienced healthcare lawyer before signing any contract.

The following outline is a fundamental review of the basis issues which should appear in most contracts.

I.        COMPENSATION:  The most important item of the contract will be the compensation.  Compensation is typically divided into three categories, i.e., base compensation, productivity or incentive compensation, and other bonuses.

A.      Base compensation is guaranteed annual salary, usually payable in accordance with the employer’s payroll practices.  Base compensation in multi-year contracts should escalate in future years to reflect added value or inflation, unless there is a productivity component in addition to the base compensation.  Experienced advisors should have comparative compensation information by specialty.

B.      Productivity compensation is typically based upon some formula, usually either net collections or some other productivity measure such as WRVUs.  Productivity based upon collections typically requires some collection level in excess of expenses or in excess of a collection target.  Be careful to clearly define the productivity formula, particularly the amount and methodology for allocating expenses.  Productivity based upon work units requires a clear understanding of how those units will be generated, i.e., by the physicians or by other ancillary providers, and whether it will include ancillary revenue, such as imaging, drugs and biologicals, etc.  Furthermore, healthcare reform may eventually create Accountable Care Organizations, medical homes, substantive Pay 4 Performance (P4P) models, and Medicare MIPS models.  Therefore, incentive based arrangements which rely on collections or WRVUs should include a commitment to make a good faith attempt to incorporate new compensation models in an equitable manner.

C.      Other types of bonuses include signing bonuses, retention bonuses that are paid following completion of annual benchmarks, and severance bonuses for premature termination.

II.       TERM:  The contract term is the number of years that the contract will be in force.  The term of physician employment contracts usually reflects some initial probationary period or qualifying period during which the physician will be an employee of the practice prior to an opportunity to become a shareholder.  Employment contracts with hospitals do not have shareholder options in the future.  This probationary period varies by geographic region of the country, but is typically 2 to 3 years.  You should assure that the initial contract continues to exist until replaced by a shareholder employment contract.  Many contracts contain “evergreen” renewal provisions, which automatically renew contract term from year to year without requiring any action by either the employer or the employee.  Be careful with evergreen contracts which contain no provisions for salary escalation.

III.      BENEFITS:  Most contracts simply state that you participate in the benefit plans in accordance with the terms and conditions of the plans; get the details.

A.      Retirement Plan:  Check participation, vesting and contribution rates.  Get a copy of the Summary Plan Description (SPD) mandated by ERISA.

B.      Health Insurance:  Most practices and all hospitals will have an employee benefit description.

IV.     BUSINESS EXPENSES:  Get the business expense policy.  If you have additional specific needs, discuss these before the contract is signed.

A.      Professional Dues:  Hospitals, specialty societies

B.      Pager/Communications/Cell Phone

C.      CME

D.      Travel and Parking

E.      Moving and Relocation

V.      MALPRACTICE INSURANCE:  Malpractice premiums are typically covered as one of the business expenses in the contract.  There are two types of malpractice insurance, i.e., occurrence and claims made.  Occurrence malpractice insurance covers the physician for any event that occurred during the term of the malpractice policy regardless of when the claim is made.  Claims made malpractice insurance, which is the less valuable coverage, covers incidents only if they both occur and are the subject of a claim made during the term of the policy, hence the name “claims made.”  When employment at an entity with claims made insurance ends, the malpractice insurance typically ends also, meaning that any future claims will not be covered unless a reporting endorsement, sometimes known as a “tail,” is purchased.  The tail should be covered as a business expense.  Sometimes, the responsibility for the tail is divided based upon the cause for termination.  If the practice terminates the physician or fails to make the physician a shareholder, then the practice pays the tail.  If the physician resigns without cause to pursue some other opportunity, the physician is responsible for the tail.  The amount of malpractice insurance varies from state to state.  Some states require a minimum level of malpractice insurance.  Some states also have state funds, such as catastrophic loss funds, into which premiums or surcharges are paid by the physician.  The physician should make sure that these additional elements are included in the malpractice coverage.

