Aberrations in contract terms can occur in remote rural areas
where orthopaedists are in short supply or elsewhere when a particular
subspecialty is needed to fill out a group’s spectrum of
orthopaedic services. In such cases, entry-level salaries can be
considerably higher than the norm. For most recruits, however, the
range of deal terms (allowing for some regional variance) is within
a narrow band. One well-structured employment contract should look
much like any other. Of course, any good contract should include
the important elements set forth below. But assuming that this has
been done, what else could adulterate the employment relationship?
Failure to be Proactive in Your Search
Many orthopaedists emerge from training without a carefully thought-out
list of personal requirements or preferences regarding their professional
setting (e.g., regional preference; size of market; type of group [academic
or private]; size of group; degree of subspecialization
among orthopaedists, etc.). Instead, many recruits react to
job opportunities that are brought to their attention and assume
that, if the money is right, then everything else will also be "right." Be
assured, that is often not the case.
Failure to Perform a Thorough Self-Assessment
The need to perform a thorough self-assessment goes hand-in-hand with
the need to be proactive in your search. The only thing that most
orthopaedists have in common is the scope of their professional training.
Otherwise, they are as different as any other group of people, and
it is these differences that demand your attention.
Failure to Adopt a Long-Term Frame of Reference
Many recruits approach a new employment setting as a trial, assuming
that they can move on if things do not "work out." This assumption
ignores substantial costs—not only financial costs (such
as a "tail" malpractice insurance policy costing
as much as $70,000 for a spine surgeon) but also the costs
associated with lost opportunity, the disruption of a family’s
social patterns, the need to move to another town, reduced self-esteem,
and so on.
Failure to Restrict Your Search to Organizations
Whose "Culture" is Compatible with Your Own
Assessing the target organization’s culture is by far
the most important and elusive process that you should go through.
What this amounts to is analyzing both yourself and the target practice,
in much the same way that you would analyze a potential marriage,
in order to ascertain whether the things that are important to the
group and the reasons underlying that importance are compatible
with the views that you hold. There is no easy way to perform this
type of analysis, but there are certain exercises and processes that
can help. First, you should seek out and interview alumni of the
target practice (both former clinical and business employees) to
determine their reasons for leaving and to get a candid assessment
of the types of people and interpersonal conflicts that are present
in the practice. Second, you should interview referral sources and
hospital personnel, particularly nurses, to see how the group members
perform in the hospital and operating-room settings. Third, it is
always helpful to hold a candid interview with several key employees
of the group, being mindful of the fact that employees are bound
to be guarded in any critical assessment offered.
It should be emphasized that, in my experience, failings in this
area have had more to do with dysfunction and the resulting break-up
of practice groups than any other single reason. The importance
of this assessment cannot be overstated.
Failure to Involve Your Spouse in Every Aspect
of the Process
It is extremely important that your spouse be apprised of all
aspects of the search process. Your spouse’s views should
be sought and carefully considered. A number of negotiations deteriorate
because of spousal disillusionment or disapproval.
Failure to Perform a Financial and Operational
Due Diligence Effort on the Target Practice
This aspect of the search process is, in effect, an effort to
audit the practice to determine whether its systems, personnel,
and other assets combine to create a forward-thinking practice that
is likely to be viable over the long term. For practical reasons,
this detailed inquiry should be restricted to the target practice after
you have eliminated others that you may have been considering. What
you are really trying to do is to determine whether the practice is
likely to be productive for you and for other group members, or whether,
notwithstanding the laudable clinical skills of its members, the
practice is so burdened with antiquated operating or financial protocols
that its financial and operational inefficiency is likely to result
in worsening problems. The illustrative checklist in the (sidebar reflects
the types of data that you should seek. It is not feasible to obtain
all of these data, but the more the better.
Many practices will exhibit, to some degree, a reluctance to
share sensitive financial and operational information with incoming
recruits in the misguided view that these data are private and really
are not anyone else’s business. The fact is, these data
are the business of anyone who is considering permanent employment
with a physician practice, and it is important that the practice understand
and acquiesce in sharing such information. As a matter of diplomacy,
however, it may be prudent for the recruit to use an advisor who
can deal with professional counterparts of the practice to help to
mitigate any concerns among senior group members. In the final analysis,
a properly inquisitive recruit is a positive rather than a negative
sign to the employer group in that such an individual appears to
be one who has done his or her homework and who is likely to make an
ongoing contribution to group governance.
Failure to Probe the Competitive Environment
in the Chosen Market
It is not uncommon for recruits to be attracted to a dominant
practice in an attractive market in which there is a surplus of
orthopaedic surgeons. Although one would expect that an employer
would not be seeking a recruit in such a situation, you may be surprised
to learn that the type of due diligence being urged on the part
of the recruit frequently has not been done by the employer practice
either.
