The 4 Worst Traps in Physician Employment Agreements

Worst Traps in Physician Employment Agreements

These 4 worst traps in physician employment agreements keep ensnaring physicians over and over again. Below are the worst traps that physicians must avoid in physician employment agreements.

Worst Traps in Physician Employment Agreements #1 – “This is our standard contract.”

The old “standard contract” line is as old as the hills, and is frequently used for a simple reason – it works! In the 40 years that I have been a physicians’ attorney, I have only encountered about five instances where an employer refused to make any changes whatsoever.

Virtually every employer will make adjustments to an employment agreement if asked. Many times the individual who presents the initial draft will inform the physician that “I cannot change the agreement.” That statement might be accurate in the sense that a recruiter, for example, might not have the authority to make contractual changes. Any change that would be made would have to go either to the legal department, or to the client of a recruiter.

When presented with the “standard contract” line a physician should always inquire who would have the authority to make changes, and ask if that person  can be contacted to review any change requests.

Worst Traps in Physician Employment Agreements #2 – When do you start work?

Another of the worst traps and physician employment agreements is signing a contract where the start date can get pushed back. There is a dichotomy in expectations concerning starting work under a physician employment agreement. Many physicians feel that after all the training they’ve gone through, the position offered is a reward from the universe for all their hard work. But unfortunately, the employer has a different perspective. The employer is hiring a physician in order to generate revenue. Therefore, there are frequently many conditions in the first draft of an agreement that can push back the start date.

Some of these conditions are very reasonable. Obviously, a physician must have a license to practice medicine in the relevant state, as well as DEA and state equivalent registrations. Obtaining licensure and DEA registration is usually not much of a problem. The DEA and state boards of medicine usually process applications very expeditiously. But there are a few common conditions to starting work that are out of a physician’s control. The two conditions that ensnare physicians the most are requirements of becoming a participating provider in the managed-care plans of the employer, and getting privileges at a hospital.

The likelihood of this trap becoming a problem depends on the time between the execution date and the anticipated start date. I frequently review contracts that have start dates that are more than a year in the future. There shouldn’t be any issue getting hospital privileges or participating provider privileges over the course of a year. The problem arises when a contract is presented in June, with an expected start date of September, for example.

Hospitals notoriously move slowly, and hospital administrators call summers the “slow period.” The issue is that hospitals want “primary verification” – an actual copy of the physician’s medical school transcripts, and fellowship and residency transcripts. The hospital may also require letters from  fellowship and residency directors. These documents can take months to pull together.

There is generally paid staff at the hospital that organizes all the documents and gets the physician’s credentialing file complete and ready for review. However, the physicians who review the documents are frequently unpaid – so scheduling credentialing meetings can be difficult. Although it may be a foreign concept for physicians in training, among the physician benefits physicians in practice enjoy is a concept called “vacation,” where they frequently hit little balls with expensive sticks at exotic locations. During vacation, the members of the credentialing committee are not available for credentialing meetings. There is no “Dean of Vacations” at hospitals, so the members of the credentialing committee are frequently taking vacations at separate times. This can result in delays of several months before a physician can obtain privileges.

Many physician employment agreements provide that the physician cannot start work until privileges are obtained. In some cases, the physician may have moved to town, signed a lease (or possibly purchased a house) and is ready to go to work, but he or she can’t start employment, or earn any income.

I occasionally see the same issue with credentialing for managed care companies. Thankfully, this issue is somewhat uncommon for insurance companies, since they generally have paid staff performing their credentialing.

Because of the potentially enormous impact on the physician, it is important that the contract provides some flexibility if the physician is not fully credentialed at the anticipated start date. For instance, if the physician does not have hospital privileges, perhaps a patient that needs to be admitted can be admitted by another physician. Similarly, perhaps some of the other physicians in the practice can do rounds until the new physician gets privileges.

There are a few provisions that should not be agreed to. The agreement should not provide for automatic termination if the physician is not credentialed. There should not be a unilateral right to terminate the agreement if the physician is not fully credentialed at the anticipated start date, and the physician’s employment should not be “suspended” pending full credentialing.

