The Art of Negotiating Physician Employment Agreements
The proverbial statement, “You only get one bite at the apple” couldn’t be truer than when negotiating a Physician Employment Agreement. Whether you’re the head of a medical practice inviting an experienced physician to join the group, or a resident contemplating a Letter of Intent, fair and effective negotiations are paramount to establishing a long-term working relationship.
Forethought, preparation, and the ability to listen are essential to success. Regrettably, by the time most physicians realize that the terms of their Agreement are less than propitious it is usually too late. In fact, most disputes between physicians and employers resulting in termination aren’t related to medical competence. To the contrary, more common than not, physicians claim that their employers failed to inform them of, or misrepresented, working conditions, patient workload, call responsibilities, partnership potential, or the prospects for increased compensation. To avoid these unnecessary pitfalls this article will address key factors to consider when negotiating a Physician Employment Agreement.
Itemize Your Priorities
First and foremost, it is important to know the difference between a “need” and a “want.” All too often, physicians become blindsided in the negotiation process for lack of preparation and the failure to rank priorities effectively. Keep in mind that priorities change over time. What you want today may not be what you need tomorrow. For instance, early-career physicians place a great emphasis on guaranteed compensation whereas, mid-career physicians focus on productivity-based compensation. Finally, late-career physicians prioritize flexibility, limited call responsibilities and a work/life balance.
According to a survey conducted by the American Medical Group Association (AMGA) and the physician recruiting firm, Cejka Search, the top three recruitment strategies medical groups use to attract new physicians are Market-based Compensation (65%), Income Guarantee (61%), and Signing Bonuses (42%). In comparison, physician-respondents prioritize Market-based Compensation (70%), Productivity Bonuses (60%), and a Flexible Schedule (34%).
Since the goal of all negotiations is to reach an Agreement that is mutually satisfactory, it is crucial to develop a strategy for getting what you “need” before addressing what you “want.” By ranking priorities in the order of importance you’ll develop a blueprint for success that will serve as a visual reminder of what’s important. Failure to prioritize not only weakens your position at the bargaining table it also delays the negotiation process, wasting valuable time and money.
Although there are many compensation models, some are more complex than others. Regardless of the model used, it is imperative to know your worth before negotiating a Physician Employment Agreement. Since regional market factors and surveys, such as Medical Group Management Association (MGMA), American Medical Group Association (AMGA), and American Medical Association (AMA), dictate physician compensation, most physicians can expect their compensation to reflect what other physicians in the region are earning with comparable skill and experience.
When evaluating an offer for employment, it is important to consider each dimension of the compensation package and its value to you. Packages that contain a bonus or incentive component should be realistic and attainable given the doctor-to-patient ratio of the practice. Most groups acknowledge that it takes time for a new physician to grow his/her share of the practice; accordingly, first and second year incentive components require only modest performance. Despite the obvious grace period, new physicians should be aware of what is expected long-term and how future earnings will be calculated. Ask the employer if future earnings will be based on productivity or group collections? If based on group collections, every effort should be made to find out what percentage of billing the group typically collects and the reimbursement rate it receives from third-party payers before committing long-term.
Look Inside the Box
Having an adequate understanding of the practice’s long-term fiscal obligations can mean the difference between financial ruin and prosperity. It is incumbent upon a new physician to take a careful look at the inner-workings of the practice prior to joining the same. Especially when dealing with smaller practices, it is important to ask whether senior members of the group plan to retire in the near future. Retirement by one or more members can potentially expose new physicians to a costly buy-out when they least expect it. Other factors to consider include the debt-to-equity ratio of the practice and whether additional capital is needed to fund overhead expenses.
In addition to assessing the practice’s fiscal health, a new physician would be wise to familiarize himself/herself with the policies and procedures of the group before accepting an offer. When terms in the Agreement reference documents, such as Bylaws, SOP manuals, Partnership Agreements, and Health or Retirement Plans, make certain to request dated copies of the same and review them prior to signing the Agreement. Many physicians are hesitant to request copies of pertinent documents because they fear being perceived as difficult or demanding; however, nothing could be farther from the truth. To the contrary, failure to familiarize yourself with these documents could jeopardize your long-term relationship with the practice. Always remember, that an ounce of prevention is worth a pound of cure.
Ask the Tough Questions
Health care is an ever changing and consolidating industry. Both internal and external factors influence how long a physician will stay with a practice. It is not uncommon for newly-hired physicians to stick with a job only a short time. Historically, 50 percent of physicians leave a practice within three years and 60 percent exit by Year Five. To avoid becoming a statistic, make sure the practice is a good fit before signing on the dotted line. Ask the employer where they see the practice five years from now and where you’ll fit into their long-term plans. By the close of negotiations you should be completely confident that the employer’s goals are realistic, attainable, and consistent with your time frame and professional agenda.
Don’t Get Lost in the Translation
Employment Agreements are designed to memorialize the intentions of the parties and protect them when things don’t go as planned. All terms governing the employer/employee relationship should be explicit and in writing. Statements that seek to dismiss or diminish terms of the Agreement should be avoided at all cost. New physicians to a practice should be leery of any comments that are inconsistent with the Agreement. Comments, such as “Oh, our attorney always puts that in there” or “That doesn’t apply to you” should be taken with a grain of salt. Remember all language is relevant and is put there for a reason. If you do not understand one or more terms, ask! Don’t wait until it is too late. A good rule of thumb to remember is to have the Agreement reviewed by an attorney familiar with the applicable laws of the state where you intend to practice. In addition to the business of medicine, the attorney should also be familiar with employment law and contracts.
