Renegotiating employment relationships

By William H. Maruca, Esq.

So three, or five, or seven years ago you sold your practice to a health system and became an employee. You took home a check for your “goodwill” value and hard assets, and signed an employment contract, or maybe the “goodwill” was buried in a compensation structure. Your hospital or its MSO took over all the headaches you didn’t want to deal with, like billing, staffing, landlords, etc., and promised you a guaranteed salary plus a productivity bonus. It sounded like a good deal at the time and everyone else was doing it. Oh, there was probably a little matter of a restrictive covenant if you separate, but nobody was thinking too much about divorce on your economic wedding day.

Now that contract is coming up for renewal, or perhaps your employer has approached you about renegotiating or terminating that contract before the end of its term. The hospital is claiming huge losses and either blaming you for not working hard enough, or pointing the finger at stingy insurers, skyrocketing overhead and other factors they claim they can’t control. Of course, no matter how your relationship may change, they assure you that they want to stay friends (i.e., keep your patients coming their way).

How did we get here?

Large entities, and smaller entities that wanted to be large players, engaged in bidding wars for practices, believing that if they did not solidify their relationships with physicians, their competitors would do so. Some of those big players, particularly the publicly-traded physician practice management companies (PPMCs), have ended up in Bankruptcy Court and are no longer in the game. The “elephant in the room” that nobody dares to mention is the revenue stream that physicians control, including admissions, subspecialty referrals and ancillary services. It is a felony to buy (or sell) referrals, so the deals had to be based on expectations of profit within the practices themselves that may have been overly optimistic.

Practice appraisals included factors that, taken on a case-by-case basis, would be reasonable, or at least would meet government guidelines, but in the aggregate, just didn’t hold up in the real world. For instance, many appraisals assumed increases in volume could be achieved with greater efficiency, but here in Western Pennsylvania, our population is declining and one practice’s gain is likely to be another practice’s loss.

Hospitals assumed that their existing infrastructure was easily adapted to bill for, collect for, staff and manage physician practices. Many physicians will beg to differ. Allocation of overhead among various practices often fueled disputes. Layers of management in large institutional settings added to the cost overruns. Anticipated economies of scale proved to be illusory.

Both hospitals and physicians assumed payors would selectively and exclusively contract only with larger entities, and do so on a risk shifting basis. These models did not materialize in many markets, or were not as dominant as expected. Remember the widely-predicted extinction of the one-physician practice? It hasn’t happened.

Hospitals will also tell you that physicians with guaranteed salaries may not have the incentive to squeeze in that extra patient at the end of the day, even if they have productivity-driven bonus formulas. Physicians will counter that the thresholds for bonuses were so high that it didn’t matter how hard they worked.

Management and professional cultures often clashed. Physicians used to being their own bosses found themselves reporting to MBAs and other non-clinical types who spoke different languages and held different values.

What Hospitals Want

Many hospitals have come to recognize the limitations of the physician practice ownership model. Some want to get out of the physician-employment business altogether, but others want to restructure the financial incentives to bring the losses under control. As contracts come up for renewal, health systems are being selective in offering renewals to those practices and physicians that they believe are most advantageous to retain as employees and seeking to part company with the less profitable practices on good terms.

First and foremost, health systems want to keep your patients, one way or the other. One way is to renew or renegotiate your contract so that you stay an employee, preferably a happy one who supports the health system. Another way is to sell or transfer your practice back to you with strings attached to assure that you don’t become their competitor’s employee or economic partner. A third and least desirable way is to go to court to force you out of their territory for a year or two to enable another friendly practice to grab your patients.

The Department of Health and Human Services gave employers a new tool to ensure loyalty in the January, 2001 Phase I final Stark regulations. A physician’s compensation may now be conditioned on the physician’s referrals to a particular provider, practitioner or supplier, but only if certain protections are in place: the compensation arrangement must be fixed in advance for the term of the agreement; be consistent with fair market value for services performed (that is, the payment does not take into account the volume or value of anticipated or required referrals); must comply with an applicable Stark exception; and must be set forth in a written agreement signed by the parties. The mandatory use of in-network providers must not apply if the patient expresses a preference for a different provider, practitioner or supplier; the patient’s insurer determines the provider, practitioner, or supplier; or the referral is not in the patient’s best medical interests in the physician’s judgement. Expect to see terms like these in any renewal contract with a health system.

