Physician Employment Contracts: Recent Developments Spell Good News, Problem Areas

August 2008

Career Resources Editor’s Note: Physician employment contracts have become increasingly complex. While candidates may initially focus on contract provisions that define income, benefits, and working conditions, they must also recognize the importance of other business-related stipulations. These include partnership requirements, termination clauses, and noncompete agreements. Restrictive covenants and conflict resolution procedures are becoming more physician-friendly, but deserve the scrutiny of legal counsel. The advice of an accountant may also be helpful to fully assess the candidate’s as well as the potential employer’s financial situation. The bottom line: physicians entering into employment contracts should seek the advice of qualified professionals.
—John A. Fromson, MD

By Bonnie Darves, a Seattle-based freelance health care writer

Contracts are becoming more physician-friendly in some aspects, but trends in income structures, liability, and performance data “ownership” may pose problems for the unwary.

For the young surgeon who is being actively wooed by three top-flight groups or the emergency medicine physician who has just been offered her dream job at her first-choice hospital, reading through a 40-page preliminary employment contract is sure to put a damper on the excitement.

Physicians who don’t take the time to not only read, but also understand the document, however, could set themselves up for problems — possibly serious financial ones — later on, if the position doesn’t work out or personal circumstances dictate a move.

That’s not to say that prospective employers are intent on putting new hires in a disadvantageous position. Rather, it’s that failing to fully understand contract terms’ ramifications and engaging in worst-case, what-if scenario planning could result in costly surprises, cautions Dev Sangvai, MD, MBA, chair of the American Medical Association’s Young Physicians Section (YPS) and medical director of Duke Student Health at Duke University in Durham, North Carolina. That’s something he hears often enough in his work with the YPS.

“Anecdotally, problems come up when individuals say, ‘Well, I’ll take this job even though it’s not my dream job, because I want to work, make money and get experience,’ ” explains Dr. Sangvai, who is an assistant professor of family medicine and pediatrics. “Then, another job comes up across town, and all of a sudden the physician realizes he is caught in a number of problematic situations — from noncompete agreement to termination clauses. I tell anyone who’s looking at a contract: Don’t take a job that you don’t want.”

In actuality, sometimes physicians take jobs that sound terrific but turn out to be not exactly as advertised. Health care contracts lawyers report that the most common reason physicians leave is workload, either unevenly distributed call duty or punishingly long work weeks. Unfortunately, problematic contract provisions still apply — even when the physician has defensible, understandable reasons for leaving.

Recent developments in employment contracts spell both good news and bad news in such situations. (For a rundown of employment contract basics, including key contract elements and pitfalls, see the original two-part series that appeared on the NEJM CareerCenter website; links are below in the Resources sidebar.) Although the basic problem areas — onerous restrictive covenants, unrealistic workloads or performance expectations, and thorny paths to partnership — persist, a softening of sorts is occurring in some realms, notes Brad C. Jones, health care lawyer and president of MedAccord in Charlottesville, Virginia.

Mr. Jones, who has represented physicians in employment matters for many years, sees positives in two key areas: noncompetes, which are becoming more fair and representative of actual market factors, and contract-dispute resolution, which is moving away from litigation as the first resort and toward more physician-friendly alternative dispute resolution (ADR) provisions.

“There hasn’t been a tsunami of changes, but rather the adoption of things that can be tweaked,” Mr. Jones observes, explaining that ADR calls for first utilizing mediation, and then arbitration, before moving to the courtroom. “ADR is included far more now than it was ten years ago, when we often had to ask for it, even if it wasn’t a tough sell. I like ADR in contracts because of the economic power of the employer, and it’s slightly more employee-friendly.”

Mr. Jones and other lawyers with health care employment contracts expertise also see steady movement toward more equitable noncompete clauses. In the past, employers’ contracts often specified patently unfair, but generally court enforceable geographic boundaries — stating that a departing physician couldn’t practice within 50 miles of his previous employer, for example, even in an urban area. Today, largely because of pressure from attorneys who represent physicians, employers are drawing a much smaller radius, according to Joan Roediger, JD, a partner with the law firm of Obermayer Rebmann Maxwell & Hippel in Philadelphia.

To counter unreasonable noncompete clauses, Ms. Roediger asks groups in the hiring mode to conduct an analysis of where their patients come from, and then “draw the line” accordingly. Prospective physician employees can do the same, ideally with attorney representation, she advises.

Contract partnership buy-in provisions and terms, a perennial source of confusion for young physicians, hasn’t gotten any easier to decipher of late, according to Gary Katz, MD, MBA, an Ohio emergency physician who just completed his term as chair of the AMA’s YPS. “Most of the questions from my peers have to do with the business aspects of the contract, and partnership buy-in — how much it costs and how it’s defined are the big issues,” says Dr. Katz.

