Critical Terms in Physician Employment Agreements, Part I

Ed. Note: Over the next few months, this page will periodically feature posts on the process of entering into a physician employment agreement.   First, we are going to review the key terms contained in a physician employment agreement.  After that, we will do an overview of how to effectively negotiate the terms that are most important to you.

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During their career, nearly every physician will navigate the process of negotiating and signing an employment agreement.   As the practice of medicine has grown more complex, so have the terms and provisions of physician employment agreements.   Physicians are well advised to stay informed on the legal and financial concepts that form the core of the relationship with a prospective employer.  This outline and discussion of terms is meant to provide a physician with a working knowledge of some of the most critical items negotiated between a physician and their employers.

In addition to the summary presented here, there are numerous other resources a physician can refer to prior to signing an employment agreement.  For example, the American Medical Association produces and periodically updates a comprehensive Model Physician Employment Agreement that contains detailed annotations and sample provisions, written from both the employer and physician perspectives.  Consulting with veteran colleagues on their experiences in negotiating their compensation and other work arrangements can also provide valuable information and insights to the physician presented with an employment agreement for the first time.

Being familiar with trends in compensation and other critical elements of employment relationships is an important part of the practice of medicine.  But the challenging legal and regulatory environment physicians now find themselves in also dictates that they engage a qualified attorney to help them negotiate and document an employment arrangement that best protects the physician’s own unique professional and personal interests.  As part of a package of recruiting incentives, prospective employers will often agree to pay the reasonable expenses of having an attorney review and negotiate an employment agreement on behalf of the physician.

Duties and Responsibilities

The employment agreement should set forth a description of the duties and responsibilities of the physician’s employment and where they will be carried out.

Duties

This section should state whether the physician will be a full or part-time employee and a general statement of the medical duties.  It is common practice to attach a more specific description of duties as an exhibit to the employment agreement.  In addition to detailing the specifics of the physician’s clinical duties to the employer and its patients, this exhibit should also lay out the physician’s obligations regarding the supervision of nurses and administrative staff, as well as service on committees or other organizational responsibilities.

Location

Physician group practices and health systems often provide services at more than one site.  The employment agreement should state the locations where the physician will be expected to perform their duties.  This provision is especially important to the physician who is new to the area in making his or her choice of where to live.

Staff Privileges

Many employers will require a physician to obtain staff privileges at one or more facilities as a condition of employment.  The employment agreement should set forth the names and locations of these facilities and give the physician a reasonable amount of time to complete the process of obtaining approval of the required staff privileges.  The physician should ask the employer to reimburse fees or expenses related to obtaining any required staff privileges.

Call Coverage

In addition to day to day duties and responsibilities, the employment agreement should spell out the physician’s call coverage obligations and how those responsibilities are allocated among the members of the practice group or medical staff.  Compensation for call coverage is often a point the parties spend a significant amount of time and effort to negotiate

COMPENSATION

The section addressing payment of compensation and benefits is obviously one of the most crucial in the employment agreement.  It is critical that the physician know how the compensation is structured and if any productivity standards are used in calculating the total compensation figure, the physician should be comfortable that those standards are reasonable and attainable in light of market conditions and the nature of the practice.  Of particular concern to physicians when reviewing compensation proposals are the federal tax, fraud and abuse, and self-referral laws that can potentially be violated if the total value of the physician’s compensation is not in line with industry norms and regulatory standards.

Physician compensation surveys compiled and published by respected health policy organizations are broken down by state and region and provide an excellent benchmark for a physician and their advisors to determine if the proposed overall compensation structure is within the range of fair market value for the physician’s specialty.

Salary

1.            Fixed Salary or Productivity Formula

A physician’s salary is typically paid using either a fixed annual figure or an amount based on the physician’s “productivity” as measured by the amount of revenue the physician generated for the group over a period of time, typically a year.  Some employers may combine a base salary with a bonus payment based on productivity.  Compensation formulas based solely on productivity will generally include a process of paying advances to the physician and a quarterly or year end reconciliation process.

The time of payment (monthly or semi-monthly) should also be included in this provision of the employment agreement.  The agreement also should address whether the physician is permitted to earn outside income from things like moonlighting, research grants, teaching, writing, and expert witness fees.

The agreement should also address the process of performance reviews and whether the physician’s cash compensation will be adjusted as part of the review process.

2.            Bonus

A significant portion of a physician’s cash compensation can come in the form of a quarterly or year end bonus payment.  The amount of any physician’s bonus payments needs to be reasonable for the physician’s specialty and geographic locale or it could draw scrutiny from the Internal Revenue Service and federal agencies charged with enforcing fraud and abuse laws.  The method of calculating bonus payments should be clearly set forth in the employment agreement and closely reviewed by an attorney to ensure that the total amount of the base and any potential bonus payments are within the range of fair market value.

3.            Examples and Illustrations

The salary and bonus provisions can be exceedingly complicated in a physician employment agreement when a productivity based compensation model is used.  To help clarify and quantify the compensation methodology, a physician should insist on having an exhibit attached to the agreement that specifically references the compensation provisions of the agreement and contains straightforward examples and illustrations of the how production based salary and bonus are calculated.

Benefits

In addition to cash compensation, a physician employment agreement should detail the fringe benefits the physician will receive as part of the total compensation package.  These types of benefits typically include:

  • Medical, Life, Disability, Dental, and Vision Insurance
  • Retirement Plan
  • Paid Vacation
  • Paid Leave for CME, Board Certifications, License Fees, Medical Society Dues, Cell Phone/Pager
  • Relocation Expenses

Retirement plans and other benefit packages offered by health care employers and group practices are frequently structured to take advantage of favorable provisions in the federal tax code.  The benefit plan presented to the physician should be analyzed by an attorney to ensure that it complies with these tax laws.
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Part II will focus on other important economic terms and what events may lead to termination of the agreement.

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About Bill Cadigan

WILLIAM J. CADIGAN is principal in the Law Office of William J. Cadigan, P.C. located in Chicago, Illinois. Before starting his own firm, Bill Cadigan was a member of the Health Industry Group of the law firm of Akin, Gump, Strauss, Hauer & Feld L.L.P.
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One Response to Critical Terms in Physician Employment Agreements, Part I

  1. Pingback: Critical Terms in Physician Employment Agreements, Part III | Doctor Parking Only

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