By Bonnie Darves

Even if there haven’t been any seismic shifts in the realm of physician employment contracts in recent years, the trends that contract lawyers are seeing as they review the documents are worth noting — and being mindful of as physicians consider job offers. For starters, even though the hoped-for national legislation that will eradicate or ameliorate the non-compete clauses that are onerous for physicians who decide to leave a job before the contract period ends is moving forward, it’s too early to count on it sticking as is.

The Federal Trade Commission in late April demonstrated that it is committed to addressing those non-compete clauses, which essentially dictate exactly where and how a departing physician may practice, by issuing a final rule outlawing them. Within hours, however, the new rule spawned a spattering of legal challenges — and a tsunami of backlash will likely ensue. As such, physicians shouldn’t count on the rule to end their worries about non-competes, according to employment lawyers.

Lauren Kaufman, an attorney with the MorganTheeler LLP health law practice in Mitchell, South Dakota, offers her view of the proceedings to date. “Let’s say that I’m optimistic but skeptical,” she said, saying that the final rule will settle the issue. Even with the rule’s initial passage, Ms. Kaufman noted, “There will likely be litigation.” In addition, it’s not yet clear how the rule will address contracts offered by not-for-profit health care organizations, which account for a large number of physician employers.

“The bottom line is that you should assume that your covenant not to compete is valid and enforceable, and not take any action that would violate its provisions,” said Dennis Hursh, managing partner of Physician Agreements Health Law in Middletown, Pennsylvania.

“Basically, the higher the sign-on bonus, the longer the employer will want the physician to stay. The majority of contracts will have clawbacks within one, two, or three years.”

—Lauren Kaufman, MorganTheeler LLP

Physicians who signed existing non-compete clauses, in the meantime, should also be very clear about the clauses’ potential reach. “I’ve seen non-competes completely uproot physicians’ lives,” Ms. Kaufman said. That’s because the geographical restrictions of non-competes may force physicians to relocate altogether, against their will. It’s not unheard of, after all, to see employers prohibit departing physicians from practicing within a 60- or even 80-mile radius of the current location for a period of two years, and even a 15-mile radius could prove problematic in a dense urban area. “Even though most of these clauses max out at two years, that’s a long time,” she said.

Avoiding onerous non-competes

Employment lawyers who specialize in physician contracts concur that the best time to contest an unreasonable non-compete clause is before the contract reaches the final draft stage. This might entail requesting the prospective employer’s proposed non-compete verbiage at the letter-of-intent stage, if possible. That way, an attorney can review that clause and other key terms before the final contract is presented. The following are recommendations for pursuing needed alterations to non-competes:

Be specific about circumstances for enforcing non-competes. Richard H. Levenstein, who heads the health law practice at Nason, Yeager, Gerson, Harris & Fumero, P.A. in Palm Beach Gardens, Florida, and who consults to the American Medical Association on physician employment contracts, urges limiting the conditions that permit the non-compete. “I try to negotiate with employers to have the non-competes effective only if the physician is terminated for cause,” Mr. Levenstein said.

“When a physician employee ends up owing money to an employer, he or she effectively becomes an indentured servant.”

—Richard H. Levenstein, Nason, Yeager, Gerson, Harris & Fumero, P.A

Be mindful of the practice locations included in the geographical radius. In recent years, the consolidation among hospitals and the tendency within health systems to purchase or affiliate with hospitals or clinics far flung from the mother ship can make non-competes even more problematic. If the clause states that the geographical radius applies to “any location” where the employer conducts business, for example, physicians could find themselves having to leave the state.

“I recommend that physicians actually pull up their Google Maps application to see what that restriction would look like in real life,” said Scott Weavil, a health law attorney at Weavil Law PC in Sacramento, California. “I counsel my clients to make sure that, at the end of the day, they can live with the restrictive covenant.” If not, physicians should have their lawyers request a more reasonable radius or enforceable time period, he added. Ideally, any geographical radius should apply only to the primary place of practice.

