For physicians entering into an employment agreement, understanding and negotiating key contract terms is essential to protecting your professional and financial interests. While every contract is unique, certain provisions frequently become points of negotiation. Below are four of the most commonly negotiated terms in physician employment agreements. 

1. Compensation 

Money matters.  In California, physician employment arrangements must compensate physicians at fair market value (“FMV”).  FMV is not a specific number and there’s no one way to calculate it.  But, any less or more than FMV can be construed as influencing the referral of patients which is prohibited in California, whether it actually results in patient referrals or whether it was even intended to.  FMV is generally defined under Stark as the value in an arms-length transaction consistent with the general market value for the subject transaction.  Centers of Medicare and Medicaid Services (“CMS”) has said that in most cases FMV will be expressed as a range based on a methodology that is reasonable under the facts and circumstances, and supported by documentation how that methodology was determined at the time the financial relationship was created.  Medical practices commonly use one or more compensation arrangements to achieve FMV, including fixed salary and percentage-based arrangements that are tied to either physician-revenue or group-revenue, plus bonuses, loan repayment, or other incentives.  These are usually fixed for one year to comply with Stark and, in a multi-year or auto-renewal contract, can contain negotiated adjustment mechanisms.  The right arrangement will depend on the circumstances at the time you contract and may take into consideration the physician’s training and experience as well as the community’s overall need.  

2. Restrictive Covenants and Competitive Activities 

California does not like restrictions on trade.  California Business and Professions Code section 16600 says subject to limited exceptions “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void” even if the restriction is “narrowly tailored.”  Still, many medical groups and foundations love it and commonly seek to restrict a physician from engaging in competitive behavior or by taking on outside activities that may distract from the physician’s ability to provide the employer 100% attention.  At the outset of a negotiation where everyone is usually trying to get along, the use of a non-compete even if unenforceable forces the contracting physician to answer a different question: are you going to be a problem?  Other restrictive covenants like non-solicitation provisions commonly included in physician employment agreements are treated differently and because they achieve different business objectives can be legitimately tailored. 

3. Insurance 

Insurance policies are different today than even a few years ago, and plaintiff personal injury lawyers are finding new ways to force the deep pocket to the table.  This results in higher premiums and often is a subject of negotiation in physician employment agreements.  Often, physicians will want to know whether they must take out tail, or possibly nose, insurance, or if the Group will.  Traditional tail coverage has been largely set aside because of its cost, though other less expensive similar products have taken its place.  A line is commonly drawn between whether the physician is being hired as an independent contractor (1099) or as an employee (W2).  However, with employers regularly mis-categorizing their workers and an uptick in vicarious liability lawsuits, groups are increasingly being asked to take out policies for their independent contractors.  

4. Termination 

Don’t be fooled by a contract that promises guaranteed employment.  Whether termed “at-will” or not, physician employment agreements commonly contain mutual termination without cause provisions upon 90 days’ notice, sometimes less.  These turn multi-year contracts into what, in reality, are only 3-month contracts.   A properly negotiated employment arrangement can build in safeguards or penalties if this is abused. 

Conclusion 

Physician employment agreements can have long-term implications for a physician’s career. Taking the time to negotiate key terms with the guidance of a knowledgeable attorney can help protect a physician’s interests and ensure a fair agreement.