The Beginning of Physician Employment Agreement Negotiation
Sometimes, but not always, physician employment agreement negotiation begins with a term sheet (sometimes referred to as a “letter of intent”) The purpose of term sheets is to ensure that both parties are “on the same page” as far as the major terms of the agreement they hope to enter. For example, if you expect to be paid $350,000 a year but the employer is expecting to pay $200,000 a year, there may not be any value in continuing negotiations.
Since the purpose of term sheets in physician employment agreement negotiation is to determine if further negotiations would be fruitful, the provisions in the document are generally not legally binding. However, some provisions in a term sheet are legally binding. Specifically, the document may provide that each party is responsible for its own attorney’s fees, and that the negotiations will remain confidential.
These provisions generally are legally binding (that is, even if you do not sign a definitive physician employment agreement, you are still bound to pay your own attorney’s fees and keep the terms of the negotiations confidential).
Remember that the purpose of a term sheet is to make sure that you and your potential employer are on the same page with respect to the major terms of the physician employment agreement you hope to finalize. Although there will be numerous terms and conditions of the final agreement that will be negotiated, you should assume that anything you agree to in a term sheet is “off the table”.
Accordingly, your potential employer may be seriously ticked off (sorry for the legal jargon) if you sign a term sheet that sets forth a specific salary, and then you later attempt to negotiate a higher salary.
A term sheet is a good way of beginning physician employment agreement negotiations. The employer will generally emphasize that the term sheet is not legally binding. That is true, but don’t treat the term sheet as a meaningless document. If there is something you are uncomfortable with (for example, the salary offered) you can attempt to retain flexibility for further negotiations by asking if the number can be replaced with a phrase such as “an annual salary of approximately $X, to be determined in the definitive physician employment agreement.”
We are often asked if an attorney should be involved at the term sheet stage of physician employment agreement negotiations. The classic attorney’s response to any question is “it depends.” A physician may not need a lawyer before the first draft of the actual employment agreement is tendered, as long as the employer isn’t led to believe that a specific term has been accepted.
However, it would be prudent to have a competent physicians’ attorney review a term sheet before signing it if all of the provisions aren’t completely clear. If you are uncertain about the fairness of the compensation offered, it would be prudent to obtain an MGMA compensation analysis before executing a term sheet. I am biased (since I make my living exclusively doing physician employment agreement reviews and negotiations), but I think it is a good idea to err on the side of caution and ensure you aren’t inadvertently “agreeing” to something that you don’t want in the final agreement.
Once the term sheet is concluded (or as a first step if no term sheet was utilized), physicians receiving a new employment contract need to be aware of several issues that can arise related to their new position. These are some of the things that should be carefully reviewed in physician employment agreement negotiation.
When do you Start? An Often Overlooked Part of Physician Employment Agreement Negotiation
Naturally, obtaining a medical license in that state and obtaining DEA and state equivalent registration is vital. These requirements rarely trip up physicians. However, some conditions for starting employment are completely outside the control of the physician. Provisions regarding these provisions must be carefully reviewed.
Hospital credentialing can be an issue, particularly if the agreement is signed in the late spring contemplating an early fall start date. Managed care credentialing is another issue that must be addressed.
The agreement should not provide that the physician’s employment automatically terminates if every hospital and managed care entity has not credentialed the physician by the start date. It should also not give the employer the unilateral right to terminate the agreement, or to “suspend” the agreement until all credentialing is complete. The agreement should differentiate between a denial of credentials (what lawyers call a “bad thing”) and a failure to have credentials completed. Although it is reasonable to require credentials with major payors, credentialing with every payor the employer deals with should not be required.
The agreement should require the parties to negotiate in good faith if everything is not in place at the contemplated start date. Both parties have to be flexible here – the employer may have to allow the physician to start, but the physician may have to agree to reduced hours and compensation until all credentialing is completed.
Compensation in Physician Employment Agreement Negotiation
The agreement should clearly provide what productivity is expected of you. You can frequently gauge expected productivity by the salary level. If one employer is paying significantly more than another employer, it is a safe bet that the higher-paying employer expects more productivity.
The employer should not have the right to unilaterally adjust compensation. The compensation should be appropriate when compared to benchmarks, such as those published by the Medical Group Management Association (“MGMA”). An MGMA compensation analysis is critical in this regard. Unfortunately, even in this day and age, this is especially important for women physicians.
If you are just starting with an employer, the bulk of your compensation should be a base salary – the risk of insufficient demand should rest on the employer, not the physician. If there is physician productivity compensation, you should carefully review the language to assure that it is understandable and internally consistent. You should have the right to confirm calculations of productivity by the employer.
