The ties that bind: Considerations for employed and shareholder physician agreements

In a world of consolidation and acquisitions, verbal arrangements about physicians’ hours, duties and expectations matter a lot less than what’s written down on paper.

A personal understanding between a doctor and chief executive officer about call duties or other elements of care goes out the window when a new owner comes in, cautioned Stephen A. Dickens, JD, FACMPE, vice president of medical practice services, SVMIC, at MGMA19 | The Financial Conference in Las Vegas.

The changing landscape of ownership — along with shifting reimbursement models and a high number of physicians retiring or leaving the industry1 — makes it vital that a medical group’s leadership have a firm understanding of the elements of contracting and compensation for both employed and shareholder physicians.

“You can spend a fortune on attorneys,” Dickens noted, if your group does not enter into a contract negotiation with key elements addressed, such as:

• Authority to enter into an agreement
• Legal purpose
• Consideration/payment
• Established terms.

Medical groups likely have needs to effectively negotiate both employed physician agreements and shareholder agreements, with the primary difference being that an employment agreement should “define the performance we expect of the physician,” Dickens said. “What is it that we expect them to do and how are we going to compensate for that?”

As for a shareholder agreement, its purpose is to help “define the legal structure” of the group’s entity, such as whether it’s a partnership or corporation. “Your corporate charter, your bylaws are all going to be derived from this,” he added. These agreements focus more on setting “rules of engagement for actually taking ownership of the organization and … the rules of departure,” Dickens said.

Crucial to both sets of agreements are provisions to handle any problems that come along in the relationship with the physician, either as a working doctor or as an owner. “We don’t want to just plan to the happy times,” Dickens stressed. “We also need to plan for ‘what if?’”

Additionally, shareholder physicians in a practice almost always will be an employee, as well. The agreements covering both elements don’t have to be separate legal documents, but Dickens urges them to be contracted separately because they are separate relationships: If a physician shareholder leaves the practice, the rules governing changes to a corporation will be much different than when an employee leaves.

Employee agreement elements to consider

Dickens outlined five key elements of an employed physician agreement:

1. Legal mechanics: While many physicians will contract to work for a group as an individual, Dickens said that it often is advantageous for the physician to set up a corporation for him- or herself, which adds personal asset protections. These legal mechanics should also spell out a term of service and a clear understanding on both sides whether any auto-renewal clause should be in place, which normally acts to protect the practice rather than the physician.
2. Compensation: Usually the hottest topic in contracting, Dickens said “there is no magic formula” beyond taking a good look at revenue and expenses and deciding how to allocate that. For employed physicians, salary, production or a hybrid split normally is used. If physician compensation follows a draw or reconciliation method, Dickens recommends clearly defining whether it is based on a threshold of RVUs or patient visits, as well as spelling out bonus criteria. Another significant part of the compensation formula is benefits, which can range anywhere from 50% to 90% of the total compensation package, which should be spelled out in the agreement.
3. Performance: Duties, representations and obligations for the physician that require definition include:

• Medical records: How soon should a chart be closed? What constitutes the chart being complete? What mechanisms are in place for enforcement regarding a physician who doesn’t finish his or her records?
• Schedule and on-call: How many days a week will the physician work?
• Hospitals and nursing homes: Is there an expectation for working in either of these areas outside the regular schedule in the main clinic?
• Advanced practitioner supervision: As more groups use advanced practitioners, will this physician be expected to supervise them?

1. Behavior: Agreements should include clauses regarding confidentiality, code of conduct, limitations on authority and indemnification (e.g., if a physician does something that causes the practice to spend money or incur legal actions).
2. Separation: “This is the most-overlooked component in employment agreements,” Dickens said. “The reason we have pre-nuptial agreements is to define what a split looks like, and the same is true in practices.” Generally, employed physician agreements should define how and why separation occurs, including:

• Amount of notice required for a physician to give and whether the practice needs cause to terminate
• Non-compete language, specifically length of time from termination and geographic distance. “It tends to be an ongoing hot topic because courts do not like non-compete clauses,” Dickens added. “We don’t like the idea of restricting someone’s ability to work.”
• Non-solicitation language to prohibit a physician from contacting former patients and/or staff
• Determinations on who pays for tail coverage and the associated policy requirements
• Enforcement information, including possible penalties and how mediation or arbitration would occur, depending on local laws. You also must spell out who is responsible — physician, medical group and/or hospital — regarding medical records ownership and retention, the work of patient notification and any other notices (such as referral sources, facilities, payers, etc.).

Benefits in a contract

Benefits are important to specify in a contract. You can default to policies in the employee handbook, but most doctors prefer something specific to them, Dickens said. In that case, it’s better to define the amount of time off they get, how much they can take in a lump sum, and whether to split out sick time from vacation or offer specific compensation to cover volunteer activities and time for continuing medical education (CME), as well as stipends to pursue the CME.