VI.     CLINICAL DUTIES:  The description of clinical duties is usually a fairly generic provision of the employment contract, but the physician should pay careful attention to the scope of those duties to make sure that the office facilities and hospitals at which the physician is required to practice are identified, that the parties understand how additional offices or hospitals can or cannot be added, how many patient office hours are expected, and how call coverage responsibilities will be divided among the physicians in the practice.  Typical language is “equitable allocation,” which does not quite mean equal.  It is common for senior physicians to take less call than junior physicians, but language stating that the call is simply assigned by the employer is too vague.  The contract should also state whether moonlighting is or is not allowed.

VII.    TERMINATION:  Contracts will typically have a termination clause which defines several different methods for termination.

A.      Expiration:  The contract can simply expire at the end of the term.

B.      Termination for Cause:  The contract can be terminated by either party for cause, which is usually defined as some breach of the contract by the other party, or the occurrence of certain events such as loss of medical license, loss of DEA number, Medicare exclusion, conviction of a crime, etc.

C.      Other Material Breaches:  The contract can also be terminable for more ambiguous breaches, such as the failure to perform duties in accordance with employer standards, and attention to patients, etc.  Ambiguous events such as these should be subject to a “notice and cure provision,” which requires the employer to first give notice of the alleged breach sufficient to describe the problem and give the physician the opportunity to cure that breach over some period of time; the purpose of  this type of provision is to prevent surprise terminations.

D.      Unilateral Termination Without Cause:  Contracts typically give both the employer and the employee the opportunity to terminate the contract without cause upon sufficient advance notice.  Termination of this type raises several questions.

a.       How much notice will the practice require?  Practices typically want time to recruit a replacement physician, but that time is usually too long to permit an employed physician to accept another position, so the parties must negotiate a satisfactory compromise.

b.       How much notice will the physician require?  Will that notice be different for non-renewal of the contract or failure to make shareholder after two or three years of employment compared to “premature” termination during the first year of employment.  It is certainly unfair to expect that employment could be terminated just 90 days after the start of the contract because the employer/practice changes its collective mind.  In such circumstances, early terminations are usually combined with greater notice or severance payments.

c.       Defining the cause for termination is very important with respect to the enforcement or applicability of the restrictive covenant.

VIII.   RESTRICTIVE COVENANTS:  The enforceability of restrictive covenants depends upon the state, i.e., the jurisdiction, in which the practice is located.  Some states prohibit restrictive covenants.  State that do permit the enforcement of restrictive covenants usually require that they be reasonable, so that they are no broader than reasonably necessary to protect the employer.  Just as an example, restrictive covenants that would prohibit the physician from practicing medicine within 200 miles of the office location will not be enforceable simply because it is improbable that a competing practice 200 miles away would do any harm to a practice.  Note that the geographic scope will definitely depend upon the nature of the practice and the population density.  While a 25 mile radius in a rural area might be appropriate, a 25 mile radius in New York City would not be.  Restrictive covenants will have the following components:

1.       Geographic Scope

2.       Time Period

3.       Prohibition of Practice/Resignation of Medical Privileges at Certain Hospitals

4.       Prohibited Activities

A crucial point is whether the restrictive covenant will be enforceable upon unilateral termination or non-renewal of the contract by practice/employer, particularly if that is coupled with the practice’s decision not to make a physician a shareholder or owner of the practice.  Enforcing the restrictive covenant in those situations makes it painless for the practice to withhold shareholder status and simply recruit a new physician.  If the restrictive covenant is designed not to apply in those situations, the practice must balance whether the right step is to proceed with shareholder status.

IX.      CONFIDENTIALITY INTELLECTUAL PROPERTY:  Most contracts provide that the intellectual property you create during employment (inventions, devices, publications, etc.) is the property of the employer.  These clauses state that patient lists and demographic information are property of the practice.  Provide exceptions if necessary.

X.       LOAN FORGIVENESS:  There are a variety of loan forgiveness issues that could come into play.  Federal programs allow forgiveness for service in underserved areas and on an income based repayment plan for 10 years of service at non-profit healthcare institutions.  In addition, hospitals and practices sometime offer additional benefits.  However the cash flow and tax implications of federal forgiveness, which are income tax free, versus private subsidy programs which are typically taxable as compensation, should be diligently evaluated.

