By Daniel M. Bernick, Esq., MBA

Published October 2008

In their professional lives, physicians sign many documents. However, few are more important than the initial contract offered to an associate physician. A poorly drafted contract can have devastating consequences if the relationship dissolves in the early years. If the relationship survives, the initial contract is typically replaced by a partnership contract, but the terms of the initial contract often heavily influence the subsequent documents. Aside from the words on the paper, there is also the process of negotiating this important contract. The process as experienced by the parties serves to educate each on the way the other negotiates and does business generally. These are highly relationship-sensitive documents. It’s not like signing an equipment lease or billing services contract or HMO provider agreement.

So what’s the best way to proceed? First, consider whether you have the right attorney. Generally, it is best to use a health care specialist, rather than an estates attorney or general practitioner who may have limited experience with physician issues. A health care attorney is best attuned to such nuances as credentialing, privileges, malpractice tail coverage, non-competes as applied to physicians, Stark restrictions on bonus clauses, and buy-in provisos. A health care specialist can also be very helpful on other matters that come up, such as new regulations (Stark, antikickback, Medicare reimbursement, etc.). If you involve him or her in this initial contract, you will have a someone to answer these questions as they arise from time to time. He will also be far better positioned to advise when the time comes for those crucial partnership agreements.

Oftentimes the best way to proceed is to commission the associate contract before the associate is interviewed. This takes some of the pressure off you to "get the doctor a contract" when a hot prospect is identified. A good candidate may have multiple offers, and you may not receive the attention you deserve if there are delays in preparing the contract. You may feel that you do not wish to incur the expense of having an attorney prepare a contract without a having a candidate in hand, especially if you are having recruiting difficulties. It’s true that your recruiting effort may not succeed, but any draft contract can be "recycled" for the next candidate, whether found the next week or next year. Having this contract prepared in advance will also force you to think about such key issues as bonus structure and non-compete mileage. This is a benefit when you talk to the candidate; you will seem far more "in control" or "business savvy" if you already understand what you want to do with respect to these issues.

Some people prefer to "go slow" on preparation of the contract. That’s fine, but at least have your attorney draw up a "term sheet" spelling out salary, bonus, benefits, contract term, non-compete mileage, and expected time to partnership. Again, this forces you to focus on the issues and make your important decisions in advance, when not under heavy time pressure.

Obviously a hot issue. If you can, be generous on the salary and careful on the bonus. The salary number has major psychological impact, and another few thousand dollars can often "seal the deal." Check around with colleagues in your specialty but outside your service area what they think the going rate is. You can’t have too much information on this key issue. Leave yourself a little room (e.g., $5,000) to go up on salary, in the course of negotiations. Every employee likes to think that they "got a good deal" in terms of compensation. And some candidates won’t negotiate the issue, which enables you to keep the extra money in your pocket.

Be wary of excessively generous bonus provisions, e.g., 50 percent of collections over two times base salary. Oftentimes such provisions are not appropriately appreciated by the candidate, and they may end up penalizing you if you aggressively feed new patients and procedures to the new doctor, to get him or her busy. (He or she gets a big bonus, while your pay decreases.) Be very careful with any kind of arrangement to pay the new doctor a flat percentage of collections. If you start out paying 50 percent of collections, it will be difficult or impossible later on to structure an appropriate buy-in; the associate will have "nowhere to go" in terms of compensation.

In tough recruiting situations, or if the start date is more than a year away, consider a signing bonus or other pre-start date compensation, such as a modest stipend for a doctor completing a valuable fellowship. Such payments help protect you against the scenario in which the candidate signs your contract, and then decides (prior to the start date) to jump ship. It’s hard for a reneging associate to give back signing bonus money, which is exactly the point. You want to make sure that the associate is both legally and emotionally committed to your practice, in the pre-employment period.

These are disliked by associates but routinely accepted by them, in some form, because they are standard in the industry. Few employers will make an offer without a non-compete clause. These clauses are prohibited or limited by law in some states; however most states, including Pennsylvania, will uphold a "reasonable" covenant that does not cover too much geographic area or constrain the associate for too long a time. Don’t believe other consultants who tell you that non-competes are not enforceable. This is a fashionable statement that appeals to employers who are reluctant to go to court to enforce their rights, but it is simply not true. There are no guarantees that the courts will uphold a given non-compete, but a well-drawn, conservative provision stands an excellent chance of being upheld in court. What’s even better is that most employees will not risk litigation by breaching such a clause. They don’t like legal battles any more than you do, and if the covenant is well-drawn, their attorney will advise them of the (substantial) damages if they attempt but lose such a challenge.

Don’t agree to make enforcement of the non-compete dependent on whether the associate is terminable "with cause." Virtually all terminations, in our experience, are "without cause" because the poor performance or attitude does not rise to the level of loss of license or privileges, loss of malpractice insurability, exclusion from Medicare, "material breach," or other "cause" provisos. You don’t want to be in a situation where the price tag of terminating an associate in this situation is that he or she is released from the non-compete.

Note: if you have secured hospital funding for an income guarantee for the associate, the rules have changed regarding non-compete clauses. Until recently, the Stark law prohibited non-compete clauses for associates whose salary was funded by the hospital. But these rules have changed to permit reasonable non-compete clauses. So you no longer need to pick between hospital financial support and protection for your practice.

The standard contract has a "term" of one or two years, and permits termination mid-contract in two ways: with "cause" and without "cause." "Cause" terminations are immediate or after a very brief period in which the associate is permitted to try to "cure" (fix) the breach (if it can be fixed at all). Without cause terminations take effect after a written notice period, which ranges from 30 days to as much as 180 days.

As noted, the "cause" termination proviso is typically of less utility than the without cause provision. However, that does not mean it is "cheap" to exercise the without cause option. If you have agreed to provide 180 days notice, then the price tag for terminating the problem associate will be 180 days’ pay. Therefore carefully consider the amount of notice you are willing to provide, when the contract is prepared. Sixty days is probably the amount that we most commonly see.

One additional point on term and termination. Make sure that the contract has an "evergreen" clause, so that the contract automatically renews itself unless one party or the other terminates it. Without such a clause, you may end up in the awkward position of having to terminate an employee whose contract previously expired. In this situation it is often very difficult for your attorney to assure you that the non-compete in the contract is enforceable, or even to answer such basic questions whether a final bonus is owed or how much notice must be provided for termination.

Some contracts discuss future buy-in, and some do not. Generally we favor a very brief discussion of the issue, to make sure there is a meeting of the minds on such key issues as goodwill value. If you do discuss future partnership, do not promise partnership, or suggest that the employee "will become" a partner. Always indicate that partnership will only go into effect if mutually agreed "in writing." You don’t want to be sued because it is claimed that you legally promised a partnership opportunity that is now being withdrawn, in violation of the contract

Daniel M. Bernick, Esq., MBA is an Attorney and Principal of Health Care Law Associates, P.C. and The Health Care Group in Plymouth Meeting, Pa.