Negotiating Your First Physician Employment Agreement

Congratulations! You completed your residency and have a job offer in hand. In light of the daunting student loans that you assuredly racked up during medical school, it may be tempting to sign your employment agreement immediately and race to the nearest post office before it closes. Please resist this temptation. Your employment agreement contains (or should contain) a number of important provisions that will affect your personal and professional satisfaction for years to come. It is critical, then, that you have an understanding of what these provisions mean and whether they enable you to accomplish your personal and professional goals. In addition, as you have the good fortune of working in one of the most heavily regulated professions in the United States, it is also important to make sure that your agreement complies with the law.

Before we examine some of the important provisions in your employment agreement, please first take a minute to reflect on what you value most personally and professionally. These are the factors that you should keep in mind as you review your employment agreement. For instance, do you prioritize financial security? Professional distinction? Time with your family? Intellectual pursuit? Community involvement? Your employment agreement may contain terms that materially hinder or enhance your ability to attain any of these goals. The better you understand your own priorities, the better able you will be to negotiate an employment agreement that enables your personal and professional satisfaction. With this in mind, we can turn to our examination of some of the key provisions in your employment agreement:

Compensation

Let’s start with money. Physician salaries can be structured in a number of ways. It may be that you will be paid a flat salary. More likely, though, your compensation will be comprised of a combination of base salary plus a productivity component, or it may even be determined entirely by productivity. Productivity-based compensation may depend on factors such as the number of patients seen, the revenue received from those patients, the physician’s origination of new patients, or even the practice’s overall profitability. It is also increasingly common for physicians to be compensated in part based on quality measures, such as patient satisfaction and patient outcomes.

If your compensation is based on productivity or quality measures, you should have a good understanding of how productivity and quality are defined and measured. First, consider whether the productivity measures are things that are within your control. For instance, if compensation is based on the number of patients seen, how are patients distributed among the physicians in the practice? If the productivity measure is based on the practice’s overall productivity, you will have less control over your compensation and it will be particularly important to understand how successful the practice has been historically. Don’t be shy about requesting recent financial records of the practice to assess its financial health (regardless of your salary structure). If your income will be based on your ability to generate new patients, you will have more control over your financial welfare, but your compensation will also be less certain, particularly if you will be new to the community. Second, consider whether the productivity model is consistent with your personal and professional ambitions. Will it enable you to pursue your research goals? Is it structured to give you control over your own financial security? Third, if quality factors into your compensation, think about how quality is measured and the extent to which you have control over quality outcomes. For instance, does a patient satisfaction measure take into account the patient’s overall experience with the practice (in which case your compensation may depend on patient interactions with reception, nurses, and other staff) or is it more narrowly focused to your treatment of the patient?

In addition to these considerations, when entering into any arrangement where something of value flows either to or from you, you should be mindful of whether the arrangement complies with applicable law, notably the federal Stark and Anti-kickback laws. The Stark law prohibits physicians from making certain types of referrals payable by Medicare to an entity in which he or she (or his or her family) has a financial relationship. The Anti-kickback law prohibits the exchange of anything of value to influence the referral of federal health care business. Compensation arrangements can run afoul of these laws in a mind-boggling number of ways, some of which are neither obvious nor intuitive. Productivity compensation arrangements in particular involve a heightened risk of raising Stark and Anti-kickback concerns. Thus, whenever you receive (or give) something of value, you should review the arrangement carefully with a health law professional to assess the risk that the arrangement violates the Stark or Anti-kickback laws.

Last, as you review your proposed compensation arrangement, consider the cost of living in the area where you will be residing. $100,000 will go a lot farther in Middlebury, Vermont than it will in New York City. In addition, take into account what other benefits are included in the offer, such as health benefits, moving expenses, continuing medical education expenses, professional dues, vacation and sick time, and retirement. Each of these benefits has real value and should be taken into account when comparing competing offers. One cautionary note: recruitment incentives and other benefits should be reviewed carefully by a professional advisor not only for Stark and Anti-kickback issues (as discussed above), but also for tax implications. Especially favorable loans in particular can have undesirable tax consequences to the physician and should be discussed with your tax advisor.

Duties

Now that you understand how you will be paid, let’s discuss what you have to do to get paid. An employment agreement should list in reasonable detail all of the duties that you will be expected to perform. This includes not only your clinical activities, but also your day-to-day office obligations, such as attending staff meetings. In addition, the agreement should clearly indicate the days and hours that you will work and/or specify the number of hours per week that you will work, as opposed to stating only that you will be employed “full-time” (which does not have an inherently precise meaning). A breakdown describing your clinical hourly expectations and your administrative hourly expectations is also recommended.

