Basic Contract Issues for New Physician Contracts

by Tucker Arensberg, P.C.
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Tucker Arensberg, P.C.

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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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