XI.      ­­­­­­­­­­­­­­­­PRACTICE BUY-IN:  (A Topic for Another Day)

WARNING

Although the foregoing discussion may appear to present a thorough analysis of the issues, you should always consult an experienced lawyer, explain to them your expectations about your new position, and let them review your contract in light of those expectations.  It is always preferable to have experienced counsel in this process.  Since the contract will define how much money you will make, what you will be required to do to make it, and how your dream opportunity can be “terminated” while you are to be contractually banished from practicing medicine in that market (which could be your hometown), you are not doing yourself any favors by asking your college roommate who has become a lawyer “to take a quick look” at your contract.

I’ve been practicing in this area for almost 35 years and have helped hundreds of doctors with these contracts.  I would be happy to help you with yours.

Tags:  “Physicians’ Contracts” “Physician Contracts” “Restrictive Covenants” “Healthcare Reform”

 

 

 

Basic Contract Issues for New Physician Contracts

INTRODUCTION

When physicians have finally completed the medical education journey, many are confronted with a “physician employment contract,” usually from a hospital or medical practice, which could define the essential terms of their professional relationship for many years to come.  If the parties live happily ever after, neither may ever read the contract again.  However, if a problem arises, the scramble to find and read the contract begins.

New physicians are always at a significant disadvantage in this process.  The “Employer,” whether hospital or medical practice, has invested significant resources into designing a contract which gives emphatic attention to the key terms upon which the physician was focused at signing (money, time, vacation, employee benefits) but is otherwise a fairly one-sided agreement; perhaps it is even presented as the “form contract we give to all the doctors.”  Residents and fellows may be pulled a little deeper into that dilemma if they remain with the teaching institution at which they completed their studies because the new contract may not appear to be that much different from the prior “student” contract.

Since this contract will basically control your professional life, by not only defining how you must work and for how much, but also by controlling where you might practice when the contract ends though “restrictive covenants,” you are well advised to read it carefully and consult an experienced healthcare lawyer before signing any contract.

The following outline is a fundamental review of the basis issues which should appear in most contracts.

I.        COMPENSATION:  The most important item of the contract will be the compensation.  Compensation is typically divided into three categories, i.e., base compensation, productivity or incentive compensation, and other bonuses.

A.      Base compensation is guaranteed annual salary, usually payable in accordance with the employer’s payroll practices.  Base compensation in multi-year contracts should escalate in future years to reflect added value or inflation, unless there is a productivity component in addition to the base compensation.  Experienced advisors should have comparative compensation information by specialty.

B.      Productivity compensation is typically based upon some formula, usually either net collections or some other productivity measure such as WRVUs.  Productivity based upon collections typically requires some collection level in excess of expenses or in excess of a collection target.  Be careful to clearly define the productivity formula, particularly the amount and methodology for allocating expenses.  Productivity based upon work units requires a clear understanding of how those units will be generated, i.e., by the physicians or by other ancillary providers, and whether it will include ancillary revenue, such as imaging, drugs and biologicals, etc.  Furthermore, healthcare reform may eventually create Accountable Care Organizations, medical homes, substantive Pay 4 Performance (P4P) models, and Medicare MIPS models.  Therefore, incentive based arrangements which rely on collections or WRVUs should include a commitment to make a good faith attempt to incorporate new compensation models in an equitable manner.

C.      Other types of bonuses include signing bonuses, retention bonuses that are paid following completion of annual benchmarks, and severance bonuses for premature termination.

II.       TERM:  The contract term is the number of years that the contract will be in force.  The term of physician employment contracts usually reflects some initial probationary period or qualifying period during which the physician will be an employee of the practice prior to an opportunity to become a shareholder.  Employment contracts with hospitals do not have shareholder options in the future.  This probationary period varies by geographic region of the country, but is typically 2 to 3 years.  You should assure that the initial contract continues to exist until replaced by a shareholder employment contract.  Many contracts contain “evergreen” renewal provisions, which automatically renew contract term from year to year without requiring any action by either the employer or the employee.  Be careful with evergreen contracts which contain no provisions for salary escalation.

III.      BENEFITS:  Most contracts simply state that you participate in the benefit plans in accordance with the terms and conditions of the plans; get the details.

