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The light at the end of the tunnel - Could a train be coming your way?



 James D. Wall, Esq.
from Doctorsfirst.com

Many physicians emerging from their residencies have completed at least eight years of training beyond college. Most have federal-sized debt, and have worked more hours per week than one should be awake. Because of the long hours and short pay, physicians emerging from their residencies and fellowships are eager to begin receiving real money for their skills. The proverbial "light at the end of the tunnel" often takes the form of the first offer of employment, with the starting salary shining like a beacon through the murky haze of legalese.

For a weary resident, the first contract is tangible evidence that loans will be repaid, children will be fed, spouses will be allotted their own razors, and cars made in this decade will be obtainable -- those things that the well heeled can afford. In their eagerness, however, residents often myopically rely on the "starting salary" as the sole criterion for decision making. However, draconian provisions in an employment contract can, believe it or not, make the new physician long for the "good ole days" when he or she was a resident. Here are some points a resident, and his or her attorney, should consider before entering into an employment contract.

Termination Clauses

Although some employment contracts may appear to provide a new physician with employment for up to three years, almost all contracts allow the employer to terminate the physician with or without cause. "Cause" generally means "a good reason" such as a physician's loss of hospital privileges, loss of ability to prescribe narcotics, or inability or unwillingness to meet patient obligations. "Without cause," however, generally means for any or no reason.

Although it is rare for a contract not to contain both "cause" and "without cause" termination clauses, a physician can minimize the adverse impact of these clauses by requiring the employer provide notice in advance of termination, especially if termination is "without cause." The notice period should give a physician adequate time either to change his or her behavior, or to find a new position.


BEWARE OF THE CONTRACT THAT DOES NOT MENTION CALL. Too many residents have been seduced by the often irresistible Siren-like whir of a bottomless ATM spewing cash, only to get closer and find that the sound was in fact the all-to-familiar chirp of a beeper. (Sometimes, believe it or not, employer-physicians no longer take call after hiring a physician fresh from residency). If a physician emerging from residency is willing to take call every night, that's fine. However, he or she should find out before signing a contract what call obligations will be, and get those obligations in writing.

Type of Work

It is sometimes difficult to get an employer to put in writing exactly what type of work a physician will be performing. However, for certain procedure-intensive specialists (e.g. cardiologists, neurologists, ophthalmologists), it is extremely important to find out the approximate number and type of procedures expected to be performed. This is especially true if board certification requires a certain number of procedures annually.

Another trap is that a practice may hire a physician to be a "table setter." That is, the physician may end up being the office practitioner while the employer-physician does all of the procedures. There is nothing inherently wrong with being a table-setter -- a physician simply needs to know what his or her role will be.


There are three ways to compensate physicians -- (i) guaranteed amount, (ii) production ("the more you work, the more you get"), or (iii) a combination of the two. If a physician has an entrepreneurial bent, he or she might like the idea of a production based contract, or one that has a relatively small guaranteed amount with a big upside for production. Because production is typically measured by cash collected (as opposed to services billed, hours worked, or patients treated), a physician should keep in mind that it takes time to collect cash. This is especially important in a physician's first year. He or she may be busy for the entire twelve months of the year, but because of the lag time endemic to collecting for physician's services, the physician's "production" will be based upon approximately ten months of collections (i.e., collections for month 1 will not be realized until month 3, and so on).

Also, with a production based contract, a physician must beware of being hired to be a "table setter." If a physician is not assigned to do procedures that enhance production, there will not be much of a production bonus.

Partnership Potential

Generally, employers are loathe to include in the initial contract a commitment to allow an employee to become a partner. If such a promise is made in the contract, or is even discussed in the course of negotiating the contract, a physician should be wary of a long partnership track.

For example, a contract may allow the physician to become a partner at the end of two years, and require the physician to buy a prorata portion of the practice's assets from the other partners at the time partnership is offered. Alternatively, some practices might tell a resident that if the resident works as an employee for five (rather than two) years, he or she will become a partner and pay nothing to buy in. In those cases, employers often refer to the wait as allowing the new physician to accumulate "sweat equity." A contract that induces a long wait for partnership by promising a "low or no buy-in" should be closely scrutinized.

In today's market, many practices are being purchased by hospitals and other providers, often resulting in one-time lucrative payouts to the practices' owners. If a physician is in a "sweat equity" arrangement, and the practice is sold the day before he or she becomes a partner, then the physician will receive nothing for his or her sweat equity in the practice.

Non-compete Covenants

Most employers try to insert "non-compete" clauses in contracts they present to residents. A non-compete clause provides that if the physician leaves the employer, he or she will not practice within so many miles of the employer (often referred to in contracts as the "Restricted Area") for a number of months or years (often referred to as the "Restricted Period"). Employers like these clauses because they do not want someone to work for them for several years, leave, and steal all of their patients.

Obviously, non-compete clauses are more detrimental to some physicians than others. For example, if Opie had become a physician rather than a Hollywood director, he should never agree to sign a non-compete that precluded him from working in Mayberry. However, Joel, the doctor in Northern Exposure, would probably have gladly signed a non-compete for the entire State of Alaska.

