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A Typical Initial Employment Agreement for Physicians

Jeff Sansweet-1By Jeffrey B. Sansweet, Esquire

Although each medical practice opportunity is unique, most employment contracts with physician-owned private practices address similar issues.  How each practice deals with those issues in the contract does vary and is the subject of this article.

Term

The term of the agreement must be set forth.  There can either be a firm commencement date or the contract may provide that the physician will start “or or about” a given date.  There also may be contingencies that must be met before the start date such as state licensure, hospital staff privileging and third party payor credentialing.  Occasionally the contract may provide that if the contingencies are not met by a certain date, the contract ends and the employment offer is withdrawn.

The term of most contracts is either one, two or three years, and many automatically review from year-to-year unless either party gives the other notice of termination.  Most contracts also provide that either party may terminate the employment without cause upon 30, 60 or 90 days written notice.  Occasionally, the contract will be guaranteed for the first year, subject only to termination by the employer for just cause.  Cause typically includes loss of license, not being insurable, conviction of a crime, loss of hospital staff privileges, and suspension by Medicare.  In addition, there may be a provision which allows the practice to fire the physician upon a material breach of the contract, and/or material neglect of his or her duties after giving the physician notice of such breach or neglect and an opportunity to cure said breach or neglect.

Duties

The employment contract should spell out the duties and schedule, although often this is not done in great detail.  However, the call responsibility should be set forth, and especially if the job is part-time, the number of sessions per week should be spelled out.  In addition, if the practice has multiple locations, the locations at which the physician will be expected to go to should be included.  The contract should also provide whether, and to what extent, moonlighting, lecturing, expert testimony and chart review will be allowed.

Leaves of absence must be addressed.  Depending on the specialty involved, most initial contracts provide for either two or three weeks of paid vacation and one additional week of paid absence for professional meetings and/or Board certification exams.  The contract may also provide for up to 30 days of paid or unpaid absences due to illness, disability or maternity.

Compensation

Obviously, the compensation terms must be set forth in the contract.  Most physicians are paid a guaranteed salary the first year.  Some, however, are paid purely based upon a percentage of collections or charges they generate.  This is more common for a part-time position, and the percentage can vary between 30 and 50%.  The contract often only provides for the initial salary with any raises determined after an annual review.  Other times, the annual salary increases are set forth in the initial contract until the time partnership is expected to be offered.

Assuming the contract provides for a set salary, it often also includes an incentive bonus provision.  Sometimes it is discretionary, but often there is a specific formula tied to the collections generated by the physician.  For example, if the starting salary is $150,000, the bonus may be 25% of collections received by the practice in the first year in excess of $400,000, payable with 30 days of the end of the year.  The threshold level of collections is typically between two and three times the salary.  The percentage is generally anywhere between 10% and 50%, but most are in the 20% to 40% range.  In some contracts, the percentage may increase each year and in others the percentages may increase at various threshold levels.  For example, the physician may be entitled to 20% of collections between $300,000 and $400,000, 30% of collections between $400,000 and $500,000, and 40% of collections in excess of $500,000.  This tends to be fair since the practice’s incremental overhead decreases as collections increase.

Another less popular bonus formula is to provide for a set percentage of any “profits” of the practice to be paid to the associate after the practice owners are paid at least what they made in the year prior to the associate joining the practice.  While this may appear to be reasonable, the associate’s bonus is then dependent upon the productivity of the owners and the practice overhead, neither of which the associate has any control over.  You also have to be careful to make sure that the bonus arrangement meets any applicable Stark and State self-referral prohibition requirements.

Finally, the contract often requires the associate to be employed by the practice at the end of the year in order to be entitled to any bonus.  Sometimes, however, the bonus will be paid quarterly or semi-annually on a pro rata basis.