You should pay close attention to your employment agreement’s treatment of on-call obligations, as call requirements will affect your quality of life as much as anything else in your employment agreement. The contract should not only describe your call responsibilities, but also how call duty is allocated among the physicians in the practice. Any system for allocating call responsibilities should be fair. You should also think about how your call responsibilities will be affected if a physician leaves the practice.  For instance, if you are considering joining a three doctor practice where call duties are shared equally, and one of the physicians subsequently leaves the practice, your call obligations will increase from 25% to 33% until a replacement physician is hired. You will want to think about how you would fare under such a scenario and whether your agreement should be modified to reduce your potential burden. Possible solutions include a commitment from your employer to hire a replacement physician within a certain period of time or to use a locum tenens physician until a replacement physician is hired.

Your employment agreement likely will also include a statement that you will agree to abide by your employer’s policies and procedures. It is easy to overlook these provisions, but your employer’s policies and procedures will include very important requirements and other information. You should request copies of the practice’s current policies and procedures and (as painful as it might sound) read them and try to get comfortable with them. If you see anything that strikes you as confusing, odd or unfair, you should ask about it.

Note that a good employment contract will not only address the physician’s duties, but also the employer’s duties (beyond paying your compensation). For instance, the agreement may describe the practice’s obligation to provide billing support, office space, appropriate staffing, and necessary equipment and supplies. To the extent that you have specific office space, equipment, technology or staffing needs, you should request that your employment agreement address these issues in appropriate detail. In addition, you may wish to have the right to interview and make personnel recommendations regarding any staff that you will be supervising or working with on a regular basis.

Location of Work

In addition to describing what you will do, your employment agreement should also address where you will do it. It should state with precision the exact locations where you will be required to work. For instance, if you join a practice with four office locations, your quality of life will be materially different if you are assigned to work in an office that is an hour’s drive from your home instead of the office that is five minutes away. Even if the practice has only one office, stating your work location with specificity is important, as it can put you in a good bargaining position should the practice later decide to open a second office or to move to another location. Even if the practice ultimately retains the full authority to assign your work location, you should at least consider seeking the right to be consulted before being assigned to a new area.

Restrictions on the Physician

Your employment agreement may include limitations on and requirements relating to activities that you may wish to engage in outside of your duties as an employee. Your employer has an interest in ensuring that your outside activities both do not compete with the practice and also do not interfere with your ability to perform your job. Thus, it is common for an employment agreement to preclude the physician from engaging in competitive activities. Your agreement may additionally place restrictions on your participation in non-competitive activities, such as engaging in research, publishing articles, teaching, consulting, and serving on boards. If your agreement addresses these issues, you should confirm that any restrictions are reasonable and will not interfere with your goals. If the agreement restricts you from engaging in an activity that is important to you, or if you are unsure whether the restrictions apply to the activity, you should modify the agreement to expressly permit you to engage in the activity. In addition, your employment agreement should address who, as between you and your employer, is entitled to ownership of and/or compensation from intellectual property developed by you, particularly if you will engage in research or author publications (whether during office hours or even after hours). If your agreement does not address these issues, your employer may own your research results, publications and related intellectual property rights. Thus, if you expect to engage in research, you should review your employment agreement carefully with a health or intellectual property law professional to confirm that the appropriate issues are addressed and are fair to you.

Term and Termination

An employment agreement should indicate the date that the agreement becomes effective and terminates, as well as the date that your employment commences. Most typically, the term of the contract will be between one and three years. At the end of the term, the employment agreement may automatically terminate, requiring the parties to negotiate and execute a new employment contract prior to the termination date. Alternatively, agreements sometimes provide that they will automatically renew for one or more renewal terms, unless either party affirmatively elects in advance to terminate the agreement. And sometimes the employer or the physician may have a unilateral right to elect to renew the agreement for one or more renewal terms. In all instances where your employer has some control over whether the agreement is renewed, the agreement should require the employer to give you sufficient advance notice of termination or non-renewal to enable you to make subsequent career plans. Similarly, if you have control over whether the agreement is renewed, your employer may require advance notice, so that the practice can recruit and train your replacement.

