Reach favorable hospital, private group contracts that reflect both parties’ understandings

Issue: October 2017

Understanding employment contracts is critical because the contract is the sole document that reflects the exact understanding between the orthopedic surgeon and his or her employer. This is the case whether the contract is with a private group or a hospital. Both the orthopedic surgeon and the party with which he or she is entering into a contract must agree on that understanding.

Therefore, the language of the contract must be clear, unambiguous, and importantly, you, the surgeon, should understand it.

Furthermore, because it is important to appreciate the compensation formula, this part of the contract should not be complicated. Termination clauses and what constitutes “cause and without cause” are important aspects of the contract, as well. In addition, how egregious the no-compete provision is and what comprises the restrictive covenant are critical to know.

I have asked three orthopedic surgeons who have experienced private practice, as well as hospital employment, and a health care attorney, some key questions about employment contract provisions. Their insights should prove helpful when the need arises to review and negotiate an employment contract for either the private practice or hospital employment setting and to determine what constitutes a favorable and an unfavorable employment contract.

Jack M. Bert, MD
Moderator

Jack M. Bert MD: What are the elements of a favorable hospital employment contract that must be addressed?

Roundtable Participants

Moderator
Jack M. Bert, MD
Woodbury, Minn.

David M. Glaser, JD
Minneapolis

James R. Larson, MD
Edina, Minn.

Louis F. McIntyre, MD
Sleepy Hollow, N.Y.

Nicholas A. Sgaglione, MD
Great Neck, N.Y.

James R. Larson, MD: When negotiating an employment contract for a hospital system, there are key elements to address. First, the basics to request: a 2-year salary guarantee based on 8,500 relative value units (RVUs); relocation allowance if moving more than 250 miles for the position; paid CMEs; and a minimum of 6 weeks personal time off. Medical, dental, malpractice, long-term disability and short-term disability insurance should be included. The hospital system should make contributions of 3% to 5% of the physician’s salary toward retirement savings. Expense coverage should include cell phone, mileage, licenses and membership dues. Non-compete clauses should be limited to 3 years for new graduates joining the group and they should be eliminated for physicians who bring an established practice with them. Physicians should take a firm stance on contract length, requesting 3 years with automatic renewal if both parties are in agreement. The landscape for ancillary income is ever-changing, with most systems not allowing outside income. This should be used as a bargaining chip to negotiate a higher rate of pay for RVUs generated.

Other important, but non-critical factors, include having an experienced lawyer review the contract, limiting mandatory retirement clauses and requesting that personnel matters be handled internally within the group. If these elements are reviewed, it ensures an enjoyable and rewarding hospital employment contract.

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Bert: What are the most important parts of the contract?

David M. Glaser, JD: In employment agreements, the most important provision is the term. Many contracts purport to have a term lasting several years. In nearly every case, that term is misleading. When a 3-year contract includes a provision permitting either party to terminate the agreement upon 90-day notice, the “3-year contract” is really more of a 90-day agreement. Understand how the agreement may be terminated. Who has the authority to make the decision? How much advance notice is required for a for-cause termination vs. a without-cause termination?

The second most important provision is non-compete or other limitation on your ability to get a new job upon termination of the agreement. Does the non-compete apply when termination is without cause or if you leave the job shortly after joining? If you are unhappy with the position weeks after joining, you haven’t had time to build relationships with clients and there is less of a basis for a non-compete. What is the size of the geographic scope to which the non-compete applies? Some non-competes apply the geographic restriction to every office operated by the employer, regardless of whether you provided services at that location. In organizations with multiple practice sites, this can create a broad geographic area in which competition is prohibited.

Finally, if you are joining a health system, make sure you understand how the system uses salary surveys. The Stark Law prevents hospitals from exceeding fair market value in compensation to a referring physician. Some hospitals take the position that any compensation above the median value is excessive. Other hospitals may use a higher threshold, but still cap compensation at the 60th or 75th percentile of salary surveys. These ceilings are becoming industry norms, although they seem irrational. By definition, 25% of all physicians are compensated above the 75th percentile. It is difficult to believe 25% of all physicians are compensated above fair market value. Nevertheless, that belief is common in the hospital industry. The problem is exacerbated by the fact most compensation surveys are not samples of the entire market. This is illustrated by the year-to-year variability present in some surveys. For example, if the 90th percentile RVU production changes by 20% from year 1 to year 2, that strongly suggests the survey is not accurately measuring the entire market because one would not expect much year-to-year variability in the amount of work done by physicians nationally. The far more likely explanation is the respondents to the survey do not accurately reflect the market. Because survey data become a fundamental part of physician compensation, you must understand the surveys and how they will be used to cap your pay.