Repayment of Recruiting Costs

Because of the competition for primary care physicians, many practices are incurring costs associated with placement (i.e., headhunters), and are advancing signing bonuses to their new employees. Often, a practice will attempt to recover its headhunters' fee, and even a signing bonus, if the physician does not complete the entire term of the contract.

Only in rare circumstances should a physician agree to repay recruiting costs. These are costs associated with the practice from which the physician derives no benefit. Second, it is sometimes acceptable to agree to repay a "signing bonus" (think of it as a forgivable loan). If the employer requires repayment, the instances in which repayment must be made should be narrowly defined. For example, if the practice fires the physician "without cause," the physician should not be required to repay the signing bonus. Additionally, if the physician fulfills twenty-three months of a twenty four month commitment, then at least 23/24ths of the loan should be forgiven.

Cover Your "Tail"

Many employment contracts are silent with respect to an employee's obligation to purchase insurance after the employment relationship ends. Because most employers provide "claims made" medical malpractice coverage for their employee physicians, employees are only covered for "claims made" during the period the employee is on the employer's policy. Once an employee leaves the employer, the employer will delete the employee from the malpractice policy. Generally, if a claim is made during the term of the employee's employment, there is coverage. However, if the claim is made after the employee has left the employer (and has been deleted from the policy), then the former employee would not be covered.

This gap can be insured by the employee's purchase of what is known in the insurance industry as a "tail." The tail is appended to the original claims made policy, and provides coverage for the physician after the term of his or her employment, for occurrences prior to his or her termination. The tail could be costly, and like many other financial arrangements, can be negotiated within the initial employment agreement. If, for example, the employee physician is terminated without cause, he or she may want to insist upon an employment agreement providing that the employer pay for the tail. If, however, the employee is terminated with cause, it may be okay to agree in advance that the employee will pay for the tail, or a portion of it.

The key is, however, that a resident must know the type of coverage offered by his or her employer, and must make arrangements for tail coverage upon departure. Failure to do so could prove costly--even successful litigants incur legal fees and other expenses that could prove life-altering.


Physician Recruitment Agreements and Revenue Guarantees

Many practice relationships today involve revenue guarantees rather than salaries. This is most common in rural areas, where there is a short supply of physicians. However, it is becoming increasingly common in suburban areas as well.

Generally, a revenue guarantee takes the form of a per month amount to be paid to the physician by a hospital. For example, a hospital may guarantee a surgeon that he or she will have gross revenues of $25,000 per month for twelve months. When the surgeon starts practicing, and receives no fees in the first month (because of a lag in collection), then the hospital would pay the surgeon $25,000. If, however, in the second month, the surgeon collects $7,000 in revenues, then the hospital would pay only $18,000--the difference between the "guaranteed amount" and what was actually collected. If, for example, in the fifth month, the surgeon collects, $26,000, the hospital would pay nothing to the surgeon.

To induce the physician to remain practicing near the hospital, the hospital often agrees to forgive the repayment of all advances if the physician stays in the area for a certain number of months. This arrangement gives rise to interesting tax consequences.

The hospital's advances are generally deemed loans, which are non-taxable. Thus, in the above example, the physician would receive up to $25,000 per month tax free for the initial period (generally 12 months). However, if the physician is required to stay in the area an additional 24 months to have the loan forgiven, and 1/24th of the "loan" is forgiven as each month passes, he or she will be taxed upon the forgiveness of the loan, as it is forgiven.

In this example, assume the physician receives $100,000 from the hospital as a "loan" in the first twelve months, and that the loan would be forgiven if the physician practices in the hospital's geographic region for an additional 24 months. The loan can be repaid either by money (i.e., $100,000) or 24 months of service in the hospital's community. In this example, the physician would have no tax liability in months 1 through 12 for receiving the $100,000 loan, but would have tax liability not only on his or her earnings in months 13 through 36, but also on the amounts advanced in months 1 through 12 but not forgiven until months 13 through 36.

Assuming the surgeon satisfies the service commitment over a twenty-four month period, he or she would recognize $50,000 in income in each of the second and third years even though the $100,000 loan was advanced in the first year. Thus, the surgeon must save money in months 1 through 12 to meet the tax obligations caused by receiving "phantom income" (i.e. taxable income for which there is no corresponding cash) in months 13 through 36.


There are no specific terms that are considered as standard in physician employment contracts. Often, a practice will present a contract to a physician and state "this is what we did for our most recent hire -- it should meet your needs." However, a physician should think of a standard contract as a suit of clothes, which rarely looks real good unless tailored. For example, a non-compete clause may be too binding for one physician yet a perfect fit for another.

Common to all physician contracts, however, is that physicians should exercise extreme caution prior to signing. An onerous non-compete clause, a loosely drafted repayment obligation, or compensation that is heavily dependent upon production could lead to a resident-like existence.


This article was contributed by:

James D. Wall, Esq.
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Last Update: 24-Aug- 2016 at 19:37:57