“Some of the arrangements make sense, and some are absolutely senseless, almost a disincentive to partnership.” Because of the long-term career importance of such deals, he adds, physicians eyeing a position with partnership potential should seek legal counsel early in contract evaluation.

The High Cost of Leaving

The other area in which things might be getting stickier for young physicians is who pays for what when the employment relationship terminates. Economic woes in health care are translating into a more self-protective stance among hiring entities. Employers may offer a hefty signing bonus to a sorely needed specialist, for example, but if that physician leaves within a short period, chances are he or she will have to pay it back.

Likewise, some employers looking to their new hires to carry some of the liability burden, and the associated insurance costs. This is occurring in such areas as general liability for non-medically related incidents that occur or clinical staff actions where employers are requiring new hires to indemnify them against such claims and incur the associated coverage costs. Contracts that require physicians to indemnify the employer from liability by essentially forcing the physician to assume liability for and insure against situations beyond the doctor’s control — such as another employee’s action — should be avoided, Ms. Roediger asserts. “If physicians see the word ‘indemnification’ in an employment contract, their radar should go off,” she says.

More commonly, this “share-the-burden” mentality is surfacing in malpractice tail coverage, for several reasons. Malpractice coverage costs are increasing, and employers are increasingly unwilling to pick up the whole tab — as high as two to three times the annual premium, and it’s usually due within 30 days of the policy’s termination — for the physician who decides, after 18 months, that the job didn’t work out. In the past, employers might have picked up this expense, except when employed physicians were terminated for “cause” or their positions were eliminated.

That’s changing. “This is a major issue I’m seeing in contracts, and it’s a huge responsibility,” Ms. Roediger reports. “Because as the cost of tail insurance is going up, more employers are trying to shift the cost to employees.” There are multiple options, she explains, including “hybrids” that divvy the bill in a range of ways depending on the circumstances. “Some employer contracts say, if we fire you without cause, we’ll pay the tail, but if you quit, you pay the tail,” she says, “and if we fire you for cause, you pay the tail.”

Dr. Katz knows this dilemma firsthand. When he took his first position, the contract stipulated that he was to assume responsibility for tail insurance if he left before a specified period, but he paid scant attention to the clause. When he and his wife were expecting their second child, they decided to move back to Ohio to be closer to family. Although Dr. Katz left the practice on very good terms, he still smarts when he recalls writing that check.

“It doesn’t mean a physician shouldn’t take a position that involves paying the tail insurance under certain conditions, but it’s important to be prepared for that possibility and put money away,” he advises, noting that he did not seek legal counsel when he signed a contract.

Far more potentially problematic on the expense spectrum than tail coverage are income-guarantee contracts. In these arrangements, which have become prevalent in recent years, hospitals pick up the tab for a medical group to bring in a sorely needed physician for a period of one to three years by paying the salary, benefits, and certain expenses. The physician agrees to stay in the community for a specified period of time and pays back what is effectively a loan, via patient revenues.

For example, a hospital might agree to guarantee the recruit $240,000 a year, via $20,000 monthly payments, and to pick up practice expenses of $10,000 a month. What that really means, Mr. Knoll explains, “is that the hospital loaned the physician $30,000 that month.” As the revenues come in, the “debt” is repaid incrementally.

But if the doctor leaves before the contracted period, as long as five years in some cases, she or he may be saddled with a huge bill — for overhead, recruiting costs, moving expenses, and whatever else figured in the original deal. “I’ve seen situations in which it cost the physician so much to settle that the hospital essentially got a free employee for a year,” Ms. Roediger says. She and the other health care lawyers interviewed for this article all cautioned that income-guarantee agreements tend to be physician-unfriendly and can be hugely problematic.

Of course, not all contracts are weighted heavily in favor of the employer, but the situations described above underscore the importance of bringing in industry-experienced professionals — a contracts lawyer and, if advisable, an accountant as well — before starting contract negotiations. And it’s especially important, Drs. Katz and Sangvai urge, to look at the contract with a specific focus on what happens if the physicians leaves — for any reason.

“The contract of employment is sort of your divorce decree — if everybody’s happy, you don’t ever look at the thing again,” Dr. Katz says. “But departures for reasons like a change in family or a spouse’s job are when the contract becomes really important. Unfortunately, many residents coming out don’t think that way.”

Dr. Sangvai proposes a simple “umbrella” approach, albeit a focused one. “I usually tell physicians looking at contracts to evaluate the contract from the perspective of what happens if you leave under good terms or under not so good terms,” he says. “That allows you to put in perspective everything from any income you may leave to your retirement contributions, restrictive covenants, or even the data collected on you.”

On a final note, Mr. Jones reminds physicians that although the contract itself is vitally important, on a scale of one to ten it’s possibly less important than two factors that determine the potential for a successful relationship: the personality fit and the practice’s financial health. “If you put this on paper, diagram the financial portrait and personality portrait and draw a connecting line — and then the contract comes after that,” he said. “If you don’t have the correct personality or financial mix, it won’t work. All you will have is the contract that’s used for fighting later.”

