AAOS Bulletin - June, 2006

Writing employment agreements that work

The best agreements are win-win situations

By Steven E. Fisher, MBA

Recent events are making this summer a boom time for hiring orthopaedists. To ensure that the match is a good fit on both sides, a well-written employment agreement between the orthopaedic practice and the new physician is key. This article outlines the basic elements of a good contract and identifies issues that practices and physicians need to remember during negotiations.

In general, employment agreements must cover four distinct subjects: compensation and benefits; reasons for separation and what will occur if a separation takes place; day-to-day working conditions; and provisions for becoming a practice principal.

Compensation and benefits

Compensation and benefit clauses usually cover salary, bonus payments and employee benefits.

Salary: This establishes what the new doctor will be paid during the first year, and may also include language describing future salary. There are no hard-and-fast rules about what a newly-employed orthopaedic surgeon “should” be paid. Salary is determined by such factors as the practice’s location, its payer mix, the new physician’s subspecialty and fellowship training, as well as the practice’s reason for hiring.

Bonus: Many practices pay one-time “sign-on” incentive bonuses to new doctors. Practices may also pay annual bonuses to employed physicians, based on performance. The circumstances under which a bonus will be paid, as well as the bonus amount, can vary widely. If a practice’s overhead is 50 percent, for example, it may pay a bonus equal to a fixed percent of all collections in excess of twice the new doctor’s base salary plus benefits. That percentage is often the subject of spirited negotiation, with no single “correct” number. Most frequently, it is between 25 percent and 50 percent.

During contract negotiations, new doctors should remember that collections typically lag behind charges by several months, which may make it unlikely that he or she will qualify for a bonus in Year One. Whether the practice agrees to normalize collections will probably depend on what happens at the other end: How will collections relating to charges incurred by a physician before he or she becomes a principal, but received after he or she becomes a principal, be allocated?

Employee benefits: Orthopaedic practices typically provide health, life and disability insurance benefits. New doctors should verify their share of the premium up front, particularly with respect to health insurance. They should also know who their life insurance policy beneficiary is and under what circumstances disability insurance will be paid.

New doctors should consult an accountant regarding disability insurance; depending on who (physician or practice) actually pays the premiums, there may be tax ramifications to consider. The accountant may also be able to advise the doctor about whether to obtain individual disability insurance.

Other employee benefits include vacation, time to attend continuing medical education (CME) courses and reimbursement for attending such courses, pension/profit sharing, dental insurance, relocation costs and an automobile or reimbursement for business use of a personal car.

Termination

Although neither the practice nor the physician may want to think about a possible separation, the employment agreement needs to include termination provisions. Most agreements contain a “for cause” termination clause, which permits the office to summarily terminate the doctor under a variety of specified circumstances (such as theft, violent workplace behavior or failure to adhere to the practice’s patient-care standards).

Agreements also generally include a bilateral termination clause, which—in principle—permits either party to discontinue the relationship by giving formal notice after an initial period (perhaps 90 days). This clause primarily protects the employee; the most a practice can do to protect itself in this situation is to impose some type of financial penalty on the doctor who leaves without adhering to the contract terms.

Increasingly, a practice principal’s annual performance appraisals will affect his/her compensation package for the following year. Employed physicians who are not principals should also be evaluated on an annual basis, ideally using the same formula.

Noncompete covenants used to be standard in employment agreements but have been outlawed in many states. These covenants typically involve time (a number of years) and distance (a number of miles from one or all of the practice’s offices). The uncertainties associated with noncompete covenants reinforce the importance of selecting a new physician carefully. Covenants should be written by counsel.

Medical records of patients treated by an employed physician who subsequently leaves the practice remain the property of the practice. The doctor may be allowed to photocopy the records, as long as the privacy provisions of the Health Insurance Portability and Accountability Act are not violated. For more information, see the Compliance section of the AAOS online Practice Management Center.

Working conditions

Working conditions are the expectations that the practice has for patient care. They might include call coverage (how many evenings and weekends), expected number of hours spent seeing patients in the office each week, protocol for scheduling vacation and CME time, the role (if any) in practice governance and operations, assignment to satellite clinics, or expectations that the doctor care for patients of specific insurance payers.

Ideally, the agreement (or an attachment) should also specify who will assign duties to the new doctor and to whom the doctor should speak if a problem arises. A key clause should require the doctor to participate in a practice orientation period and to provide the information required under payer agreements.

Partnership provisions

Finally, the employment agreement must address the transition from employed physician to practice principal. Unfortunately, many agreements do not cover this issue, which has led to numerous lawsuits.

The agreement must clarify when the transition will take place (for example—after x years of employment). If the transition to partner does not necessarily take place at a fixed time, the agreement must spell out the basis on which the practice makes its decision. For example, is the basis for the decision solely objective, such as whether or not the doctor has reached a certain level of charges or receipts in the previous 12 months? Or is it subjective, depending on the practice principals’ perceptions of a good personality fit? The new doctor is likely to push for objective criteria; the practice is likely to push for subjective criteria. The ultimate decision must be negotiated.

The payment buy-in must also be specified. A buy-in often consists of three components: accounts receivable (A/R), practice assets and “goodwill.” Increasingly, however, the entire concept of a buy-in fee is being questioned. Depending on the income distribution formula used, for example, buying into A/R may not make any sense. Fixed assets in many offices are often completely depreciated and have limited worth. Finally, “goodwill” often doesn’t count for much when a doctor can simply open an office next door with assistance from the local hospital and start practicing.

The termination clause of the contract should include provisions in case the practice decides not to extend a partnership offer to an employed physician.

Conclusion

Contract negotiations between practices and newly employed doctors always involve challenges. However, if they are undertaken in good faith, and if both sides are willing to compromise, the resulting agreement will set the stage for a long and mutually beneficial relationship.

Steven E. Fisher, MBA, is AAOS manager of practice management affairs in the department of socioeconomic and state society affairs. He may be reached at (847) 384-4331 or sfisher@aaos.org.

Contract writing dos and don’ts

Do enter into an employment agreement only after both parties have decided they truly want to be in business with each other.

Do your own due diligence. The practice must evaluate the new doctor’s skills, work ethic and personality fit. The doctor must evaluate the practice’s location, governance, management, finances and operations.

Do be clear about the terms. The worst agreements fail to cover key aspects of the relationship (such as reasons for termination), contain ambiguous language and/or include clauses that are internally inconsistent.

Do include a provision for resolving disagreements by mediation and not by litigation. Litigation might still occur, but is less likely. Overall, settlements reached under mediation tend to be fairer and involve lower legal costs than settlements reached under litigation.

Do put everything in writing.

Don’t take verbal communications on trust.

Don’t cut costs. Both the practice and the physician should retain competent counsel—the practice to draft the agreement and the new doctor to ensure that he or she is adequately protected.

Don’t make a one-sided agreement. For example, while it may be in the practice’s short-term interest to pay as low a salary as possible—and the new doctor may accede to this—it’s likely to come back to haunt the practice in the future. The old aphorism “What goes around, comes around” is very relevant.


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