Drafting and Negotiating Physician Employment Agreements – Part 2

September 23, 2014   By: Mark Ison

Note:   This is the second in a series of posts that will examine various aspects of drafting and negotiating physician employment agreements in detail.  The first post addressed initial considerations, compensation and benefits.  This second post addresses the provision of various items such as equipment and staff, malpractice insurance, and the term and termination provisions of an agreement.  

Equipment, Staff, Office Space, Etc. 

Some agreements provide that the employer will provide the physician with all equipment, staff, office space, etc., required for the physician’s practice on behalf of the employer, although this is typically understood.  The specifics of such items are usually left to the employer’s discretion.  However, just as with employee benefits, if there is any specific items that have been promised to the physician (e.g., dedicated staff or special space or equipment), they should be specified in the agreement.

Malpractice Insurance

While some specialties have it worse than others, malpractice insurance is expensive for any physician.  Having the cost of malpractice insurance covered by an employer is a valuable employee blog_ison_phyempagr_part2_pic1benefit, and the cost of malpractice insurance should be factored into the overall calculus of any proposed employment or independent contractor arrangement.  Historically, most physicians carry malpractice insurance with limits of “$1 million/$3 million,” which means that the policy has a limit of $1 million per claim and $3 million in the aggregate per policy year, although some physicians practicing in high-risk specialties (e.g., obstetrics, neurosurgery) carry policies with much higher limits.

Even if the policy is to be paid for by the employer, some attorneys are hesitant to specify the policy limits in the agreement itself, as it increases the likelihood that a jury could learn the amount of the physician’s insurance in a malpractice action.  In such a situation, it is acceptable to include language in the agreement that employer will pay for the physician to obtain a policy “with coverage limits equal to those maintained by the other physicians practicing on behalf of employer,” or words to that effect.

…the cost of malpractice insurance should be factored into the overall calculus of any proposed employment or independent contractor arrangement.

There are two types of malpractice insurance – occurrence and claims made.  Occurrence policies cover malpractice that occurs during the policy term.  So, if the policy term is 1/1/14 through 12/31/14 and an insured surgeon leaves a foreign object inside of a patient on 6/1/14, a subsequent claim against the physician for the malpractice is covered by the policy, even if the claim is not filed until after 12/31/14 (subject to any policy limits on the date by which a claim must be made to be covered).  Occurrence policies are most commonly offered by large, self-insured entities, such as hospitals, health systems and chains of health care facilities, and most medical residents and fellows are covered by such policies.

Claims made policies, on the other hand, cover malpractice claims that are made during the policy period.  So, if the policy term is 1/1/14 through 12/31/14, the malpractice occurs on 6/1/14, and the claim is made on 9/1/14, the claim is covered by the policy.  However, if the claim is not filed until 3/1/15, the policy will not cover the claim, because it is not “made” within the policy term.  If the policy were renewed with the same carrier on 1/1/15, however, the claim would be covered by the renewed policy.  Claims made policies are most commonly purchased by physicians in stand-alone practices.

The fact that the protection offered by a claims made policy “expires” at the end of the policy term presents a problem for physicians with claims made policies who switch insurance companies or otherwise let a policy expire without renewing it.  There are two solutions to the problem.  In some cases, a subsequent claims made policy will be written so as to cover claims arising out of malpractice that occurred prior to the policy’s commencement date.  This retroactivity, which is sometimes known as “nose” or “prior acts” coverage, eliminates the potential gap in coverage.

The other solution is to purchase an extended reporting endorsement on the expiring policy, which is also known as “tail coverage.”  Tail coverage, which can cost from 60% to more than 300% of the physician’s annual premium under the expiring policy (which amount is typically due in full at the time of purchase), extends the protection of the claims made policy to cover claims made in the future for acts that occurred during the expired policy’s term.  In other words, it turns a claims made policy into something akin to an occurrence policy.  As noted above, tail coverage is most often purchased as an extension of coverage under an existing policy, but in recent years stand-alone tail coverage policies have been marketed by various companies.