Failure to Inquire About "Off-Balance-Sheet
Liabilities" and Separately Owned Assets
You should be aware that a number of liabilities and possible
assets of the practice will not show up on the profit and loss statements
or balance sheet of the practice entity. This does not suggest any
impropriety or illegality on the part of the practice, but, rather,
that certain items have no place on these regular financial statements.
Such items include leases, guarantees of the obligations of others,
personal guarantees on the part of the physicians, threatened or
real litigation, threatened or real Medicare and other managed-care
audits, and so on. With regard to separately owned assets, sometimes
a practice will own its real estate in a separate entity that will
not show up on the practice’s books. This ownership might
be set up as a trust for the children of the senior partners for tax
purposes. In such cases, it is important that the terms under which
the practice is leasing the premises be realistic and comport with
market norms. These types of separately owned assets can be quite
sizeable when they are a part of a "center of excellence" or
similar combination of providers around a disease state. In order
to learn the facts regarding such matters, you will need to go beyond
the official financial reports of the practice. The services of
an accountant or consultant can be helpful in this regard.
Failure to Ascertain the Extent to Which a "Group
Dynamic" Exists in the Practice
One of the most important aspects of a progressive medical practice
is the existence of a so-called group dynamic among the partners. Instead
of a collection of individual physicians sharing office space and other
services in a "fraternity" context, while continuing
to function as separate autonomous business units, the group practice
sets protocols, rewards, and sanctions, applicable to and approved
by all physicians, which establishes a common standard for collective physician
behavior. This attitude prevails in all truly successful enterprises
outside of health care. However, for a variety of cultural reasons,
it is frequently difficult for physicians to embrace wholeheartedly
the idea of working for and "under" a group, notwithstanding the
fact that they are the owners of that group. Orthopaedists coming out
of training have less difficulty embracing this dynamic. It is important
for you to ascertain the degree to which the attitudes and protocols of
the practice reflect the existence of a group dynamic. In the absence of
such a dynamic, the likelihood of a progressive, forward-thinking practice
is reduced.
Failure to Initiate Your Search Early Enough
The several elements detailed above probably will take more time
than you expect. In addition, there is one very pragmatic reason
you should complete the process and enter into a contract several
months before your start date; namely, the fact that application
for your Medicare license and for empanelment in the several managed-care
plans with which your group is contracted can take as long as four
to six months. We urge you to begin your search at least nine months
before your projected start date.
Only after you have completed the analysis of yourself and of
the target practice or practices that you are considering, in all
contexts set forth above, should you address the contract process
itself. There are essentially two elements involved in this process:
negotiation of the contract and verification of the critical elements
of an appropriate physician employment agreement. A summary of each
follows.
The Negotiation Process
Analyze the interests of the parties
You should analyze and prioritize the respective interests that
you and the employer want to be contained in the agreement. You
will find that there are not a large number of them and that in
many cases there is no divergence between the employer’s
and the employee’s interests; for example, both parties will
want appropriate malpractice insurance coverage. The important thing
is to focus on the areas in which the interests of the two parties
diverge.
Employ a lawyer from the outset
The contract is an important document and the negotiation process
is an important undertaking for both parties, and it would be foolhardy not
to involve a lawyer to assist you. The services of a lawyer will
not be particularly expensive, especially if most of the negotiation
is done by the physicians themselves, which we recommend. Indeed,
the cost of changing jobs will usually exceed these attorney fees
by a substantial amount.
Avoid "gentlemen’s agreements"
Occasionally, the employer will say "well, we’ve
always done this and you can count on it because it’s part of
our practice protocol." This type of "gentlemen’s
agreement" is not a good business procedure. An employment
arrangement requires that all of the important elements of that
relationship be set forth in writing. It is not necessary, however, that
they all be written into "the contract." For example,
the practice may well have employee rights and responsibility manuals,
procedure manuals, protocols, and so forth that all physician employees
must follow. These elements can simply be incorporated into your
contract document by reference. The point is that you should not
tolerate any unofficial verbal agreements about any matter of substance.
Of course, this principle serves the interests of both the employer
and the employee.
Emphasize your unique attributes
You may well have just completed a hand fellowship, and the target practice
may lack a subspecialist in that area. Obviously, your expertise in
the hand is one of the reasons that they were attracted to you,
and it is one of the main leverage points that you will have for
persuading them on contentious points. In a like manner, if you
are a member of an ethnic or racial group that is represented in
the market area, you should point out that you are likely to be
able to attract a substantial number of patients from that group to
the practice.