Don’t assume that the non-compete won’t be enforceable. Outside of a handful of states where physician-employment restrictive covenants have been either outlawed or limited substantially in scope by regulation — these include California, New York, Washington, Delaware, and, recently, North Dakota and the District of Columbia — the provisions should be considered enforceable, and physicians should expect the employers to litigate, according to Dennis Hursh, managing partner of Physician Agreements Health Law in Middletown, Pennsylvania. “Even if it seems unimaginable that a judge would enforce an unreasonable non-compete, you don’t want to have the burden of fighting it,” Mr. Hursh said. That might prove a very expensive proposition with an uncertain outcome, all sources agreed.

“Physicians should understand that non-competes should be addressed at the contract stage because the courts are not knocking them out. You don’t want to sign a contract and ask questions later,” said Neil Talegaonker, a partner in the law firm Kaufman & Canoles, P.C., in Richmond, Virginia.

Contract pitfalls: They’re in the fine print

Another potentially problematic contract clause is the so-called “clawback,” in which physicians receive enticements to employment, such as generous signing bonuses, education-loan repayments, or five-figure relocation packages. If the physician decides that the job wasn’t as advertised or wants (or needs) to leave for any reason, employers may require that some portion of those employer-incurred expenses be repaid, especially if the physician leaves, for example, after one year of a two- or three-year contract (the most common durations).

“Most employers will require physicians to pay back all or a portion of those offer-associated benefits, and physicians need to understand what those requirements are before they sign a contract,” Ms. Kaufman said. “Basically, the higher the sign-on bonus, the longer the employer will want the physician to stay. The majority of contracts will have clawbacks within one, two, or three years.”

Although most lawyers agree that employers should be entitled to a return of some funds if the physician decides to leave early for personal reasons, it’s important to understand how that repayment would be apportioned. Generally, as Mr. Weavil explained, employers will seek the return of sign-on bonuses and relocation expenses, so those terms should be understood and acceptable. For example, it might be reasonable to expect full payback if a physician leaves at the end of the first year, but not if she or he leaves 20 months or two years into a three-year contract.

In those cases, physicians should ensure that any required repayment is prorated on a monthly basis from the time of departure to the contract’s end date. “You really want to avoid a clause that states that if the physician leaves before two years, those expenses must be repaid in full,” said Mr. Weavil, who said that he has seen such unreasonable terms.

The other important issue with clawbacks is when they would apply. Mr. Weavil and other sources agreed that if an employer lays off a physician without cause, for reasons such as the entity’s sale to another organization or its decision to narrow the physician workforce, physicians should be relieved of any obligation to repay those funds.

Performance expectations: beware of pitfalls

One aspect of contracts that may prove especially problematic involves any clause related to employers’ requirements for meeting performance thresholds. Simply put, this boils down to the level of required productivity, usually in terms of either work relative value units (W-RVUs) or patient census numbers. W-RVUs, which define the value of a service or procedure relative to all services and are based on the extent of physician work required, are assigned by the Centers for Medicare & Medicaid. These W-RVUs enter into contracts in two ways.

For starters, employers may set an expectation that physicians reach a certain number of W-RVUs either per month or annually, in year one and subsequent contract years. That’s reasonable provided the expectation is in line with what other physicians in the same specialty achieve. For example, if the median number of W-RVUs, as reported in national compensation surveys, for an internist is 4,800 annually and the prospective employer expects 5,200, that level might not be doable for an internist starting out in practice. Mr. Talegaonker advises physicians to conduct due diligence to establish reasonable W-RVU expectations, with the following questions in mind:

• Will the employer’s market support this level of productivity performance?
• What are the historical W-RVU patterns in the practice/organization for same-specialty physicians, and what percentage of those physicians actually meet or exceed those expectations?
• What is the patient population like, and how much organizational assistance will the new physician receive to ensure an adequate patient census?