The agreement should differentiate between a failure to be credentialed and a denial of credentials. If credentials are denied, that could be evidence of a serious quality problem on the physician’s part, and the employer might reasonably refuse to wait to see if the physician can fix it. In contrast, if the physician diligently completed applications, that physician should not be penalized because credentialing took longer than expected. The employer should always provide administrative assistance in completing credentialing applications.

I believe that credentialing should only be required for major payors. If a relatively minor payor has not credentialed the physician, that should not be grounds for delaying the start date. Patients can be scheduled with other physicians without too much of a disruption if it is not a major payor. Obviously, the payor mix is going to drive this decision. For example, if a physician is not credentialed for Medicare, that’s a huge problem for a geriatrician, but not so important for a pediatrician.

Both sides (the employer and the physician) need to be flexible. The employer needs to be willing to allow you to start even though you’re not fully credentialed, which may cause strain and additional work for the other physicians until the new physician is fully credentialed. At the same time, the new physician may need to accept reduced hours and reduced compensation until fully credentialed.

Worst Traps in Physician Employment Agreements #3 – Restrictive Covenants

Another of the worst traps in physician employment agreements that I see physicians getting caught in is restrictive covenants, also called physician covenants not to compete.

Many times I’ve gotten a call from a physician who wants to leave her current position. She has gotten a great offer and only then does she pull out her current contract. She tells me that the contract “seems to say” that she can’t practice medicine within 15 miles of her current location. She tells me that a 15-mile radius covers her prospective new employer, and all of the local hospitals. The effect of this restrictive covenant is that the physician won’t be able to practice medicine in this town if she quits.

When a physician is starting a new position, this may not seem to be important, but after the physician has been there for some time, there might be kids in school, and a nice practice established. A restrictive covenant can force the physician to give it all up, move out of town, and be forced to start building that physician’s practice over again if he or she wants to leave that employer.

Many physicians say “Oh, I expect to retire here.” But there are many reasons why a physician might want to leave that employer. Sometimes the lovely Dr. Jekyll interviewer turns out to be Mr. Hyde when you’re working with him. Sometimes the hospital gets a brutal new cost-cutting CEO, or perhaps the physician’s circumstances change, and the physician no longer want to put in as many patient contact hours or satisfy that employer’s call coverage requirements. A physician must ensure that he or she will be able to earn a living at this location if they quit working for this employer.

Physicians often wonder why, given the physician shortage, restrictive covenants for physicians are allowed. Many physicians feel that these restrictive covenants are not fair, and should be against public policy. Some states have prohibited restrictive covenants for physicians. But courts and legislatures also look at the employer’s perspective. When a physician first started out, the patients that physician was seeing probably came to see another physician. They may have called the practice and asked to see Dr. Jones. But they were told, “Dr. Jones can’t see you for three weeks, but we have a new physician that can see you tomorrow.” So those first patients probably came to the new physician somewhat reluctantly.

Eventually, the physician will build the physician’s own practice. There will be patients coming to see that physician, and referral sources will be referring specifically to that physician. But at the beginning, given the time and money that the employer spent to introduce the new physician to patients and referral sources, it’s probably reasonable for the employer to want something to prevent that physician from taking patients. However, physicians must still protect themselves and ensure that any practice restrictions are reasonable.

There are two components to a restrictive covenant – the geographical area and the time period that the physician is restricted. I believe the geographical area is more important. If the physician is out of the market for a year and can’t treat patients, that does not seem significantly different than if the physician is out of the market for two years. Either way, the physician will have to start over and rebuild the practice. I always request the lesser of one year or the time the physician worked at that employer. But as I said, I think the geographical restriction is more important.

I typically request a restriction of five miles around the place where the physician spent most of the physician’s time in the year before termination. I say “typically” because it does vary. If the physician’s patients are driving 35 miles for groceries, a five-mile restrictive covenant isn’t reasonable for the employer. In downtown Manhattan, a few blocks would be reasonable, and five miles may not be reasonable. The physician’s specialty also makes a difference. A pediatric cardiologist specializing in electrophysiology is going to have a larger restrictive area than a cardiologist or a pediatrician.

