For a physician who has spent his or her whole professional life developing and growing a medical practice, the process of selling that practice can be a traumatic experience. Typically, the physician may focus on the short term, attempting to maximize the price at which the practice will be purchased and the applicable payment terms. However, the long term happiness of the selling physician may depend less on the size of the purchase price at which the practice is sold, and more on how well the physician negotiates the terms and conditions of employment following the acquisition, most notably where the physician is moving from a smaller medical practice setting to a larger institutional setting, such as being employed by a hospital system or large, multi-specialty medical practice. [NOTE: While this blog focuses on physicians, the same issues would also apply to other health care practitioners, such as dentists and oral surgeons, podiatrists, chiropractors and the like.]
This blog takes a closer look at the issues which may be of critical importance to the selling physician, as he or she enters into the new, post-acquisition employment arrangement with the purchasing hospital or medical practice. Unlike most of our blogs, which provide answers, this blog is designed primarily to provide questions – - questions that should be answered as part of negotiating the final employment agreement.
- Term - What is the initial term of the employment agreement? Are there automatic renewal terms, or can the physician get out at the end of the initial term? Negotiating the term of the new employment agreement may be complicated by the nature of the physician group being acquired. For example, the more senior physicians may not be willing to make a long-term commitment to the new employer (e.g., 5-10 years), while the more junior physicians may be looking for that exact type of job security. It is also important to keep in mind how the term of the employment agreement can be impacted by the other items discussed below. (A five-year agreement that can be terminated without cause at any time on 30-days written notice by either party is not a five-year agreement; practically speaking, it is a rolling 30-day agreement.) Similarly, while the agreement may have a term of five years, compensation adjustments may occur more frequently.
- Duties – Negotiating the duties for the employed physician generally does not get intense, but there are some critical issues on which the physician should focus. Can the physician be relocated to one or more other offices during the term of the agreement, without his or her consent? What are the call coverage obligations? Will the physician be authorized to moonlight, or take on medico-administrative responsibilities, such as medical or service line director positions? In the end, the physician and the employer group should have a clear, mutual understanding of the employee’s day-to-day duties on behalf of the group.
- Compensation - Even something as simple as a guaranteed base salary can be complicated in fact, so particular attention should be paid to all aspects of the compensation arrangement. Beyond base salary, as we have previously described, it is critical to understand fully how compensation may be calculated, such as where compensation is based on wRVUs. It is also important to understand how other aspects of compensation may work, such as bonus calculations (e.g., are bonuses prorated for partial years?), medical or service line director fees, speaking fees or honoraria, expert witness fees, royalties, etc.
- Benefits – For the most part, employee benefits will not be controversial, as the employer is likely to have a standard package of benefits (health, dental, disability and perhaps group life insurance, pension/profit-sharing plan, etc.) for all physician employees. However, benefits may also encompass non-standard items, and it is important for the employee to make sure that all promises made by the employer are included in the written employment agreement; this could include items such as use of a company car (or, alternatively, an automobile allowance), purchase and/or use of a smart phone (including monthly service fees), support services (e.g., physician extenders), etc. Maternity/family leave may also be an important issue to pin down, during negotiations.
- Restrictive Covenants – Typically, the post-acquisition physician employment agreement will contain several types of covenants – - (i) a covenant not to compete, which would keep the physician from practicing medicine within a certain geographical area for a certain period of time, following termination of employment; (ii) a no-pirating covenant, which would keep the physician from soliciting or employing the practice’s other employees following termination; (iii) a non-solicitation covenant, which might be aimed at post-termination solicitation of patients, or referral sources, or both; and (iv) confidentiality and non-disclosure covenants, which might also deal with access to patient medical records following termination of employment. Each of these covenants should be understood fully by the physician, so that there are no surprises down the road, should the employment arrangement not work out as planned. Also, any necessary exceptions to the covenants (e.g., maintaining privileges at a particular hospital or surgery center) should be hammered out up front. [NOTE: Some states prohibit the use of non-compete agreements as applied to physicians, primarily for public policy reasons, although this is less common where the non-compete agreement is made in conjunction with the sale of the medical practice.]
- Termination – We have previously discussed the importance of the termination provisions in a physician employment agreement. On the front end, the physician should be clear on the different types of terminations (with cause, without cause, non-renewal), and, related specifically to termination for cause, the objective (e.g., loss of license or DEA number) or subject (e.g., engaging in any act detrimental to the best interest of the employer) nature of the specific grounds for termination. The physician should also understand precisely what consequences attach to each type of termination: Will accrued but unpaid bonuses be forfeited if the physician resigns or is fired for cause? Who pays for tail coverage? Will all of the restrictive covenants apply, if the physician is terminated without cause by the employer?
- Dispute Resolution – Many physician employment agreements contain an arbitration, mediation or other form of dispute resolution, which may restrict the parties’ ability to go directly to court, should a contract dispute occur. While there is typically not a lot of back and forth concerning these dispute resolution provisions, it is important for the physician to understand the dispute resolution process: Which issues require arbitration or mediation? Who pays the costs? Where does the arbitration or mediation take place? What rules apply? Is the arbitration or mediation binding on the parties, or just a preliminary step before a suit is filed?
- Post-Termination – Dealing with obvious post-termination issues is better done prior to the start of the employment arrangement, rather than in real time at the end of that relationship, when emotions can run high and the “practice acquisition euphoria” has worn off. So, it pays to negotiate the basics into the employment agreement up front: What degree of cooperation is required between the parties, following termination? What happens if the employer is hit with a recoupment action by a payor, based on the coding practices of the employee prior to termination? Who pays for tail coverage? how are medical records handled?
The Bottom Line: While it is certainly important to focus on the purchase price and payment terms, where the physician is selling his or her medical practice, it is just as important for the physician to focus on the post-acquisition employment relationship, so that, in the years following the acquisition, the physician can enjoy both the proceeds of the sale of the practice and the post-acquisition employment arrangement.