Seek a relationship rather than a "transaction"
Probably the most important aspect of an appropriate negotiation
with a professional practice is the fact that what is being sought,
or should be sought, by both parties is a long-term relationship
instead of a "transaction." Thus, the nature of the
relationship requires a low-pressure, low-key approach. This approach
should emphasize what is in the best ongoing interest of both parties
rather than who gets the last dollar, and it should create the kinds of
incentives that will induce both parties to behave in a way that
furthers their mutual as well as their individual interests. The
importance of such an approach to the negotiations cannot be overstated.
This is the antithesis of buying a washing machine or a used car.
Primary Contract Provisions
Salary
It is common for an orthopaedist coming out of training to receive
a fixed salary that is guaranteed by the practice and payable regardless of
the recruit’s financial success. In other words, the employer
is at risk regarding the initial performance of the recruit. It
should be emphasized, however, that any recruit who fails to ramp
up his or her practice beyond the break-even point over a reasonable
period of time is certain to be terminated for that reason, so it
behooves the individual to do everything possible to access referral
sources and to market himself or herself as effectively and quickly
as possible. The annual salary range for incoming orthopaedists
has not changed measurably over the last several years. For that
reason, the salary item is seldom a contentious element and is usually
offered and agreed to at an early stage of negotiation. At the same
time, there is some evidence that managed care’s fixation
on primary care in the 1990s led to a decrease in the number of
specialists emerging from training. A shortage of orthopaedists
emerging from training in your area could cause a spike in entry-level
salaries.
Performance bonus
In many ways, a performance bonus can be a more meaningful compensatory
element than the fixed salary. A bonus is, of course, not guaranteed
and will be received only as a function of the performance of the recruit.
Both parties must recognize that no bonus is payable until the practice
is "made whole" for all costs associated with
bringing the recruit aboard. These costs include the salary, fringe
package, moving costs, and any and all other costs associated with
recruiting and attracting the new physician. Since most practices
operate their business at approximately a 50% expense ratio
(meaning that, for every dollar of revenue, fifty cents is spent
on general overhead), the aggregate costs of bringing the new doctor
aboard need to be doubled to arrive at a threshold number for production
before any bonus is earned or payable. This number is called the "kick-in" point.
A second important element to consider when negotiating the bonus
is the extent to which the recruit should be paid for any production exceeding
kick-in point. This can range anywhere from 20% to 100%, but
the normal range is 40% to 70% of such excess.
Finally, in multiyear contracts, the question arises as to whether
the bonus should be paid annually on a discrete computation basis
or whether the computation should be based on cumulative production
by the recruit. That is, if the practice loses money on the recruit
in year one, in which case no bonus would be payable, should that
loss be recouped in year two before paying any bonus with respect
to year two, or should the second year be computed on a discrete
basis? This point is negotiable, of course, but it is felt that
the better argument is that the bonus should be computed on a cumulative
basis.
Fringe-benefit package
The fringe-benefit package can well amount to $20,000
to $30,000 or more, depending on what is included. Normally,
the following items are the most important to look for: (1) health
insurance premiums for the physician and his or her family, (2)
vacation and continuing medical education time (usually two to three
weeks, one of which is to be used for continuing medical education),
(3) expense reimbursement, including $2000 to $3000
for the week of continuing medical education expenses plus reimbursement for
automobile expenses if the recruit is expected to use a personal car
in the business, for example, while serving a satellite office,
and (4) hospital staff and specialty society dues as well as subscriptions
to relevant professional journals (this is a small-dollar item but
is almost always paid for by the practice).
Malpractice insurance
You should seek coverage of $1,000,000/$3,000,000,
meaning one million dollars per episode and three million dollars
per year. This coverage should not be a contentious item in your
negotiation, as it normally will be offered to each physician in
the same amount as it is offered to existing physicians and will
be paid for by the practice.
"Tail" coverage
An important cost item is "tail" coverage,
which refers to the cost of insuring the practice and the physician
against malpractice claims that may be made after the employer-employee
relationship has been terminated for any reason. The cost of this
coverage can be substantial, and it is one of the contentious items
in many negotiations. The recruit will, of course, want the practice
to pay for any tail coverage, and the practice will want the opposite.
In many cases, we have suggested a compromise in which the party
that causes the termination of the employer-employee relationship
bears the cost of the tail coverage; that is, if the recruit quits, he
or she pays for the tail coverage, whereas if the practice terminates the
relationship for any reason other than cause or fails to offer a partnership
at the end of the contract term, the practice pays for the tail
coverage.
Moving costs reimbursement
Moving expenses represent a one-time cost, and it is reasonable
for the recruit, particularly if he or she is moving from a distant
location, to request that the practice reimburse the cost of moving,
including any visitation costs incurred in order to bring the spouse
to the market to seek out a new home and to get settled in the new
community. Moving costs can range anywhere from $4000 to $10,000.
