Reviewing Physician Contracts

When negotiating a contract for your new job as a practicing Physician, there are several clauses that are important to review. Not all employment contracts are alike, and starting out on the right foot could bring you benefits for years to come, especially if you plan on creating a long-term relationship with your new employer.

Also keep in mind that there may be additional points added to your contract based on your specialty, such as the required number of hours on call or any licenses you are expected to maintain. Benefits are important in determining the value of an offer and may include retire­ment plans with matching contributions, health, dental, vision, disability, life, and malpractice insurance, professional membership dues, CME reimbursement, student loan repayments, signing bonuses, relocation expenses, and vacation, maternity, and sick leave. Not all of these will be included, however, so it’s important to know what your employer is offering.

While it’s difficult to predict every contract clause you may encounter, the following are general clauses that can be found in most Physician contracts:

Malpractice Insurance: Occurrence or Claims-Based?

The contract should specify who has responsibility for purchasing a malpractice policy — the employer or you. There are two types of malpractice policies: Claims-Based and Occurrence. The Claims-Based policy coverage will only apply if the claim is made while the policy is in effect. With an Occurrence policy, the carrier is responsible for the claim if the incident occurred anytime during the active policy period, even if the claim is brought to attention after the insurance policy has ended. Obviously, Occurrence policies are more expensive to make up for this extended coverage.

If a Claims-Based policy is terminated, then continued coverage — the “tail” — should be purchased for a period of time within which all possible claims can be discovered. Make sure your employment contract specifies who is responsible for purchasing “tail” coverage. If it’s an Occurrence policy, no tail needs to be purchased, even you move on to another job with different insurance. Prior claims will be covered with the previous insurance company.

Usually Malpractice insurance coverage is an employer paid benefit, but exceptions may occur with part-time employment. Your agreement should specify the minimum limits of coverage, i.e. $1M per claim and $3M annual aggregate is common but higher risk specialties may require higher coverage limits.

Retirement Benefits

Retirement plans for Physicians are usually 403b or 401k plans. Your contract should describe eligibility requirements and vesting schedules for any employer matching contributions (i.e. you have to work there for at least one year before contributing and any employer contributions vest 25% every year after that).

IMPORTANT NOTE: Plans with matching contributions are extremely valuable because the Physician can sometimes double the amount of money that is going into their retirement plan. I’ve seen many a Physician neglect to fully contribute to their 403b because they are unaware of the benefits. Tax-advantaged 403b contributions allowed by the IRS for employees and employer matches are limited each year, and cannot be made up in later years, so grab the chance to contribute while you can!

Other Insurance

Does the practice offer health and dental insurance? Is it individual or family coverage? What is your expected contribution? Is there a life and disability insurance benefit? Note that group life insurance that exceeds $50,000 is taxable to the employee (you). Similarly, when disability insurance premiums are paid by an employer, the benefits are also taxable to you. In addition, these plans are usually not portable, so if you change jobs, there is no guarantee that the next employer will provide the same benefits. Therefore it is also important to consider purchasing private, individual insurance plans to supplement employer coverage.

Partnership / Ownership

Your agreement should outline any future partnership opportunities for you to become an owner in the practice and share in any profits, above and beyond their regular salaries or bonuses. But keep in mind that language with regards to ownership is often vaguely expressed or explained verbally. So if this is something of interest, it should be explored further and obtained in writing.

The actual terms of the ownership buy-in is normally detailed in a separate “buy-sell” and/or “partnership” agreements. This is usually not signed until ownership takes place in the future. Therefore if you are planning to stay in a practice more than a few years, make sure that any potential partnership offers discussed during the original employment negotiations are clearly spelled out in writing.

If possible, your contract should specify the terms under which you may be offered partnership, the timing and method by which you acquire ownership in the practice, how the purchase price will be determined, and the period over which the purchase price will be paid. Since large upfront, lump sum buy-ins tend to scare off potential candidates, the trend today is toward smaller front loaded buy-ins, e.g., $5,000-10,000, followed by an offset against annual compensation for a number of years. The physician’s purchase price is often based on a percentage of the practice’s hard assets, accounts receivable, and goodwill.

The practice should also state any differences in profit sharing between junior and senior partners. Some groups divide net income equally once a physician becomes a partner. In addition to compensation, voting rights should also be discussed in terms of who gets to have a say in any new hires or other major purchases or decisions.

In considering the value of ownership, it is important to realize that holding equity in a medical practice is not as simple as owning stock in a public firm like Google or Microsoft. It is an “illiquid”asset with limited market value in that there is not a ready market to purchase your shares should you wish to dispose of them. You will most likely will have to sell them back to the practice, if possible.

In addition, the ownership of a practice may require you to help absorb any losses the practice may experience and to perform certain additional owner duties on behalf of the practice. So it’s important to consider the potential gains of ownership against the added risk and responsibilities involved.

When buying into the practice, it is also important to determine what assets (i.e., medical equipment, furnishings or real estate) or additional lines of business (i.e. labs) are part of the practice.

Outside Activities

An employment contract should also address whether you are allowed to work outside the practice, including moonlighting, research and publishing, teaching, directorships, and consul­ting. It also needs to specify if money earned from outside activities is private compensation paid directly to you or considered part of the group’s overall income. If it belongs to the practice, the employment contract should detail how you will be credited for these outside revenues within your compensation formula. Contracts sometimes also require you to give up any royalties or ownership claims on computer programs or medical devices you may have invented while employed by the practice.