If productivity is based on wRVU production, you should be aware of wRVU compensation traps for physicians. In particular, your productivity should not be adjusted by compensation modifiers. A wRVU should be treated as earned at the date of service, not when it is billed. In addition, the timing of payment of any productivity bonus should be specified in the agreement.
The agreement should provide a physician sign-on bonus if you are just starting at the employer, or a retention bonus if you are renewing the agreement. MGMA has benchmarks for signing bonuses, which should be consulted. We generally argue that a retention bonus should be equal to the median signing bonus paid to starting physicians.
The employer should offer a separate relocation allowance if you are moving to the area. Here again, MGMA has benchmarks to consult.
If the agreement requires you to repay the signing bonus and/or the relocation allowance if the agreement is terminated, repayment should be forgiven on a monthly basis. Ideally, the period over which the bonus or relocation allowance is forgiven should not exceed the length of time your base salary is guaranteed. You should not be required to repay the bonus or relocation allowance if the employer terminates the physician employment agreement without cause or because of a change in law, if you terminate the agreement because of a breach by the employer, or if the agreement is terminated because of your death or disability.
The agreement should provide compensation for excess call, which can be compared to MGMA benchmarks.
It is sometimes possible to negotiate medical school debt assistance, and to receive a fellowship or residency stipend while in training.
Finally, you should be leery of compensation arrangements that tie compensation directly or indirectly to the value or value of referrals, as these arrangements could run afoul of the fraud and abuse laws.
Benefits in Physician Employment Agreement Negotiation
Physician benefits are an important aspect that should also be reviewed. In particular, you should examine the physician disability benefits. The agreement should provide compensation for some period of time while the physician is disabled. A “disability” should be determined by a physician mutually agreeable to you and the employer. If the employer offers disability insurance, the policy should define a disability as an inability to work in your “own occupation.”
Malpractice insurance in physician employment agreements is another vital area to review. There are two types of malpractice insurance: “occurrence-based” insurance and “claims-made” insurance. The important difference between these two types of insurance involves what happens if a claim is filed after the physician has left employment. Occurrence -based coverage will cover any claim that occurred during the policy period, no matter when it is filed.
However, claims-made insurance only covers claims that are made during the policy period. Accordingly, if a claim is made after the physician leaves the employer, this type of insurance would not cover the claim. To protect the physician, an extended-period policy (generally called “tail coverage”) must be purchased. These policies can be expensive, so it would be best if the employer covered the expense of the policy. If the employer is not willing to pay the full cost of tail coverage, sometimes they can be persuaded to pay a portion of the cost based on years of service (e.g., 1/5 of the cost for every completed years of service).
When the employer puts the cost of tail coverage on the physician, sometimes exceptions can be negotiated. For example, sometimes the employer will pay for tail coverage if the employer terminates the agreement without cause, or if the agreement is terminated because of the death or disability of the physician.
Vacation should be consistent with MGMA benchmarks. Most employers provide an allowance for CME (which can be compared with MGMA benchmarks) and also pay or reimburse the physician for medical staff dues for maintaining privileges. The agreement should also require the employer to pay or reimburse for medical licensure and DEA and state equivalent fees.
Most employers provide a cell phone and usage plan and a laptop computer. Many employers provide mileage allowances for trips between offices and hospitals and also pay or reimburse you for the dues for the AMA or AOA and state and local medical societies. Some employers also pay the dues for one or more specialty societies.
Board certification and recertification expenses should be separately reimbursed, rather than included in the CME allowance.
The employer’s discretion to change benefits should only apply to benefit plans purchased from a third party or offered as a tax qualified plan. Although an employer cannot guarantee deductibles for your health insurance plan, for example, the employer should not be authorized to amend schedules regarding vacation, CME allowances, or other benefits that the employer is not relying on a third party to provide.
You should be aware if benefits are charged against you in the calculation of compensation, as is sometimes the case in “eat what you treat” arrangements.
Working Conditions Addressed in Physician Employment Negotiations
The conditions you will enjoy (or endure) can make or break your experience at a new employer. There are several issues that should be carefully considered.
The call coverage requirements should be carefully reviewed. Although a small group or department might not be willing to guarantee exactly how much call you must take, they can sometimes be persuaded to provide a maximum beyond which you will not be required to take call (e.g., 1:6). The employer should agree that call coverage will be equitably allocated among all eligible providers.
As noted above, you should be compensated for call beyond reasonable limits. MGMA has benchmarks regarding the amount of unpaid call coverage various specialties provide.
