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Payment structures, non-competes, and contract duration among areas where shifts are occurring

By Bonnie Darves, a Seattle-area health care journalist.

Deciphering physician employment contracts is a perennially challenging task for young physicians. Now, myriad changes in health care, particularly the trend toward creating mega-systems and what industry observers call “super groups,” are adding yet another level of complexity. What is new in the employment contract arena reflects what is happening in the employment market itself: Physicians are increasingly opting for employed positions — with hospitals, health systems, or large practices — and contracts that govern those employment arrangements are changing accordingly.

On one level, health lawyers point out, employment contracts are becoming more uniform. On another, areas such as restrictive covenants are becoming more complex. In themselves, these trends are neither positive nor negative, because it’s the actual terms of the contract that matter, regardless of the organization offering the opportunity. At the same time, as medical practices and health care organizations grow, physicians who join large organizations might encounter less flexibility in contract terms than they once did.

There is one positive to the uniform-contract approach that might comfort young physicians: They’re less likely to see an egregiously unfair contract, by virtue of the fact that the agreement is probably the same one that their colleagues before them signed, said Andrew Knoll, MD, JD, a Syracuse, New York, health lawyer. “It’s the safety-in-numbers doctrine — you have a contract that treats all physicians the same regardless of their specialty. If you’re the new physician and there’s something particularly unfair, you can be sure that the other 300 doctors will complain before you do,” said Mr. Knoll, who advises physicians and health care organizations on contract matters.

Health lawyer Bruce Armon, a partner with the law firm Saul Ewing, LLP who is based in Philadelphia, said that health care organizations’ rapid growth in recent years is driving the trend toward contract uniformity. “As organizations grow, they may develop more robust employment agreements and be inclined to offer less flexibility,” he said. “They’re essentially saying, ‘We have several hundred physicians signing this agreement, Dr. Smith, and, respectfully, you will be treated in the same manner as everybody else.”

That doesn’t mean that contract provisions should not, or cannot be negotiated, according to Kyle Claussen, JD, vice president of Resolve Physician Agency in Columbia, Missouri, which advises physicians on contract issues. “We’re definitely seeing more uniformity in employment contracts at larger organizations, which are trying to take the stance that things are not negotiable,” he said. “But we’re not finding that to be the case.” Physicians in high-demand specialties might still succeed in negotiating more favorable terms in compensation, schedule, or working conditions than a boilerplate contract indicates, Mr. Claussen said.

Non-competes: new issues arising
Restrictive covenants, also called non-compete clauses, which stipulate what physicians are not permitted to do after they leave an organization, continue to be a key issue in employment contracts. Mr. Claussen and other health lawyers point out what while such clauses, generally speaking, have changed little in recent years, there are emerging areas for concern in how the restrictions are drawn.

An especially problematic area are covenants’ geographical boundaries — clauses that prohibit the departing physician from practicing within a certain distance of the employer for a certain time period. A typical covenant might state that the physician may not practice within, for example, 20 miles of any location of the practice or hospital. That distance “might have been reasonable in the past,” Mr. Knoll said, “when typical practices operated a single satellite location,” or when hospitals and health systems were relatively “contained” geographically. Today, with the trend toward consolidation in the health-services marketplace, the picture is more complex.

“Now, when large hospital systems are gobbling up facilities and practices over a 60- or 80-mile radius around an urban area, or developing clinic networks that stretch across an entire region, the geographic-distance issue has become more complicated,” Mr. Knoll said. To avoid unreasonable geographic restrictions, physicians should narrow the distance scope by drawing the radius from a single, or two principal practice locations. “Ideally, the contract should limit the distance to the locations where the physician will spend most of his or her time, and draw the line from there,” he said. If the position will require the physician to travel among locations, as in the case of a surgeon who performs procedures at two or three hospitals, the radius should be drawn from a single location, Mr. Knoll advised.

Young physicians should keep in mind that restrictive covenants are common not just in health care but in many industries, and that geographic-distance non-compete clauses can serve a legitimate purpose, Mr. Armon explained. “Employers want to protect their business interests, and you, the physician, want to ensure that there is enough flexibility that you won’t need to uproot yourself and family should there be a change of circumstances. And that can be a fine balancing line,” he said.

