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Physician employment agreements

By Michael R. Burke, Esq.

In our Firm’s health care law practice, we represent many sole proprietor physicians and physician groups (hereafter referred to as “physicians-employers”) that are hiring physicians and many physicians who are seeking employment, some of whom are doing so for the first time. Most of the articles that members of our Firm have written on the topic of employment agreements have focused on the issues faced by an employee when reviewing his or her employment agreement. However, in this article, I will focus on the issues facing a physician-employer when hiring a new physician. This article will hopefully also be useful for employees who are reviewing employment agreements with physician-employers, so that they can see the issues that are important to physician-employers when negotiating an employment agreement and understand the mindset behind the physician-employer’s position on these issues. This article will focus on employment arrangements between physicians and physician-employers where the employee is not an owner of (and is not in the process of buying into) the physician group; these arrangements have their own set of circumstances that are in addition to and beyond the scope of the issues to be addressed in this article.

The first key concept in a physician employment agreement from the physician-employer’s perspective relates to the term and termination provisions. In many instances, the physician-employer will set the term to be equal to the number of years until the employee will be given an opportunity to become an owner of the practice. However, the employer does not want to guarantee the employee that he or she will be employed until that time; as such, nearly all physician-employer employment agreements will contain a provision that allows the physician-employer to terminate the employee’s employment without cause by giving him or her a certain number of days notice. Since this provision generally will apply to both the physician-employer and employee, the physician-employer should make its decision on the number of days of “without cause” termination notice to be given based upon how quickly it could adjust its schedule if the physician-employer decided to terminate the physician-employee’s employment or the employee provided notice that he or she was leaving this practice. For most groups, this will range from 30 90 days.

In addition to the ability to terminate a physician-employee without cause, the physician-employer will want to have a provision detailing the reasons by which it can terminate the employee immediately “for cause.” While many of these reasons will not be controversial to the employee (such as loss of license, inability to maintain malpractice insurance, inability to maintain hospital staff privileges, etc.), the physician-employer will generally want to leave the agreement more open-ended as it relates to certain cause provisions (such as the failure to abide by the terms of the agreement or to follow the policies of the employer) so that it has a certain amount of discretion in terminating the employee for cause.

Scheduling and call/coverage are also important issues for a physician-employer to consider. A physician-employer will generally want the scheduling provisions to be “loose” to provide it with the flexibility to cover the needs of its practice. With regard to call/coverage, the physician-employer also will want to keep the language as vague as possible to avoid having an employee complain that his or her call schedule does not match the terms of his or her agreement; however, many employees will push to have the call/coverage arrangements that they have been promised included in the agreement or at least include the requirement that call/coverage be allocated on a “substantially equal” basis.

Physician-employees usually first focus on the compensation provisions in an employment agreement. The physician-employer wants these provisions to be well-defined so that there can be no argument as to the calculation of salary and any bonus compensation that may be due and payable to an employee. Often, the best compensation formulas (for both the physician-employee and the employer) are the simplest to understand; for example, providing a physician-employee with a base salary and a bonus equal to a percentage of collections related to services performed by the employee over a certain threshold of collections target. The target often used by physician-employers in this regard is two to two and three times the base salary of the physician-employee, which should allow the physician-employer to make up the overhead costs associated with the employee and make a profit off of the employee before any excess revenues are shared with the employee.

The physician-employer will want the employment agreement to provide that all revenues generated by the employee’s professional services will go to the employer. Any exceptions to this should be granted with the consent of the employer, so that it knows what the physician-employee is doing “on the side” while not working for the employer. Notwithstanding the foregoing, however, many employers will allow physicians to retain any honoraria garnered from speeches or articles, as that helps promote both the practice and the physician and can be a useful marketing tool.

Many physician-employers will want to leave the descriptions of benefits to be received by the employee and the business expenses to be reimbursed to the employee as “loose” as possible. As Medicare and third party payers continually cut back the reimbursements to physicians for the services that they provide, the generosity of physician-employers in this regard has correspondingly decreased. Physician-employers need to leave open the ability to change and/or terminate any fringe benefit plans (such as health insurance, life insurance or disability) provided to its employees to account for (among other things) financial changes in their practice. Many physician-employers will pay for certain non-discretionary items needed by a physician-employee, such as his or her medical license fees, hospital staff dues and DEA registration costs. The physician-employer then needs to decide whether it wants to be specific on the other items that will be reimbursed to a physician-employee (such as providing a stipend to cover CME fees, dues for professional organizations and the cost of journals, or to agree to pay for specific categories of these expenses) or to have the agreement provide the physician-employer with the discretion to decide on which items it will reimburse from time-to-time in this regard. Many physician-employers obviously would prefer to retain discretion so as to have better control over their costs, but this issue is often negotiated by physician-employees.