Again, this is a dollar issue, and we have successfully requested
that the practice reimburse such costs, inasmuch as they are nonrecurring.
At the same time, it is reasonable for the practice to insist that
the moving costs be repaid should the recruit voluntarily terminate
his or her employment and leave the practice.
Covenant not to compete
This item is normally the most contentious point in any employment contract
negotiation because it pits two very legitimate and strong interests
that are diametrically opposed. In the case of the employer, the
practice is understandably reluctant to transfer its goodwill by
introducing the recruit to all referral sources and by aggressively
marketing the recruit’s practice throughout the market, thereby
transferring the practice’s reputation to the recruit only
to have the recruit quit and to go across the street to compete
for its patients.
At the same time, of course, no incoming physician who has spent the
major part of his or her life training to be an orthopaedist will want
to be circumscribed from continuing to practice in a chosen market
if the practice determines that the relationship is not a "good
fit."
The realities of the situation are that the covenant is almost
certain to be asked for by private practices and that it must be
reasonable in its purview, in terms of both time and distance of
applicability. Indeed, certain states have completely outlawed covenants
not to compete. You will definitely need to check with a local lawyer
in the area in which you plan to practice to see to what extent
covenants are enforceable and what is a reasonable constraint. The
variability of reasonableness can be illustrated as follows. In
rural Nebraska, it is quite feasible that a radius of fifty miles
from the practice’s office is totally reasonable, in that
the catchment area for the practice may well exceed that by many
miles. At the same time, in downtown Manhattan, a constraint of
one mile may well be totally unreasonable in that thousands of potential
patients within that radius area have never been patients of the
practice and the recruit should not be constrained from marketing
to them after leaving the practice. It is always a matter of facts
and circumstances, and you will need the advice of local counsel
as to enforceability. However, in states that allow such constraints,
it is unlikely that a recruit will be successful in trying to avoid the
application of a covenant in any case.
We have had some success in urging the same compromise mentioned above
with respect to tail coverage. That is, the party who initiates
the termination of the employment relationship determines the enforceability
of the covenant: if the recruit quits, he or she is bound by the
covenant, whereas if the practice terminates the agreement for any
reason other than cause or fails to offer a partnership after the
term of the agreement is completed, then the covenant is not applicable
and the recruit is free to practice in the area.
Term of the agreement
Most physician employment agreements are for one, two, or three years.
The term of the agreement can be important with respect to the bonus
compensation element mentioned above. If you have a one-year agreement,
after which you either will or will not be offered a partnership,
the chances are that you either will be unable to meet your bonus kick-in
point or will exceed it by only a small margin, since it takes several
months of your first year to ramp up to full productivity. On the other
hand, if you have a two or, particularly, three-year deal, the bonus
is usually more important than the base salary, because by that
time you will have become a recognized physician in the market with
solid referral sources and will be able to produce well above the threshold
kick-in point.
Allocation of discounted-fee patients
This can be very important to the incoming orthopaedist because,
in the absence of a stipulation in the agreement that such patients
will be allocated equitably among full-time physicians, it is possible
that the new physician will bear a disproportion of such patients.
If so, the revenue collected for services rendered to those patients
will, in most cases, be considerably less than the revenue collected
from similar patients with other insurance. Accordingly, this disparity
can have a substantial negative bearing on your ability to earn
a bonus.
Terms of buy-in
While neither the practice nor the recruit should be expected
to commit to a buy-in, it is helpful to have the expected terms
and methodology of buying-in set forth in your initial employment
agreement, even though there is no obligation on the part of the
practice to offer them. Formerly, it was not uncommon for practices
to charge a substantial amount for "goodwill" to
the incoming physician to buy-in. This is becoming less and less
the norm. Instead, we have seen an increase in a much more basic
buy-in predicated on the discounted book value of the hard assets
of the practice.
Exit provisions
It is important to both parties for there to be a provision setting
forth the circumstances under which either can terminate the agreement. In
all such contracts, the employer will have the right to terminate
the employee "for cause," that is, for something
egregious such as conviction of a felony or loss of medical license.
It is seldom, if ever, fruitful for a recruit to try to resist such
a provision, and resistance is not recommended. Occasionally, however, some
of these "for cause" provisions will include subjective
language to the effect that "cause" exists if
the practice feels that the employee has not met its protocols properly.
We urge you to resist any such nonspecific subjective language and
to substitute objective language instead.
Finally, it is common for each party to have a unilateral right
to terminate the relationship, usually based on either sixty or
ninety days’ notice.