The merger trend in health care services is posing another geography challenge in a different aspect of the employment contract: locations where physicians are required to practice. “Where you provide services is very important because, as practices expand or become ‘super groups,’ they could have locations 80 miles apart,” said Michael F. Schaff, a health lawyer with Wilentz, Goldman & Spitzer in Woodbridge, New Jersey.

Many contracts state that the physician “will perform services at the company’s office and other locations as the company requires,” Mr. Schaff observed. If the company is based in San Diego County, for example, but after the physician is hired, the company merges with an organization that operates clinics in Los Angeles County, that clause could become problematic for the physician who doesn’t want to spend many hours commuting to distant practice locations. To avoid that scenario, Mr. Schaff counsels physicians to have the contract specify a principal place of service, and require the physician’s consent if the company asks the physician to practice anywhere beyond a certain distance from that location. “I try to build this into young physicians’ contracts – that providing services anywhere outside 25 miles, for example, of that principal location will require consent,” he said.

Contract length, benefits shrinking
One notable change in physician contracts is that the terms are getting shorter, some sources observed. While three-year agreements were once standard, many practices and health care organizations are moving toward one-year, renewable contracts, Mr. Claussen noted. “I see this as an attempt on the part of employers to treat physicians like any other employee – and say, we can let you go whenever it’s convenient for us or when the economics of the situation change,” he said.

Whether shorter employment contracts are a downside or a plus depends on numerous factors, such as the physician’s specialty, career stage, and family considerations. “I think it’s largely a matter of preference,” Mr. Claussen said. “If you’re an emergency medicine physician or a hospitalist, physicians who tend to hop around more, it might be attractive to have a one-year vs. a three-year commitment.” A dermatologist or ophthalmologist, on the other hand, might not be comfortable with a shorter term, given the logistics of and timeline for building a practice.

A shorter contract might also be preferable to physicians whose family or professional lives are somewhat in flux, such as when a physician spouse or partner is in training, or the physician is contemplating going on to fellowship in the relatively near term.

In another general trend, benefits are being pared back, some sources noted, and this likely reflects the general uncertainty in the health care economy and the reimbursement arena. Justin Nabity, a certified financial planner with the Omaha, Nebraska, firm Physician Advisors, observed that the loan forgiveness offers have become less common and less generous, and that CME allowances are being squeezed. On a potentially more pressing note, organizations are increasingly requiring physicians to carry a larger portion of the health benefits tab.

“We’re seeing organizations pay the premiums for the physician but not for dependents, and far fewer organizations are offering short-term disability coverage than in the past,” said Mr. Nabity, who frequently speaks to physicians in residency and fellowship programs about contract financial issues and negotiation. In any event, candidates should carefully review the benefits package for any position they’re considering. “Physicians should keep in mind that the value of benefits can range from $20,000 to $50,000, so it’s important to compare offerings,” he said. He also urges physicians to ask to review benefits when leaving an interview during which both parties expressed an intent to move ahead with an offer.

Payment structures becoming more important
The way physicians and their practices are reimbursed for services is shifting away from volume and toward value or quality structures, through the Medicare Quality Payment programs and shared-risk arrangements, for example. Employment contracts are changing accordingly to reflect those changes. The challenge is that relatively few practices have deep experience with these programs. As such, many organizations are struggling to figure out how best to incorporate potential bonus and at-risk compensation in employment contracts, several sources concurred.

What this means is that physicians seeking a new practice opportunity should be aware of the incentive and risk programs their prospective organization is involved in, and should ask for specifics on how individual and group performance might affect compensation. “If the entity is part of a shared-savings program, physicians need to ask what happens if the group performs well or, alternatively, is penalized for poor performance,” said Mr. Schaff. He urged physicians to ask to see concrete examples of how these structures have affected their prospective colleagues’ compensation. “The point is to make sure that you receive any income you’re entitled to, and that you understand the practice’s compensation model and how any incentives or penalties are structured,” he said.