Because of the cost of tail coverage and the high risk associated with a gap in malpractice insurance coverage, both physicians and their employers are keen to make sure that a departing physician is covered.  Of course, each party would like for the other to pay for the tail coverage, and this point is often heavily negotiated.  Suffice it to say that there are many ways this negotiation can play out, including situations where the physician pays for the tail coverage in certain cases (e.g., termination by the employer for cause or termination by the physician without cause) and the employer pays for it in other cases (e.g., termination by the employer without cause).

Some agreements provide a departing physician with a choice and require that the physician purchase either: (i) an equivalent claims made policy with a retroactive coverage date covering acts that occurred while the physician was employed by the practice from which he or she is departing (i.e., “nose” coverage), or (ii) tail coverage.  Maintaining an equivalent claims made policy can work well if the departing physician is merely going to a new job in the same insurance market where he or she will maintain a claims made policy with the same insurance carrier, since the required retroactive date can typically be negotiated for much less than the cost of true tail coverage.  Of course, the former employer has to be satisfied that the physician will comply (and is complying on an ongoing basis) with the requirement to maintain such a successor policy, which could be accomplished by the periodic submission by the physician of evidence of the policy.  If a practice is going to allow such an option, it certainly will want to consider obtaining a “corporate” policy of malpractice insurance, under which the practice is separately insured under its own coverage limit (in truth, a corporate policy is always a good idea where more than one physician is practicing through a single group practice).  One final thing to remember is that where a departing physician is truly retiring, some malpractice insurance carriers offer complimentary or reduced-cost tail coverage.

Term and Termination

Most physician employment agreements have a “term”, or length, of between one and three years, although just about anything is possible.  Often, an agreement with a stated term also will have an “evergreen” clause that states that the term renews automatically unless either party gives prior written notice to the other party that it does not want to renew the agreement.  Keep in mind that, while bona fide employment agreements are afforded blog_ison_phyempagr_part2_pic2significant latitude under health care regulatory laws, independent contractor agreements are more restricted by those laws, including in some cases by being required to have a stated term of at least one year.  Where those laws apply, an early termination of the agreement does not necessarily violate the law, but the parties are forbidden to enter into a new agreement on different terms until the first anniversary of the date of the agreement.   That is just one more reason it is important to speak with an attorney experienced in health care regulatory compliance matters when negotiating a physician employment or independent contractor agreement.

Once the term of the agreement is decided, it is necessary to define the circumstances under which the agreement can be terminated prior to the end of its stated term.   Most physician employment agreements provide that they can be terminated by either party without cause on between thirty and one hundred eighty days prior written notice, although some agreements purposefully limit the ability of one party or both parties to do so.  That is often the case where the employment agreement is part of the consideration paid to a physician for the purchase of the physician’s practice, since the physician in that instance wants to make sure that he or she is able to take advantage of the full term of a lucrative employment agreement.

Termination without cause provisions cut both ways, particularly since such provisions might be exercised at an inconvenient time for the other party.  For instance, a physician might want a longer notice requirement so that he or she has ample time to find a new position following termination, but if the same notice period applies to termination without cause by the physician, the physician might have to stick around for several months in a difficult situation, working for an employer who is upset about the physician’s impending departure.  Further, something to keep in mind when negotiating is that a contract that either party can terminate on ninety days’ prior written notice is, in reality, a ninety-day contract, regardless of its stated term.

Something to keep in mind when negotiating is that a contract that either party can terminate on ninety days’ prior written notice is, in reality, a ninety-day contract.

The negotiation of a provision allowing for termination without cause on prior notice often leads to discussions about the impact of such a termination on other aspects of the agreement, including covenants not-to-compete, bonus compensation or other trailing payments, the expectation that the physician work his or her regular schedule during the notice period (sometimes, a practice would rather just send the physician home during all of part of the notice period and simply pay him for that period, thereby keeping the physician away from patients and other employees), and the physician’s obligations under any associated recruiting agreement.  Also, parties sometimes negotiate the consequences (e.g., liquidated damages) of a physician’s termination without cause on less than the required notice, since in such cases the practice may have to engage a substitute physician to provide locum tenens coverage at a higher rate of pay than the departing physician was receiving.