Hope for the Best, Plan for the Worst
Despite the best intentions, things don’t always go as planned. Negotiating with the worst-case scenario in mind will help you deal with the uncertainty of the future. Although there are a plethora of issues that arise after a physician leaves a practice, there are two provisions of the Agreement that cause considerable concern, insurance coverage and restrictive covenants.
Insurance Coverage: Let’s face it, as long as there’s health care there will be claims of malpractice. One of the most important provisions of the Agreement is insurance coverage. Though most employers offer coverage within statutory limits, it is prudent to confirm sufficient coverage in order to avoid being placed in a financially precarious position in the future.
Depending on the employer, coverage is offered on an “occurrence” or “claims-made” basis. Occurrence coverage is usually preferred by physicians because the purchase of extended reporting endorsement (“tail”) is not required at the end of the policy. Occurrence coverage applies to alleged acts of negligence that occur during the policy year. Even if you no longer possess the policy, you are still covered if the incident occurred while the policy was in effect.
In contrast, claims-made coverage is the most common type of coverage. It provides protection for claims that occur on or after the policy retroactive date and are reported to the carrier, in writing, during the policy year. Tail coverage is required for claims that occurred during the active period of the policy, but were reported after the policy terminated.
Keep in mind that tail coverage is very costly. Tail coverage typically costs between 150 to 200 percent of the price of a mature claims-made policy. Given the expense, it is prudent to negotiate full payment by the practice. Since many employers are hesitant to flip the bill, strategize by negotiating one or more of the following: (i) tail is to be paid, in full, by the party who terminates the employment relationship; (ii) tail is to be paid by the practice, in full, if termination is without cause (professional misconduct, loss of licensure, uninsurable for professional liability, or acts involving moral turpitude); (iii) tail is to be paid by the practice, in full, after three years of service; or (iv) the cost of tail is to be divided evenly between the parties. If all else fails, cover your tail! Start saving now or look into the purchase of prior-acts coverage, also known as “nose” coverage, once you leave the practice.
Restrictive Covenants: Non-competition and non-solicitation provisions of the Agreement place time and geographic restrictions on where a physician can practice and who he/she can solicit as patients upon separation from the practice. Restrictive covenants are premised on the fact that since the employer invested tremendous resources in recruitment and helped the physician build his/her practice, the employer should be protected from future competitive activity.
Although the intricacies of such covenants exceed the scope of this article, it is important to keep in mind that restrictive covenants are governed by the laws of the jurisdiction in which the practice is located. Historically, jurisdictions which recognize such covenants have held that the covenant be “reasonable” to protect the legitimate interests of the employer, impose no undue hardship on the employee, and do not harm public interests. As with all other provisions of the Agreement it is wise to have the covenants reviewed by counsel before consenting to the same.
Know When to Walk Away
Reluctance to negotiate terms of an Employment Agreement may be an early indication of a strenuous working relationship or an inability to embrace conflicting ideas, or encourage professional development in the workplace. Accordingly, a physician should never hesitate to question the terms of an Agreement or tenaciously negotiate terms that are integral to professional growth and personal satisfaction. If negotiations are not going well, or seem particularly adversarial, it may be a good time to reevaluate your options and pursue another path.
Check and Double Check
Once negotiations are complete and an Employment Agreement has been presented for consideration the final step is to go through the Agreement with a fine tooth comb. At a minimum, make certain that the following provisions are expressly stated in the Agreement and meet with the approval of counsel:
- Conditions of Employment (State Licensure, DEA, Credentialing and Hospital Privileges);
- Term (Length of Contract), Renewal or Future Negotiations;
- Termination (At Will v. For Cause, Notice Period, Payment and Post-Termination Obligations);
- Compensation Package (Base Salary, Percent of Collections, Bonuses, etc.);
- Business Expenses (CMEs, Professional Dues, Staff Fees, Journals, Stipends, etc.);
- Fringe Benefits (Health / Life Insurance, Retirement Plans, etc.);
- Malpractice Insurance (Occurrence or Claims Made and Tail Coverage);
- Paid Time Off (Vacation, Sick Leave, Maternity, Disability, etc.);
- Restrictive Covenants (Non-Competition, Non-Solicitation); and
- Co-Ownership (Partnership, Buy-Ins, Pay- Outs).
In closing, the strategy you implement to negotiate your Employment Agreement should reinforce your personal goals and professional agenda. As you go through the negotiation process stay focused on the fact that you’ve invested a great deal of time and money to get where you are today; so don’t drop the ball now. Remember, if you don’t look out for yourself, no one else will!
Lucia Francesca Bruno, JD, LLM, MBA, is Principal Shareholder of Physicians’ Legal Group, LLC (www.physicianslegalgroup.com). She can be reached at (215) 688-3909.
 Tom Flatt, The Recession and the Three R’s of Healthcare: Reform, Recruitment, and Retention Medical Groups Are Adjusting to Meet Economic Challenges Reports Cejka Search and AMGA Survey (March 2010)
 Gail Garfinkel Weiss, Group Practice: How to keep the new guy. Modern Medicine (June 2010)