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Anatomy of a Physician Employment Agreement

Author: Laurence Geller, MS, MPA — Senior Consultant, Medical Management Associates, Inc.

As a consultant to physicians, I am sometimes asked by new clients to review employment agreements they have already signed. This is the equivalent of a patient asking his physician to examine how the patient had stitched himself up. At that point you can clean up trouble spots, but it’s too late to achieve best results.

The employment contract you sign when joining an ophthalmic practice creates the financial framework for your professional life. Understanding the key components of this agreement is essential to establishing a successful relationship with your employer, whether it be a hospital, single or multi-specialty group practice or solo ophthalmologist. This article explains these components and tells you what else you must know before signing on the dotted line.


Term

It is common to have a two- to three-year contract term with a provision for automatic renewal. Since many agreements will give you the option to purchase stock in the practice at the end of the initial term, the practice should consider your age and experience when it sets the conditions of that option. In some cases where an associate produces 80 percent to 90 percent of shareholder income in the second year of that term, agreements can be restructured to accelerate the buy-in accordingly.


Conditions of Full-Time Employment

As a new associate, you typically have to fulfill the following obligations:

  • Obtain a license to practice medicine in the state where the practice is located;
  • Secure narcotics and controlled-substance numbers and licenses;
  • Provide information to apply for and receive clinical privileges at local hospitals; and
  • Provide the practice with the credentialing information it needs to apply on your behalf to Medicaid, Medicare and the managed care plans that hold contracts with the practice’s physicians.

You also have to affirm that:

  • Your license to practice medicine has never been suspended or revoked;
  • You have never been reprimanded, sanctioned or disciplined by a licensing board, state or local professional society or specialty board or by Medicare or Medicaid;
  • A final judgment or agreed-upon settlement has never been entered against you in a malpractice action;
  • You have never been denied membership or reappointment to the staff of any hospital and no such membership has ever been suspended, curtailed or revoked; and
  • You have never been treated or sanctioned for any type of alcohol- or controlled- substance abuse.

The agreement usually contains the practice’s definition of full-time employment and clarifies how any outside income you generate will be handled. It requires you to maintain regular office hours and attend to patients at hospitals utilized by the practice. Expectations for night call, holiday and weekend coverage are also spelled out.

At a minimum, any outside income the practice receives related to your practice of medicine should be credited to you in determining your bonus compensation. In some cases, an employer may let you retain the honoraria for speaking engagements or publications.


Salary

Most agreements provide associates with a guaranteed base salary during the initial term, instead of basing your pay on the practice’s collections. The contract should specify exact annual salary increases in the $5,000 to $10,000 range. This guaranteed income arrangement is typically followed by an opportunity to purchase stock in the corporation. This works well for the practice because it can get a financial return on the risks it takes by hiring a new associate during the initial employment period. It also works for you, the associate, because you get a guaranteed, acceptable income during the initial period, plus the chance to arrange a more lucrative contract down the road should both sides choose to continue the relationship.

Although less common, some agreements base their compensation on profitability or a percentage of the practice’s collections. However, these arrangements can be a double-edged sword for you as the new associate. Profitability-based arrangements put you at risk for a share of the practice’s overhead – which is probably beyond your control – as well as a portion of expenses in the form of draws, fringe benefits and malpractice insurance. Under this type of agreement, you do very well if you are immediately productive, but you lose income if you start off slowly.


Incentive Bonus

Other than stock options, the incentive bonus is probably the most important part of the overall compensation package. An equitable bonus plan considers your production and that of the entire practice.

One approach I recommend is the “bonus threshold.” This pays you a percentage of your collections beyond a predetermined amount representing your direct cost to the practice and an allocated share of overhead. For example, if your base salary is $150,000 and your benefit package is worth $20,000, your direct cost to the practice would be $170,000. The practice also incurs overhead expenses in connection with your work (staff, rent, supplies, etc.). Assuming a 55 percent overhead rate for the practice (applied to your direct costs) the practice would need to gross $380,000 to net the $170,000 funding your salary and fringe benefits. If a 5 percent overhead contingency cushion is added, the final threshold would be $400,000. Bonuses would then be paid based on a percentage of any practice collections in excess of this amount.

It might be appropriate for a practice with net income of 45 percent to give a bonus of 25 percent of the overage, as in this example. The bonus percentage might also be increased during the associate period to reflect your tenure with the practice.


Fringe Benefits

The agreement typically defines your eligibility for fringe benefits such as group health, life and malpractice insurance; vacation and sick leave; a continuing education allowance; licensing and application fee reimbursement; meeting expenses, professional dues and subscriptions; moving expenses and retirement plan contributions.

In most agreements, the practice will cover the cost of your malpractice insurance, but this coverage typically applies only to claims made during your employment with the practice. Most practices will not pay for tail coverage, which involves claims made during your work for previous employers and can be quite expensive.

