Understanding Physician Employment and Partnership Agreements

December 22, 2010

Are you nearing contract negotiation time? Make sure you understand what you’re reading before you sign. Here’s a detailed analysis of what should and shouldn’t be in your next binding agreement.

Pop quiz: If you sever ties with your practice, do you forfeit privileges at your local hospital? Who pays malpractice tail insurance after you part ways? Would you lose any bonus you earned if you quit without cause?

If you're still scratching your head, that employment contract or partnership agreement you keep stuffed in your bottom drawer could give you a nasty surprise. "Like many of us, physicians sometimes sign on the bottom line and don't pay much attention to their contract until it becomes an issue," says Deborah Hiser, a healthcare attorney with Brown McCarroll in Austin, Texas.

Employment contracts, of course, define your working relationship with the practice, spelling out such things as your employment status (independent contractor or employee), the manner in which you will be paid, and grounds for termination. Partnership agreements, likewise, which are typically offered after two years of employment, define the legal boundaries of your equity stake in the practice.

But there's a lot more to it than that, says Jim Kelso, a healthcare attorney in San Antonio, who specializes in contract review. To successfully evaluate such documents, which are fraught with legalese, you'll need to know what to look for, what to watch out for, and how to protect your interests at the negotiating table. "Employment contracts tend to be most useful when the relationship dissolves or there is a dispute regarding compensation," says Kelso. "Sometimes there are provisions that eliminate the bonus opportunity if the physician terminates without cause, for example. There are all kinds of little nuances that you need to understand."

Such contracts vary widely depending on the employer, but the following provides a snapshot of the basic elements found within - and how to determine whether the document is worthy of your signature.

Compensation

The headline of any employment contract is compensation - which includes both benefits and income. It should specify how you'll be paid, either straight salary, salary plus bonus, or productivity-based. If the model relies on productivity, it should also tell you how that figure is calculated: work relative value units (RVU), collections, or some other measure. Benefits, meanwhile, include your retirement plan, health, life, and disability insurance, as well as paid time off. It also includes malpractice premium payments, including tail liability coverage for claims made by former patients after you leave the practice. Many practices require the employee to pay for tail coverage, but some will split the costs depending on tenure or if they terminate your contract without cause. If you can't get your practice to pick up the tab, figure out how much it would cost you out-of-pocket and push for that amount in the form of a larger signing bonus. The terms of such bonus and any other money you receive from the practice for education expenses, student loan repayment, salary advances, or relocation expenses should also be defined. Employers often require you to repay that money if you leave before a fixed number of years.

At the same time, your contract should identify any annual pay increase to which you are entitled - especially for those with multi-year contracts. Before agreeing to anything, though, you'll want to be sure the compensation package proposed is fair for your skill set and local market - information you can glean from salary survey data through your professional association or the Medical Group Management Association.

You will most likely move to an "eat what you kill" compensation model if you become partner. That means you make what the practice collects from your professional services, less expenses. As such, your partnership agreement should define what constitutes expenses. Often, overhead expenses are divided between group (or shared) and individual expenses. It's important to figure out how your practice manages group expenses since poor cost control negatively affects your income, says Kelso. It should also spell out the methodology used to calculate and disburse profits amongst shareholders, adds Roderick Holloman, a healthcare attorney with The Holloman Law Group in Washington, D.C.

Restrictive covenants

The biggest sticking point in any physician contract is generally the restrictive covenants. That includes the non-compete clause, which precludes departing doctors from setting up shop within a certain geographic distance for one to two years after they leave the practice. "There's a lot of controversy about whether or not these are enforceable, but in many states they still are if deemed reasonable by the courts," says Jamie Claypool, a healthcare consultant with J. Claypool Associates in Spicewood, Texas. "I saw one that was for 30 miles and that's ridiculous. It actually came to a lawsuit and the practice lost." A non-compete radius of even 15 miles, however, might still be too restrictive, depending on your specialty and locale. "What if you're in a geographic area [rural location] where you don't have the capacity to open up outside that area?" asks Hiser. "If you're going to sign it, get a healthcare lawyer to look at it and determine whether it's reasonable."