A.      Retirement Plan:  Check participation, vesting and contribution rates.  Get a copy of the Summary Plan Description (SPD) mandated by ERISA.

B.      Health Insurance:  Most practices and all hospitals will have an employee benefit description.

IV.     BUSINESS EXPENSES:  Get the business expense policy.  If you have additional specific needs, discuss these before the contract is signed.

A.      Professional Dues:  Hospitals, specialty societies

B.      Pager/Communications/Cell Phone

C.      CME

D.      Travel and Parking

E.      Moving and Relocation

V.      MALPRACTICE INSURANCE:  Malpractice premiums are typically covered as one of the business expenses in the contract.  There are two types of malpractice insurance, i.e., occurrence and claims made.  Occurrence malpractice insurance covers the physician for any event that occurred during the term of the malpractice policy regardless of when the claim is made.  Claims made malpractice insurance, which is the less valuable coverage, covers incidents only if they both occur and are the subject of a claim made during the term of the policy, hence the name “claims made.”  When employment at an entity with claims made insurance ends, the malpractice insurance typically ends also, meaning that any future claims will not be covered unless a reporting endorsement, sometimes known as a “tail,” is purchased.  The tail should be covered as a business expense.  Sometimes, the responsibility for the tail is divided based upon the cause for termination.  If the practice terminates the physician or fails to make the physician a shareholder, then the practice pays the tail.  If the physician resigns without cause to pursue some other opportunity, the physician is responsible for the tail.  The amount of malpractice insurance varies from state to state.  Some states require a minimum level of malpractice insurance.  Some states also have state funds, such as catastrophic loss funds, into which premiums or surcharges are paid by the physician.  The physician should make sure that these additional elements are included in the malpractice coverage.

VI.     CLINICAL DUTIES:  The description of clinical duties is usually a fairly generic provision of the employment contract, but the physician should pay careful attention to the scope of those duties to make sure that the office facilities and hospitals at which the physician is required to practice are identified, that the parties understand how additional offices or hospitals can or cannot be added, how many patient office hours are expected, and how call coverage responsibilities will be divided among the physicians in the practice.  Typical language is “equitable allocation,” which does not quite mean equal.  It is common for senior physicians to take less call than junior physicians, but language stating that the call is simply assigned by the employer is too vague.  The contract should also state whether moonlighting is or is not allowed.

VII.    TERMINATION:  Contracts will typically have a termination clause which defines several different methods for termination.

A.      Expiration:  The contract can simply expire at the end of the term.

B.      Termination for Cause:  The contract can be terminated by either party for cause, which is usually defined as some breach of the contract by the other party, or the occurrence of certain events such as loss of medical license, loss of DEA number, Medicare exclusion, conviction of a crime, etc.

C.      Other Material Breaches:  The contract can also be terminable for more ambiguous breaches, such as the failure to perform duties in accordance with employer standards, and attention to patients, etc.  Ambiguous events such as these should be subject to a “notice and cure provision,” which requires the employer to first give notice of the alleged breach sufficient to describe the problem and give the physician the opportunity to cure that breach over some period of time; the purpose of  this type of provision is to prevent surprise terminations.

D.      Unilateral Termination Without Cause:  Contracts typically give both the employer and the employee the opportunity to terminate the contract without cause upon sufficient advance notice.  Termination of this type raises several questions.

a.       How much notice will the practice require?  Practices typically want time to recruit a replacement physician, but that time is usually too long to permit an employed physician to accept another position, so the parties must negotiate a satisfactory compromise.

b.       How much notice will the physician require?  Will that notice be different for non-renewal of the contract or failure to make shareholder after two or three years of employment compared to “premature” termination during the first year of employment.  It is certainly unfair to expect that employment could be terminated just 90 days after the start of the contract because the employer/practice changes its collective mind.  In such circumstances, early terminations are usually combined with greater notice or severance payments.

c.       Defining the cause for termination is very important with respect to the enforcement or applicability of the restrictive covenant.

