Shape a contract you'll be glad you signed

January 8, 2001

The employment document is a blueprint for your life at the new practice. Don&t pick up your pen in haste.

Your Career Guide
Landing the job you want

Shape a contract you'll be glad you signed

Jump to:Choose article section... For clarity and security, get everything on paper Concentrate on the heart of the deal Red flags

The employment document is a blueprint for your life at the new practice. Don't pick up your pen in haste.

By Doreen Mangan
Senior Editor

You've met the doctors. You've toured the practice. You're a huge hit. The partners offer you the job and hand you a contract. Smiling in gratitude, you reach for a pen.

Stop right there. Are you happy with the salary promised? Does the wording make clear what your bonus will be based on? Who'll pay for your malpractice insurance? What are your ownership prospects? What will happen if things don't work out in a year?

Since the employment agreement dictates almost every aspect of your working life, before you sign it you need to devote time and thought to the details it covers. "Consider the contract you're offered a rough draft," says Rosary Payne, an attorney with the AMA. "Study it, and highlight everything you don't understand or would like to change."

Don't even think about handling this on your own. The contract has most likely been drawn up by an attorney, and—no surprise—favors the employer. You, too, should be represented by an attorney or other professional who is familiar with physician employment contracts.

Michael J. Clippard, who's finishing a dual residency in internal medicine and pediatrics at the University of Tennessee in Memphis, asked his financial adviser to review the employment contract he was offered by a Missouri multispecialty group he plans to join next summer. The adviser raised questions Clippard wouldn't have thought to ask. For example, would the group help the doctor pay off a school debt? Yes, it would, Clippard has since learned.

Among other concessions, the group changed its bylaws to include a stipulation about compensating permanently disabled doctors—including forgiveness of certain loans. The partners also agreed to replace a vague definition of disability with the definition in the group's insurance contract. "I tried to remove as much subjectivity as possible from the contract," says Clippard's financial planner, Richard Carman of Germantown, TN.

Don't worry that involving an adviser in the contract review will make you seem pushy, counsels Richard S. Cooper, a health care attorney in Cleveland. "No one will think that, as long as you and your adviser approach the negotiation in a reasonable, nonadversarial way," he says. "The people you're dealing with went through the process themselves and ought to understand your point of view."

It could, however, be overkill to bring a lawyer to negotiating sessions, cautions James G. Stuart, a health care attorney with KarenZupko & Associates in Chicago. "This can limit the flexibility of both parties," he says. The deal is likely to move faster when there's free give-and-take just between the principals. But be sure to consult with your attorney before and after each meeting, and leave any document drafting to your lawyer.

A simple contract review should cost $500 or so, more if negotiations are protracted—hardly the most expensive legal bill of your career. "This is not rocket science, legally speaking," Stuart says. "Yet it's one of the most important documents you'll sign."

For clarity and security, get everything on paper

"The biggest mistake doctors make is not getting every aspect of the employment agreement in writing," says Carman, who frequently helps his doctor clients, most of whom are young, negotiate those pacts. "You might think your new colleagues are all nice guys. But after six or eight months, they may renege on oral promises."

Adds the AMA's Payne, an author of Annotated Model Physician Employment Agreement (AMA, 2000): "A written contract requires both parties to think clearly about their expectations and obligations, and prompts discussion of important issues. Misunderstandings that arise during these discussions can be clarified before the contract is signed."

Moreover, says Payne, as time goes on, the parties may forget what was promised. "A written contract serves as a clear reminder of precisely what the parties agreed on."

Aim for a structured and highly detailed contract that leaves no room for interpretation, cautions Carman, who has an attorney review every contract he negotiates. Sufficiently thorough documents can run eight to 15 pages. "I've seen some that are 30-something pages," says Cooper. "That's absurd."

Before you begin negotiating, decide what salary, benefits, and working conditions you're looking for, says Jeffrey J. Denning, a practice management consultant in Long Beach, CA. Figure out what your deal breakers are, and prioritize them. If your heart is set on becoming a partner in two years, but the group won't consider you then, this might not be the spot for you. Long office and on-call hours may be an issue if you have young children and want to spend evenings at home.

But be realistic. Employers aim to maintain as standard a contract as possible; major concessions to a newcomer can cause disputes within the group. "While most groups will be willing to make reasonable compromises, it's counterproductive to define success as getting everything you want in a contract, especially if you're just coming out of residency," Cooper cautions.