At the same time, Holloman encourages physicians to negotiate away any non-compete clause that requires them to terminate their privileges at the hospital where they treat patients after they leave the job. "I encourage doctors to take that language out because they didn't earn that privilege by working for the practice, but by their own track record and credentials," he says.

Other restrictive covenants include the anti-solicitation clause, designed to thwart outgoing physicians from taking other doctors, staff, or patients with them when they leave. It's the ownership of medical records, however, that creates the most legal angst. "There's always the issue of whose medical records are they?" says Hiser, noting contracts typically dictate that records belong to the practice. Some state medical boards, however, require groups to give doctors a list of their patients' addresses so they can notify them of their new practice location. "If your state does not, make sure your right to do this is written into the contract," says Hiser. All of these covenants are, of course, negotiable, especially if demand for your specialty is high. "It is possible to negotiate a smaller distance and period of time under these provisions and to include circumstances where the group will waive the non-compete," says Hiser.

Termination

Your contract will also include provisions for termination. Your employer will reserve the right to terminate your job immediately "with cause," if you are convicted of a felony, lose your license, or are otherwise unable to perform your job with competency. They will also identify the reasons for which they can terminate your contract "without cause" with advanced notice - usually 90 days. Just make sure the contract is reciprocal. "Every contract should allow the physician an out just as the employer has an out," says Holloman. Termination provisions in a partnership agreement generally require a longer advance notice (180 days) because of the many details that must be resolved in unwinding the partnership interest, says Holloman. For example, the value of the outgoing partner's share needs to be determined via audit.

Employment contracts

Apart from that, employment contracts should define your anticipated workload, including the average number of hours you're expected to work weekly and any additional non-patient responsibilities you're expected to perform, including call duty, peer review, committees, and continuing medical education (CME). "The contract should include very specific provisions for CME, how much the practice will pay toward it, and how much time you'll be allowed off for it," says Claypool.

Contracts should be concise (40-page documents are excessive), equitable, and make clear the scope of your practice, says Jack Valancy, a healthcare consultant and clinical assistant professor in Cleveland Heights, Ohio, who specializes in contract review. "An ordinary person should be able to sit down and read it and understand what's going on," he says. "Often overlooked is the actual definition of the job itself." You want specifics. If you're a family physician, for example, will you perform obstetrics? See outpatients and inpatients? Round on nursing home patients? Which site will you work out of if the practice has multiple locations, some of which are likely more desirable? Be sure, too, that the workload described is fair. The best contracts use language like, "will perform duties equivalent to employer's other physicians or similarly situated physicians." Otherwise, you might get stuck with disproportionate call duty.

If you're interested in partnership, be sure your contract includes a minimum twice a year review to establish whether you are en route toward that goal, advises Holloman.

Partnership agreements

By and large, partnership agreements are more straightforward. There is also less room to negotiate. "These are very difficult to amend," says Kelso, noting any change would require all partners to agree and incur the expense of updating their own contracts as well. But the stakes are higher, too. As a prospective owner, the onus is on you to be sure you know what you're buying and that the practice's financial health is sound, through a valuation of the practice by a certified healthcare appraiser or accountant.

Partnership or shareholder agreements should define the practice's legal structure: sole proprietorship, partnership, professional corporation, limited liability corporation, or hybrid. It will also spell out terms of the buy-in, or how much you are required to pay to become an equity owner. Family practices, for example, might charge $10,000, because their overhead is low, while radiology groups often require a much larger buy-in of $200,000 or more due to the cost of diagnostic equipment. Be forewarned: Some practices bait physicians with a zero or low buy-in price in exchange for a reduced salary during their years of employment. "The partner is, in effect, prepaying their buy-in," says Valancy. "Rather than charging you $40,000 for the buy-in, they charge you a nominal amount and pay you $140,000 a year instead of $160,000. But what happens if you don't reach partner? You want to be sure you're fairly compensated for the work you are doing."