Tips for Identifying and Avoiding Employment Contract Pitfalls

Employment contracts, by virtue of the fact that they’re intended to protect the parties who enter into them, tend to be weighted in favor of the person or entity who drafted the document. In the case of the physician seeking a job, that’s usually the prospective employer.
It’s probably impossible to come up with a physician employment contract that is truly evenly balanced. As such, physicians should focus their attention on identifying — and avoiding, ideally — contract elements or terms that are particularly disadvantageous or patently unfair. In that vein, experts offer the following tips for steering clear of a bad deal:

Ask — and answer — key questions before moving to contract negotiations. When interviewing for a position, physicians sometimes focus too much on compensation and the contract particulars and not enough on the big picture. Before talking about contract terms, physicians should ask themselves (and be able to answer) the following questions, urges contracts lawyer Brad C. Jones.

• Does the employer appear to be generally fair? If not, Mr. Jones counsels, the physician should consider abandoning discussions before moving to contract negotiations.
• Is this even a prospective employer I should be talking with; have I searched widely and exposed myself to all possible suitable practice opportunities? If not, Mr. Jones counsels, the physician may be wasting both parties’ time and resources.
• Is the employer financially successful? If not, the contract “may simply be pulled out later to help sever the relationship,” Mr. Jones cautions.

Strike a fair noncompete clause by obtaining pertinent information first. Rather than being relegated to negotiating an unreasonable noncompete radius, from — say, 100 miles to 10 — late in negotiations, obtain details about the practice’s patient base and demographics during the interview phase, advises Philadelphia lawyer Joan Roediger, JD. That information may later be used effectively if the prospective employer has drawn an overly broad noncompete radius in the preliminary contract, Ms. Roediger advises.

“That way, when physicians see a restrictive covenant that covers the planet Earth, they can use that information to their advantage,” Ms. Roediger explains. “They can say, why have you excluded me from a 50-mile radius when you told me that all of your patients live within a ten-minute drive from your practice? That’s unreasonable.”

Avoid discussing compensation or other key terms before seeing a contract — even a “sample” one. If a prospective employer brings up salary or other potentially important contract elements, the physician should be somewhat evasive until she or he has a contract to review, suggests Andrew Knoll, MD, JD, an associate with the Syracuse, New York, law firm Scolaro, Shulman, Cohen, Fetter & Burstein, P.C. Even a tentative verbal “OK” at that stage can come back to haunt the physician later.

“It’s important during the interview stage to be somewhat noncommittal about this and say, ‘This seems like a nice practice; I’d like to consider joining you. Can you give me an idea of what the contract looks like?’ ” Mr. Knoll advises, before seeking professional legal advice. “If a lot of the [terms] have already been hammered out, and the physician has verbally agreed to a salary that’s too low, for instance, often there’s little I can do other than potentially kill the deal.” Most practices in the hiring mode will already have “a contract on the shelf,” he adds, which can serve as a starting point.

Request practice financial documents early on in contract discussions, and beware of practices that won’t produce them. The physician who is considering joining a practice is also, wittingly or unwittingly, signing on to that employer’s financial situation — for better or worse. As such, physicians, and their attorneys, should request three years’ worth of financial documents, including income statements, tax returns, and details on partners’ compensation history, as appropriate or warranted, urges Mr. Jones.

“Look for [revenue and expense] trends, and at owners’ incomes. If there has been deterioration, you want to know why,” Mr. Jones explains. “And by knowing the upside [compensation] potential, you can start to compare one offer with another. If the group is cagey or won’t turn over the information, there is something they would rather not have you know.” (In certain situations, such as academic practices, that information may not be pertinent to the physician’s contract, Mr. Jones notes.) In exchange for receiving the documents, Mr. Jones adds that physicians should be willing to sign a confidentiality agreement in which they promise not to disclose the information.

Employment Contract Resources

 American Medical Association. The AMA offer resources to help physicians understand employment contracts and spot potential drawbacks. The newly updated Annotated Model Physician Employment Agreement and a supplemental streaming video, “Physician Employment Contracts,” cover many of the common contract provisions that some physicians may find confusing. Members can access the resources and streaming video at www.ama-assn.org/go/joboffers.

American College of Physicians. The ACP’s Physician Employment Contracts guide, updated in 2007, contains helpful information on contract terms, pitfalls, and negotiation and a handy self-assessment tool. To access the guide, go to www.acponline.org.

MedAccord. The website of this Charlottesville, Virginia, company, which specializes physician employment contract guidance, contains numerous articles on common contract terms and issues and a frequently updated list of tips and pitfalls. Go to www.medaccord.com.