The radius should be drawn around the place where the physician spent most of the physician’s time in the year before termination. Some first drafts provide restrictions based on every office of the physician’s current employer. Similarly, the radius should be drawn from the physician’s new office, not every office or location of the new employer. The language of these restrictions is critical. Many restrictive covenants prohibit the “practice of medicine” in the restricted area. That can be significant for a primary care physician that sees patients in nursing homes, even though their new office may be outside the radius, or for a specialist if the hospital is within the restricted radius. I believe a physician should be allowed to admit and treat patients in the hospital as long as the physician’s office is outside of the restricted area.

I resist provisions that require the physician to resign privileges upon termination. However, if a practice has an exclusive arrangement with a hospital (frequently radiology, pathology and sometimes hospitalist private practices have these arrangements), then resigning privileges is appropriate. But generally, I think a physician should be able to maintain hospital privileges within the restricted area, as long as the physician’s new office is outside of the prohibited area.

These provisions also typically have anti-solicitation provisions, which provide that the physician cannot directly or indirectly solicit patients or employees. Obviously, a physician should not hire that awesome nurse that the physician’s current employer spent ten years training. But the physician should ensure that something like a Yellow Page ad or a website presence is excluded from the definition of “indirect solicitation.” Most new employers are going to place information about the new physician on their website, noting that the physician is  “taking new patients.” I want to avoid an argument that the physician is violating a non-solicitation provision because of that website.

The agreement should provide conditions for waiving the restrictive covenant. For example, if the employer terminates the physician without cause, or does not renew the agreement, then the employer should release the restrictive covenant. Ideally, if the employer breaches the agreement, the physician should also be released from the covenant. Getting a waiver because of a breach by the employer can be difficult, however. The employer may be concerned that the physician’s lawyer will produce some dubious claim of a breach by the employer such as “You were mean to me, which constitutes constructive termination.” Getting the restrictive covenant waived because of a breach can be difficult, but it is still worth trying. In employment agreements with a private practice, I also attempt to get the restrictive covenant waived if the physician is not offered ownership.

I have also negotiated a specific list of conditions where the restrictive covenant does not apply. For example, if the physician terminates the agreement because the employer did not pay the physician, I think it’s reasonable to provide that the covenant does not apply. Hospitals will often waive a restrictive covenant as long as the physician does not work for a competing health system.

Occasionally a physician can buy out of a restrictive covenant – but it’s always expensive (usually about a year’s salary). I am sometimes able to get that buyout reduced over time, based on two arguments. The first argument, as we discussed, is based on the fact that the first year or so the physician is taking a senior physician’s patients who wanted to see “their” physician, but instead were assigned to the new physician. But after a year or two, those are the new physician’s patients. Patients came to see that physician, and referral sources referred specifically to that physician, so it’s reasonable to reduce the amount of the buyout. Secondly, the employer initially had significant costs of recruitment, and paid a physician sign-on bonus and relocation costs.  The employer also probably had some loss from delays in payment from managed care companies – so they were paying the physician’s salary but there was a lag until the employer was paid for the physician’s services. After some period of time, however, those costs should have been recouped, and the employer presumably was earning income from the physician’s services.

Physicians always ask if a restrictive covenant can be enforced. The answer is that the market will enforce a restrictive covenant that a court almost certainly would not enforce.

For example, I once represented a very senior physician who wanted to change positions. He had a 65-mile restrictive covenant in his contract with his current employer, and his new prospective employer was 63 miles away. I spoke to the general counsel of the hospital that wanted to hire him and we both agreed the other hospital would have a great deal of difficulty enforcing that restrictive covenant in court. Nevertheless, his prospective employer ended up hiring somebody else, because they didn’t want to risk potential litigation. Nobody wants to hire a physician if they think they might end up in court. Don’t ignore a restrictive covenant thinking that it is so unreasonable that a court will never enforce it-because the market probably will enforce it.