Many physician-employers are moving towards a combination of time-off for vacation, continuing medical education and illness. Whereas 10 years ago having physician-employers pay a physician’s salary for the first 30 days of disability was common, physician-employers now often combine all time-off into one package. The physician-employer will also want to make sure that time-off will only be taken with the approval of the physician-employer to ensure that its practice is properly covered. In addition, many physician-employers will not permit accrued but unused vacation to carry over from year to year.

Malpractice insurance is a topic of paramount importance in most physician employment agreements. It is customary for the physician-employer to pay for the cost of malpractice insurance; however, more employers have begun including provisions that ask for an employee to share this cost when it exceeds a certain fixed amount or when it exceeds a certain percentage of the “standard” premium or the average premiums paid by the other physicians in the physician-employer’s practice. The payment of a reporting endorsement (tail coverage) is also an issue that should be addressed in the employment agreement. A physician-employer may want to address this issue even in instances where it maintains occurrence malpractice coverage (in which “tail coverage” is not required) for the employee at the inception of the agreement, in case such coverage changes during the term of employment. The physician-employer will obviously want to the place as much of the cost of the tail coverage on the employee as is reasonably possible; however, alternate arrangements include splitting the tail equally or based on an agreed upon percentage or having the tail coverage paid by one of the parties depending upon the circumstances of termination (for example, if the employee terminates the agreement without cause, he or she would pay the tail, but if the physician-employer terminates the employment without cause, it would pay the tail).

In Pennsylvania, physician-employers should also consider who will reimburse the state for the MCARE abatement if the physician’s employment with the practice terminates and he or she leaves the state to practice elsewhere. If the physician-employer does not want to reimburse this abatement, it should make it clear that it is the employee’s responsibility in the employment agreement. However, this is also an issue of reasonableness, as the physician-employer would have been required to pay such amount under the employment agreement if the physician had refused to sign the MCARE abatement pledge, and most employees at the time of signing the pledge do not believe that they will be leaving their position with their current employer (or fear for their job if they do not sign it).

The inclusion of a restrictive covenant and non-solicitation provisions (where permitted by state law) is also an important provision to the physician-employer. The physician-employer does not want to develop the employee in his or her practice and allow him or her to then practice in competition with the physician-employer after it has incurred all of the expenses of establishing that physician in practice. While restrictive covenants and non-solicitation provisions need to be crafted so as to not be overbroad (and therefore unenforceable), the physician-employer will want to make these provisions as strong as possible and attempt to apply these provisions regardless of the reason for termination. A physician-employer may also want to consider the inclusion of a liquidated damages provision that applies if the employee violates the restrictive covenant, which provides a defined monetary remedy for such a violation in an amount equal to the anticipated damages that the physician-employer would incur as a result of an employee’s competition in breach of the covenant.

The possibility of the physician-employee becoming an owner of the practice in the future is also often addressed in the employment agreement. From the physician-employer’s perspective, it wants to provide as little of the details of this arrangement in writing as possible and definitely does not want to guarantee that the physician-employee shall be permitted to buy into the practice simply by still being employed at the end of the term. If a physician-employer has an established buy-in process, it may elect to sketch this process out in the employment agreement, but no promises or guarantees of ownership should be made. While most physician-employees understand that no guarantees will be made in this regard, they will still press for as many details of future ownership as possible, and the physician-employer will ultimately have to decide how far it is willing to go in detailing these possible buy-in terms in the employment agreement.

The foregoing sets forth some of the key issues for physician-employers to consider in employment agreements with their physician-employees and the physician-employer’s perspective in preparing such employment agreements. Points detailed herein should be useful for physician-employers in making sure that they address the key topics associated with employment in their arrangements with physician-employees and for physician-employees to see the physician-employer’s point of view on these issues. Obviously, all of theses issues are subject to negotiation, and the need of the physician-employer for the physician-employee in question (i.e., leverage) definitely plays a role in the physician-employer’s willingness to negotiate. Of course, if you have any questions in connection with preparing or reviewing a physician employment agreement, you should consult a health care attorney who is knowledgeable in dealing with these arrangements.

Michael R. Burke, Esq., is a shareholder with the health care law firm of Kalogredis, Sansweet, Dearden and Burke, Ltd., located in Wayne, PA.

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