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Physician employment contract issues

By Daniel M. Bernick, Esq., MBA

In my work as a health care attorney, I have reviewed and drafted hundreds of physician employment contracts. Here are some of the key “lessons learned” over the years.

Termination. Every contract runs for its full length (term), such as one or two or three years, including renewals, unless it is terminated according to the contract’s terms. Therefore, it is critical to include termination provisions. Without a proper ability to terminate the contract during the term, the physician practice will be “on the hook” for all salary payments that are to be made during the term, if the physician must be terminated during the term.

Generally, there are two ways to terminate a contract: with cause, and without cause. “Cause” is often a defined term. “Cause” generally means loss or suspension of license, loss or suspension of hospital privileges, loss of malpractice insurance, abuse of drugs or alcohol, conviction of a felony, or theft or other dishonesty. Generally, these events allow for immediate termination, thereby removing the “bad” physician from the practice, and terminating the practice’s responsibility to provide continuing salary. However, these cause provisions are not complete without a catch-all “material breach” clause. This will enable the practice to terminate for other unspecified material breach of the contract, such as the associate’s failure to perform duties, turn over fees to the corporation, and abide by its policies. Oftentimes there is a period for “cure” by the associate. This essentially means that the physician must be given notice of the material breach, and an opportunity to fix the problem to the reasonable satisfaction of the employer.

The attorney representing the medical practice should be careful not to permit a cure proviso to apply to some of the more serious “bad acts” such as loss of license or privileges, since these acts are really not capable of cure (they cannot really be fixed). Thus, while it is possible for a physician to cure his work habits (arriving to work tardy), it is not really possible for him to cure an act of embezzlement, or loss of license, as in such cases the physician’s ability to provide services, and/or the practice’s trust in the physician, has been irreparably damaged.

In addition to cause termination, we recommend a provision permitting termination without cause. This is any termination that is not a cause termination. Because it is without cause, it does not require justification. Typically such a proviso would say the physician can be terminated “for any reason or no reason, upon 30 [or 60 or 90] days’ advance notice to the physician.”

Some newly hired physicians resist a provision allowing termination without cause, although in fact it has become standard in associate physician agreements. The associate worries that the practice will act arbitrarily in terminating his or her employment. In fact, our experience with hundreds of physician practices is that no decision to terminate, even without cause, is made on the spur of the moment or a whim. Generally, it is made only after considerable soul searching and delay, after the parties have long since devolved into a dysfunctional working relationship.

In terms of the amount of advance notice required, this is simply a question of money. Typically, a without cause proviso includes an additional sentence or two that enables the practice to suspend the physician’s active provision of services to the practice, so long as the practice continues to pay salary and benefits for the given notice period. This enables the practice to get the associate out of the practice, where he or she cannot say bad things to the staff about what has happened, or contribute to a bad atmosphere with his negative attitude, and so forth.

Thus, the bottom line on the amount of notice provided is simply the amount of money that the practice will pay to make the associate go away

Bonuses. Volumes can be written about bonus provisions. A typical bonus provision gives the associate physician a percentage of his collections if those collections exceed a certain threshold, oftentimes, two or three or 3.5 times base salary (or times base salary and benefits).

Once the associate’s production exceeds this level, then the associate is normally entitled, as a bonus, to 20 percent, 30 percent or even 40 percent of collections in excess of that threshold.

Be clear about what is included in the revenues that are counted, and what period is used. For instance, will ancillary services ordered by the physician count as “production?” In some practices, this can be substantial.

A conservative bonus provision will provide that only collections for personal services rendered (i.e., excluding all ancillaries) will be included. That arguably makes better sense than including all ancillaries in the bonus calculations because (1) Stark restricts the Practice’s ability to pay for various “designated health services,” rendered to Medicare or Medicaid patients and (2) the availability of ancillary services is really not a function of the associate’s work efforts (which is what the bonus is designed to reward), but rather reflects investment by the owners of the practice in the technicians, equipment and supplies necessary to furnish the ancillary service.

Fringe Benefits. The typical package of benefits for a new associate physician includes health insurance (family coverage), malpractice insurance, dues, licenses, journals and CME costs. In addition, the practice will normally provide a vacation allowance of two to three weeks for an associate, plus a week in each year for continuing medical education. Typically, there is also a separate proviso for sick pay at five to 15 days per year, as needed.

One consideration is with respect to vacation/CME time. Oftentimes, in lieu of vacation/CME and sick pay, the practice will provide a “paid time off.” With PTO, it does not matter why the physician is absent (vacation, sick, CME, etc.) only that he or she is absent. The PTO concept is helpful to the practice as it limits the total amount of time off that the physician may take.

Questions also arise regarding “maternity leave.” Generally all that is required by federal anti-discrimination law is that the practice does not discriminate against pregnancy-related disability. Thus, if the practice normally provides ten days of sick pay for a broken leg, or illness, it cannot deny ten days of sick pay if a female employee goes on bed rest, or for recovery from childbirth. In other words, there is no legal requirement to provide for extra paid time off for a pregnant employee. Some practices provide paid “maternity leave,” which is paid leave over and above that provided for other illnesses or injuries. However, that is purely discretionary, not required by law.

Malpractice Tail. This is typically a hotly negotiated item. In the past, most medical practices paid 100 percent of the tail cost for a departing doctor. However, many practices are now shifting this cost, in full, to the associate. In response, associate doctors frequently propose the following: the tail will be paid by the associate if he resigns voluntarily, or is terminated with cause, but it will be paid by the practice if the physician is terminated involuntarily and without cause.

The intent of such a proviso is to allocate the tail cost to the party who is “at fault” for the termination of the relationship. Thus, if the associate leaves voluntarily, he must pay for the tail, since he acted under his own volition, whereas if the practice terminated the associate, without cause, then the practice must pay. The problem with this formulation is that it is difficult oftentimes to determine whether or not a termination is voluntary or involuntary. If the relationship is not working out, the associate may be tempted to provoke his own termination, so that he is terminated without cause, and therefore is not responsible for the tail. Accordingly, to avoid such ambiguities, the parties should clearly specify the allocation of tail in the event of any termination, whether that is 100 percent to the doctor coming on board, or a 50/50 split, or 100 percent to the practice.

Non-Compete Provision. Again, volumes can be written on this subject. A non-compete in the Commonwealth of Pennsylvania needs to be “reasonable” in terms of duration and geographic scope. A typical debate with respect to the non-compete is when it should apply. As with tail, the associate may argue that it should not apply if he is terminated without cause. However, like tail, this is far too important an issue to be turn on such niceties as whether the physician left voluntarily or in fact was terminated without cause, involuntarily.

Thus, we generally advise that the non-compete should apply in all circumstances. If the associate maintains that the employer has breached other terms of the document, so that he should in turn be released from his non-compete obligations to the practice, this can be dealt with by a clause that says that “breach is not a defense” to enforcement of the non-compete provision. In other words, any alleged breach by the employer has to be litigated separately, and does not vitiate the non-compete obligation of the associate.

The practice should also specify that it can recover its attorneys fees if it prevails in the non-compete litigation. Thus, if the practice seeks to enforce a reasonable non-compete, it can be assured that it will be made whole, in terms of its attorneys fees, if it does prevail.

These are the key provisions to watch for in a physician employment contract. The employment agreement is a key document that needs to be drafted with care, as any of these provisions can cost the practice considerable money.

Daniel M. Bernick, Esq. M.B.A., is a Principal with Health Care Law Associates, P.C. and The Health Care Group, Inc. in Plymouth Meeting, Pa.

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