Don't hesitate to ask questions, even if you're uncertain how they'll be received. "It might seem awkward to ask about, say, bonus structure or revenue growth, but there is an etiquette," Denning says. "Give the other party permission not to answer. Say something like, 'I hope you won't think I'm prying when I ask these questions. If you'd prefer not to answer them, I'm sure you'll say so. But since this is an important step for everyone involved, I feel I should ask.' " You'll probably get answers to questions presented this way, but if you don't, you might want to think twice about whether this is the group for you.

Concentrate on the heart of the deal

The employment contract should cover a myriad of details, such as office hours, time on call, CME reimbursement, and vacation time. But experts advise you to focus on these key issues:

Compensation and benefits. Typically, a new recruit is guaranteed a fixed salary for at least the first year, when he's building up a referral network and patient base. The amount varies by specialty and region. (For information on physician compensation, see "What they're paying.")

Salary is usually negotiable to the extent that the physician has additional training in a needed specialty or is joining a practice in an area where recruiting doctors is difficult. Richard Carman says that if his client is board-certified in two specialties or is filling a gender need at a practice, such as when a female urologist joins an all-male urology group, he aims for 10 to 20 percent more than the offer. In internist-pediatrician Michael Clippard's case, Carman didn't press for a higher salary because the practice kicked in a larger-than-usual bonus to help him pay off an education debt. The group also agreed to a less restrictive noncompete clause.

If the salary is based on productivity, be sure all details are laid out clearly. For example, if you're offered 55 percent of any fee-for-service income the practice collects for the patients you treat, find out how many fee-for-service patients you're apt to see. Will you also be expected to treat capitated patients, and how much will you be paid for that work?

"If the contract is for more than one year or renews automatically, ask for a provision addressing salary increases," advises Cooper.

You may have some more room for negotiation if moving expenses are part of the deal. The employer might offer $10,000 for a move that will cost only $2,500. "Try to get the $7,500 difference in salary," Carman says. "Every practice has a cumulative budget in mind when it's hiring. The extra $7,500 in salary isn't any more than the practice has budgeted for."

Be very clear about what benefits you're offered. Cooper suggests you request a copy of the summary plan descriptions, that most employers are required to maintain. These documents give an overview of all benefits, including health, life, and disability insurance, as well as pension and retirement provisions, with terms for vesting and eligibility. "They're especially important when you're weighing competing offers," Cooper says.

Be sure, too, that you're not incurring gaps in insurance coverage if you're changing jobs. If, for instance, your health insurance from a previous employer will run out before your coverage at the new group kicks in, you could negotiate an earlier coverage date.

Bonus. Usually offered as a deal sweetener, a bonus is typically based on productivity and may be more lucrative after you've built up your practice. Request a history of bonuses paid over the last few years to get an idea of size and how soon you're likely to see any extra pay. Be sure the contract specifies a formula for calculating the bonus. A typical one is a percentage of revenue that exceeds overhead, including your salary, benefits, and moving expenses.

The formula Carman aims for is 80 percent of the new doctor's net collections, minus base compensation and overhead. For example, take a doctor earning $120,000 annually in a practice with 50 percent overhead. If his net collections for the quarter totaled $110,000, he'd receive a $3,000 quarterly bonus. That's $110,000, less $22,000 (the 20 percent of collections that goes to the group), less $55,000 (50 percent overhead), less $30,000 (base quarterly compensation).

To get an idea of future profitability, Carman always asks about anticipated expenditures and other practice plans. If a bonus seems unlikely because of other expenses, he tries to negotiate better terms in other clauses.

However, be aware that there's a norm relating to deals offered to doctors just out of training. "Don't try to pursue something dramatically different," Stuart advises. "If you have partnership aspirations, it's frequently wise to leave something on the table."

Termination clause. The contract will include language to the effect that the employer or employee can terminate the agreement on 60 to 90 days' notice, without giving a reason. Typically, the doctor will be paid and receive benefits during that notice period.

Stuart suggests that if you must move a great distance to join the practice, you might want a six-month moratorium on the employer's right to terminate you. This would give you time to develop contacts and referral sources in the area, which will make it easier to find a new position should that become necessary.

Pay particular attention to "termination for cause" language. Reasons for dismissal, which typically include dishonesty, moral turpitude, and professional incompetence, should be specified in the contract. Beware of subjective, open-ended provisions like "behavior that is not in the best interests of the practice."

"Being terminated for cause could follow you for a long time," says Cooper. "If the definitions of cause are too loose, ask that they be eliminated."

