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Physician Locums July 12, 2023

10 Key Factors to Understand in a Physician Contract

What are the key elements to look for in a standard physician contract today? In this blog, we'll take a look at what any physician should look for in a contract.

Physician contracts cover a variety of areas, generally seeking to govern how you will be incentivized in terms of compensation, in the various shapes and sizes that can take. Of course, a physician employment agreement will seek to specify the behaviors that the employer wishes to encourage, but you should also be sure that it reflects your interests and rights.

With that in mind, here are some basic physician contract terms and concepts with which you should be familiar.

  • Work Status
  • Productivity
  • Income Guarantees
  • Forgiveness of Guarantees
  • Educational Loan Forgiveness
  • Non-competes
  • Hours/call/duties/vacation
  • Partnership
  • Benefits
  • Termination
  • Summary

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10 Key Factors In A Physician Contract

1. Work Status

At its most basic level, a physician contract stipulates your employment status. Are you an employee of the group or hospital? Are you an independent contractor, a shareholder, a partner? As an employee, you generally will be paid a salary, often with a bonus based on your productivity level and growth.

2. Productivity

The most common type of production bonus is the "50 percent" model, in which you're allowed to keep 50 percent of your production. Some contracts allow new physicians to keep up to 100 percent of their production, and some as little as 20 percent.

Physician contracts often define your production bonus as based either on billings or collections. Many believe collections are more favorable because billings often don't amount to much if you happen to see a high percentage of uninsured or underinsured patients. And as a group's newest physician, these types of patients may very well be sent to you. From this perspective, collections are the more advantageous productivity framework.

This is why some physician contracts base production measurements not on the number of patients seen, but on the amount of work done by the physician. In these contracts, work is measured by a point system that's based on relative value units (RVUs). Under this type of system, a physician who sees a high number of older, more acute patients receives more points per patient than a physician who sees mostly younger, well patients. Under an ideal RVU point system, the amount of work done by physicians is equal, resulting in equal pay, as well.

These types of physician contracts might also provide compensation for things other than patient care, such as positive outcomes, scores on patient satisfaction surveys, or participation in group governance. The compensation structure in this type of contract might look like this:

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

As you can see, there are a variety of ways to "slice the pie" here. As a new physician, you may prefer a simple structure in which you receive a base salary that is predicated on current physician income data for your specialty, supplemented by a bonus for patients seen. Whatever you ultimately prefer, it's always important that the terms be clear in the physician contract. This way, you're as clear as possible on what's expected of you, and you also have a clearer path for achieving a certain level of income.

3. Income Guarantees

If you're being recruited as an independent contractor, your physician contract may be different than if you're being recruited as a hospital employee. Much of today's physician recruitment is driven by a hospital in a given community; the hospital is involved because it wants to ensure quality patient care and ready access to physician services in its area. And, of course, the hospital also wants to ensure its own financial viability by recruiting physicians who may refer it to patients.

Part of the hospital's role in physician recruiting is to provide independent physicians with an income guarantee, which serves as an inducement to attract an incoming physician. It's also a testament to the need for new physician services in that particular community. An income guarantee ensures that the physician will earn a certain amount of income per month after practice expenses.

As a sample, let's say that the amount of an income guarantee is $10,000 per month or $120,000 per year. Each month, you as the physician will be guaranteed to receive $10,000 after all practice expenses have been paid. If you only make $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 than the hospital has guaranteed. Not only does the physician then keep this additional amount, but it's typically desired that this will be the case.

If the guarantee is not met, the physician owes the hospital the difference. In the example of a $120,000 annual guarantee, a physician who makes $100,000 during his or her first year requires that the hospital "make up" the remaining $20,000. The physician then owes the hospital $20,000. However, most income guarantees do include a forgiveness clause to avoid this scenario. Be sure to look for the full details.

4. Forgiveness Of Guarantees

An income guarantee forgiveness clause means the hospital agrees to forgive any amount that the physician owes at the end of the guarantee period, generally ranging 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 period.

Such forgiveness is offered only when the physician agrees to remain with the employer. So, for instance, 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 has concluded, the hospital will forgive the $20,000 — but only after the physician has practiced for an additional year in the community.

By this mechanism, the physician is ensured to earn a certain amount over the contract period and will pay no penalty by staying through the forgiveness period. This hospital, in turn, is assured of retaining the physician for the period of the contract, and perhaps longer. However, new physicians must remember that if they wish to leave at the end of the contract period, they will need to repay any outstanding amount from the income guarantee. In effect, the income guarantee is a loan that must be repaid — if not in money, then through continued service in the hospital and community.