Another health system goal is to reduce the flow of red ink. Practice losses may stem from too-generous salary guarantees, poor billing and collection results, disproportionately high overhead, staff turnover, lower than expected physician productivity, failure to capture anticipated referrals and ancillaries, or a combination of the above.

What You Want

Your goals may vary depending on your circumstances, how pleasant the employment experience has been so far, and the options presented by the employer.

If you are renegotiating and staying on as an employee, you may want to focus on where the problems have been in your current situation and work to create win-win solutions to those problems. Your employer is likely to be looking to reduce or even eliminate salary guarantees. This is a major concession on your part and should be agreed to only if you are getting significant concessions in return, or if the alternatives are otherwise unacceptable to you, i.e. an enforceable restrictive covenant that will require you to relocate beyond a distance your patients will travel.

In place of salary guarantees, productivity models should be designed to reflect factors you can control, such as your workload, efficiency and the quality of your care, but not those that you cannot control, such as the employer’s billing and collection results or your payor mix. Productivity models should be fully accountable and you should be certain to bargain for access to all relevant financial information to verify the accuracy of your compensation.

To the extent you remain at risk for collections, you should build in floors for collection percentages where possible. You should not be at risk for productivity targets that cannot be reached by reason of your exclusion from insurance panels due to your affiliation with your employer, or because your employer has otherwise undermined your efforts at productivity such as by locating another employed physician too close to your offices, or due to inappropriate shifting of ancillary income to the central operating entity.

Other hot issues include commitments from your institutional employer to levels of staffing (both clinical and support staff), marketing efforts and other amenities such as a hospitalist service which may enhance your ability to deliver high-quality and efficient care.

If the hospital is asking you to reopen your compensation terms, you should ask for other considerations in return such as reductions in the scope, time or applicability of your restrictive covenant, a longer extension, “friendlier” exit terms upon expiration of the renewal term (as noted below) or other concessions valuable to you. Your individual goals will dictate your priorities.

If you are separating from an institutional employer, there are potentially many more issues to negotiate. Also, you have more clout if the hospital is asking you to separate before the end of the term than if you are asking to be released early or if your contract is at an end.

Issues to consider and negotiate include:

• Waiver or modification of restrictive covenants (and strings attached, if any, i.e. staying on staff at the hospital and continuing to participate in any affiliated health plans, or not selling to or joining another health system for a stated period).

• Ownership of charts.

• Notice to patients, particularly if you are relocating to a new office.

• Permission to solicit key staff for employment, if desired.

• Transfer of billing, collection and patient demographic data in usable form.

• Start-up capital and transition financing (MGMA estimates capital needs to re-launch a private practice to be between $100,000 and $250, 000 per physician)—can be structured as a loan or an early-termination settlement.

• Assumption of leases, if desired.

• Repurchase and valuation of hard assets.

• Valuation of repurchase of goodwill. Note that both the IRS and the Inspector General may raise an eyebrow if the repurchase price is for little or no consideration but the original hospital purchase price was six figures. Be prepared to demonstrate that the current fair market value of a practice in today’s environment is different from its value at the time of acquisition due to changing market conditions and other factors.

• Timing of transition, particularly with regard to the need for health plan recredentialing and contracting and/or new group provider numbers.

• Keeping divisions together, or separating them if desired, upon divestiture.

Just as it was important to have qualified and experienced advisors when entering into a relationship with a health system, it is even more important when modifying or ending that relationship. Your health care attorney should be involved in the discussions before they are reduced to a final proposal so that all issues and alternatives are raised and considered in a timely manner.

William H. Maruca, Esq., is a shareholder with the Pittsburgh law firm of Kabala & Geeseman.