The usual considerations for insurance coverage should also be defined: medical, dental, vision, disability, professional liability for the provider, as well as dependents. Portability should also be determined: If a physician spends a long time with a group, he or she will age into a new bracket that will make it more difficult to obtain similar policies for disability or life insurance later on. If you want to emphasize a strong benefit for physicians who may retire early, portability of those plans upon departure from the group is an option, Dickens said.

Building payment models

Updating payment models sends a message to current physicians and those you hope to recruit.

Dickens recommends setting a base salary tied to a benchmark from the past few years. If 20% to 25% of revenue will be driven by quality metrics, going back to set that base to coincide with a decreased emphasis on collections is a good start, but it’s important to educate physicians on what quality outcomes are being incentivized.

Citing a June 2017 MGMA Stat poll wherein more than 50% of practice leaders said their physicians were not satisfied with their compensation plans, Dickens noted, “what I do think it tells us is that physicians don’t understand their compensation,” and that not understanding the formulas behind the plan can cause dissatisfaction on its own.

Dickens recommends using measurable metrics — direct expenses, indirect expenses/overhead — aligned with drivers of revenue to show physicians where the money comes from and how it will be allocated. “Direct expenses are easy: Professional liability insurance, are you getting a car allowance, are you getting a phone allowance — those types of things are really easy to direct to a physician,” Dickens said. Particular attention then should be paid to indirect expenses/overhead, as they are a bit trickier: “How do you allocate rent? What about supplies?” Dickens noted.

However that model gets tweaked, Dickens said the compensation formulas should be reviewed at least annually to see if they accurately reflect what you’re being paid and receiving in contracts.

Termination for cause

There are numerous reasons why a physician may be terminated for cause, including failure to perform; licensure suspension or restriction; committing a crime; absenteeism or inability to obtain liability coverage, privileges or credentialing.

For any of these issues, Dickens recommends defining remedies. If a physician does not complete charts on time and is given 30 days to correct the issue, a contract may need to define some form of progressive discipline for a second or third offense.

A code of conduct is very useful, as it defines the ways an employee should act and what constitutes unacceptable behavior. It also standardizes disciplinary issues rather than leaving them to the whim of a certain individual. Long before entering a negotiation, a code should be developed by committee or group consensus, adopted by the group’s board, established via a written policy and referenced within a contract for consistent application — the last part is of importance, as consistency in applying a code is vital to avoid accusations of discrimination.

Dickens said integrated systems and hospitals are relying more heavily on codes of conduct to handle disruptive physicians. That more aggressive stance sends a clear message on behalf of the organization: “We’re not going to tolerate this,” Dickens said.

A strong code of conduct, in addition to stating core values, should outline:

• Appropriate conduct: Respect, courtesy, professionalism and cooperative behavior
• Inappropriate conduct: Threatening or abusive language, profanity, degrading/derogatory or demeaning comments, inappropriate physical contact and/or refusal to abide by policy
• Disciplinary guidelines: Who takes the lead, consequences and enforcement.

Using addenda

Items such as codes of conduct, compensation models and other items that may change on a more-frequent basis often can be attached to the main contract via addendum — “unless you’re making very sophisticated changes to a contract and revising key elements — you probably want to start over with a new contract,” Dickens said, so as to avoid introducing contradictory language.

Shareholder agreement elements

The components of a shareholder agreement speak to the structure and overall function of the medical group, with a largely different set of elements than an employed physician agreement, Dickens said.

Incorporation of the group as a legal entity will vary greatly due to state-specific laws, and the tax implications of those differences will be important to a potential physician shareholder.

The agreement should clearly outline initial investments required for the physician shareholder, as well as any ongoing capital account contributions expected, Dickens said.

More than anything, a shareholder agreement helps determine the decision-making process for the organization, including expectations for meetings and voting rights. “Define what the leadership structure is,” Dickens says. “Many groups suffer from what we call governance disorder syndrome2 … they can’t make a decision, or they make a decision and can’t stick to it — their meetings are ineffective.”

The group’s meeting structure should be determined with agreement on a decision-making process and the follow-up required on decisions made by the board.

Additional resources

• Physician Contract Guidebook, by Rade Vukmir, MD, JD, provides a practical, easy-to-understand approach to creating successful and binding physician contracts based on legal theory, case law, medical literature and management techniques.

Notes:

1. “New research shows increasing physician shortages in both primary and specialty care.” Association of American Medical Colleges. April 11, 2018. Available from: bit.ly/2Fys06B.
2. Latham W. “Herding cats: 4 steps to overcoming governance disorder syndrome.” MGMA Connection. May 2015, 24-30.