If the practice is new to quality-based payment or bonus structures, it might be hard to tease out potential effects on income. In such cases, the more important consideration is probably the percentage of total compensation that derives from the structure, Mr. Claussen suggested. “I think physicians should be careful about how much of their compensation is weighted for that [quality] bucket,” he said. “If it’s five percent of your total compensation, it’s probably something you can live with being a gray area. But if it’s 30 percent, you need to understand the model and make sure they show you data on what has been paid out in the past.”

Although value-pegged reimbursement structures are starting to affect compensation models, productivity-based compensation or bonus structures are still common in employment contracts, and physicians should understand how these components work. The most important issue is how productivity is measured for the purposes of both expected physician performance and the threshold for earning bonus compensation.

“It’s very important for young physicians to understand these thresholds — usually measured in work RVUs — and make sure that they’re actually attainable based on MGMA or other compensation survey data,” Mr. Claussen cautioned. “We have encountered physicians who say they were told they would make all of this money, and then they can’t actually get there [above the threshold] once they see what average production looks like.”

To avoid such situations, physician candidates should find out how their colleagues have fared under the system in recent years, Mr. Knoll said, and should request that such information be provided in actual examples. He also points to a productivity clause that should be a red flag: a provision that calls for a productivity bonus when the physician exceeds the cited RVU or other threshold but doesn’t guarantee that the bonus will actually be paid out.

“I have seen practice contracts that say the physician will receive a bonus for any earnings over X, but states that the bonus will be paid out ‘at the practice’s discretion,’” Mr. Knoll said. “That’s just unfair.” Such one-sided clauses are more likely to show up in private practice agreements than in large organizations’ contracts, he said, and might be included primarily to enable owner-partners to control the flow of payments and protect partners’ income. “In a big health system, you’re not taking that bonus money out of someone’s pocket, but that’s not the case in the small practice,” he said.

Other trends and pitfalls
Even though employment contracts in general haven’t seen major changes in the last five years, physicians should be aware of minor factors and trends that might make some contracts less favorable than others. Physicians should also avoid or attempt to negotiate patently physician-unfriendly provisions. Following are other contract issues and areas that physicians should consider.

Tail coverage responsibility shifting. Employers, through employment contracts, are increasingly shifting the financial burden of malpractice tail coverage to the physician. That might be in order for some situations, such as if a physician leaves without providing proper notice. Health lawyers interviewed for this article advise physicians to seek an approach based on reasons for termination: If the physician is terminated without cause or the contract isn’t renewed, the employer pays. If the physician breaches the contract or leaves without cause, she or he picks up the cost. In any event, physicians should be aware of the cost of tail insurance for their specialty in the geographical area(s) under consideration, in the event that the coverage responsibility becomes a sticking point.

Academic medical center (AMC) contracts becoming more complex. As AMCs expand and affiliate with non-academic entities, their physician employment contracts have become shorter in duration and more complicated, and the contracts’ provisions more numerous, sources noted. Although the key considerations are unchanged — physicians should closely evaluate balance of time (and responsibility) for clinical and non-clinical activities, and the opportunities and avenues for promotion — physicians should also look beyond the body of the contract.

AMC contracts tend to have many more attachments than private-sector contracts do, presumably to address the myriad policies and procedures. Termination policies, for example, might be in an addendum, not the actual contract.

Signing too early could be costly. It’s not uncommon for organizations to offer residents a contract up to a year before they finish training. Although that is flattering and especially positive if the physician has her heart set on joining the organization, there can be downsides to signing early. Besides the possibility that the physician might change her mind and the problems that decision might cause, there might be financial penalties associated with walking away, Mr. Claussen cautioned.

“There could be a real issue about whether a non-compete should apply to you. Even if you haven’t started working, you have gained access to information, and the organization might have stopped recruiting for your specialty. So some provisions might be enforced against you,” he said. At the least, physicians inclined to commit early should ensure that non-compete provisions don’t apply until the start date, not the date that the parties executed the contract.