The contracting process for physician employment agreements and medical practice sales sometimes (but not always) begins with a letter of intent.
The Purpose of Letters of Intent in Physician Contracts
The purpose of letters of intent in physician contracts (sometimes referred to as a “term sheet”) is simply to provide a very brief summary of the main terms of what the parties assume will be a binding formal contract (either a physician employment agreement or a medical practice sale agreement, or both, as the case may be), in order to make sure that both parties are “on the same page” as far as the major terms of the agreement they hope to form.
In an employment agreement, if you think you’re going to be paid $300,000 a year but the employer is expecting to pay $200,000 a year, there may not be any value in continuing negotiations. Similarly, if the hospital or other purchaser thinks they are buying only used furniture, but you think you are selling a valuable medical practice, it is better to know that before the lawyers start looking at documents.
You can think of a letter of intent as a means of making sure that it is worthwhile to continue negotiations.
Most terms of the letter of intent are not legally binding
Since the purpose letters of intent in physician contracts is just to determine if further negotiations are in order, the terms in the document are generally not legally binding. However, certain provisions of a letter of intent are legally binding. Specifically, the document will most likely provide that each party is responsible for its own attorneys fees, that the negotiations will remain confidential, and that the physician will negotiate exclusively with this employer/purchaser for some period of time.
These provisions generally are legally binding (that is, even if you do not sign a physician employment agreement or medical practice sale agreement, you are still bound to pay your own attorneys fees and keep the terms of the negotiations confidential).
The Effect of a Letter of Intent
Remember that the purpose of a letter of intent is to make sure that you and your potential employer are on the same page with respect to the major terms of the employment agreement (and, possibly, the medical practice sale agreement) you hope to conclude. Although there will be countless terms and conditions of the final agreement(s) that will be negotiated, you should assume that anything you agree to in a letter of intent is “off the table”.
Accordingly, your potential employer/practice buyer will be seriously ticked off (sorry for the legal jargon) if you sign a letter of intent that sets forth a specific salary, and then attempt to negotiate a higher salary, or if you attempt to negotiate payment for goodwill for your practice if the letter of intent was clear that only hard assets were being purchased.
How to Handle a Letter of Intent
A letter of intent is not a bad way of starting off negotiations for your physician employment agreement and (if applicable) medical practice sales agreement. The employer will generally emphasize that the letter of intent is not legally binding. That is true, but don’t treat the letter of intent as a meaningless document. If there is something you are uncomfortable with (e.g., the salary offered) you can always attempt to retain flexibility by asking that the hard number be replaced with a phrase such as “an annual salary of approximately $X, to be determined in the definitive physician employment agreement”.
Should You Get an Attorney Involved in Letters of Intent in Physician Contracts?
The classic lawyer’s response to any question: “It depends.” You probably don’t need an attorney before the first draft is tendered, as long as you don’t say something that could lead the employer to believe that you are going to accept a given term. If you are uncertain about the compensation offered, it would certainly be smart to get a MGMA compensation analysis.
However, it would be prudent to have a competent physicians’ attorney review a letter of intent before you sign it if all of the provisions aren’t crystal clear. I may be a tiny bit biased (since I make my living doing this stuff), but I think it is a good idea to err on the side of caution to make sure you aren’t “agreeing” to something that you don’t want in the final agreement.
Please schedule a free phone consult if you would like to discuss your particular situation.
You may also be interested in my posts about physician productivity compensation and negotiating physician employment agreements.
For a complete discussion of all the major aspects to review, see our book on physician employment agreements.
If you have a physician employment agreement you would like us to review, you can start your review.