VIII.   RESTRICTIVE COVENANTS:  The enforceability of restrictive covenants depends upon the state, i.e., the jurisdiction, in which the practice is located.  Some states prohibit restrictive covenants.  State that do permit the enforcement of restrictive covenants usually require that they be reasonable, so that they are no broader than reasonably necessary to protect the employer.  Just as an example, restrictive covenants that would prohibit the physician from practicing medicine within 200 miles of the office location will not be enforceable simply because it is improbable that a competing practice 200 miles away would do any harm to a practice.  Note that the geographic scope will definitely depend upon the nature of the practice and the population density.  While a 25 mile radius in a rural area might be appropriate, a 25 mile radius in New York City would not be.  Restrictive covenants will have the following components:

1.       Geographic Scope

2.       Time Period

3.       Prohibition of Practice/Resignation of Medical Privileges at Certain Hospitals

4.       Prohibited Activities

A crucial point is whether the restrictive covenant will be enforceable upon unilateral termination or non-renewal of the contract by practice/employer, particularly if that is coupled with the practice’s decision not to make a physician a shareholder or owner of the practice.  Enforcing the restrictive covenant in those situations makes it painless for the practice to withhold shareholder status and simply recruit a new physician.  If the restrictive covenant is designed not to apply in those situations, the practice must balance whether the right step is to proceed with shareholder status.

IX.      CONFIDENTIALITY INTELLECTUAL PROPERTY:  Most contracts provide that the intellectual property you create during employment (inventions, devices, publications, etc.) is the property of the employer.  These clauses state that patient lists and demographic information are property of the practice.  Provide exceptions if necessary.

X.       ­­­­­­­­­­­­­­­­PRACTICE BUY-IN:  (A Topic for Another Day)

WARNING

Although the foregoing discussion may appear to present a thorough analysis of the issues, you should always consult an experienced lawyer, explain to them your expectations about your new position, and let them review your contract in light of those expectations.  It is always preferable to have experienced counsel in this process.  Since the contract will define how much money you will make, what you will be required to do to make it, and how your dream opportunity can be “terminated” while you are to be contractually banished from practicing medicine in that market (which could be your hometown), you are not doing yourself any favors by asking your college roommate who has become a lawyer “to take a quick look” at your contract.

I’ve been practicing in this area for almost 35 years and have helped hundreds of doctors with these contracts.  I would be happy to help you with yours.

 

 

CMS Posts Open Payment Data – $7.52 Billion in 2015

CMS published the 2015 Open Payment Data on June 30, 2015.  This is the link to the notice and the CMS site: https://openpaymentsdata.cms.gov/

CMS has presented tables in its press release showing the highest paid specialties and highest paying companies.  Over the last two years, Novartis has paid approximately $842 million to 344,000 recipients, which is an average of $2,500.  Genentech has paid $855 million to 44,000 recipients, making their average approximately $20,000.  Note that we are using the term recipient to reflect each of the records posted by CMS there could well be more than one record posted for any specific recipient.

 

 

Tucker Arensberg’s Michael Cassidy Named a Top Author by JD Supra

The law firm of Tucker Arensberg, P.C. is pleased to announce Michael Cassidy has been named a Top Author by JD Supra.  Mike is the founder and frequent contributor to the Med Law Blog (www.medlawblog.com).  This award recognizes the top authors being read by executives, in-house counsel, media and other professionals across the JD Supra platform in 2015.  The Top 200 Authors were selected based on their engagement with readers, general visibility and thought leadership in selected categories from over 34,000 authors that publish on JD Supra.

Mike’s practice focuses on representing physicians and other healthcare providers in all issues relating to the business of health care and has been certified in Healthcare Compliance (CHC) by the Health Care Compliance Association (HCCA).  Mike concentrates his practice in Health Law, chairs the firm’s Business and Finance Department, and is a member of the Health Law Practice Group and the Employee Benefits Practice Group, and currently co-chairs the HALA National Practitioner Data Bank Work Group.

Mike earned his Juris Doctor from the University of Pittsburgh School of Law and his Bachelor of Arts from Brown University.