The other factor to consider is the dollar value assigned to each W-RVU. For example, according to the Medical Group Management Association’s survey data, the median W-RVU dollar value for family medicine physicians was $59.69 in 2021. If the hiring organization proposes a much lower value, the physician’s compensation will be lower accordingly. This is complicated stuff, Mr. Talegaonker acknowledges, so it’s best to do some homework and to have an experienced health care lawyer review the data early on. This helps ensure that the physician’s proposed compensation will be competitive regionally and nationally. Physicians should expect their legal counsel to obtain and be familiar with such survey data.

“Even if the employer states that the contract is ‘standard’ and can’t be changed, physicians should not assume that there’s no room for movement, or compromise.”

—Dennis Hursh, Physician Agreements Health Law

Health law attorney Richard H. Mr. Levenstein, with Nason, Yeager, Gerson, Harris & Fumero, P.A. in Palm Beach Gardens, Florida, further recommends that physicians request that an example of the formula used for determining physician productivity or performance and how it’s applied for the purposes of compensation be included in the contract. In addition, the contract should clearly state what happens if the physician doesn’t achieve the stipulated productivity level. For instance, if physicians are “docked” for not achieving the required number of expected W-RVUs, they could end up in an untenable financial position.

“When a physician employee ends up owing money to an employer, he or she effectively becomes an indentured servant,” said Mr. Levenstein, who also teaches at Tulane University Law School in New Orleans, Louisiana, and lectures at Tulane’s medical school. If the physician encounters pushback when asking for details on productivity formulas and associated compensation levels — specifically how the organization makes calculations regarding what’s owed to, or potentially by, the physician — that’s a serious red flag, in Mr. Levenstein’s view.

Understanding post-employment issues, like tail coverage

Surely no physician accepts a new job expecting to leave in short order, but that can and does happen for reasons ranging from personal or family issues to serious professional dissatisfaction. As such, physicians should be sure that they review any proposed contract from a what-if perspective, ideally with their lawyers and not necessarily in the context of face-to-face discussions with a potential employer. This means ensuring that any clause that’s unacceptable be either removed or modified, even if slightly.

One example of where this future perspective is important is the tail malpractice coverage provision, which can range considerably from one contract to another. Of course, it’s ideal if the employer agrees to pay the full cost of tail coverage when a physician leaves after the contract’s end date, but that responsibility might have to be negotiated if the physician leaves early, according to Ms. Kaufman.

If an employer won’t provide tail coverage outright, Ms. Kaufman recommends requesting a vesting or cost-sharing period of three years. If the physician leaves after one year of a two- or three-year contract, she suggests that the employer be required to pay one-third and the physician two-thirds of the coverage cost. After two years, those portions would switch, with the employer paying two-thirds and the physician one-third. If the physician stays for three years, she recommends that the policy then convert to fully employer paid.

In addition, Ms. Kaufman notes that the type of malpractice liability policy is important to understand; if it’s “claims-made” coverage, meaning that claims could arise after the physician leaves, the repayment schedule might be an issue. If it’s an “occurrence” policy, tail coverage wouldn’t be needed. Finally, as with clawbacks, the reason for termination is a key consideration in tail coverage responsibility. If the contract is terminated “without cause” by the employer (versus “for cause,” in the case of an employee breaching the contract), the employer should assume responsibility for the cost of coverage.

In the big picture, and given all the potential risks outlined above, how should the physician prepare to avoid patently unreasonable or downright unfair employment-contract clauses? First of all, physicians should choose a labor and employment attorney who specializes in physician contracts and engage that individual as early in the negotiation process as possible.

Second, physicians should not expect that, even in this age of “boilerplate” contracts, prospective employers won’t accommodate reasonable requests. “Even if the employer states that the contract is ‘standard’ and can’t be changed, physicians should not assume that there’s no room for movement or compromise,” Mr. Hursh said. “There usually is.”

Mr. Weavil points out that contract adjustments, either through a language change or a new addendum, do occur. “The key is to ask nicely for accommodation on a reasonable number of issues,” he said.