Insight into Physician Employment Contracts
When a physician sells their urgent care business to a hospital or other interested buyer, there may be a chance for either side that the physician seller can remain on for a time as the new owners grow into the skin of the business. The Ambulatory M&A Advisor and sources discuss the benefits of being a physician employee, reasons to transition, and what terms of the contract to look out for before sealing the deal.
Roberto Castro, a Washington State attorney and Certified Valuation Analyst (CVA), Law Office of Roberto Castro PLLC explains that the seller first of all must understand that if they continue practicing, their role in the decision-making process will be reduced. Buyers, including hospitals tend to have dedicated staff and professionals that manage operations. Those operational duties include marketing, billing, hiring, firing, state and federal regulatory compliance and important matters such as the purchase or lease of EMR systems and software updates.
“The physicians contemplating selling must make sure that there is a fir for the buyer and seller. The physician that seeks to practice medicine must make sure that there is a personal and professional fit and that the buyer’s mission and vision is realistic and achievable. That is really important. If the buyer is unable to deliver on its end on matters ranging from financing expansions, modernization, hiring good talent, and bringing in new patients, that is a problem; it certainly doesn’t help to work for a buyer that cannot deliver as promised,” Castro says.
Zandra O’Keefe, CPA and managing director with CBIZ, MHM, LLC says that sometimes the decision to keep the selling physician on board is made by the acquirers.
“For gatekeepers such as those in primary care and internal medicine there can be a strong ongoing patient relationship that has value. Patients want to keep going to the doctor they have trusted for years. In order for the buyer to retain that value, that patient has to stay with the practice. In order for the seller to be paid that full value, there has to be a successful transition process. The selling physician typically works as an employee for a while and continues to see those patients and along the way introduces another provider, but not without a strategic plan. Understand that the patients need to feel that there is continuity of care at the same if not higher quality level for them to want to stay. A plan is developed with the entire patient service team’s involvement from the front desk to the billing office and everything in between. Patients are eased into the new owner’s practice collaboratively. When patient satisfaction surveys indicate high marks after patients have been seen by other providers, consider it a successful step. Ultimately time will tell,” O’Keefe says.
O’Keefe says, “This is why it’s critical to have the seller still be engaged and employed for a while to help with the transition.”
“Also there can be a financial incentive earn-out tied to the success of the patient retention processThe more patients that remain with an acquirer, the more earn-out proceeds the seller gets. This keeps the buyer and seller tied together. Since the seller’s value is in the successful transitioning of the patient base to the buyer, the seller will be paid when the buyer can see that those patients have been retained over time,” O’Keefe says.
Castro says when it comes to the actual employment agreement it will usually have a term between one to three years and the usual compensation model will be based more heavily towards productivity.
“Besides removing administrative burdens, sometimes physicians will see some immediate gains in terms of RVU compensation. Larger entitities may have the ability to extract and negotiate better concessions from payers, meaning insurance companies. In addition, acquisitions that are accretive may also lead to more patients. In most cases, the buyer will make a case that it can deliver more patients, that the physician’s level of productivity will increase, and that the physician will have better access to specialists,” Castro says.
As far as choosing a company to go with, Castro says sellers should seek out a seasoned group that has a good track record. As for how much is paid for the practice, most transactions are asset-based transactions that require the employment of evaluation analysts. Usually, the physician or group selling will retain the accounts receivable. “The employment agreement will include not just the usual perks and terms, but also additional language that will corroborate that there is a synergy and reason for them basically joining,” Castro says.
“I think the employment agreement would include not just the usual perks and terms, but there would be such additional language that would basically corroborate that there is a synergy and reason for them basically joining,” Castro says.