5. Educational Loan Forgiveness

A physician contract may sometimes specify that the employer will agree to pay off a physician's medical education loans. With many new physicians $100,000 or more in debt, this can be a very important incentive! Medical school debt that might otherwise burden a physician for years can be eliminated in a much quicker amount of time. The quid pro quo of this scenario is that the physician must agree to practice in the community for a certain duration, commonly measured in years. If your physician contract contains this clause, be sure to understand whether the loan payoff happens at the end of each year, or at the end of an entire period of, say, three years. In the latter case, if a physician wants or needs to leave a community before the three-year period has elapsed, he or she still receives a percentage of loan payment based on precisely how much time was spent at the practice.

6. Restrictive Covenants/Non-Competes

Some physician contracts contain restrictive covenants or non-compete clauses. These oblige physicians to agree that they won't go to work for competitors during a specific period of time. So, a physician makes a commitment not to practice within a 10-, 20- or 30-mile radius of the employer for a certain number of years (typically two) in the event that he or she leaves a group's or a hospital's employ. The point is to prevent physicians from taking patients with them to a new practice.

Such clauses aren't legal in some states. In other states, they're only legal so long as they're deemed to be reasonable. And the details will differ based on specialty; for example, a neurosurgeon will be subject to a much wider geographic restriction than will a family practitioner because neurosurgery is a more specialized practice.

It's usually a good idea to have an attorney versed in healthcare law review your contract — and this is doubly true if a non-compete clause is involved.

7. Hours, Duties, Call, Vacation

A common bone of connection for many new physicians is the number of hours they're expected to work. Often, new physicians enter into an employment contract expecting to work a certain number of hours, only to find that the employer's requirement or common practice is to work a bit more than that.

The same holds true for call. Sometimes, it just isn't as good as new physicians were led to believe. The contract should stipulate the number of hours required from the physician each week — including the maximum number of hours that can be required. It should define exactly when you'll be expected to arrive and to leave, as well as what the call arrangement will be.

Too many physician contracts are ambiguous in this regard, indicating that call will be arranged on an appropriate or fair basis — wholly subjective terms. It's always ideal for call to be shared on an equal basis within the group.

It can be also hard to quantify duties, because it's hard to know in advance how many patients a physician will see, or how many procedures he or she will perform. All the same, the physician contract should generally specify what the physician is there to do — services, procedures, administrative duties, and so on.

The amount of vacation time should also be specified in the contract. This is very often a contract negotiating point, and for specialties in high demand, vacation times are increasing. The allotted vacation time can also fluctuate based on the number of physicians in the practice, the culture, and other similar factors.

8. Path To Partnership

The path to partnership can be a key negotiating point in a physician contract. In high-demand specialties, the path to partnership is becoming much quicker than the several-years-span that used to be standard. In some cases, new physicians are even granted partner status automatically. Whatever the case, the path to the partnership should be clearly spelled out in the contract. Is it one year, two years, or three years? Partnership promises that involve reaching a "full practice" status, or "meeting the expectations of the group," are far too vague. And remember, buy-ins for goodwill are becoming increasingly rare. Generally, the only buy-in today involves helping with existing equipment leases.

9. Benefits

Like many other types of employees in today's economic landscape, physicians are generally offered benefits, which are spelled out in the physician contract. Health insurance, disability, and malpractice insurance are among the must-have features to look for here. The rest may be a matter of personal preference — availability of vacation time, for instance, as discussed above — but should also be considered in terms of financial value. In other words, a rich variety of additional benefits can help compensate somewhat for a salary that may be otherwise less than competitive.

10. Termination

The contract should make absolutely clear under what circumstances a physician may be terminated. Generally, there are two types of provisions relating to termination: with cause and without cause.

Under with cause termination, the employer has to provide clear reasons for releasing a physician. These reasons typically include loss of hospital or prescribing privileges and inappropriate conduct. These terms need to be specific! "Inability to meet patient needs," for example, is a subjective phrase that can be open to a wide variety of different interpretations.

without cause provision allows the employer to terminate a physician for no stated reason whatsoever. The notice must be given in writing from 30 to 180 days in advance; and here, a longer period is preferable from the physician's perspective, to allow a proper amount of time to find other opportunities. Termination provisions of this type should also let the physician terminate the contract with no stated reason, either, as long as written notice is given.

A physician contract is an extremely important document, governing not only how you'll practice, but also how much you'll be compensated for doing so. All too often, new physicians fail to read contracts as closely as they should — or without the full understanding necessary to properly evaluate them. It's enormously important to read a contract closely and to fully understand it.

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