Physician Employment Contracts: Strategies for Avoiding Pitfalls

Career Resources articles posted on NEJM CareerCenter are produced by freelance health care writers as an advertising service of the publishing division of the Massachusetts Medical Society and should not be construed as coming from the New England Journal of Medicine, nor do they represent the views of the New England Journal of Medicine or the Massachusetts Medical Society.

By Bonnie Darves

As physicians increasingly opt for practice opportunities in employed-model arrangements, and hiring entities move toward standardizing employment contracts to simplify matters and ensure equitable treatment of existing and incoming physicians, it might appear that there’s scant room for negotiating contract terms.

That’s not a prudent attitude to take about such an important document, contract lawyers maintain. That employment agreement not only dictates the next year or two of a physician’s career but also could potentially negatively affect his or her personal and professional life for years into the future. Benjamin J. Mayer, JD, MBA, a Denver lawyer whose firm specializes in physician contracts, advises physicians to take the position that any terms that aren’t favorable can — and should — be made more reasonable. “The physician might not be able to get a higher starting salary or a larger signing bonus but definitely should negotiate anything that’s explicitly unfair or clearly intentionally ambiguous,” Mr. Mayer said.

Key examples he cites are contracts with onerous non-compete provisions that would prevent a departing physician from working within, say, a 60-mile radius of any of the employer’s locations, or contracts that contain little detail about weekly work hours and schedules, or call requirements. Essentially, anything that is vague or an overreach should be modified and specified. “The physician needs to require reasonable boundaries on all of the contract’s terms,” Mr. Mayer said. For example, any non-compete radius should be drawn from a single primary location, not from all of a sprawling mega–health system’s hospitals and clinics. Similarly, regarding schedules, the contract should at least specify a cap on total weekly hours or days worked and should dictate an equitable call schedule.

“Duties, hours, and responsibilities should be spelled out, and if the call coverage isn’t specified, the contract should at least state that those duties will be ‘equally divided among all physicians’ in the group,” Mr. Mayer said. He acknowledged that some young physicians might be willing to shoulder commensurately more call duty than their peers if they’re trying to pay off medical school loans, for example, but such special arrangements are best addressed outside of the contract.

Michael Schaff, cochair of health law for Wilentz, Goldman & Spitzer, P.A. in Woodbridge, New Jersey, suggests that young physicians in surgical and other call-intensive specialties should determine whether practice culture or bylaws issues might translate into an inordinate call burden that they’re not willing to assume. For example, Mr. Schaff noted, some practices enable physicians who reach a certain age — 55 or 60 is common — to opt out of call altogether. If several senior doctors stop taking call, younger physicians’ “equally divided duties” might be unmanageable. To be safe, the contract should specific a “not to exceed” number of call days per week or month, Mr. Schaff and other sources advised.

Emerging “super groups” affect contracts
On a global scale, practice acquisition and management trends — specifically, the growing influence of private equity on physician practice and facility management and the creation of huge organizations that operate scores of groups — are affecting physician employments. Rebecca Gwilt, a Richmond, Virginia, lawyer and partner in Nixon Law Group, said she is witnessing a “trickle-down effect” on contracts as private equity–operated super groups emerge.

“We’re seeing a more sophisticated framework for physician contracts,” Ms. Gwilt said, as well as a tendency toward both shorter employment terms and slimmer benefits. “Legally, these companies aren’t permitted to influence the delivery of services, but in general, they’re non-physician companies, which means that the MBAs are making contract decisions, not physicians,” said Ms. Gwilt, who frequently speaks on physician contract issues. “So, as this [model] becomes more common, market salaries and benefits could change.”

Although the trend toward super-group formation isn’t inherently negative — such groups have more bargaining power regarding physicians’ reimbursement rates than smaller ones do, generally — it does call for due diligence and research on the part of physicians who consider interviewing with such entities. “You first should find out who runs the company, because you will have less room to negotiate a contract than with a physician-owned practice,” Ms. Gwilt said. “You want to know what it’s like to work there, so I advise clients to ask for the name of the last physician hired — someone who’s been there for a year — and then talk to that physician.”  

The movement toward “corporatization” of medicine, in tandem with the fluctuating health care economic, reimbursement, and policy environment, is prompting employers to reduce their financial risk wherever possible. One example is instituting shorter contract employment terms, which enables employers to more easily let go of poor-performing physicians. Another recent development is the setting of limits on how much individual physicians can earn, regardless of their productivity, according to Kyle Claussen, CEO of Resolve Physician Agency, a Missouri-based firm that counsels physicians on contract issues.

“It’s becoming more prevalent to see clauses with caps on compensation, such as the 75th or 90th percentile in a major national survey such as the Medical Group Management Association survey,” Mr. Claussen said. Although such caps aren’t likely to affect most physicians coming out of residency because starting salaries are rarely set at those percentiles, the caps could penalize high-income specialties such as neurosurgery and orthopedic surgery as those physicians move into their second and third years of practice. “I’ve seen some high-income specialists walk away from those potential jobs,” he said. He added — and other sources concurred — that sign-on bonuses are less common now than they were a few years ago, possibly for some of the same economic reasons.