Such documents should also tell you how many shares you'll receive in the group, what constitutes group expenses (overhead), and how the practice is governed. For example, which decisions require a majority vote? Who has check writing authority? How are partners added or dismissed? Does any agreement to merge or acquire require a unanimous vote or merely the approval of the majority stakeholders? You'll want all of this in writing.{C}

Likewise, the agreement should address a buy-back provision, which tells you how much you will receive from the practice if it dissolves, when you retire, or when you otherwise sell back your shares - including how much your beneficiaries would get if you pass away. Some practices offer nothing, while others pay out the equivalent of the initial buy-in. More often, though, the amount is based on the number of shares you hold and the value of the practice's tangible assets (office furniture and equipment) and intangible assets, including accounts receivable and debt at the time you sell.

According to Holloman, it is best to review your agreement every other year to ensure that it still adequately addresses issues that arise as the practice grows. "For example, if a practice owned one facility when the partnership agreement was first entered into, that agreement must be revised to reflect a subsequent facility purchase, new partners, departing partners, as well as changes in relationships with third party centers," he says.

Red flags

As you weigh the merits of your contract, there are several potential land mines to consider. Be wary of contracts with excessive terms (greater than 3 years), those with overly harsh language, those full of typos (which indicates it was probably not reviewed by an attorney), and any agreement that looks like it was written on a 1980s word processor. "That means it could be 20 or 30 years old and medicine has changed drastically in that time period," says Kelso.

One big no-no for doctors just starting out are income guarantees, also called hospital recruitment incentives, in which the hospital where you treat patients essentially subsidizes your pay for the first one to three years while you build your practice, says Valancy. Remember, there is no free lunch. Typically, you'll owe two years of service for each year of financial support. If you stay in the community long enough, the hospital forgives the loan. If not, you'll have to pay it back.

Another cause for pause are one-way indemnification clauses. Such clauses under your malpractice insurance stipulate that you, the physician, will hold your practice harmless of any costs and expenses arising from an error or omission on your part. "The problem with these is that there are a lot of people in that office and there could be shared liability," says Valancy. "Maybe someone on staff did something wrong - the chart wasn't available or the lab results came late." Best to remove that language from your contract, he says.

If you're going for partner, you should also steer clear of any practice that is unwilling to engage in a candid discussion of the business's debt, a recent exodus of partners, and a clause that the partnership interest does not pass to the estate of a deceased partner but reverts back to the practice without a buy back, says Holloman. Finally, he adds, don't sign contracts with a liquidated damages provision, which essentially means you'll owe the practice big bucks if you violate your non-compete agreement.

In the modern age of medicine, the value of employment contracts and partnership agreements that clearly define your rights and responsibilities cannot be overstated. They provide a framework for conflict resolution and help eliminate costly surprises. Just be sure you know what you're signing and what to look for before you sit down at the negotiating table.

Editor's note: Want to know how to broker the best employment/partnership deal? Read "Contract Negotiating 101."

In Summary

Before you sign on the dotted line, keep this advice in mind:

•Contracts should be clear, concise, equitable, and define your workload expectations.

•If your employer won't pay for tail insurance, get the equivalent amount added to your signing bonus.

•If your state medical board does not require groups to give you a list of your patients when you leave, make sure you assert that right in your contract.

•Make sure the termination provision gives you an out, too.

•Income guarantees and one-way indemnification clauses are a big red flag.

Shelly K. Schwartz, a freelance writer in Maplewood, N.J., has covered personal finance, technology, and healthcare for more than 12 years. Her work has appeared on CNNMoney.com, Bankrate.com, and in Healthy Family magazine. She can be reached via editor@physicianspractice.com.

This article originally appeared in the January 2011 issue of Physicians Practice.