Drafting and Negotiating Physician Employment Agreements – Part 1
Note: This is the first in a series of posts that will examine various aspects of drafting and negotiating physician employment agreements in detail. This first post addresses initial considerations, compensation and benefits.
Perhaps you are a physician just out of residency or fellowship, or maybe an established physician looking for someone to help you shoulder a demanding caseload. Or maybe you are a lawyer asked to assist a practice in hiring a new physician, or to assist a physician joining a new practice. Regardless of the specific situation in which you find yourself, you are reading this because you are faced with drafting or negotiating a physician employment agreement. What follows is a step-by-step primer to help you in your process.
OK, first things first. If you are not a lawyer, do you need a lawyer? If you are not an experienced health care lawyer, should you consult an experienced health care lawyer? In a word, yes. A physician employment agreement can involve hundreds of thousands of dollars, can severely restrict a physician’s practice following termination, can subject a physician to significant economic risk, and can include concepts, terms and pitfalls that are simply unfamiliar to physicians, and even to lawyers who don’t regularly represent physicians. To put it another way, what other transaction of similar size, importance and financial impact would you want to negotiate and document on your own? So, step one is to find an attorney with experience in representing physicians.
To put it another way, what other transaction of similar size, importance and financial impact would you want to negotiate and document on your own?
The next step is to consider the “structural” aspects of the deal. For instance, will the agreement involve true employment, or will it create an independent contractor relationship? Most physicians joining physician groups will become true “W-2” employees, but that is certainly not always the case. In some instances, physicians want to work for an entity that cannot, under applicable state laws prohibiting the “corporate practice of medicine,” actually employ a physician. In that case, an independent contractor arrangement is often appropriate. The IRS has its own views regarding the proper classification of someone as an employee or independent contractor, however, and getting it “wrong” (i.e., treating someone as an independent contractor when the IRS believes that he or she should be treated as an employee) can have unpleasant consequences, including the payment of back taxes, penalties and interest. Employees and independent contractors also are treated differently under the federal Stark Law, where noncompliance can be financially catastrophic. In other words, the decision is not simply one of convenience or preference, and qualified legal counsel should assist in the determination of the appropriate characterization of the relationship.
If you are in the position of looking at a draft contract that has been presented to you for review, another important initial consideration is whether there is anything missing. For example, if you are physician joining a practice with five offices, and you have been told that you will only have to work in two of those offices, does the contract say that? Keep in mind that if it is not in the contract, you probably won’t get it. Also, are there specific personal priorities that you would like to include in the contract? Again, if an issue is important enough to have been discussed with a potential employer, it probably belongs in the contract.
Keep in mind that if it is not in the contract, you probably won’t get it.
Other initial items to verify include the specific legal identities of the parties (especially where the contract involves a health system with many affiliated entities or where a physician is engaged through a professional entity owned by him or her), the specialty in which the physician is expected to practice (particularly where board certification or board eligibility is required), the commencement date and term, and whether the physician will work on a full-time or part-time basis (and what that really means). As mentioned above, practice locations are also important to specify in many cases, particularly as a physician may be subject to geographical limitations under a recruiting agreement with a hospital, not to mention the effect that strenuous or lengthy commutes can have on a physician’s quality of life. Also, a physician’s practice location(s) may be the basis for the geographic scope of a covenant not-to-compete.
Also make sure the agreement addresses hours of employment (particularly if certain days off are expected), call coverage requirements (and how call is shared), specific duties that may have been discussed or that may be expected of the physician, conditions to the commencement of employment (e.g., credentialing, licensure, hospital privileges), and any associated recruiting agreements or facility agreements.
In many negotiations, the parties’ primary focus is on compensation. There are countless ways to structure physician compensation (including many ways that can violate the federal Stark Law and Anti-Kickback Statute and other laws), but the three basic categories of physician compensation can be roughly described as: (i) fixed salary, (ii) hourly rate, and (iii) production-based or productivity. Sometimes, an agreement will include more than one category, such as where a physician is paid a fixed base salary and a production-based bonus.
There are countless ways to structure physician compensation (including many ways that can violate the federal Stark Law and Anti-Kickback Statute and other laws), but the three basic categories of physician compensation can be roughly described as: (i) fixed salary, (ii) hourly rate, and (iii) production-based or productivity.
