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With the Benefit of “2020” Vision, Make Sure Your Employment Agreements Work for You

Posted: 03/12/2020
Industries: Health Care

​It is no surprise that the health care delivery system continues to rapidly evolve through mergers, acquisitions, affiliations and consolidations. Through these changes, an increasing number of physicians are becoming employed by hospitals and health systems and are less and less part of the traditional private medical practices.  A recent report from consulting firm Avalere Health and the Physicians Advocacy Institute stated that hospitals acquired 8,000 medical practices, and 14,000 physicians left private practice to enter into employment arrangements with hospitals between July 2016 and January 2018.  The number of hospital-acquired physician practices grew from 35,700 in 2012 to more than 80,000 in January 2018.  These acquisitions have resulted in an increase of hospital or health system employed physicians from 25% in 2012 to 44% in 2018.   This is obviously a significant change in a very short period of time.  

Hospital and health system employed physicians often receive a base salary, generous benefits, malpractice insurance coverage (which may include “tail” coverage) and productivity incentives.  However, these employed physicians are not immune from the economic challenges facing many health systems (and private practices) around the country.  In recent months, there have been physician layoffs at hospitals and health systems nationwide.  Recently, fifteen physicians at Chicago-area Edward-Elmhurst Health clinics lost their jobs.  Other health systems have similarly announced doctor cuts including the Cleveland Clinic and Crozer-Keystone Health System headquartered near Philadelphia.

There are several key contract considerations that hospital/health system employer and physicians should consider when entering into an employment contract.

Term and Termination Without Cause

Generally, no employment contract lasts “forever.”  The length of the employment relationship can vary substantially based on several factors, including the parties’ respective interests, the demand for that specialty in that community and the regional norms.  By negotiating a longer (five year) or shorter (one year) employment term, the physician and employer can create expectations regarding the length of the relationship.  When the term of the agreement ends, a renewal of the agreement may be negotiated or there may be an “evergreen” or automatic renewal of the employment agreement.

Employment agreements typically contain a provision allowing the parties to end the employment relationship even where no breach has occurred.  These provisions generally require that written notice be provided to the other party in advance of the termination.  The length of this notice requirement is often negotiated to allow the physician time to find another position and the employer time to replace the physician.

Depending on the market and physician specialty, the demand for a physician’s services will vary.  Hospital employers may want the ability to terminate the physician on shorter notice while a physician may want the longest notice possible to ensure a smooth transition to the next employment opportunity.  This is due in part to the fact that, in most circumstances, an employee can quit their job without liability.  Notices of termination typically vary between 30 and 120 days.

Restrictive Covenants

Many physician employment contracts include a non-compete clause prohibiting the physician employee from “competing” against their employer within a certain geographic radius for a certain period of time after employment.  The geographic scope of the non-compete provision must be reasonable in area and duration so as to protect a legitimate business interest of the employer (such as an employee appropriating the goodwill of the “practice” by leaving for a competitor) while not preventing the physician from earning a livelihood and supporting the physician’s family.  The duration and geographic radius of the non-competition prohibition is often negotiated between physician and employer.

Employment contracts may also have a non-solicitation clause prohibiting a physician from reaching out to patients, staff, and professional relationships that drive referrals to the physician after the physician separates from their job.  Additional restrictive covenants may take the form of a non-disclosure agreement (or confidentiality provisions captured in the employment agreement) and a non-interference clause, stating that the physician will not interfere with the employer’s business.

A hospital employer and physician employee should carefully consider in advance of signing the agreement under what circumstances, if any, a portion of or the entire restrictive covenant provisions or agreements will be waived depending upon the circumstances related to the termination event.  

Malpractice Coverage

Several issues should be considered regarding professional liability insurance.  While the employer generally pays for the malpractice insurance coverage, the amount of coverage purchased must be considered.  In some states, including Pennsylvania, a minimum amount of insurance is required by law.

Malpractice insurance can take the form of “occurrence” or “claims made”.  An occurrence policy covers the physician for claims that arise out to the physician’s acts or omissions while employed – even if the claim is not made until after the physician’s employment has ended.  A claims made policy provides coverage only for claims that arise out of the conduct occurring during the physician’s employment and for claims that are made while the physician is employed by the employer.

For claims that are filed after the physician’s employment has ended who has a “claims made” policy, a tail policy should be purchased (and many states require a tail policy be purchased) unless continuing coverage is obtained and maintained until the running of the statute of limitations.  Employees should investigate the types of claims that are covered and those that are not covered.  In particular, hospital policies may not cover disciplinary complaints, billing disputes and other non-malpractice claims.  Work performed outside of the purview of the hospital (e.g., moonlighting) will undoubtedly not be covered, and a separate individual policy should be obtained if moonlighting is permitted under the employment agreement.  Physicians performing services without compensation may not need malpractice insurance if those services are covered under the state’s Good Samaritan laws.

Compensation

Physician compensation is a key term of any employment agreement and varies widely.  Compensation may take the form of a mixed formula combining a base salary plus a discretionary or productivity bonus.  Large employers often compensate physicians based upon work effort as measured by the number of work relative value units (WRVUs) the physician generates, which is multiplied by a conversation factor.  An employment agreement should detail how the profit-based compensation will be calculated, paid, and the timing of such payments (e.g., quarterly).

A physician may also be eligible for several forms of bonus, including a starting or signing bonus, relocation bonus and performance bonuses.  The employment agreement should set forth the structure of each bonus, including if the bonus is guaranteed or discretionary, when it is paid, if the physician is eligible for a bonus upon termination of the agreement, as well as other terms.

The term, termination without cause, restrictive covenant, medical malpractice, and compensation provisions are only a few of the critical terms in an employment agreement between a hospital employer and employed physician.

In addition to the rise in employment of physicians by hospitals and health systems, private equity firms are increasingly investing in and or buying medical practices.  Whether you are an employer or an employed physician, it is becoming more and more important to ensure you have drafted and agreed to an employment agreement that works best for your interests in the short-term and the long-term and hopefully anticipates the expected and unexpected changes in your community.

Saul Ewing Arnstein & Lehr attorneys regularly assist physicians, medical groups, hospitals, health systems and private equity interests in negotiating physician employment agreements and alignment arrangements.  If you have questions regarding an issue in this article, please contact the authors or the attorney at the firm with whom you are regularly in contact.