Notwithstanding a stated term, your employment agreement will enable your employer, or both of you, to terminate your employment before the contract’s natural expiration for certain enumerated reasons. Sometimes the contract is terminable by a party “without cause” (i.e., for any or no reason) upon the delivery of advance notice to the other party. A clause that allows your employer to terminate without cause considerably weakens your job security, regardless of any stated term in your agreement – a three year term does not offer a lot of comfort if your employer can terminate for no particular reason by providing you with fifteen days’ notice! Thus, you should consider carefully whether you are comfortable accepting employment that can be terminated without cause and ensure that the required notice period is sufficient for you to prepare and execute a transition plan. A notice period of three to six months is typical. If you will have to move to a new area to begin your employment, it would be reasonable to ask your employer to agree not to exercise its right to terminate without cause during the first year of the contract. In addition, fairness would dictate that if your employer can terminate your employment without cause, then you should also have the right to terminate without cause.

In addition, your agreement may be terminable for “cause” and, if so, it may include a list of events that will constitute “cause” for termination of your employment. A shorter list and a narrower definition of cause benefits the physician. Some common triggers for termination for cause include the imposition of restrictions on the physician’s ability to practice medicine, violations of law, certain unethical or unsafe practices, and the physician’s breach of the agreement, but in each case the magic is in how each of these events are described. Broad descriptions cast a wide net for conduct that could potentially trigger termination. Thus, your agreement should be reviewed carefully to confirm whether the list of termination triggers is appropriate in scope. A trained eye can assist you in making sure that the list is consistent with market practices and that each listed trigger is sufficiently tailored. In addition, if the physician’s breach can trigger termination of the agreement for cause, then the physician should be entitled to both written notice of the breach and a reasonable opportunity to cure the breach. Last, when the employer can terminate for cause under the agreement, then the physician too should have the right to terminate for cause if the employer breaches its contractual obligations to the physician.

One final note regarding termination: Most employment agreements will state that the employer owns the patient records. It is in your interests to negotiate for the right to access these records even after you are no longer employed by the practice, as such access can be critical to successfully defending medical malpractice actions or licensing or peer review investigations.

Medical Malpractice Insurance

Recognizing that most physicians would prefer not to think about medical malpractice insurance at all, I would like to underscore the importance of your employment agreement’s malpractice insurance provisions. As an initial matter, you should confirm whether your employment agreement states that your employer will provide you with malpractice insurance coverage at its expense. In addition, your agreement should state whether the coverage will be occurrence-based or claims-made. If your employer provides you with occurrence-based insurance, then, generally speaking, it means that the policy will insure against malpractice claims regardless of when the claims are actually made, so long as the alleged malpractice occurred when the policy was effective. This means that if your employer provides coverage during your employment and your employment is terminated, you will nevertheless be insured against claims that arose out of events that occurred during your employment, even if those claims are not asserted until after your employment has ended. If your employer has offered you an occurrence-based policy, congratulations, you are one of the lucky few and you can skip to the next section.

Claims-made insurance policies are much more common. Such policies insure against malpractice claims that (i) are based out of events arising during the coverage period, and (ii) are actually asserted during the coverage period. Thus, if your agreement provides you with claims-made insurance coverage, then you will want so-called “tail insurance” to insure you against claims made after your employment has ended. A point of negotiation is often who pays for tail coverage, which can be quite expensive. One customary arrangement is that if the agreement is terminated by the employer for cause or by the physician without cause, the physician is on the hook for procuring tail coverage at his or her expense. If, however, the employer terminates the physician without cause, the agreement expires, or the physician terminates for cause, then the employer will pay for the physician’s tail coverage.

Noncompetition

As the malpractice insurance discussion exemplifies, the terms of your employment agreement will continue to affect your life even after the contract expires. For instance, in addition to determining whether, and on what terms, you will have post-employment insurance coverage for your prior acts, your employment agreement will also likely restrict where you can practice after you have parted ways with your employer. Most physician employment agreements include non-competition provisions, whereby the physician agrees not to engage in certain activities that would be competitive with the practice, within a certain region, and for a certain period of time. The underlying rationale for non-competition agreements is that it would be unfair for a physician, upon leaving a practice, to use information and/or relationships that belong to a practice, to the practice’s detriment. The question of whether a non-competition provision can be enforced is governed by state law. In Vermont, as in most states, a non-competition restriction will not be enforced unless it is reasonable. The Vermont Supreme Court has interpreted this to mean that the agreement must be narrowly tailored in terms of geographical, temporal and subject matter restrictions to protect the employer’s legitimate interests. Summits 7, Inc. v. Kelly, 2005 VT 97, ¶ 8. The evaluation is also highly fact and circumstance dependent. For instance, a restriction of several miles is more likely to be reasonable in a very rural area than in a densely populated urban area. Similarly, restrictions identical in scope may be reasonable with respect to a highly specialized oncologist, but not for a general practitioner.

