Top Issues in Negotiating Physician Employment Agreements

Originally published in Healthcare Michigan, Volume 40,  No. 12

Successful negotiation of physician employment agreements requires a careful balance of the objectives of the prospective employer with those of the prospective employee while ensuring that the negotiated agreement complies with the federal and state laws that apply to agreements of this type.  The prospective employer wants to make certain it has enough professionals to handle the needs of its patients, and the prospective employee wants to be paid adequately and fairly for services provided while preserving a work-personal life balance.  If the agreement “blows up,” the prospective employer wants protection against the physician “stealing” its patients, and the prospective employee wants to practice medicine without relocating.

Impact of Federal and State Laws That Apply to Physician Employment Agreements

Written physician employment agreements should comply with the regulatory safe harbors for agreements of this type under federal and state anti-kickback statutes (“AKS”) and the exceptions to the laws that restrict referrals by physicians to entities in which the physician has a financial interest for certain types of ancillary services under applicable state and federal laws, such as the Stark Law.  In addition, federal and state laws require preservation of the privacy of patient records (such as HIPAA and corresponding state laws).  Finally, state laws may affect the enforceability of covenants not to compete.  In the future, the Federal Trade Commission may prohibit these covenants as a matter of federal law.

Big Issue #1- Compensation and Benefits. How much will the prospective employee be paid?

One of the three most important issues to be addressed in physician employment agreements is the compensation and benefits package for the prospective employee.  This includes setting the initial base compensation (usually fixed for at least one year) and any adjustments to base compensation during the term of any multi-year employment agreement, such as through pre-negotiated increases, CPI adjustments, renegotiation provisions, or a combination of these adjustment mechanisms.

For most employment agreements, variable compensation is a significant component of overall compensation in periodic bonuses that are objectively determined (i.e., formula-based) or (less frequently) subjectively determined.  The key issue is balancing the need to incentivize the physician-employee without running afoul of AKS, the Stark Law, or other similar statutes.  To meet the regulatory exceptions for physician-employees, variable compensation cannot be based on the volume or value of referrals for ancillary services provided, such as the number of x-rays or ultrasounds ordered.  However, a bonus formula based on RVUs (Relative Value Units) is permitted since it is based on the complexity of the services provided by the physician and not the volume or value of the services.

Physician employment agreements should also ensure that the physician will be entitled to participate in the employer’s retirement and health insurance plans (such as medical, dental, and vision) and whether any waiting periods are required under these plans.  If the newly hired physician must wait for a specified time period prior to being covered by any of these health insurance plans, the employer will sometimes reimburse the employee for the COBRA insurance premiums paid to maintain coverage under the plans of the employee’s former employer.

Another important issue to address is how to handle professional liability insurance for any acts or omissions of the physician before first becoming employed and as to claims asserted for acts or omissions while employed that are asserted after the agreement terminates.  For example, when will tail insurance policies be required, and who will pay the premiums for this protection?

Big Issue #2- Term and Termination. How long will the employment agreement last?

The second big issue that physician employment agreements must address is the duration of the agreement.  To meet the regulatory exception under the Stark Law, the agreement must be at least one year in duration.  However, physician employment agreements are typically multi-year agreements, such as 3-5 years.  They often contain one or more renewal options that are exercisable by the employer on notice to the employee (such as 180 days before expiration of the then-current term).

Employment agreements typically contain options for early termination by the employer for cause (such as if the physician loses his or her license to practice medicine or is convicted of a felony) or by the physician for good reason (such as if the practice group does not pay the physician in a timely manner or drops its professional liability insurance policy).  Physician employment agreements will also often allow either the employer or the employee to terminate the agreement without cause with advance notice to the other party (anywhere from 30 to 180 days).

Big Issue #3- Restrictions on Employee. How will expiration or termination of the employment agreement affect the physician?

With narrow exceptions, physician employment agreements typically prohibit the physician from working for others while employed by the employer.  After employment terminates, the physician will generally be restricted from the practice of medicine near the employer’s practice location (say 10 miles) for a time period (say two years after termination).  Sometimes, these limits go away if the physician terminates the agreement for good reason.

Other post-termination provisions require confidentiality of patient-related and employer-related information under HIPAA and applicable state laws, specify who is entitled to patient records, and limit the physician’s solicitation of the employer’s patients and sometimes its employees.

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About the Authors:

Ralph Levy, Jr. is Of Counsel at Dickinson Wright in the Nashville office. Ralph has over 30 years of experience in counseling clients in the Healthcare arena. He has served as General Counsel for a national health care services provider and manufacturer of medical equipment where he gained critical operating experience and an appreciation of the need for businesses to manage their legal matters in an efficient but proactive manner. Ralph can be reached at 615-620-1733 or and you can visit his bio here.