Another contract area where shifts are occurring involves bonuses and productivity-based compensation, several sources mentioned. As employers, as well as government and commercial insurers, move toward providing monetary incentives to physicians for performance on measures ranging from patient satisfaction to hospital readmissions, it’s important to know how such payments are handled on the employer side. This is particularly the case with any bonuses or incentive payments that may be due a physician, Mr. Schaff pointed out.

For example, if the contract states that incentives and bonuses are paid only through the employment period or only at the end of a calendar year, the physician might lose out on a substantial sum if he or she leaves the job on, say, Dec. 22, rather than Jan. 1 of the following year. Ideally, the contract should call for payment of “all bonuses earned through the time of termination.”

Ditto for accounts receivable monies that physicians might be due. It’s very common for such monies to continue flowing to the practice for several months after a physician departs, so ideally, Mr. Schaff suggested, the contract should call for reporting on such funds for a specific period after termination and ultimately paying out what’s due at, say, 60, 90, or even 180 days post–termination of employment. “This is all over the map in contracts I’ve seen,” Mr. Schaff said. “I’ve even seen contracts that state that the physician only receives payments through the last day of employment. This is something that should be negotiated.”

At the other end of the spectrum, physicians whose contracts set minimum or expected productivity or quality performance targets in order to continue the base salary beyond year one should understand not only what those requirements are but also — and more importantly — whether they’re achievable and reasonable. That means talking to other physicians at the prospective practice to see how they’ve fared in year two in productivity. It’s also helpful to find out how much personal effort is required to track the performance metrics that underlie performance payments, several sources advised. Mr. Mayer said that when a base salary arrangement converts to a totally productivity-based one at the end of the first year, he often negotiates for something less dramatic, such as continuation of the base salary for an extended period or and perhaps a part-base/part-productivity structure. 

“The point is that your contract governs how your money works, and compensation structures are becoming increasingly complicated,” Ms. Gwilt said. “That’s why it’s really important that physicians understand those structures and obtain legal review.” It’s not uncommon for compensation methodologies to incorporate a half-dozen components beyond base salary, such as incentive bonuses or “clawbacks” (monies returned to the employer for underperformance or other reasons) based on quality measures, cost metrics, patient-specific clinical measure reporting, compliance, and shared-savings, to name a handful.   

On a final note, all sources stressed the importance of physicians reading every word of the contract and obtaining expert review. The point is to make sure that physicians understand what the contract entails and what its provisions would look like in their daily lives, by requesting specific examples of not only what’s expected of them but also what might happen should they leave the position prematurely. “One thing that physicians need to think about but are reluctant to ask is this: What happens if they want to get out or if the employer wants to terminate the contract?” Ms. Gwilt said. “If there’s a penalty clause, that should be highly negotiated.”

Contract pitfalls to watch for

Contract language that’s vague and highly employer favorable. Such language might show up in any area of the contract, but it’s especially problematic when it comes to physician schedules and duties, according to Ms. Gwilt. “You want to beware of anything that states, ‘X will be determined by the practice at its discretion,’” she said. That leaves the physician open to whatever the employer decides at any time during the contract period. At the least, physicians should negotiate to add that the terms be “fair and reasonable, and in accordance with [requirements] for all like colleagues.”

Mr. Mayer provides an example of where “at the practice’s discretion” could have a serious lifestyle effect: unspecified practice locations. As organizations merge and/or add satellite facilities, a vague location clause might mean that physicians could be required to commute to or travel among four different clinics or hospitals. Mr. Mayer suggests that physicians ask prospective employers to specify locations and limit their number contractually, or at least give the physician the opportunity to decide if she or he is willing to expand the number.  

Highly restrictive non-compete clauses. Syracuse, New York, attorney Andrew Knoll, JD, MD, cautions physicians to beware of and negotiate onerous non-compete terms when employers aim to keep physicians from working for a slew of specific competitors. “I’ve seen clauses that state, ‘Within two years of leaving the practice, the physician cannot work for health system Y or hospitals A, B, or C.’ That’s overly broad. Others might restrict the employee from going to a particular large health system, but not to smaller hospitals or systems in the same urban area,” Mr. Knoll said. “These clauses should always be reviewed.”

Unreasonable benefit start dates. One pitfall with benefits is not ensuring that they commence at a reasonable time, Mr. Schaff observed. For example, if a contract stipulates that that health insurance benefits start on the first day of the month following hiring or 90 days hence, he said, “The physician could be on the hook for paying the premiums for COBRA [continued coverage from the previous employer]. At the least, if the benefits start date can’t be modified, the incoming physician might try to negotiate that the employer pay the COBRA premiums until the coverage starts.”

Onerous — or unspecific — indemnification or liquid damages clauses, especially regarding malpractice claims. The first order of business here is to understand any limitations that employer-paid malpractice coverage might have, and then ensure that the employed or contracted physician isn’t on the hook fully for additional damages that the policy doesn’t cover, Mr. Mayer advised. For example, if the malpractice coverage tops out at $1 million and the judgment comes in at $1.25 million, some contracts might shift the entire shortfall to the physician, explicitly or not so explicitly. “Such a provision might say that ‘the practice and the doctor agree to indemnify and hold each other harmless for any liability caused by the other,’” Mr. Mayer said. “It sounds and seems fair, but in practice, the malpractice claim will usually follow the physician, not the practice. This is something that requires careful review and possibly negotiation.”

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