Drafting and Negotiating Physician Employment Agreements – Part 3
October 17, 2014 | Sherrard Roe Voigt & Harbison Blog I Mark Ison
Note: This is the third in a series of posts that will examine various aspects of drafting and negotiating physician employment agreements in detail. The first post addressed initial considerations, compensation and benefits. The second post addressed the provision of various items such as equipment and staff, malpractice insurance, and the term and termination provisions of an agreement. This third post addresses moonlighting, consideration for ownership, recruiting agreements and restrictive covenants.
“Moonlighting” and other Outside Activities
When a physician takes a job, regardless of whether it is with a private practice, a health system, or a facility, the employer wants to make sure that it gets the best of the physician’s efforts, time and attention. Physicians, on the other hand, are often engaged in numerous outside activities, which can include anything from research, consulting, teaching, providing charitable medical services and other “professional” pursuits, to investing in real estate. As such, physician employment agreements typically address whether, and to what extent, a physician is permitted to engage in outside activities. In negotiating the terms of permitted outside activities, it is important to understand first and foremost the demands of the physician’s primary employment as well as the physician’s personal and professional priorities. In many cases, true “moonlighting”, i.e., treating patients for another employer on the physician’s own time (e.g., nights and weekends) is prohibited due to concerns about malpractice insurance coverage, competition, use of confidential information, etc., but numerous other outside activities (e.g., speaking, teaching, expert witness testimony, charitable medical work) are permitted, so long as they do not interfere with the physician’s duties for the employer and the physician provides the employer with advance notice of such activities.
If outside activities are permitted, the employment agreement should address how outside compensation is to be treated (particularly if a recruiting agreement requires that all of the physician’s collections be attributed to him or her). Does the compensation belong to the physician or the employer? Is it to be paid directly to the physician or the employer? If it is to be paid to the employer but credited to the physician, how does that work? Does the physician receive all of the compensation on a dollar-for-dollar basis, or does the compensation flow through a formula? All of these questions should be answered in provisions addressing outside activities.
Consideration for Ownership
If a physician is joining a private practice as an employee, in many cases he or she anticipates one day becoming an owner of the practice. The timeframe for inviting a physician to become an owner varies from practice to practice, of course, but in recent years the average time seems to have shrunk to two to three years. Some new physicians will insist on having an employment agreement that addresses consideration for ownership. Unless the practice has a standardized ownership consideration process, however, such provisions are probably not worth much. The reason is that few practices will (or should) commit to making someone an offer of ownership without the benefit of having employed that person and having evaluated him or her over some period of time. Another reason is that many practices honestly have no idea what the terms of an ownership offer might be. In other words, any provision that a physician might successfully negotiate is probably going to be so vague and full of employer discretion as to be useless.
One compromise is to include a provision that the employer will “consider” the physician for ownership after some point in time, and that the basic terms of the offer (e.g., price, payment period, etc.) are “anticipated” to be as set out in the agreement. Such a provision has few, if any, teeth, but at least it creates a moral obligation for the practice to consider in good faith whether to offer ownership to the physician on the stated terms.
Recruiting Agreements
In some instances, such as where a medical resident is beginning his or her first “outside” job or where a physician relocates his or her practice to a new area with a new patient population, the physician’s income may be subsidized by a local hospital under a recruiting agreement. Generally speaking, a recruiting agreement allows a hospital to pay a physician various amounts – such as an income guaranty, relocation bonus, start-up expenses and marketing expenses – associated with the physician’s establishment of a new practice in the recruiting hospital’s service area. Hospitals enter into such arrangements to fulfill specific medical staff needs (i.e., where a hospital has determined that it lacks adequate physician coverage in one or more medical specialties).
A recruiting agreement typically provides that the hospital will make various payments to the physician in support of his or her practice during an initial period of six months to two years, and that the physician in turn will obtain privileges at the hospital and practice in the hospital’s service area for a minimum of two to three years after that. The various payments to the physician are often treated as a loan, the aggregate amount of which is then forgiven in periodic (usually monthly) installments for so long as the physician fulfills his or her commitment to practice in the hospital’s service area for the specified minimum period. If the physician fails to practice in the hospital’s service area for the minimum period specified in the recruiting agreement, he or she then owes a portion of the loan back to the hospital.