Tucker Arensberg is an 85 attorney law firm headquartered in Pittsburgh, PA with offices in Harrisburg, PA and New York, NY.  It is a full service regional firm providing service to its clients in the areas of  general business law, banking, insolvency and creditors’ rights, estates and trusts, school and municipal law, health care, litigation, mergers and acquisitions, energy, technology and intellectual property, environmental, labor and employment, real estate, workers’ compensation, employee benefits, and investment management and fiduciary services.  For more information on the firm, please visit www.tuckerlaw.com

JD Supra delivers need-to-know legal and business content to professionals in all industries via more than 100 proprietary social feeds, on mobile platforms, in daily email digests and as news across the web.  JD Supra connects over 34,000 professionals writing on important topics to executives, in-house counsel and the media.

Final 60 Day Overpayment Rule

CMS has issued the final regulations to implement that section of the Affordable Care Act amending the Social Security Act to provide that retention of identified overpayment could be a false claim and be subject to both the False Claims Act (FCA) and the Civil Money Penalty Act (CMP).

ACA § 6402(a) established new Social Security Action § 1128J(d), 42 USC § 1320a-7(k)(b).  The statute and the final rule require reporting and returning of an identified overpayment no later than 60 days after the date on which the overpayment has been reasonably identified.  There has been significant debate over the definition of “reasonably identified” and the “look back” period, which is essentially the statute of limitations requiring that similar overpayments in prior years be identified, reported and returned as well.  CMS originally proposed a 10 year look back.

The final rule states that an overpayment has been identified when a person “has, or should have, through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount.  A provider will be considered as having acted with “reasonable diligence” when it conducts a “timely, good faith investigation” within “six months from receipt of credible information, except in extraordinary circumstances.”  Therefore, a provider has six months from the time they reasonably suspect that overpayment has been made to conduct an investigation and identify the overpayment, and then 60 more days to report and return the overpayment.  The look back period has been defined as six (6) years.  The CMS press release and the final regulation are linked.

 

Progress on Medicare Payment Reform

HHS is gearing up to design and implement a revised Medicare payment system.  The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) has designated a merit based incentive payment system (MIPS) as a goal.  CMS is tasked to design a value based payment system based upon quality, resource use, clinical practice improvement, and meaningful use certified EHR technology.

As part of the implementation, HHS and the CMS Innovation Center have established the Health Care Payment Learning and Action Network.

HCP-LAN published a whitepaper “Alternate Payment Model (APM) Framework” on January 12, 2016.

Ironically, the work group believes the person centered care rests upon 3 pillars (quality, cost effectiveness, and patient engagement), instead of a Triple Aim (patient experience, population health, and cost).

The whitepaper states that the new alternative payment model (APM) framework rests on 7 principals:

  1. Changing providers financial incentives is not sufficient to achieve person centered care, so it would be essential to empower patients to be partners in healthcare transformation (this has previously been called patient involvement or consumerism).
  2. The goal for payment reform is to shift US health care spending significantly towards population based and more person focused payments (and fee for service).
  3. Value based incentives should ideally reach the providers that deliver care.  (This was previously called moving the needle or bending the cost curve.)
  4. Payment models that do not take quality into account are not considered APMs and the APM framework, and do not count as progress toward payment reform.  (This is self explanatory.)
  5. Value based incentives should be intense enough to motivate providers to invest in and adopt new approaches to healthcare delivery.  (This is a correlated item 5 is that the incentive must be meaningful enough to actually change care).
  6. APMs will be classified according to the dominate form of payment when more than one type of payment is used.
  7. Centers of Excellence, accountable care organizations, and patient centered medical homes are examples rather than categories in the APM framework.

Sadly, if you read the new goals and the whitepaper, I am sure most of you will agree that this is nothing new.  These goals, these theories, these pillars and these triple aims are, I think, commonly accepted by everybody.  Implementation in a healthcare system that has incentivized volume based payment for both hospitals and individual providers for the last 20 years (actually 50+ years for Medicare physician reimbursement) and what is essentially the largest for profit industry in the country, will be a challenge.