Regardless of the specific compensation model, the agreement should provide that the physician is “reassigning” his or her right to bill and collect for services provided by him or her to the employer. In other words, it is the employer, not the physician, who owns those collections, even if the physician is paid based on productivity measured by collections. The physician’s right is not to the collections themselves, but to the compensation specified in his or her employment or independent contractor agreement.
Where a fixed salary is involved, it is helpful to clarify how often it is paid (i.e., weekly, every 2 weeks, monthly), and whether it is paid in advance or in arrears, although it is common practice to state that the salary will be paid “in accordance with employer’s ordinary payroll practices” or words to that effect. In any employment setting, it is wise to state that the salary will be subject to required withholding for taxes, unemployment, Social Security, etc. The opposite is true for independent contractor relationships – no withholding is made.
Hourly compensation raises additional issues, including whether the physician will be subject to a minimum, maximum or average number of hours per week, month, etc. Further, the payment of hourly compensation is often conditioned on the physician’s submission of a time report or invoice showing the number of hours worked, and sometimes on the submission of additional verifying documentation. Those requirements should be clearly set out in advance, and it is good practice to include the required form of report or invoice as an exhibit to the agreement.
Productivity-based compensation is more complex than the other two models, and also provides the most pitfalls for inexperienced parties or drafters. For example, on what is productivity based? Collections? Billed charges? W-RVUs? What types of services are included in the model? Ancillary services? The services of mid-level providers supervised by the physician? How are refunds or adjustments treated? Are expenses included in the compensation formula? Only expenses subject to the physician’s control? Shared overhead expenses, and if so, what percentage? Procedure- or treatment-specific expenses? Is there a floor or ceiling on compensation? If there is a floor or minimum “draw” against compensation, how are deficits treated? If certain payors are more/less desirable from a financial standpoint, is payor mix monitored or equalized in some way? Will the physician receive trailing compensation following termination as collections are received by the practice? Does the model have some basis in experience, or is it a shot in the dark? Is the formula likely to allow the physician to make the level of compensation that he or she expects? As the foregoing demonstrates, productivity compensation models require a significant amount of careful consideration and drafting.
Bonus compensation can similarly be fixed or based on an hourly or productivity formula. One of the most important things to evaluate when significant bonus compensation is involved is the likelihood that the physician will be able to obtain the bonus. Where reliable benchmark data is not available (for instance, where there have been no recent hires under the same bonus formula) it might be helpful to both parties to place some boundaries around the bonus compensation in the form of stepped bonuses, minimums and maximums, etc. Often, bonus compensation is subject to a degree of employer discretion, which can be negotiated. Also consider whether the physician will be entitled to an earned bonus (or a portion thereof) if he or she leaves prior to the date on which the bonus is to be paid.
…productivity compensation models require a significant amount of careful consideration and drafting.
Finally, decide whether ancillary services revenues are to be included in the physician’s compensation package. Ancillary services can include clinical laboratory services, radiology and diagnostic imaging services, physical therapy, durable medical equipment, prosthetics, orthotics and supplies, prescription drugs and injectables, and even the services of mid-level providers. In a majority of cases, ancillary services revenues are allocated solely among the owners of a physician practice. In many other situations, particularly where a hospital or other facility employs physicians, no physicians share in ancillary services revenues, which revenues are simply retained by the employer. Where ancillary services revenues are to be distributed to an employed or engaged physician as part of his or her compensation, it is important to define those revenues carefully. Further, where the ancillary services involved are “designated health services” under the Stark Law, additional regulatory requirements may apply, including limitations on the ability of the employer to give a physician credit for ancillary services that he or she has ordered.
Employee benefits can constitute a significant part of the value of a physician’s overall compensation package. In most cases, only true employees (as opposed to independent contractors) receive benefits. Many agreements simply say that the physician will be eligible to participate in the employer’s standard employee benefit plans. What that language means is that the physician’s benefits are subject to change in the discretion of his or her employer. As a practical matter, that is typically the case with respect to the employer’s maintenance of a group health plan or 401(k) or other retirement plan. Other benefits, however, are often separately negotiated, including reimbursement for malpractice insurance premiums, reimbursement for medical licensure, professional society memberships, continuing medical education, phone, computer, wireless and Internet expenses, paid time off (and whether there is such a thing if the physician is paid on a productivity basis), and signing and relocation bonuses. In short, if a physician wants to make sure he will receive a particular benefit, it should be specifically set out in the agreement.
Stay tuned for subsequent posts addressing additional issues associated with drafting and negotiating physician employment agreements.