What Should New Physicians Look For In a Contract?

What are the standard elements in physician contracts today? What are some of the terms with which new physicians should be familiar?

This section examines these questions, covering areas such as educational loan forgiveness, salaries, income guarantees, profit-sharing, non-competes and other topics.

Elements of a Contract:

Contracts will cover a variety of areas and generally will govern how you will be "incentivized." The contract often reflects the "behaviors" that the employer wishes to encourage, but you need to be sure it also reflects your interests and rights. Here are some basic terms and concepts with which you should be familiar.

Work Status

The contract will stipulate your status from an employment perspective. Are you an employee of the group or hospital, an independent contactor, a shareholder, and/or a partner? As an employee, you generally will be paid a salary, often with a bonus based on your "productivity." Let's discuss the concept of productivity for a moment.

Productivity

In a typical example of a production-based bonus, you may be an employee of a single specialty internal medicine group brought in to practice general internal medicine. Your salary may be $140,000 per year with a bonus allowing you to keep 50% of all billings or collections after you have brought in revenue equal to your salary plus overhead. In other words, revenue from patients you have seen at some point in the year may exceed the $140,000 you are being paid. From that point forward, 50% of the billings or collections from patients you see will go to you after overhead has been covered. There should be some expectation (though it may not be put in writing) as to what your gross will be when salary and production are combined.

Is it more favorable, then, to have a contract where the production bonus is based on billings or collections? We believe collections are more favorable, because billings won't amount to much if you are seeing a high percentage of uninsured or underinsured patients. As a new physician in a group, these types of patients very well could be funneled to you. We therefore believe that collections is the more reasonable framework.

The "50%" model referenced above is fairly standard, though we have seen contracts that allow new physicians to keep up to 100% of their production or as little as 20%. This is the most basic type of production bonus, but there are a variety of others. In some contracts, production may be based not just on number of patients seen but on the type of patient seen. Not all patients are equal.

Again, in the example of the internal medicine group, one physician may be seeing a high percentage of elderly patients with chronic problems. These patients take more time than younger, well-care patients. If your practice is comprised of mostly older, chronic patients you won't be able to see as many patients as a physician seeing well patients. In a production-based contract that rewards physicians for number of patients seen, you could be penalized for having an older patient base.

That is why some contracts base production not on number of patients seen but on the amount of work done by physicians. In these contracts, work is measured by a point system based on RVUs (relative value units). A physician seeing a high number of older, more acute patients will get more points per patient than a physician seeing mostly younger well patients. At the end of the day, the amount of work physicians are doing will be equal and their pay will be equal - at least that is the idea behind these types of contracts.

These contacts also may provide compensation for things other than patient care, such as scores on patient satisfaction surveys, participation in group governance, and on positive outcomes. Compensation in this type of contract might work like this:

CONTRACT A

Production..........50% - 60%
Patient satisfaction..........10% - 15%
Group governance..........5%
Resource utilization..........10%
Profit share..........5%

While there are a variety of ways to "slice the pie," the one which seems to work best in our experience is the simple one in which new physicians get paid a base salary that is predicated on current physician income data for their specialty supplemented by a bonus for patients seen. At any rate, it is important that the terms be clear in the contract so that you know what is expected and you have a clear path for achieving a certain level of income.

Income Guarantees

Your contract will be different if you are being recruited as an independent contractor. It is important to realize that much of the physician recruitment that takes place today is driven by a hospital in a given community. Even if you are joining a group, the group's affiliated hospital may be funding the recruitment and overseeing the recruiting process. The hospital is involved because it wants to ensure quality patient care in its area and ready access to physician services. And, of course, the hospital also wants to ensure its own financial viability by recruiting physicians who may refer it patients.

Please keep in mind, however, that physicians are under no obligation to refer patients to the hospitals that are recruiting them and it is in fact illegal for hospitals to require this. You can learn more about federal physician requirements in the article Federal Physician Recruiting Laws and Regulations, which we encourage you to read.

Part of the hospital's role in physician recruiting is to provide independent physicians with an income guarantee. It is the hospital, then, not the group, that is providing physicians with the economic incentive to come to the community. It is the hospital that is taking the economic risk of providing a new physician with money. But the hospital is willing to take this risk because it is confident that a need for a physician exists. The income guarantee is, in fact, the hospital's way of saying it knows there is a need for another physician and they are willing to put their money where their mouth is. The hospital may be confident that a need for your services exists based on a community physician needs assessment it has conducted. For more information on this topic, please see the article How to Know if They Really Need You on this site.

The income guarantee, then, serves as an inducement to attract an incoming physician and is a testament to the need for new physician services in the community. The guarantee ensures that the physician will earn a certain amount of income per month, after practice expenses. For simplicity's sake, let us say that amount is $10,000 per month, or $120,000 per year.

Each month the physician is guaranteed to receive $10,000 after the physician has paid all practice expenses. If the physician only makes $7,000 in a given month, the hospital will make up the difference. At the end of the guarantee period, which usually runs one to two years, the physician may have made more in his or her practice than the hospital guaranteed. The physician can, of course, keep this additional amount, and it is desired that he or she will make more than the guarantee.

If not, the physician owes the hospital the difference. In our example, if the physician made $100,000 the first year and the hospital "made up" the remaining $20,000, the physician owes the hospital $20,000. However, the majority of income guarantees include a forgiveness clause.

