Blog May 23, 2019
Physician Employment Agreements: Key Areas to Negotiate



Physician employment contracts encompass relationships between doctors and savvy hospitals/health systems, academic medical centers, and private practices.  These contracts have evolved into sophisticated instruments drafted principally to benefit the employer.  They specify the duties and obligations of the physician (from patient-care hours to on-call duties), outline compensation, address malpractice insurance coverage, and delineate termination rights.  A well-drafted Employment Agreement can set out the obligations and expectations of the company and the employee in a way to minimize future disputes.


The following provides a checklist of critical issues to consider when negotiating your physician employment agreement.


  • Background-Check Your Prospective Employer.


Before beginning contract negotiations, physicians should research the turnover, percentages of physicians engaged by the employer who make partner, the employer’s profit or loss history, past payouts, malpractice claims, pending litigation, and the reputation of the partners and the employer. What the employer has done in the past may be more important than what the hiring physicians promise to do in the future.


  • Salary and Incentive Pay.


A pure salary without a productive component is unusual beyond the first few years of employment. Therefore, the methodology and variables for calculating incentive payments usually determine the attractiveness of the offer. Most incentives tied to productivity are defined in terms of RVUs, charges, net or gross collections. Sometimes other performance variables added to reflect patient satisfaction, utilization, quality improvement measures

While compensation formulas vary considerably, each practice ultimately must provide an overall compensation package sufficient to attract and retain its doctors. It is wise for a physician to compare compensation offers to industry norms to determine whether the pursuit of a higher salary or better bonus structure is worth further negotiation. If a practice is in a low cost of a living community, it should point out and document this factor to prospective candidates, especially when the group’s salary structure is on the lower end compared to other parts of the country.

In many employment contracts, physician incentive or bonus plans are written to protect the employer and not the physician employee. Some clauses a physician employee should be particularly careful about include: (a) The ability of the compensation committee to cancel or prospectively revise the incentive plan; (b) The need for a site to “break even” before the incentive plan takes effect; (c) The precise calculation of the physician incentive; and, (d) The definition of key terms (e.g., positive net income, negative variance, percentage, gross revenue).


  • Benefits.


Benefits play a crucial role in determining the value of an offer and may include, but are not limited to: health, dental, vision, and malpractice insurance; professional membership dues; CME reimbursement; vacation/sick leave; plus, retirement and disability plans.

For employed physicians, it’s preferable to have occurrence-based malpractice insurance coverage. Occurrence-based malpractice covers incidents that happen during the coverage year, regardless of when a claim is filed. If you have claims-made coverage (for claims filed during the coverage year), you will need a reporting endorsement (“tail coverage”) when your employment ends. Claims-made coverage covers incidents that happen during employment but aren’t litigated until after employment ceases. If the employer offers a claims-made policy, your employment agreement should specify whether the employer will pay for part or all your tail coverage upon termination of employment.

More employers are combining vacation, CME time, and sick leave into a “paid time off” concept. Be sure that your employment agreement specifies paid time off to which you’re entitled. If not, changes to your employer’s leave policy could reduce your benefits without your consent.  If your compensation is based in part on productivity, analyze how your income may be affected when you take paid time off.

Also sometimes included are enticements such as student loan repayment, signing bonuses, and relocation expenses.

Maternity and family leave are examples of other valuable benefits. Male and female physicians can benefit from the Family and Medical Leave Act of 1993, which allows up to 12 weeks of unpaid leave per year for specified family and medical reasons, such as the birth of a child. However, the act applies only to companies that employ 50 or more people within a 75-mile radius.


  • Ownership/Partnership.


Determine whether the employment contract addresses or allows for future ownership opportunities. Terms of the ownership buy-in will be stipulated in separate “buy-sell” or “partnership” agreements, usually not signed until ownership takes place in subsequent years. Thus, a physician planning to stay in a group-practice for more than a few years should make sure that any implied ownership options or assurances discussed during the original employment negotiations are spelled out in the written employment contract. Such provisions may include stipulations regarding the circumstances under which the physician may be considered for or automatically offered partnership, the timing and method by which the physician may acquire ownership in the practice, how the proposed purchase price will be determined, and the period over which the purchase price will be paid.


Since large front-loaded buy-ins tend to scare off potential candidates, the trend today is toward smaller front-loaded buy-ins, e.g., $5,000-10,000, followed by compensation off-sets for a specified number of subsequent years. The stipulated purchase price often is based on a percentage of the practice’s hard assets, accounts receivable, and occasionally goodwill. If a group-practice is unwilling to include an ownership commitment and detailed provisions in the initial employment contract, it may be willing to define the conditions under which ownership will be considered later. If a group requires an associate to work for a specific length of time before discussing a buy-in contract, a new hire should ask when to expect such partnership consideration to take place, the criteria for selection, and the ownership terms. The candidate should also ask whether there have been associates who opted not to join or who were not invited to join. The practice should also explain the compensation arrangements for owners, including whether there is any income differential between junior and senior partners.


Some groups divide net income equally once a physician becomes a partner. Other groups employ a standard salary formula, such as a base salary plus a productivity incentive that divides the net income remaining after paying practice expenses and physician compensation.


