Critical Terms in Physician Employment Agreements, Part II

Ed. Note.  Welcome to the second installment in a series analyzing the critical terms in physician employment agreements.  Part I can be found here.

In addition to salary and benefits, other provisions of the agreement have an impact on the overall economics of the relationship between the physician and their employer.

Billing Issues and Participation in Managed Care

When a physician joins a group practice or hospital staff as an employee, the physician waives any right to independently bill the patient or the patient’s insurer for services.  A well-drafted employment agreement will address this issue and require the physician to comply with the billing practices of the employer.  The fraud and abuse issues associated with inaccurate billing can pose a problem for a physician.  Therefore, the physician should inquire about the employer’s billing compliance program and mechanisms for ensuring the accuracy of bills sent to government and private third-party payors.

Employers may also require that as part of the employment agreement, the physician agree to participate in certain managed care programs.  If this is the case, the physician should ask to see current copies of the managed care participation agreements to determine if the rates paid are competitive with other plans in the area, particularly if the physician is being compensated under a productivity formula.

Professional Liability and Other Insurance

Employers typically provide employed physicians with professional liability (or “medical malpractice”) and other insurance coverage.  The agreement should set forth the amount of these policies and give the physician the right to review the policy from time to time.

The employer commonly pays for professional liability insurance, and policies will either be “occurrence” or “claims made.”  Generally speaking, an occurrence policy covers those malpractice claims that result from services rendered while the policy was in-force, regardless of when the actual claim is reported.  Under a claims made policy, the claim must be made, or reported to the physician during the policy period.

A common negotiating point in physician employment agreements is which party will pay for the “tail coverage” on a claims made professional liability policy.  The tail coverage provides protection to the physician and the employer against any malpractice allegation presented after a claims made policy expires.  Because tail coverage can be a significant expense, the physician should make every effort to have the employers absorb the cost of securing it.  If the employer insists on the physician paying the premium for tail coverage, the physician should attempt to determine the cost and availability of tail coverage before signing the employment agreement.

Insurance policies can now also be obtained that cover expenses related to fraud and abuse investigations, credentialing disputes, HIPAA violations and state licensure actions.  Physicians should attempt to secure coverage through their employer for these matters as part of their professional liability insurance.

The physician should also be named as an insured under the employer’s general liability policy.  General liability insurance policies typically are written to protect the employer’s legal obligation to pay damages resulting from the negligence of the employer or its employees for things such as slip and falls, sexual harassment, and other employment discrimination claims.

Rights to Intellectual Property

If the physician will be employed in a research or academic position where the physician is involved in developing technology with commercial potential, the employment agreement should address what rights the physician may have with respect to any royalties or other revenues derived from the physician’s ideas.

Partnership Opportunities

The physician just starting out in a group practice will want to know what opportunity there will be down the road to have an ownership or partnership stake in the group.  For a new physician, a guarantee of partnership or ownership in the group would be difficult to negotiate into the employment agreement.  Therefore, the physician should seek to structure a review process that gives the physician the opportunity to regularly measure whether the goal of partnership within the group will be realized.  Once the physician is made a partner in a practice, the physician and his or her attorney must address a whole host of other legal and tax issues associated with new ownership rights and obligations.

Term and Termination

Just as every employment relationship has a beginning, it will surely have an end.  Hopefully, when the end comes, it is after a long and mutually productive association between the physician and the employer.   But that is not always the case and physicians need to know the types of events that can trigger termination under a typical employment agreement and the consequences of failing to agree on a fixed term of employment and what effect the termination will have for the physician.

For instance, physicians often relocate to a new area as part of their first job.  The hardships associated with a move to a new area mean that the physician should get some written assurances that the employer will only seek to terminate the relationship for certain causes.  Otherwise the physician will be deemed an “at will” employee and can be terminated with no notice at all.


The agreement should set forth a date that the employment relationship commences and expires.  The initial term of a physician employment agreement is typically between two and five years.  Depending on the length of the initial term, the employment agreement might also contain an automatic renewal provision, allowing the contract to continue in effect on a year to year basis until terminated by the parties.


1.         Termination without Cause

If the physician desires flexibility in the term of the employment relationship, the physician might attempt to incorporate a provision allowing the parties to terminate the agreement if they mutually agree in writing.   Often, if the employer agrees to such a provision, it will require the physician to provide adequate notice of their resignation so that the employer can have sufficient time to recruit a replacement.  Correspondingly, the physician should require the employer to provide a long notice period before exercising its termination rights under this type of provision so the physician can begin the process of finding another position.

2.         Termination for Cause Due to Health Reasons or Long Term Disability

Healthcare employers will often seek to have the right to terminate the agreement if the physician suffers health problems or has a long-term disability and they are unable to perform the essential functions of their job.  If a physician agrees to this provision, then the physician should make sure that adequate insurance is in place to replace the income lost as a result of termination due to health or disability issues.

3.         Termination for Cause Due To Other Factors

Employers generally insist on employment contract provisions that allow for the immediate and automatic termination for certain breaches.  These kinds of breaches include things like loss of license, suspension from participation in government payor programs, conviction of a crime, repeated violations of the terms of the employment agreement or the employer’s policies, and use or abuse of alcohol or controlled substances in a manner that affects the quality of medical care, and loss of staff privileges.

In the event of other less serious breaches, the employment agreement typically contains a provision requiring the aggrieved party to give the other notice of the infraction and a period of time to cure the breach.

Merger, Consolidation, Change of Control

In order to avoid having to work for a different employer than the physician originally contracted with, the physician may want to include a provision in the employment agreement that in the event that the employer undergoes a merger, consolidation, or change of control, the physician may terminate the agreement.  Without a very long notice period, employers are generally reluctant to agree to these types of provisions.

Change of Law

Because of the rapid change of health care laws and regulations, it is common to now include a provision in employment agreements permitting the parties to terminate the agreement in the event that any change of law, rule, or regulation which may render certain terms of the contract unenforceable.  The provisions typically require both parties to agree to cooperate in making reasonable revisions to the agreement to bring its terms into compliance with the new law or rule change, with termination as a final option if agreement cannot be reached.

Right to Payments Following Termination

If a physician is compensated based on a production formula, it is advisable to include a section of the employment agreement addressing the portion of the accounts receivable the departing physician is entitled to after the physician has left the practice and how and when those payments will be made.


Part III will focus on post-employment covenants and the “miscellaneous” provisions of the employment agreement.


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.
This entry was posted in Physician Employment Agreements and tagged , , . Bookmark the permalink.

2 Responses to Critical Terms in Physician Employment Agreements, Part II

  1. Steven Reta says:

    Bill great stuff!!! I’m going to share this with my clients!

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

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