Recent Trends in Physician Compensation and Contracts
Last week, The Ambulatory M&A Advisor discussed the importance of physician credentialing in the process of hiring a new physician to an ASC or Urgent Care business. Although credentialing is at the top of the list for most providers, taking a look at compensation plans and updated contracting is also an area that cannot be ignored.
Leslie Rojas, an associate attorney with The Health Law Partners, P.C., practicing healthcare regulatory and transaction law, says that while the initial contract is important, compensation is always the first thing on a potential employees mind.
“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.
Roberto Castro, a Washington State attorney and Certified Valuation Analyst (CVA), Law Office of Roberto Castro PLLC says that most employee agreements usually have a term between one to three years and the usual compensation model will be based more heavily towards productivity, especially in the current value-based market.
“Besides removing administrative burdens, sometimes physicians will see some immediate gains in terms of RVU compensation. Larger entities 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.
Isabelle Bibet-Kalinyak, associate with McDonald Hopkins says that with the shift in model trends there are some issues that need to be addressed.
“The problem with value-based payments today is that we don’t really know what it is going to look like. We are in the middle of healthcare reform right now; Medicare drives everything in healthcare, so we have new models emerging but in the end, the industry does not know what these changes are going to do for the revenue,” Bibet-Kalinyak says.
“You have to be cautious with physician compensation, and it is going to be a balancing act because we don’t know what the revenue side is going to be like. We could be taking big hits just to save in the system, because somehow we have got to close the gap between the cost of healthcare and the demand for healthcare. On the other side you have to balance retention. It is easier for new grads because you can still shape their expectations in terms of salary; but if you take an Interventional Cardiologist, it is going to be very difficult to get them to understand that their revenues are not going to go up in the next few years and are going to go down.”
Bibet-Kalinyak says hiring operators want to give as much certainty as they can for people applying for positions but again, not promise them too much because of the stark uncertainty of where the market is going. Bibet-Kalinyak advises that owners leave as much flexibility in the agreement to revise wherever they may have to revise, and then have periodic reviews to make sure all provisions are regularly up to date.
Bibet-Kalinyak says that owners also need to take specific steps to ensure they can afford the hire.
“It all starts with data, data, and more data. Today, it is very easy to analyze your collections, speed of collections, compare your business to others at a local or national level before deciding to hire a new physician. Take some time to speak with a reputable consultant. There are people that know what they are doing that can really help you understand whether your business can handle this move or not. It is going to take time, it is not easy, especially if you operate in a remote area,” she says.
While compensation is at the tip of every potential employee’s tongue Bibet-Kalinyak says that keeping up-to-date with physician contracting trends is equally if not more important.
“I think that template agreements, although not ideal, are useful in order to ultimate and be very effective in not forgetting things. However, they also are full of potential pitfalls. First, I would say that they have to be reviewed on an annual basis for compliance and things like typos, or if things were moved around and some cross sections may suddenly be wrong, and then your non-compete agreement may go out the window because you do not have a proper reference. They should be reviewed on any hot topics such as non-competes, or employing a foreign national. In this review there should be a do’s and don’ts check list,” Bibet-Kalinyak says.
She goes on to explain that one of the best practices is to work from something similar to a letter of intent, but the employer would have a cheat sheet that lets the parties know what the compensation is and how long the contract is, etc.
“If you have a cheat sheet like that, someone can just easily plug it into the template agreement, then also have the opportunity to check them against it. In terms of non-compete agreements, you want to keep them as standard as possible so that we know where we are in the process and nothing gets mixed up.”
Bibet-Kalinyak says she sees many mistakes made at the recruitment level, especially when recruiting a new physician.
“You need to understand that it is very difficult to recruit and get people to move now, although some people may take a job for the job sake and move for a certain period of time. There are still questions that you cannot ask applicants or any of your employees. Anything of a personal nature is off limits in the interview process,” she says leading into the fact that another challenge area is foreign nationals; and 25 percent of the workforce in healthcare are international medical graduates or foreign physicians.
“You cannot ask anything such as if they have a green card, or are a US citizen. Foreign nationals are protected through the Constitution and you cannot discriminate on basis of national origin. Immigration is a hot topic now, but in healthcare, we definitely need to watch out for what we are doing. I think there are some mistakes, but today, employers really have the advantage.”
Over 50 percent of physicians don’t have employee agreements reviewed, and this is particularly true with new physicians just out of residency or fellowship, she says.
“They have so much student debt, and they don’t want to spend another thousand dollars to have somebody review it. Employers can stuff the contract with whatever they want most of the times. Still, even with that, because they use the same old template, get something online or from a friend, there will still be things that are missing or not well defined. People have to remember that employment is based on state law. Although there are some Federal rules applicable like referral laws, Anti-Kickback etc. On the other hand, when it comes to non-compete agreements we go back to state law, and they are not enforceable in every state in the US,” she says.
“States that are red flags are California, North Dakota, and Massachusetts where you can’t even have non-competes but also, there are states where you can have the agreements but they can be very restrictive. It is very diverse out there and you can’t just assume that a template agreement is going to work across state lines; you need to know where that was drafted.”
Bibet-Kalinyak says the standard provisions seem to take place in most contracts, but there are some little things that those drafting the contrats don’t think about. When looking at the consolidation of healthcare today, there should be an assignment clause in the contract so that if a merger occurs the providers don’t have to deal with that issue and have to draft a brand new agreement.
“Another common mistake is what happens to receivables if you terminate the agreement. Sometimes this area is defined and says the practice will keep everything, but what happens where an agreement is early terminated because a physician is becoming a shareholder in that corporation, and then the lines become blurred. These issues are small things but can cost a lot of money in the end,” she says.
If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or Blayne@ambulatoryalliances.com.
If you have suggestions for future topics, email Blayne@ambulatoryalliances.com.