Termination for cause is, as they used to say in my neck of the woods, “a whole ‘nother matter.”  In reality, a party to a contract may always terminate the contract and sue for damages in the event of a material breach by the other party, but termination for cause provisions greatly simplify that process with respect to certain situations that the parties agree will be cause for immediate termination.  Most of the time, the termination for cause provisions are one-sided in favor of the employer – i.e., the employer’s right to terminate the physician for cause is spelled out in the agreement, but no corresponding language addresses whether the physician has a right to terminate for cause.

For the employer, common reasons giving rise to a termination for cause include a physician’s: (i) loss of his or licensure, DEA certificate to prescribe controlled substances, credentialing with a material payor of the employer or privileges at a facility material to the employer’s business, (ii) uninsurability, (iii) commission of embezzlement, fraud, a felony or a misdemeanor involving moral turpitude, (iv) willful failure to comply with his or her duties and employer’s policies and procedures (often after notice and an opportunity to cure), (v) substance abuse, (vi) competition with the employer, (vii) disclosure of confidential information of the employer, (viii) failure to comply with payor contracts, or (viii) other acts or omissions materially adverse to the business or reputation of the employer.  Of course, the parties will want to negotiate carefully the extent to which the employer has discretion to determine whether any grounds for termination exist.

If an agreement grants the physician an express right to terminate for cause, it is usually limited to major issues such as the employer’s: (i) failure to pay the physician as agreed in a timely manner, (ii) bankruptcy or similar insolvency, or (iii) material breach of the agreement (often after notice and an opportunity to cure).  Since the physician’s primary consideration is usually to make sure that he or she is paid as agreed in a timely manner, and since an employer’s failure to pay the physician would generally give the physician a common-law right to terminate the contract and sue for damages, the main purpose of including provisions granting a physician the right to terminate for cause is usually to trigger other rights in the contract,  such a right to severance or the dissolution of a covenant not-to-compete, as parties often see a rough justice in tying for cause termination to other provisions that work to the detriment of the breaching party.

Two final issues to consider are termination due to disability and the effect of termination on facility privileges.  A discussion of the issues surrounding termination for disability provisions could fill an entire article; however, a few points can be mentioned here.  Often times an employer proposes a contractual process through which the existence of a “disability” is to be determined that is unfavorable to the physician (e.g., where disability is determined by the employer or automatically determined if the physician misses a certain number of days of work).  Such a provision is likely short-sighted from an employer’s perspective, however.  Care should be taken to ensure that the process used to determine whether a disability exists is objectively fair, preferably by utilizing a neutral third party to make any required medical determination.  More importantly, both parties should remain aware that the terms of the contract may be superseded by the Americans With Disabilities Act and/or the Family Medical Leave Act (or similar state laws).  Such laws, which cannot be avoided by contract may impose additional requirements on the process by which disability is determined, may force the employer to make “reasonable accommodations” for any perceived or actual disability, etc.

As for the second issue, always consider whether a physician’s termination should result in his or her relinquishment of privileges at a health facility served by the employer.  Such “clean sweep” provisions are appropriate in cases where a physician leaves a group that has an exclusive contract with a facility (e.g., for example, an group of emergency physicians with an exclusive contract to provide emergency room coverage for a hospital), but in other circumstances a practice may achieve the same result with a simple covenant not-to-compete.  Certain states view such provisions with suspicion, and in general they should be conspicuous and in some states even separately acknowledged by the physician.

Stay tuned for subsequent posts addressing additional issues associated with drafting and negotiating physician employment agreements. 

photo credits:  hin255 via freedigitalphotos.net; frameangel via freedigitalphotos.netsscreations via freedigitalphotos.net

The information contained on this blog is not legal advice. This blog does not create an attorney-client relationship. The viewpoints expressed on this blog do not necessarily reflect the viewpoints of SRVH or its clients. Our attorneys will not blog about pending matters handled on behalf of our clients, nor will our attorneys ever disclose client confidences.


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