Worst Traps in Physician Employment Agreements  #4 – Malpractice Tail Coverage

The fourth trap is an issue with malpractice insurance in physician employment agreements. The first draft of many physician employment agreements provide that the physician is required to pay for tail coverage. I once spoke to a physician moving from Seattle to Philadelphia. Obviously, the restrictive covenant was no problem. The office manager informed her on her last day of work that she had to arrange for tail coverage. The insurance broker informed her that the cost of the tail coverage was many thousands of dollars. The physician and her husband had saved money for a down payment on a house in Philadelphia, but that money went to pay for tail coverage instead.

When I review a physician employment contract I’ll ask the physician if her current employer has a “tail.” A physician once told me that she was sure her current boss had horns, but she’d never seen evidence of a tail. Tail coverage is insurance that covers you after you leave a job. You don’t always need tail coverage – it depends on the type of insurance the employer has. Many first drafts of employment contracts require you to pay for the tail, which can be as much as a third of a year’s salary. If the physician is required to pay for tail coverage, that physician may not be able to afford to leave that employer. They are effectively stuck there for life.

As I said, there are two types of malpractice insurance, and a tail is only required for one type. The first type of malpractice insurance is occurrence-based insurance, which will cover claims that occur during the policy period. No matter when a lawsuit is filed against the physician, there is coverage if the lawsuit alleges that the physician did something or failed to do something during the period that the physician was at the employer.

The second type of insurance coverage is claims-made insurance, which only covers claims that are made in the policy period. If a physician leaves the employer on December 1st and a lawsuit is filed January 2nd, claims-made coverage would not cover that claim. A “tail” must be purchased to cover post-employment claims.

You should negotiate for tail coverage even if the employer currently has occurrence-based insurance, because they may switch to claims-made coverage later. Most hospitals will pay for a tail, but private practices are less likely to pay for a tail. A physician can often convince an employer to pay for the tail under certain circumstances by appealing to its sense of fairness. For example, if the employer terminates the physician without cause, I feel the employer should pay for the tail. Similarly, if the agreement is terminated because of the physician’s death or disability, then I believe the employer should pay for the tail.

Sometimes it’s possible to convince the employer to pay a portion of the cost of tail coverage based on years of service. For example, the employer could be requested to pay a third of the cost of the tail for every completed year of service.

The above traps have ensnared many physicians. I hope that you are now forewarned of the dangers of these provisions.

We review physician employment agreements in all 50 states. Our proprietary Physician Prosperity Program® provides a fixed fee physician contract review and compensation analysis utilizing Medical Group Management Association (“MGMA”) benchmarks. We have helped thousands of physicians, so they could get a fair deal. If you would like to speak to a member of our staff about your specific situation, please feel free to contact us.

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Dennis Hursh

Dennis Hursh

Dennis Hursh has been providing healthcare legal services in Pennsylvania since 1982. Since 1992, he has been a physician's lawyer serving as Managing Partner of Physician Agreements Health Law, the first law firm in the country to focus exclusively on physician employment agreements. Dennis has devoted his life to serving physicians and medical practices. He is the author of the definitive book on physician contracts "The Final Hurdle - a Physician's Guide to Negotiating a Fair Employment Agreement, and a frequent lecturer on physician employment agreements.

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After purchasing the physician contract review, you will receive an email asking you to transmit the agreement and any concerns you have to me. Many physicians do this by email, but I will be available by phone, too. In three business days from the time you purchase the Physician Prosperity Program® and transmit the draft physician employment agreement along with any concerns you have about the agreement and the information I will need to perform the MGMA analysis, you will receive a detailed physician contract review letter from me.

After you receive my physician contract review letter, you will have the opportunity to discuss it with me, to make sure all of your concerns were met, and to correct any factual inaccuracies, or to point out things that were verbally promised but didn’t make it into the physician employment agreement. These discussions, and revisions of the letter following these discussions, are included in the initial fixed fee.

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