Forgiveness of Guarantees

Under this clause, the hospital agrees to "forgive" any amount the physician may owe at the end of the guarantee period in exchange for the physician's continued service in the area. The period of "forgiveness" generally ranges from one to three years. In the example above, the hospital may agree to forgive the $20,000 after the physician has practiced in the community for one year past the contracted income guarantee period. In short, if the physician has an income guarantee of $120,000 for each of two years and owes $20,000 to the hospital after this two year period, the hospital will "forgive" the $20,000 when the physician has practiced for an additional year in the community. By this mechanism, the physician is ensured that he or she will earn a certain amount over the contract period and will pay no penalty by staying through the forgiveness period. This hospital is assured of retaining the physician for the contract period and perhaps longer if part of the guarantee is "forgiven." However, new physicians must keep in mind that if they wish to leave at the end of the contract period they will need to repay the hospital any outstanding amount on the income guarantee. In effect, the income guarantee is a loan which must be repaid, if not in money than through continued service in the community.

Educational Loan Forgiveness

Sometimes, hospitals, groups or other employers may agree to pay off a physician's medical education loans as part of the contract. With many new physicians $100,000 or more in debt, this can be a very important incentive. Debt that might burden a physician for years can be eliminated in a much quicker time frame. The quid pro quo is that the physician must agree to practice in the community for a certain length of time. The employer might agree to pay the physician's educational debt on a pro rated basis over two or three years. A physician $100,000 in debt therefore would have about $33,000 paid off by the hospital in exchange for a commitment to stay in the community three years. It's important, however, to ensure that the stipulated amount is paid at the end of each year, not at the end of the three year period. If, for professional or personal reasons, the physician wants or needs to leave the community before three years, he or she should be paid for their time in the community. For example, if the physician leaves after one year, one-third of his loans should be paid off.

Non-competes

Some contracts will contain restrictive covenants or non-compete clauses. These clauses oblige new physicians to agree that they will not go to work for specific competitors over a given period of time. Therefore, if a physician leaves a group's or a hospital's employ, he or she has committed not to practice within a 10, 20, or 30 mile radius of the employer for a certain number of years - typically two years. This acts as a barrier to physicians taking patients with them to a new practice.

These clauses are not legal in some states that prohibit non-compete clauses. They are legal in other states as long as they are deemed to be "reasonable." As a general rule, a neurosurgeon will be subject to a much wider geographic restriction than a family practitioner. The more specialized the practice - and hence the larger patient population needed to support the practice - the larger the geographic restriction will be.

It is usually a good idea to have an attorney versed in health care law review your contract, while paying special attention to any non-compete clause.

Hours/call/duties/vacation

One common bone of connection for many new physicians is hours. Often new physicians enter a group with an expectation that they will work a certain number of hours, only to find that the requirement or common practice in the group is longer hours than they expected. The same holds true for call. Sometimes, it isn't as good as new physicians were led to believe. The contract should stipulate the number of hours you will be required to work each week, including the maximum number of hours that can be required, and when you will be expected to arrive and leave. It should also stipulate what the call arrangement will be. Some contracts are ambiguous, indicating that call will be arranged on an "appropriate" or "fair" basis. It is preferable that call be shared on an equal basis within the group.

Duties is an area that can be hard to quantify, because it is hard to know in advance how many patients a new physician will see or how many procedures he or she will perform. However, the contract should specify in general what the physician is there to do - what services or procedures, what administrative duties, etc.

Number of weeks of vacation also should be specified in the contract. Often, this is a negotiating point, and for those specialties in the greatest demand, such as radiologists, vacation times are going up. While 4 or 5 weeks was common in radiology four or five years ago, 10 to 12 weeks is common now. For other specialties such as cardiology and orthopedic surgery, 4 to 6 weeks is common, while in primary care 3 to 4 weeks is standard. However, vacation can fluctuate based on the number of physicians in the practice, culture of the practice and related factors.

Partnership
Path to partnership can be a key negotiating point. In specialties that are in very high demand, such as radiology, the path to partnership is getting much quicker than the three years that used to be typical. In some cases, new physicians are automatically made partner. In any case, the path should be clear - one year, two years, or three years. Being promised partnership when you reach a "full practice" or when you have "met the expectations of the group" is too vague. Moreover, buy-ins for goodwill are becoming increasingly rare. Generally, the only buy-in today involves helping with existing equipment leases.

Benefits

Physicians are more similar to other employees today in that they generally are offered benefits which will be spelled out in the contract. Our annual Review of Physician Recruiting Incentives indicates which benefits are standard today - these include health insurance, disability and malpractice.

Termination

It should be clear under what circumstances a new physician may be terminated. Generally, there are two types of termination provisions: "with cause" and "without cause."

Under the first type, the employer has to provide reasons for which it can terminate a physician. These reasons usually include loss of hospital or prescribing privileges, or inappropriate conduct. It is important that these be specific. "Inability to meet patient needs," for example, is a subjective consideration that can be open to wide interpretation.

A "without cause" provision allows the employer to terminate a physician for no stated reason. However, notice must be given in writing in advance - usually from 30 to 180 days. A longer period is preferable from the employed physician's point of view, so that he or she will have time to find another practice. A "without cause" provision should allow the employed physician the option to terminate the contract with no stated reason as long as written notice is given.