As you review the non-competition agreement, you will of course want to make sure that the duration and subject matter restrictions are reasonable and not overly burdensome. Chances are, however, that the geographic restriction will have the most direct impact on you. After all, a one-year restriction will have nearly the same disruptive effect on your life as a three-year restriction: either way, unless you move, you will likely be unable to practice your profession for at least a year – something that most people cannot afford to do. Similarly, a more narrowly tailored restriction on the practice of a specialty is unlikely to be materially less burdensome than a broader restriction. For instance, prohibiting a radiologist from practicing radiology is likely to have a similar effect as precluding the radiologist from practicing medicine more generally, as the radiologist is unlikely to practice a different type of medicine during the non-competition period. Thus, while all three aspects warrant careful consideration, you should pay especially close to the geographic scope. At minimum, you should try to limit the provision so that you are able to make a living in your specialty without having to relocate your home. Also, the geographic scope should specifically relate to the office or location where you will actually practice medicine. If the scope does not relate to the location where you actually work, then the rationale underlying the restriction – preventing you from taking the practice’s patients who you saw during your employment – is substantially attenuated.

In addition to refining the scope of the non-competition agreement, you should examine the circumstances that trigger the non-competition agreement. In nearly all cases, the provision will apply if you are terminated for cause or if you terminate without cause. It is considerably less fair, however, for your former employer to restrict your ability to work if the practice has terminated your employment without cause or if you leave the practice for cause.

You should also consider including a liquidated damages provision in your agreement. Liquidated damages provisions allow the physician to buy out the employer’s enforcement of the non-competition restriction by paying a pre-established fee. If you are particularly concerned about the disruptive effect on you or your family of having to relocate to a new community if your employment is terminated, it may be especially important to have your employer incorporate a liquidated damages provision in your agreement.

Last, it is worth bearing in mind that it is in the employer’s interest as well to have an appropriately tailored and reasonable non-competition provision, as an overbroad provision will not be enforced by the courts. Thus, you should work with your employer and experienced counsel to negotiate restrictions that are reasonable for both of you and limited to the extent necessary to protect the practice’s patient base and relationships.

Final Thoughts

You are now familiar with some of the more important provisions that commonly appear in physician employment agreements, but there are a whole host of topics that may be covered. Thus, it is important that you review your entire agreement from beginning to end to verify that you are comfortable with each section and, to the extent that you are not, identify the sections that you wish to negotiate with, or seek clarification from, your employer. Experienced health care counsel can be especially useful in reviewing your agreement with you to identify atypical provisions and material risks. And if there is anything that your employer has promised, or anything else that you understand to be true, in connection with your employment, you should make sure that it is incorporated into your agreement.

As you negotiate your employment agreement with your future employer, do your best to maintain a pleasant and respectful tone. Think of your negotiations with your employer as a collaborative effort, where the focus is on what is fair and not on how much you can get for yourself. The people with whom you are negotiating will be your colleagues for (hopefully) years to come. Coming in with guns blazing may not be the best way to launch your medical career. At the same time, this does not mean that you should be a pushover in negotiations. Quite the opposite, you should be firm on the issues that matter the most to you. Giving up the things that are priorities to you will likely lead to unhappiness and resentment, a situation that neither you nor your employer want. If your employer balks at making a change to the agreement that is important to you, try to clearly communicate the underlying reason why the change is important to you. More often than not, you and your employer will be able to find a solution that fits your respective needs.

It can be daunting for a young physician to negotiate his or her first employment agreement, and some employers will be more willing to negotiate than others. But, at the very least, you should make sure that you understand your agreement and ask questions about any provisions that concern you. If the employer refuses to negotiate the agreement itself, you may be able to have them prepare a side letter to you to clarify any questions or concerns that you may have. And if your employer bristles at being asked questions or for clarification, that may be a red flag that it may be worth considering other employment options.

I will leave you where I began, by congratulating you on the beginning of what I hope will be a tremendously rewarding career practicing medicine. Your employment agreement will undoubtedly shape your practice and, if it is negotiated carefully and thoughtfully, will facilitate your professional and personal satisfaction for years to come. So pour yourself a cup of coffee or tea and spend some time with your agreement. The post office will re-open soon.

Disclaimer: This article is provided for general informational purposes only and is not intended to constitute legal advice or to substitute for the advice of an appropriately licensed attorney. If the reader requires legal advice, s/he should contact a competent attorney licensed to practice in the reader’s jurisdiction. This article is general in nature and may not apply to particular factual or legal circumstances. The information presented is not an invitation to, and does not form, explicitly or impliedly, an attorney-client relationship.