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It is also important to understand what services will yield production credit. Because of actual or perceived legal requirements, hospitals often will not compensate physicians for a wide variety of services for which they would receive credit when in private practice. For example, you may not receive compensation for services provided incident to your work. Therefore, understand what services are credited in the formula.

Bert: How does a hospital structure a contract so that it addresses the hospital’s concerns regarding a future employed orthopedic surgeon?

Nicholas A. Sgaglione, MD: Increasing growth and consolidation of health care systems and institutions has contributed to a rapid expansion of full-time integrated employed physicians. Hospital orthopedic departments, service lines and health systems, along with private practice groups, share similar goals in the recruitment of orthopedic surgeons.

The hospital’s view is, and should be aligned with, the vision of the physician recruit and the vision of the clinical and administrative leadership. The hospital’s concerns are to establish and sustain a recruitment model that is predicated upon the growth of high-quality, efficient, credible and stable clinical practices. Contractual processes must support that mission and reflect the wish to ensure that a department and practice group is patient-centric, clinically excellent, well-aligned and fiscally successful.

Contracts must be equitable, transparent, reproducible, sustainable and competitive. The process must reflect a collegial approach that ensures both shorter term goals of making an established orthopedic surgeon who is recruited “whole,” as well as longer term growth and career development. The term of the contract must take into consideration physician retention and renewal and allow for advances in productivity.

Automatic renewal (evergreen renewal) and reassessment review renewals contribute to stability. Compensation models using work RVUs or net collections must include guaranteed base and tiered incentives. Termination and exit strategies must be definite, including the potential for non-compete clauses. Larger health systems may be more interested in institution-based rather than distance-based or geographic-restrictive covenants relative to other competitive institutions. An individualized approach to each recruited physician must take into account what is achievable both clinically and fiscally through projected business planning, but also what is based upon historical market performance and peer success and experience.

Defining and communicating duties, responsibilities and deliverables are key. Employee benefits and codified onboarding processes, including comprehensive marketing strategies and networking opportunities, are always incorporated. Hospital contracts should always include specific drivers to advance physician recruitment success.

Bert: What tips do you have for negotiating a favorable employment contract?

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Sgaglione: Here are five elements of a favorable employment contract:

defined work/clinical expectations and aligned career development strategies;
incentivized goal-oriented compensation;
clarity regarding exit strategies and the “what ifs”;
look for collegial, stable practice groups with defined clinical physician leadership and advocacy; and
understand mechanisms and metrics for retention and contract renewals, including historical predicate processes.

Bert: Did you notice anything different in negotiating a private practice group contract and a hospital employed contract?

Louis F. McIntyre, MD: Although the essentials of hospital and private contracts are similar, the former are more formal in the process of negotiation. With a private contract, you negotiate with one or several of your new colleagues and you all share the commonality of being orthopedic surgeons. With a hospital negotiation, you usually are speaking with an administrator or someone who does physician recruitment for a living. Many private contracts are initiated through personal relationships, so there is a familiarity that may not be present when negotiating with a hospital or system. Systems also recruit in “bulk” and interview many candidates. However, private practice recruitment tends to be done one person at a time. To many on the hospital side, all orthopedic surgeons are equal even though your orthopedic peers will recognize that your individual talents bring specific value to their practice. Hospitals and health systems where orthopedic leadership manages the recruitment process tend to do it in a way that is more similar to how it is done in private practice negotiations. Although their efforts may be in “bulk,” it is more of a peer-to-peer experience.

For more information:
Jack M. Bert, MD, can be reached at Minnesota Bone & Joint Specialists, 2025 Woodlane Dr., Woodbury, MN 55125; email: bertx001@umn.edu.
David M. Glaser, JD, can be reached at Fredrikson & Byron PA, 200 S. 6th St., Suite 4000, Minneapolis, MN 55402; email: dlgaser@fredlaw.com.
James R. Larson, MD, can be reached at Sports & Orthopaedic Specialists, 8100 W. 78th St., Suite 225, Edina, MN 55439; email: james.larson@allina.com.
Louis F. McIntyre, MD, can be reached at Northwell Health Westchester, 755 North Broadway, Suite 530, Sleepy Hollow, NY 10605; email: lfm@woapc.com.
Nicholas A. Sgaglione, MD, can be reached at North Shore – Long Island Jewish Medical Center, Northwell Health, University Orthopaedics Associates at Great Neck, 611 Northern Blvd., Suite 200, Great Neck, NY 11021; email: nas@optonline.net.

Disclosures: Bert, Larson, McIntyre and Sgaglione report no relevant financial disclosures. Glaser reports he represents both physicians and hospitals in his law practice.