Associates typically have to pay for continued malpractice insurance coverage if they leave the practice for any reason. In some cases, the practice will agree to cover the cost of the malpractice tail if the agreement is terminated due to a material breach by the practice. Conversely, you would be responsible for tail coverage if you resign or are terminated for cause.

Professional development allowances typically range between $1,500 and $2,500 per year. New associates should get time off for such development – usually five days per year –in addition to any vacation allotment.


Restrictive Covenants

Differences in state employment laws create wide variability in the restrictive covenants practices can include in an employment agreement. In states allowing such covenants, expect agreements to address three key issues: specialty, duration and geographic area. The specific provision might read: “Upon termination of this agreement for any reason, the associate shall be prohibited from (1) practicing ophthalmology in competition with the practice (2) for two years and (3) within a 10-mile radius of the practice.”

You can also expect to see a provision that restricts your access to patient records if you leave the practice. Patient records typically remain the property of the practice; terminated associates generally have access to them only when a patient requests that access in writing.

Other restrictive covenants may prevent associates from competing with the practice at specific hospitals where the practice has a professional relationship and from soliciting either patients or practice staff. These additional restrictions typically would apply regardless of the reason(s) for termination.


Termination

Parties entering into a contract expect a mutually beneficial relationship. However, since the reality is that relationships sometimes do not work out, it is appropriate for agreements to allow either side to terminate the agreement. Agreements frequently contain a short but specific list of reasons for which your employment can be terminated. Don’t accept provisions stating that you can be terminated for vague reasons like “conduct detrimental to the practice” or “failure to provide services in a professional manner.” Do seek to include a provision that gives you a specific period of time to cure a breach and avoid termination.

Agreements may list justifications for immediate termination that include:

  • No longer being eligible to practice medicine in the state where the practice is located;
  • No longer being able to maintain professional liability insurance;
  • No longer being on the active medical staff of any hospital where the practice has a working relationship; or
  • Fraud, dishonesty or other misconduct on your part that is not “curable.”

Agreements generally allow either party to terminate the contract without cause — typically with 90-day advance notice.


Stock Purchase

Most agreements include a provision wherein an associate can become a partner in the practice by purchasing stock. However, this is simply an “agreement to agree”: the practice is not obligated to sell stock to you, nor are you obligated to purchase stock if it is offered.

One typical approach lets you purchase an amount of stock equal to that held by each existing partner, provided certain conditions are met. These can include:

  • The stock purchase is subject to the type of non-compete covenant described above and/or
  • The senior shareholder in a solo practice can effectively maintain control of the practice without having to own more than 50 percent of the stock. For example, a senior shareholder could repurchase stock from an associate if irreconcilable differences develop between the two parties or that shareholder would have the right to make the final decision in situations where the two parties have reached an impasse over an important business issue. Most associates typically accept such provisions as long as they otherwise have the opportunity to participate equally in the business.

The buy-in normally provides fair compensation for a senior shareholder’s interest in the practice, while minimizing your after-tax investment. At a minimum, the buy-in will generally include stock and accounts-receivable components.

The formula for determining the stock purchase price is typically based on the underlying value of the practice’s hard assets and liabilities. Using a formula ensures that the practice is consistently valued, fairly reflects the assets and liabilities of the practice at any point in time and allows you to become a shareholder in the corporation at a relatively low cost.

Buying-in to a practice does not entitle you to the accounts receivable. Instead, a mechanism must be created that funds your participation in the revenue stream of the receivables, without requiring you to write a check for that participation. Frequently, the associate’s salary is reduced so that he can receive tax benefits. One commonly used method pays supplemental compensation to the senior shareholder(s) based on the collectible value of the accounts receivable at the time of your stock purchase.

After the buy-in, all shareholders typically enter into new employment agreements that define how all parties will be compensated.

Keep in mind that closely-held corporations rarely make decisions on the basis of voting shares of stock. Practices that have long-term success generally make important decisions by consensus.

Some agreements do not include a buy-in provision, but I think this is short-sighted. Deferring that consideration until an associate is eligible to become a partner may persuade that associate to reject the employment offer.


Conclusion

Ultimately, the terms of your employment are those set forth in the formal agreement signed by you and your employer. When the contract is signed, both sides acknowledge that it is the entire agreement and that there are no other agreements between the parties, written or oral. You must ensure that the terms of the agreement you sign are unambiguous and complete in order to avoid misunderstandings or misinterpretations that could create disputes down the line.


ABOUT THE AUTHOR

Lawrence Geller is a senior consultant with Medical Management Associates, Inc., in Atlanta. He has been advising physicians and hospitals on medical practice issues for the past 20 years. Larry is a member of the Academy’s Consultant’s Directory.