As a full practice owner, a physician conceptually shares equally in the practice’s net income and governance. However, a new partner’s actual impact on decision making may be more limited, both because senior owners can out-vote any individual physician, and one physician often is responsible for the daily management of the practice. In considering the value of ownership, it is essential to recognize that holding equity in a physician practice is unlike owning stock in a commercially traded company. It is an “illiquid” asset with limited market value, yet it obligates the owner to assist in absorbing any income shortfalls the practice may experience and to perform specific additional owner duties on behalf of the practice. Thus, a physician considering partnership should weigh the potential income gains and personal satisfaction of exercising governance against the added risk and ownership obligations entailed.



  • Outside Activities.


An employment contract should specify whether and under what circumstances the physician can work outside the practice. Outside income, which can become substantial, can include: Honoraria for lecturing; Royalties for writing treatises and articles; Consulting work; Testifying as an expert witness; Inventions; Patents; Copyrightable works; Discoveries; and, Other intellectual property


Work outside the group that benefits the group’s image or reputation may be compensated through bonuses and honoraria. The employment contract, however, needs to specify explicitly whether money earned from outside sources is to be considered private compensation paid directly to the individual physician or more typically as part of the group’s overall income. If treated as practice income, the employment contract should indicate whether and how the physician will be credited for these outside services within his/her compensation formula. If the physician may retain income derived from any outside activities, the contract either should identify these specific activities or state how they will be identified in the future. Groups usually preclude physicians from performing outside services that will interfere with their ability to satisfy their practice obligations.



  • Duties, Requirements, and Call Coverage.


The contract agreement should clearly state whether a physician is considered a full or part-time employee, whether the physician will have to perform administrative or teaching duties and share in after-hours call schedules. A physician should inquire about the length of the workweek (hours) and how many patients are expected to be seen per hour, day, or week. It is also vital to define working relationships, such as to whom the physician reports, who reports to the physician, and the physician’s role in hiring support staff.


From the outset of negotiations, be transparent and open about your schedule expectations to ensure that they align with the employer’s requirements.

Employers often leave scheduling provisions loose, so employed physicians have the flexibility to deal with the needs of their patients and the practice.


However, the following should be stipulated in your employment agreement:


(a) Promises the employer has made regarding your schedule (i.e., if the employer promises you won’t have to work more than one Saturday per month or agrees to a flexible schedule, get the specifics in writing.); and,


(b) Call and coverage obligations. Be sure your call responsibilities are not more burdensome than those of other family physicians employed under similar terms. Also, find out whether the employer offers compensation for taking additional call.


In certain procedure-intensive specialties, it is crucial to find out the approximate number and type of procedures expected to be performed. Similarly, a hospitalist will want to learn as much as possible about the group’s contract to provide hospitalist services, since this agreement will largely determine the physician’s duties and objectives. A practice should inform the potential hire of any performance evaluation process and the possible positive or negative effects such evaluations can have on the physician.


  • Restrictive Covenants.


Restrictive covenants, often called non-compete clauses or non-competition agreements, can be one of the most important yet least understood and potentially most contentious aspects of an employment agreement. Following termination of employment, these clauses seek to prohibit the physician from practicing medicine for a specified period in a specific geographical area. The objective of the covenant is to prevent departing physicians from damaging the practice by taking with them a significant number of patients on which the group’s economic well-being depends. Often the group itself originally had acquired or helped the physician to attract these patients. Usually, a companion “non-solicitation” clause prohibits the departing physician from actively seeking to attract patients, employees, and health plan contracts away from the former practice.


Many states enforce restrictive covenants to reasonably protect the employer’s interest against the competition, although state law may impose limits on enforcement. These states generally require that restrictive covenants must be limited in: (a) Duration- It is typical for restrictive covenants to last for one to two years following termination of employment; and, (b) Geographic radius- A reasonable geographic radius depends on where you practice. A restriction of 25 miles might be appropriate in a rural area, whereas a one-mile range might be enforced in an urban setting.


When you’re negotiating an employment agreement, ask if the employer will limit the instances in which the restrictive covenant would be enforced. For example, the agreement could specify that the restrictive covenant will not be enforced if you terminate your employment for cause.


  • Term and Termination Provisions.


Employment contracts should specify the “term” which includes both a starting date and an ending date. Some contracts are written for one year and are automatically renewable while others last longer and have a specific renewal process.


Termination provisions set the term of the employment agreement, regardless of the stated term. If you or the employer can terminate the agreement without cause, the actual term of the agreement is the length of the notice period (e.g., 30 to 90 days).


The following termination provisions are often included in physician employment agreements:


(a) Termination without cause. Many employers (especially physician groups) include a provision that allows you or the employer to terminate your employment without cause. (A notice provision that requires written notice 30 to 90 days before termination is typical); and,


(b)Termination for cause. Most physician employment agreements allow the employer to terminate “for cause.” Clauses authorizing termination “for cause” typically are unilateral, but the causes should be reasonably and narrowly defined. Loss of medical license or federal DEA registration, termination or suspension of medical staff privileges, violation of a material provision, a felony conviction, use of illegal drugs or abuse of controlled substances are standard examples of “for cause” reasons for termination. For some cause, a physician may negotiate a provision requiring that the employer provide advance written notice of the complaint that, if uncorrected, will lead to termination, thus allowing the physician adequate time either to change the objectionable behavior or to find new employment.


The practice may include a provision for severance pay under some circumstances. If the physician is terminated without cause during the first year of employment, the practice may waive required repayment of relocation funds—due to the undue hardship on such a physician.