10 Significant Physician Contracting Mistakes

1.          Failure to Begin with the End in Mind. The most important provisions of your employment contract will be the provisions governing your termination rights, for two reasons. First, if the relationship goes well, chances are the contract will never be read again. However, if there is a dispute, both parties will be reading the contract looking for the provisions defining rights and responsibilities arising out of termination, including things such as severance pay and restrictive covenants. Second, if the employed physician has no rights when the contract terminates, such as the right to remain in practice under certain circumstances as an exception to the restrictive covenant, then the physician also has no leverage to resolve the dispute. It is important to preserve some type of leverage throughout the contract.

2.          Restrictive Covenants are Not an Urban Myth. Although there are some states in which restrictive covenants are unenforceable by law, that is a distinctly minority position; restrictive covenants are definitely enforceable in Pennsylvania provided they satisfy some basic conditions. The restrictive covenant must relate to the protectable interests of the practice, it must be reasonable with respect to time and geographic scope, and it must have been voluntarily entered into in exchange for valuable consideration.

Standard restrictive covenants are usually applicable regardless of the reason for termination. You should attempt to protect yourself against termination without cause, termination associated with failure to become an owner, and termination initiated due to a breach of the employment contract by the practice. Furthermore, there may be some exceptions that can be incorporated into the contract.  For example, if it is important to the physician that he or she remains in a particular geographic area because of family or other considerations, perhaps the restrictive covenant can be negotiated to provide some available relief with respect to communities or hospitals. Perhaps the contract can clarify that private practice is prohibited, but academic work, hospitalist work or ER coverage is not. What happens to the medical records of the patients you have been following if you remain in practice in the area? How will the patients know that you remain in practice? Will you simply take the medical records or will a joint neutral letter be sent advising patients of your new location?

3.          Termination without Cause. Most contracts have a provision allowing the practice to terminate a physician’s employment upon 30, 60 or 90 days without cause. Practices always maintain this is just standard procedure for employment contracts. As mentioned above under the restrictive covenant topic, you should attempt to avoid being subject to a restrictive covenant in the event you are terminated without cause. Specifically, termination without cause during the beginning phases of the contract, i.e. a probationary period, during which the physician would not have had sufficient opportunity to establish relationships with patients or referring physicians to the extent that it would damage the practice. Similarly, termination without cause at the end of the contract or after an extended period of employment simply to avoid ownership eligibility should also be excepted from the restrictive covenant. This last point is an example of leverage. If the physician is subject to a restrictive covenant under any circumstances, including termination following the practice’s failure to advance the physician to ownership status, then the physician has no leverage to negotiate a continued relationship with the practice, and is basically compelled to accept the ownership offer under any circumstances.

4.          Contract Term. Contracts are either for a specific term, i.e. they expire in a definite number of years, usually not exceeding 3, or the contracts are “evergreen”; they continue indefinitely until terminated for some reason. This presents two very basic issues. If the contract is for an extended period of time, then there should be a provision for compensation increases, at least in those contracts that do not have incentive compensation clauses. Second, in order to preserve leverage, physicians must anticipate both how a contract can end and what their rights are at that time. If the contract continues until terminated and the restrictive covenant applies if the physician resigns, then the physician cannot resign without conceding the enforcement of the restrictive covenant. This is where the concept of “beginning with the end in mind” comes into play.

5.          Malpractice Coverage. Malpractice insurance coverage is usually available in two forms, i.e. occurrence and claims made. Occurrence is the better coverage, because it covers events that occur during the term of the insurance policy regardless of when the claim is made, i.e. it continues indefinitely. Claims made insurance is usually less expensive, but it also provides less protection because it covers events only if they both (i) occur during the term of the policy, and (ii) relate to a claim that is made during the term of the policy. Therefore, when the policy expires, coverage ends, unless a tail is purchased. You need to know type of malpractice insurance is being provided by the practice and who would bear the responsibility for the tail, if the tail is necessary. A typical resolution of this issue is that the tail is paid by the practice if the practice is responsible for the termination but the tail is paid by the physician if the physician is responsible for the termination. Note that a tail will not be necessary if you continue your malpractice coverage with that carrier at your next position, which may or may not be a possibility.