Recruiting agreements can assist a practice in hiring a new physician, since the hospital’s subsidy ensures that the practice is not required to absorb all of the physician’s compensation cost during the initial months of his or her employment (when the physician’s collections are few or even nonexistent). Regulatory requirements (namely those promulgated under the federal Stark Law and Anti-Kickback Statute) strictly govern the manner in which a hospital may provide recruiting payments to a physician joining a group practice, however, with the result that the physician’s employment agreement must dovetail with the recruiting agreement to ensure compliance, particularly with respect to the physician’s compensation, the treatment and reporting of collections in respect of services provided by the physician, and the calculation of the employer’s actual incremental costs of employing the physician.
Recruiting arrangements bring additional complexities, costs and risks to the process of hiring a physician into a group practice, such as the potential that the practice could be jointly liable to the hospital for the repayment of amounts paid to the physician, the requirement that the physician practice on a full-time basis in the hospital’s service area for a specified period of time, and federal regulatory limitations on the practice’s ability to impose a covenant not-to-compete on the physician. Those complexities and risks, along with the fact that a practice may only allocate to a subsidized physician the additional incremental costs associated with his or her employment (i.e., the recruited physician may not be allocated a share of the general overhead expenses of the practice as part of his or her compensation formula), leads many practices to avoid recruiting arrangements entirely. In truth, recruiting agreements, like many other arrangements, offer advantages and disadvantages to the parties involved, and any physician or group practice considering hiring a physician subject to a recruiting agreement should discuss the arrangement with an attorney experienced in such matters prior to finalizing the arrangement.
Restrictive Covenants
Entire books have been written about restrictive covenants (i.e., covenants not-to-compete, covenants not-to-solicit, confidentiality covenants, non-disparagement covenants, etc.), and no blog post, regardless of length, could cover a fraction of the issues posed by such arrangements. No blog post regarding physician employment agreements would be complete, however, without mentioning a few key points, as such covenants are ubiquitous in the physician employment context. Physicians expend enormous quantities of resources developing their practices, which are often built one physician-patient or physician-referral source relationship at a time. Consequently, physicians and physician practices are rightly jealous and protective of such relationships.
The most basic restrictive covenant – that a physician will not use or disclose the confidential information of a group practice outside of the scope of his or her employment, is normally non-controversial. Indeed, every physician employment agreement should have such a confidentiality provision (which is separate from, and should not be confused with the obligations of a physician and his or her group practice under HIPAA). However, the devil, as they say, is in the details, and physicians should understand that confidentiality provisions often define “confidential information” to include items, such as patient names and patient contact information, that would impact the ability of the physician to maintain his or her patient relationships upon the termination of employment.
Of course, many physician employment agreements go further and expressly prohibit “competition” or “solicitation.” Competition can be defined in countless ways, but is often defined as the physician’s provision of a certain type of medical services (e.g., services within a certain medical specialty) within a defined geographical area, for a particular group of patients, and/or at a particular hospital or other facility. The related concept of solicitation is often defined as the physician’s contacting certain patients, referral sources, facilities, etc., to establish a professional or business relationship with such persons or entities. Another related concept that sometimes appears in conjunction with non-competition or non-solicitation is “non-interference”, where the physician agrees not to interfere with the relationship between the practice and any of its patients, referral sources, contracted facilities, etc.
Although physicians often view confidentiality, non-solicitation and non-interference provisions as more palatable than express non-competition provisions, attorneys must carefully consider the exact wording of such provisions and the implications of the same, since a broadly drafted non-solicitation provision (e.g., one that prohibits the physician from soliciting the business of third-party payors, vendors or suppliers of his employer) could, as a practical matter, lock a physician out of a particular geographical area as effectively as an express non-competition provision. In any event, ambiguous or poorly drafted restrictive covenants, like loose cannons, endanger all parties involved, and care should be taken to craft bright lines between prohibited and permitted conduct.