Noncompete clause. Chances are, your contract will contain a restrictive covenant. This means that, should you leave the practice, you agree not to compete with this employer within a certain geographical area for a certain time period, typically one to three years. This is probably one of the most contentious parts of the employment contract. "I've seen deals fall apart because young physicians flatly refuse to sign this," says Stuart.

The restriction should not appear on contracts in states where it's not enforceable, such as California and Massachusetts, or where it's prohibited. In states where there has been mixed judicial opinion on the restriction, employers may include it, "hoping that they'd draw the right judge if it came to a court fight," says Cooper. The legality would depend on the reasonableness of the duration and the geographic scope. A one-year limitation and a one- to two-mile radius in a small town or suburban setting could be quite reasonable, Stuart says. On the other hand, a one-mile radius in a major city might be considered unreasonable because it could cover thousands of potential patients.

Try as you might, it's highly unlikely that you can eliminate this clause. The group wants to protect its business, so aim for a reasonable balance. Richard Cooper suggests that the restriction specifically name the practices or health care facilities you're not permitted to work at, as opposed to barring you from an entire area. Cooper also suggests limiting the triggering events for a noncompete clause to termination for cause by the group or no-cause termination by the doctor.

Partnership. Generally, a doctor joining a practice accepts a lower salary because she expects to become a partner. The employment agreement won't promise partnership, but it should specify at what point the new doctor will be considered—say, after one, two, or three years—and should describe, at least in general terms, how the buy-in price will be determined.

This section of the contract should address:

• The trial period. Stuart believes that one year should be enough for a practice to decide whether it wants a more permanent union with the new doctor. Rosary Payne says that the contract should specify an annual or, preferably, semiannual review of the new doctor's work so she and the practice know where they stand. The evaluation criteria, such as quality of medical care, nature and frequency of patient complaints, and productivity data, should be described.

• What's being purchased. Is it stock in a professional corporation or an interest in a professional partnership? Are assets such as real estate part of the deal?

• The buy-in formula. Traditionally, a practice has been valued based on three components: hard assets such as furniture and equipment, accounts receivable, and goodwill. Until recently, goodwill has been the most significant factor. But as managed care has grown, patients have tended to choose doctors in their health insurance plans rather than by reputation. So goodwill has become less of a factor, and buy-ins are generally less expensive.

If the price will be high, however, will the group finance the buy-in at low interest rates over several years? Alternatively, practice consultant Jeff Denning recommends that the group credit the new doctor with the amount he or she earns for the practice above the compensation package (including bonus). The credit should be applied to the eventual buy-in price. And the new doctor shouldn't be shy about asking how the partners value the practice.

Again, remember your etiquette, Denning advises. "It's always delicate to raise such an issue when you're being courted, and that's why everyone is so happy to leave it until later. But you could feel abused later," he says. "Acknowledge that looking at the books would be premature because the doctors don't know you, but that you'd like to know how they set a value on the practice when a new partner arrives. Tell them, 'If we can agree on a methodology, it doesn't matter as much what the numbers are.' " The more you can nail down the buy-in details, the better you can compare the deal with other opportunities and the cost of creating your own practice from scratch (see "Do you have the right stuff to go solo?").

Ultimately, you probably won't get everything you want in your employment agreement. But keep in mind that you're pursuing a relationship. "It's more akin to marriage than to buying a car," says James Stuart. "With the latter, you're interested in getting the best car possible for the least amount of money. You don't care whether the salesperson has a good opinion of you." In negotiating with a practice, you want a favorable contract, but you should also want a good deal for the partners—and their good opinion, particularly if you have partnership aspirations. Adds Stuart, "This has to be a win-win relationship."

Red flags

As you go through the job-hunting process, be wary of the following:

• An abbreviated contract that doesn't cover key issues such as compensation, grounds for termination, benefits, vacation, or sick leave.

• A group that attempts to rush you into signing an agreement.

• A prospective employer who suggests you don't need to have an attorney or other adviser review the contract. "It doesn't necessarily mean there's anything to hide; the employer probably just doesn't want to get lawyers involved," says Cleveland attorney Richard Cooper. "But you have a right to have the document reviewed."

• A contract that offers you something substantially different from what's been accepted by other physicians in the group in recent years. Find out what's behind the difference. An unusually generous starting salary, for example, could suggest that the practice has been having problems and is looking for young blood to reinvigorate it.

• A deal that seems particularly one-sided, in favor of the group.

• A contract that doesn't mention partnership. Despite what you may have been told, the practice may have no intention of adding new partners.

 

Doreen Mangan. Shape a contract you'll be glad you signed. Medical Economics 2001;1:79.