Duties & Requirements

The contract agreement should clearly outline the hours involved in the job, including after-hour calls, weekends and weekdays, whether you will be required to perform administrative, teaching, or research duties, and how many patients are expected to be assigned to you. In certain procedure-intensive specialties, it is also important to clarify the target number and type of procedures expected to be performed each year.

Non-Compete Clauses

Restrictive clauses, often called non-compete agreements, can be one of the most important yet controversial aspects of an employment agreement.

If you were to leave your job, for any reason, these clauses try to prohibit you from practicing medicine for a specified period of time within a certain radius distance from your former employer. Most restrictions need to “reasonable” to be enforceable, but that may be two miles in a busy city and twenty miles in a rural setting. The point of the restriction is to prevent departing physicians from harming the practice and its revenue by “stealing” clients away. It might not seem fair to not be able to take your patients with you, but oftentimes the practice feels justified because they may have spent their own time and marketing resources helping you obtain those clients. Usually a non-compete clause is accompanied by a “non-solicitation” clause which prohibits you from actively contacting patients, employees, and business partners or vendors and trying to “lure” them away to join you instead.

Consultants advising physicians on contract negotiations often recommend that they try to limit the two clauses to as small a geographic radius and time span as they can, i.e. 2 miles and 6 months vs 10 miles and 2 years. If you don’t take care to negotiate this upfront, and you decide to leave one day, you could someday be forced to choose between relocating to an entirely different city or taking a long sabbatical while you wait for your non-compete to expire.

In case you do need to break the non-compete clause for any reason in the future, it helps to know the penalty you will face for violating a restrictive covenant. If it’s just monetary and you can afford to pay it, you might be able to break the clause and continue practicing the way you wish. Another penalty option is for your employer to obtain a court injunction, which is a ruling by the court prohibiting you from violating the non-solicitation or non-compete clause. Regardless of which penalty you will be facing, obviously the safest route to take is to avoid breaking any clauses if you can avoid doing so to begin with.

Contract Term

Contracts should make some mention of the employment term. Some contracts are written for one year and are automatically renewable while others last longer and have a specific renewal process.

Termination

Termination clauses in a contract may include both termination without cause and termination with cause. In some cases the right to terminate the contract without cause is granted only to your employer, which gives them unilateral power. When possible, it’s best to negotiate a two-way right to termination without cause, or at least limit your employer’s right to terminate you to the first year of your employment only. However it is more usual to allow either party to terminate without cause at any time, as long as there is an advance notification of anywhere from 30 to 90 days, sometimes longer if your employer wants time to find a replacement for you.

Clauses allowing termination for cause typically are on the employer’s side but the clauses should cover only justifiable reasons for termination, such as loss of medical license or a felony conviction. To protect yourself, it is also wise to have a clause asking the employer to first provide warning of any violations or impending termination to give you a chance to correct the problem or find your own replacement job.

Your contract should also include a clause for severance pay under some circumstances. If you are terminated without cause during your first year of employment, your employer should agree to waive required repayment of relocation funds and possibly pay you 1-6 months salary after you leave — due to the hardship you may face in finding a new position so soon after your recent employment.

Assignability

An assignability clause should be written into your contract to address what will happen in case of a merger, group acquisition, or consolidation (i.e. your practice is bought out by a bigger hospital). If there are significant changes in ownership of the practice and the employment contract is assignable, your responsibilities and contract continue as before. If your contract is “non-assignable,” then you are freed from you obligation to continue working for the new group or can negotiate and sign a new contract instead. Keep in mind that renegotiation with a bigger employer might not bring you the same favorable terms as you had previously, so it’s always best to have the option of being able to continue with your current contract terms.

If your employment contract provides no guarantee of continued employment following an ownership change, you may also wish to negotiate for a cash settlement or release from the non-compete/non-solicitation clauses in the event you get unexpectedly terminated from the practice as a result of the change.

Bonuses

You should also ask what type of bonus you might receive should the practice and/or you do well. The first point you want to enquire about is the type of bonus you might receive — more cash or more stock in the company. Next, you want to define how your bonus is determined — is it solely based on how the overall practice does, or is your individual contribution considered as well? Or you may receive both, based upon revenue generated above a certain amount for yourself and the practice as a whole. To be safe, you may want a health care attorney to review this portion of the contract to be sure there are no anti-kickback or Stark violations uninten­tionally included.

Services & Supplies

Your job usually comes with office space, medical equipment, personnel help, malpractice insurance, and billing assistance. However keep in mind that additional items can be negotiated into your contract such as cell phones and pagers, computers, and any special supplies that might be needed above and beyond the usual medical practice. If you are interested in having any of these expenses covered, be sure to ask for these upfront — it’s always difficult to bring them up later once you’ve already started your job!

Revenue Base

While this is not a covenant that you may want written in a contract, it’s a good idea to evaluate the firm’s culture and procedures to see if they match yours. For example, if bonuses are awarded based on team efforts and practice-wide events and training are encouraged, that may be different from a culture where physicians work independently and rewarded only for their own contributions.

In addition, the referral network should be discussed, such as can you expect any assistance in building up a base of patients, and do they have any supporting lines of business from where you can expect referrals. The breakdown of their revenue in terms of Medicare, private insurance, and self-pay patients would also be good to know. In terms of Medicare, ask about the percentages for capitation and discount fees on any HMOs or service plans. Lastly, you want to find out how many sources of revenue they have — if they are dependent on large amounts coming from just a few sources, there is a risk of volatility and significantly decreased revenue should one of them disappear.