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.