O’Keefe has a tax tip. “The employee physician should understand who will be paying for non-shared business expenses and negotiate that before signing the employment agreement. Typical non–shared expenses can include: CME, cell phone, automobile business mileage reimbursement, parking. It may also include practice development costs if any, such as meals, entertainment and business gifts. As a W-2 employee there may be no personal tax benefit when paying those expenses personally. What? Well when an employee reports business expenses on their personal tax return using Form 2106, the deduction is limited to the amount that exceeds 2% of their adjusted gross income. So when your income is high, then a very large amount of these expenses is needed in order to realize a benefit. Your salary is high? If yes, then practically count on zero benefit. So what’s the solution? Negotiate with your employer up front to pay for non-shared expenses as part of your “reasonable compensation” package. Your employer can receive benefit from the business deduction if you provide them with the substantiation. They may come back with a limitation up to a certain amount so they can control those total amounts. That’s fine, but if you don’t get those items added to your employment agreement now, then you may be in for a surprise later at tax time.” O’Keefe says.
Leslie Rojas, an associate attorney with The Health Law Partners, P.C., practicing healthcare regulatory and transaction law, gets into the finer, legal details of the physician employment contract.
“The first business term that the physician is going to look at is compensation,” Rojas says. “In their private practice, the physician may be used to a certain salary based off of their collections. When employed, a lot of compensation formulas, especially bonuses, are based on the physician’s work RVUs.”
Rojas says that RVUs, Relative Value Units, are sometimes used as a way to measure a physician’s productivity when calculating compensation. Medicare pays for physician services based off of CPT codes for the service, and each CPT code is assigned an RVU. The RVU is based off of three components: (i) the physician’s time, work, and effort associated with the service; (ii) the malpractice insurance cost associated with the service; and (iii) the overhead cost associated with the service. Physicians negotiating employment contracts should know their RVUs so they can better understand and negotiate their compensation formulas.
Rojas advises that parties should review recent physician compensation surveys to help determine fair-market value compensation for the physician based on specialty, region, and other factors.
One contract term that physicians often overlook – and are sometimes unfamiliar with – is tail coverage issues. Rojas says that a lot of physicians aren’t aware that if they terminate the employment contract or do not renew the contract upon expiration, then they might have a tail coverage issue. She says that many employers are purchasing “claims made” malpractice insurance policies, which are generally less expensive than “occurrence based” policies. “Claims-made” insurance protects you from malpractice claims only if the company that insured you at the time of the alleged malpractice is the same company at the time the claim is filed.
“If a physician sees a patient in 2015, leaves that employer and obtains a new claims-made insurance in 2016, and is then sued by that patient, they will need tail coverage.,” Rojas says in an example. If the employment agreement doesn’t say anything about the employer paying for tail coverage, then the physician may not have coverage for such an event. In fact, most of the time, a contract prepared by the employer’s attorney will say that the employed-physician is responsible for obtaining tail coverage upon termination. “That can be really expensive. They might be looking at an out of pocket payment of anywhere from $20,000 to $60,000 – or sometimes more depending on the specialty – just to cover any malpractice cases that might arise after the expiration or termination of the contract.”
Unfortunately if the physician doesn’t have a lot of leverage, those types of provisions in a contract are pretty common, Rojas says.
When representing the physician in contract negotiations, Rojas argues that the cost of malpractice insurance is the hospital or group practice’s cost of doing business, and that shouldn’t be passed onto the employed-physician.
The non-compete and non-solicitation provisions are usually the terms that the physician will go to right after compensation when considering whether to accept a contract. Rojas says that some states have laws that preclude or restrict these types of provisions, but most states will require the provisions to be reasonable in time, reasonable in geographic location, and reasonable based on the physician’s specialty area.
“For example, let’s take a pediatric neurosurgeon. His non-compete clause will probably be much broader in geographic location than a primary care physician’s non-compete. Depending on the specialty, you might find a five or ten mile non-compete or a non-compete that encompasses the entire state. Whether that is reasonable depends on a number of factors,” Rojas says.
Rojas says an employment agreement should specify that a physician is entitled to copies of his patient’s records if the patient so requests in writing. The physician should also have access to those records upon termination of the employment agreement in the event that the physician has to defend a malpractice action or maybe a billing audit.
As far as the non-solicitation clause, the parties may want to agree that, upon termination of the employment agreement, the employer and the employed-physician will jointly send a notification to the physician’s patients that the physician is leaving the practice and where they are going.
“A lot of the times the parties can agree to the form of that letter right there in the employment contract,” she says.
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