Benefits and Expenses

In addition to the compensation formula, the fringe benefit packages should also be included in the contract or in an exhibit thereto.  At a minimum, the contract should provide that the practice obtains and pays for the physician’s malpractice insurance premiums (unless a physician is paid on a percentage basis and all expenses and benefits are paid by the employee).  The type of malpractice coverage should also be specified – i.e., “claims-made” or “occurrence.”  Occurrence coverage is more expensive, not always available, and covers the associate no matter when a claim is made.  Claims-made coverage is more prevalent, at least in Pennsylvania, and covers the associate only for as long as the policy is in place.  Therefore, a reporting endorsement, or “tail,” must be purchased once the policy is terminated to cover the associate against future claims.  Thus, the issue of the responsibility for the tail payment should be addressed in the contract.  There is no “typical” way to handle this issue.  The options include (i) the practice being responsible for the tail payment; (ii) the physician being responsible; (iii) the practice and the physician splitting the tail evenly; (iv) the practice paying the tail if it fires the physician without cause; and (v) the physician paying the tail if he or she quits or is fired for cause.

Other expenses that may or may not be paid by the practice include CME expenses and society dues (often up to a certain dollar limit per year), hospital staff fees, licenses, Board certification exams, cell phone, automobile expenses (although not usually reimbursed until partnership) and moving expenses.

Most practices also provide and pay for health insurance coverage for the physician.  In the past, most contracts also provided that the practice would pay in full for dependent coverage.  However, some practices are now requiring the physician to pay for all or part of the dependent coverage.  Typically, there is not a waiting period, but if there will be a 30 or 60-day waiting period before becoming eligible for health insurance, that should be in the contract.  Some practices may provide for group disability and/or life insurance, but many do not.  Even if that is the case, a physician should obtain or maintain his or her own personal life and disability insurance policies to supplement the group polices, as the group coverage is often low and not transferable after leaving the practice.

Finally, if the practice maintains a retirement/401(k) plan, the contract should state that the physician shall become eligible for the plan once he or she meets the eligibility requirements thereof.  Most plans have a one or two-year waiting period and there may be a vesting schedule.  A Summary Plan Description can be provided to the associate to explain the details.  Occasionally, the physician’s bonus entitlement may be reduced by any employer contributions to the retirement plan.

Non-Compete and Non-Solicitation Covenants

Although they may be difficult to enforce, almost all physician employment contracts include both a restrictive covenant and a non-solicitation clause.  In most states, including Pennsylvania and New Jersey, restrictive covenants may be enforceable only if, and to the extent, they are “reasonable” in terms of time and geographical restrictions and necessary to protect the employer’s patient base.  Most restrictive covenants apply for one or two years after termination of employment.  The geographic area varies depending upon the location and the practice’s drawing area.  A practice in Center City Philadelphia may have a restricted area of only a few miles, a suburban Philadelphia practice may have a 10-mile restricted radius, while a rural area in Central Pennsylvania may have 30 miles.  Instead of using a radius from the practice site, a map may be used as the practice may draw significantly more patients in one direction as opposed to other directions.  If the physician is only working at certain practice locations, the restricted area may run only from the locations at which he or she was “regularly practicing” (perhaps spending at least 20% of his or her time in the 12 months prior to termination).

The contract will also usually set forth the remedy or remedies for violating the non-compete.  These include obtaining an injunction, suing for actual damages, and/or an agreed-upon liquidated damages amount to “buy-out” the covenant.  A common liquidated damages amount is one year’s salary.

A typical non-solicitation clause provides that the physician will not solicit patients, referral sources or employees after he or she leaves the practice.

Co-ownership

Most practices are not willing to commit to partnership before the associate begins employment.  The contract may not mention anything about partnership.  Sometimes, however, the contract will state that the intention (but not the obligation) is to offer co-ownership after two or three years.  Other times, a separate non-binding letter of intent will be provided with the employment contract which may set forth the potential terms of the buy-in.

Final Thoughts

This article has reviewed common provisions found in an initial physician employment agreement.  Keep in mind, whether you are the employer or the employee, each deal is unique and each contract should be drafted, analyzed and negotiated to fit the particular situation.  Having experienced healthcare attorneys representing each party also may help finalize the deal in an expeditious manner.

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Jeffrey B. Sansweet, Esq. is a shareholder with Kalogredis, Sansweet, Dearden and Burke, Ltd. (www.ksdbhealthlaw.com) in Wayne, PA where he has practiced healthcare law with the firm since 1985.

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