6.          Know Your Maximum Duties. Employment contracts do not specifically spell out hourly requirements, but, you should have a basic understanding of how many office hours are typically expected, how many hospitals will be covered, the hospitals at which you will be expected to perform rounds, and what your call coverage responsibilities will be. Employment contracts typically state that you will perform the duties as reasonably assigned by the practice, but you need to know what is normally expected. If the practice has multiple offices or hospitals at which it practices, you should know whether you will be expected to work at all locations and in all hospitals. Call coverage is typically handled by a statement that a physician will share equitably in the call, recognizing that senior physicians may take less, but it would be wise to know how much less before you sign the contract.

7.          Fringe Benefits. Most employment contracts typically state simply that the physician will share in the benefits that are provided to the other physicians in the practice. This language is typically satisfactory, but you should know what those benefits are. Most practices have employee benefit handbooks, or schedules identifying the benefits, at least as they exist at the current time. If you do not need health insurance because you are covered by a spouse’s health insurance, perhaps you want to negotiate for some other increased benefit in lieu of health insurance, which can easily cost between $7,000 and $10,000 per year per for family coverage. What business expenses will be covered for transportation, medical staff dues, professional society membership, CME, board travel and expenses? Most contracts state that all business expenses incurred with the approval of the employer will be covered, and they may establish a limit, but you should know that ahead of time.

8.          Ownership. Most private practice physicians intend to become owners of a practice at some point. It is extremely rare for a practice to guarantee a specific ownership purchase package. Typically, practices provide a “letter of intent” which states merely that it is the intention of the practice to make the new physician an owner if all goes well for the initial term of the contract.

You should accept the fact that practices almost never guarantee ownership. However, you should ask how the purchase price is going to be calculated. Will it be calculated according to an established formula that has been used in the past? If so, what has that been in the past? If there was no history of purchased transactions, but the practice nevertheless intends a formula approach to determining the purchase price, you should ask what the purchase price would be if the formula is applied was applied today. You should know whether all of the owners of the practice of equal owners and whether you are intended to also be an equal owner, whether there are two owners or ten owners. There are typically three components of the practice value, i.e. tangible assets such as office equipment, accounts receivable, and good will. Will all of those components be included in the formula?

9.          Compensation. Compensation should be the last item you agree upon, although it is usually the first item you discuss. Obviously, adequate compensation is critical to a successful relationship, but you should know the answers to the other questions before you can say that a compensation proposal is acceptable. For example, if the answers to all the other questions have been ideal, then lower compensation may not be a problem. However, if the benefits are low or you are expected to shoulder a disproportionate amount of call, or there is some other problem with the contract, then perhaps a higher compensation is in order.

There are usually two facets to compensation, i.e. a base compensation and bonus. The base compensation is the minimum compensation you expect to earn and must obviously be adequate. If the bonus is defined as a discretionary bonus to be awarded at the discretion of the practice, then you cannot rely upon additional compensation and need to assure an adequate base salary. Base compensation in contracts without realistic incentive programs should have cost of living protection.

Bonus or incentive or productivity arrangements are typically linked to your productively as measured by collections or WRVUs. You should have an idea of the historical performance of the physicians and the practice so you can project whether you will hit those targets under normal circumstances. You should provide protection against low productivity attributable to the practice’s failure or inability to provide experienced resources, e.g. physician assistants, or time, etc.

10.        Legal Counsel. Hopefully, by the time you have read this article, you will have recognized that experienced legal counsel is necessary to work your way through these agreements. It is a bad idea to try to handle negotiations yourself and then engage legal counsel at the end simply to review a contract that has already been agreed to in principal. By that time, it is almost impossible to fix any mistakes you might have made, without making it appear that you are breaking your word. This would be similar to a patient diagnosing, medicating and even performing procedures on themselves, and then calling you to see if they got it right!

Whether you engage legal counsel and have them conduct the negotiations or simply keep them in a consulting role in the background is usually a question resolved on a case by case basis, depending upon the nature of the discussions between the parties and the involvement of the practice’s counsel. Suffice it to say, you should be taking advice from your own attorney on how to handle those negotiations. It is almost certain that the practice has had legal counsel for the practice for a number of years; your retention of counsel to assist you in this process will not be viewed as an aggressive or adversarial step. In fact, any attempt by the practice to discourage you from consulting counsel should be viewed as a warning sign that the practice prefers that you be under-informed.

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