Selected Employment Contract Issues for Physicians

The Health Law Section attorneys at Hurwitz & Fine, P.C. have considerable experience in negotiating employment agreements on behalf of medical practices and physicians. Over the years, we have been privileged to review employment agreements drafted by private medical practices, hospitals, university groups and managed care organizations for use both here in New York State and in many other jurisdictions. Listed below are 8 commonly asked questions on physician employment contracts and their interpretation:

  1. Is the term of employment guaranteed?
    Usually not. Many physician employment contracts allow each party to withdraw from the arrangement "without cause" upon 30, 60, or 90 days’ advance written notice. This means that the employer may terminate a physician’s employment without giving a reason for the action simply by giving the physician adequate written notice of the termination. In effect, the physician has a written employment agreement for the 30, 60, or 90 day period, which contract "renews" daily for the applicable 30, 60, or 90 day period.

  2. What are the common compensatory arrangements for employed physicians?
    Most physicians will be offered a base compensation (or salary), payable in equal monthly or semi-monthly installments. The contract may provide for a "signing bonus" and increases in base compensation in the second or third year of employment. In addition, many contracts will have an "incentive compensation" clause that will pay physicians additional compensation based on productivity. One example of such a clause pays physicians a percentage of their net annual collections over a specified amount. Objective incentive compensation formulas such as the one noted above are preferred for their predictability, but the physician should also ask if the incentive payment is to be prorated if the physician works less than 12 months.

  3. Are there any issues pertaining to the employer’s payment of professional liability insurance?
    Virtually all employers will pay the physician’s professional liability insurance premiums in accordance with any state-mandated coverage requirements. However, if the professional liability insurance policy is a "claims made" policy, some employers will require the physician to obtain a reporting endorsement (tail coverage) upon his or her departure from employment, at the physician’s sole cost and expense, insuring the physician and the employer against professional liability for events occurring during the terms of employment but reported after the policy term. The cost of tail coverage may be a substantial expense for the unwary physician.

  4. What forms of financial assistance are available from the employer during the transition period leading up to the initial date of employment?
    If requested, many employers will advance to the physician all or a portion of the first installment of base compensation or salary and arrange to make payment directly to the moving company of the physician’s relocation expenses. Signing bonuses may also be negotiated with the employer.

  5. What happens if the physician becomes disabled during the term of employment?
    If the physician experiences a disabling condition which renders the physician unable to perform the duties assigned for a specified period of time, the employment contract usually provides the employer the discretion to terminate the contract. Some employers will continue to pay the physician his or her full salary, or some portion thereof, for anywhere from 30 to 90 days after the onset of disability. Others may provide group or other disability insurance coverage for their professional employees. The physician should therefore review his or her disability, life, and other personal insurance needs with his or her insurance advisor on a periodic basis.

  6. Are restrictive covenants common?
    Yes. Many practices impose burdensome restrictions on a physician’s post-termination opportunities in the employer’s practice area. Such restrictions generally prevent the physician from competing with the employer for a specified time period (one or two years) within some geographic area (e.g., within 10 miles of any of the employer’s locations), and should be reviewed carefully with legal counsel before the employment agreement is signed.

  7. When are physicians considered for shareholder or partner status?
    The majority of employment agreements make some reference to the physician’s opportunity to become an equity owner in the medical practice. However, any such offer is usually not enforceable as it is conditioned upon satisfactory performance during the term of employment. Thus, the execution of an employment contract with such a provision will not give the physician any legal or equitable right or claim against the employer for the physician’s subsequent failure to become an equity owner.

  8. Are all contract provisions negotiable?
    Most employers are eager to respond to physician requests for clarification of contract provisions and expect the physician to seek changes to the employment agreement. Physicians intending to work for certain larger medical practices or institutional employers may have less opportunity to negotiate changes to the contract, as such employers typically will have developed a "template" or "model" with standard clauses. Physicians should nevertheless seek to have any important promises reduced to writing in the contract and be guided by the old adage in negotiating for change … "nothing ventured, nothing gained."

Fines Increased Under New York Prompt Pay Law

The New York State Insurance Department (the "Department") is clamping down on insurance companies and HMOs who do not promptly pay undisputed claims. On January 27, 2000, the Department issued a letter to insurance companies and HMOs advising that the rules under the Prompt Pay Law are changing. The letter is in response to the extreme number of claims processed by the Department over the last two years that have resulted in $266,000 in fines. The Department writes,

"Tougher penalties will be sought for those companies that are determined to be recidivists. HMOs and insurers who have repeatedly failed to pay their claims on time will face fines of up to $5,000 per violation, as allowed by the statute." (Circular Letter No. 6, 1/27/00, can be found at www.ins.state.ny.us/cl00_06.htm)

In addition to increased fines for repeat offenders, the Department also implemented tougher claims processing reporting requirements. Complaints under the Prompt Pay Law should be directed to Laura Dillon, Senior Examiner, Consumer Services Bureau, New York Insurance Department, Agency Building 1, Empire State Plaza, Albany NY 12257, (518) 486-9105.

American Federation of Teacher Union Agrees to an Affiliation Arrangement with New York Psychologists

Effective January 1, 2000, the New York State Psychological Association ("NYSPA") members became affiliated with the American Federation of Teachers Union ("AFT"). The NYSPA hopes that the move will create increased bargaining power for its 3,200 members. The AFT’s legislative and lobbying efforts and its benefit programs should aid the NYSPA in recruiting new members.

Telemedicine Raises Legal Concerns

Recently, the Health Law Section of the New York State Bar Association issued a Statement on Telemedicine to the State’s Legislature addressing the legal concerns raised by the use of telecommunications technology in the delivery of health care. The Bar is primarily concerned with the patients’ rights to confidentiality, informed consent and health care treatment by licensed professionals.

Currently, a bill is being considered by the New York State Senate that, if approved, will authorize the practice of health care delivery, diagnosis, consultation, treatment, and the transfer of patient records via audio, video or data communications. The bill also covers licensing issues, insurance coverage for telemedicine, and requires the patient’s informed consent prior to delivery of the health care services. Several other proposals are expected to be considered by the State Legislature this year.

Should State Laws Governing Patient Confidentiality Issues
be "Preempted" by the Federal Government?

The American Health Information Management Association ("AHIMA") suggests that the answer to this questions is yes. AHIMA is a national organization with over 38,000 members who manage several thousand patient records per day. The confidentiality of medical records has increasingly gained attention at both the state and federal government levels as a result of the changing health care environment.

In the last issue of Health Law Pointers, we summarized proposed federal privacy rules issued by the U.S. Department of Health and Human Services ("HHS"). AHIMA supports these rules and further regulation currently contemplated by Congress under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA requires the reporting and disclosure of certain health information and is regulated by HHS. In 1997, Donna Shalala, Secretary of HHS, submitted recommendations to Congress for the development of legislation regarding the privacy of individual health information as mandated by HIPAA. Ms. Shalala’s suggestions require federal preemption of patient confidentiality, which has long been a state-regulated issue.

AHIMA believes that the ever-increasing number of people who have access to an individual’s confidential health information requires federal control and preemption of state law. To view AHIMA’s analysis of who, both inside and outside, the health care industry have access to an individual’s confidential medical information, see Flow of Patient Health Information Inside and Outside the Healthcare Industry, October 1998.