You should also review the flexibility afforded the employer to assign you to various locations. The locations at which you are expected to provide services (including the hospitals where you are expected to maintain privileges) should be enumerated in the agreement, and no additional locations or hospitals should be added without your concurrence.
Also review the patient contact hour requirements. Ideally, “full-time” for a physician with no non-clinical responsibilities will be defined as 32 patient contact hours per week, which will give you adequate time for charting and other administrative duties.
There should not be limits on the employer’s duty to provide needed staff and equipment (e.g., this duty should not be “subject to budgetary constraints.”)
The physician should be not be required to practice medicine “with the highest standards.” The standard of care in the community should be the benchmark. The employer should agree to provide the physician with every policy and procedure material to the physician’s performance of duties.
Termination Provisions in Physician Employment Agreement Negotiations
Although you may be viewing this position as your “forever job,” there may come a time when you need to leave (voluntarily or otherwise). The physician should have the right to terminate the agreement if the employer breaches its obligations. This seems obvious, but it is frequently missing in agreements that have a massive list of “for cause termination provisions” authorizing terminating the physician.
Ideally, the agreement should only allow for termination if the physician is convicted of a crime (rather than just being charged with a crime). The crimes should be limited to felonies and cases involving healthcare fraud (Dr. Leadfoot should not be terminated because of a speeding ticket).
Without cause termination in physician employment contracts is another issue that should be reviewed. Although these provisions are troublesome if the physician is in the US on a J-1 visa, they are important for every other physician. Either party should be able to terminate the agreement without cause with reasonable notice. 90 days is standard, but I generally try to obtain 120 days, since the physician is likely to have a gap in income if only given 90 days to seek suitable replacement employment. It should go without saying that the notice period should be the same for the physician as for the employer.
Restrictive Covenants in Physician Employment Agreement Negotiation
Restrictive covenants, also called physician covenants not to compete, can have serious implications for your future career. These provisions impose restrictions on what you are allowed to do after you leave this employer. The restrictions generally impose a geographical restriction for a given period of time.
In physician employment agreement negotiation, I generally attempt to limit the time restrictions to the lesser of one year or the time you have worked for that employer. However, I believe that the geographical restriction is more important than the time restriction. If you are required to leave the area for one year, your patients and referral sources will find another physician. Therefore, the difference between one year and two years is probably not significant.
However, the geographical restriction is extremely important. When I am involved in a physician employment agreement negotiation I generally attempt to obtain a radius of no more than 5 miles from any location where the physician has spent a material portion of the physician’s time in the year before termination. The 5-mile radius is not carved in stone. In Manhattan, I have negotiated a radius of two blocks east and west, and five city blocks north and south. If you are in a very rural area, where your patients drive 30 miles for groceries, obviously a larger radius would be appropriate. There should be exceptions to the covenant not to compete for work at a Veteran’s Administration facility, where you will obviously not siphon off patients or referral sources.
The restriction should be based on your new office location, rather than the “practice of medicine.” So, for example, primary care physicians should be able to see patients in hospitals and nursing home within the radius, so long as their office is outside of the radius. Similarly, specialists should be able to see patients in ambulatory surgery centers and hospitals within the radius, so long as their office is outside the radius.
The physician should not be required to surrender privileges upon termination of the agreement (unless the employer is a hospital, or a facility that has a closed staff).
It is appropriate to agree not to solicit patients, employees, or staff, either directly or indirectly. However, the provision should authorize general media advertisements and an Internet presence.
There should be conditions under which the covenant not to compete does not apply. For example, the covenant should not apply if the employer exercises its rights for without cause termination in physician employment contracts, or if you terminate the agreement because of a breach by the employer. I believe it is also appropriate to request a provision that the covenant not to compete will not apply if the agreement is terminated because of a force majeure event or a change in law. I am rarely able to obtain an exception to the covenant not to compete if a private practice fails to offer the physician partnership, but I always ask for that provision when negotiating physician employment agreements with a private practice.
Physician Employment Agreement Negotiations with a Private Practice
As noted above, there are special considerations when negotiating physician employment agreements with a private practice. There should be a specific provision in these agreements concerning when the physician will be considered for partnership. The methodology for determining the purchase price of ownership if ownership is offered should be provided. This methodology should match the methodology used to determine the sales price of the physician’s equity when he or she leaves the practice.
If it is contemplated that the physician will become an equal owner if offered ownership, this understanding should also be included in the agreement.
Summary of Issues in Physician Employment Agreement Negotiation
Physician employment agreement negotiation involves a multitude of issues: from when the agreement begins, to conditions during employment, to termination provisions and restrictions on the physician after termination. Physicians would be well advised to seek the assistance of a law firm that focuses exclusively on physician contract review and compensation analysis.