The time periods of restrictive covenants vary widely. At a minimum, a confidentiality covenant and a covenant not-to-compete are almost always appropriate during the term of a physician’s employment with a group practice, since an employee generally should not compete with his or her employer or disclose the employer’s confidential information. Following the termination of a physician’s employment, such covenants can last up to three years or more, although one to two years is more common. Similarly, geographical restrictions can range from a few miles, to one or more counties, to entire states or regions in the cases of multistate practices or subspecialties in short supply.
Restrictive covenants typically must be “reasonable” under the circumstances in most states and restrictive covenants involving physicians are often subject to additional state-specific statutory or common-law limitations on their permitted temporal or geographic scope (e.g., in Tennessee, a post-employment covenant not-to-compete is limited to two years in length and a geographical area that is the greater of a ten-mile radius around the physician’s primary practice site or the county in which that practice site was located). In nearly every state in which restrictive covenants are permitted they are enforced reluctantly by courts and, in some states (e.g., Alabama), they are essentially unenforceable in the physician employment context. In other states (e.g., Texas), specific language is required to be included in the contract addressing physician-patient relationship issues. Further, some states permit courts to modify restrictive covenants that are overbroad, while others invalidate such covenants entirely. Such limitations can, of course, be researched by any attorney in the same manner as other multistate legal issues and typically do not require any intimate knowledge of the jurisdiction in question, but occasionally it makes sense to consult with local counsel when dealing with a restrictive covenant in an unfamiliar jurisdiction.
From the employed physician’s perspective, as noted above, certain types of restrictive covenants are generally viewed as less onerous than others, although in order to understand the potential impact of a restrictive covenant it is important to understand the specific situation in which a physician is likely to find himself or herself upon termination of employment. For example, in certain areas, a five-mile geographic restriction could be devastating on the ability of a physician to practice his or her profession, while in other areas such a restriction would have little impact. In some cases a patient-specific restriction is more or less palatable or appropriate, while in others (e.g., in the case of an anesthesiologist, pathologist, emergency physician, hospitalist, general surgeon or other hospital-based physician) a facility-specific restriction is important to consider. Often, a physician will have no choice but to move to another city or state if he or she is to continue to practice during the pendency of a restrictive covenant, and the physician and his or her attorney must consider that possibility before the physician enters into such a covenant.
In addition to the specifics of the covenants themselves, there are other ways to attenuate the harshest impacts of post-termination restrictive covenants in the employment context. For instance, some agreements provide that restrictive covenants only apply if the physician is terminated for cause or resigns without cause. That way, if the physician is terminated due to no fault of his or her own, he or she is able to seek alternative employment in the same area. Other agreements provide for a probationary period in which the physician may leave without a restrictive covenant, while still others include a “buy-out” provision that releases the physician from the restrictive covenant upon his or her payment of some specified amount to the employer. In short, there is no such thing as a “one-size-fits-all” restrictive covenant.
When a physician breaches a restrictive covenant, there are three primary types of remedy that may be available to the party in whose favor the covenant operates: (i) injunctive relief, (ii) monetary damages, and (iii) contractual and/or liquidated damages. In the first instance, the employer may seek an injunction against the physician, which is a court order forbidding the physician from continuing to breach the covenant through competition, solicitation, use of confidential information, etc. Contractual provisions addressing injunctive relief often state that the employer will not be required to post a bond with the court to obtain the requested relief, but in many cases a court will require one anyway as a precondition to granting such relief.
In the case of monetary damages, the employer would have to file a lawsuit and prove to the court the amount of its damages as a result of the breach of the restrictive covenant by the physician. Proving such damages is often difficult, if not impossible, which means that in most cases injunctive relief will be sought as a first step, even if a lawsuit seeking damages is subsequently or simultaneously filed. Finally, in the case of contractual or liquidated damages, the parties specify in the employment agreement that upon breaching the restrictive covenant the physician will owe the employer some stated amount. As with the covenants themselves, such provisions typically must be reasonable and are often subject to state-specific limitations on enforceability.
