Think about exit strategies before signing that contract

Specific language should focus on noncompete clauses and your ability to tell patients that you're leaving

From the April ACP Observer, copyright © 2005 by the American College of Physicians.

By Phyllis Maguire

Sidebar:

In job talks with a group practice, physicians may be tempted to settle for the simplicity of a one-page "gentlemen's contract" and avoid the hassle of negotiations.

But signing such a simple contract before you start a position may work against you in the end. If you leave that practice to join a competitor or strike out on your own, it may be too late to negotiate departure terms to your advantage.

It may sound like obvious advice, but experts say that too many physicians fail to define explicit departure terms before signing on the dotted line. That failure can create serious problems down the road.

"Deal with these issues before you've relocated your family to a community or set foot in that office," said Joan Roediger, JD, a Philadelphia-based partner and health care attorney with Obermayer Rebmann Maxwell & Hippel LLP, who represents physicians and practices.

Vaguely worded contracts can stir up trouble, as can agreements that are years old and haven't been updated. And while fights often break out over big issues such as patient solicitation and tail insurance, even seemingly minor matters like who pays for photocopying patient records create problems when your contract isn't specific enough.

Here's a look at issues you should negotiate before you sign on. (The same advice holds for the medical groups that hire new physicians. See "Protecting your practice.")

Noncompete clauses

Also called restrictive covenants, noncompete clauses define a zone where departing physicians must not practice for a certain period of time.

Laws on noncompetes and their enforceability vary from state to state. For example, while noncompetes are prohibited in Massachusetts, California permits their use only for shareholders and partners. And in Texas, restrictive covenants have to include five provisions, including one that makes patient lists available to departing physicians.

"The greatest urban legend passed from residents to fellows is that restrictive covenants aren't enforceable."
—Joan Roediger, JD

Some jurisdictions are becoming less tolerant of noncompetes, but they hold up to judicial scrutiny in many states. "The greatest urban legend passed from residents to fellows is that restrictive covenants aren't enforceable," Ms. Roediger said. "Physicians do themselves a big disservice by operating under that assumption."

The key to negotiating a noncompete is deciding what's reasonable. Consultants say a realistic length of time for a noncompete to be in force is two years. What is reasonable regarding the area covered by the provision depends on the practice location.

"In the middle of Manhattan, a covenant will have to be a lot smaller than in Wyoming, where people drive hundreds of miles," said Daniel Bernick, JD, MBA, principal with The Health Care Group, a practice management and consulting firm in Plymouth Meeting, Pa., and with its sister corporation, Health Care Law Associates.

Geographic terms also depend on specialty and scope of practice. The area defined for a primary care practice will be a lot smaller, for instance, than for a narrow subspecialty.

A noncompete must also be reasonable in terms of scope of practice. A cardiologist who signs a noncompete with a cardiology group, for example, could conceivably leave and set up a general internal medicine practice within the noncompete zone without violating its terms.

Public interest also must be weighed when deciding whether a noncompete is reasonable, said Michael Parshall, a consultant at The Health Care Group. If you're the only gastroenterologist in town and you work for a primary care group practice, he said, "but by virtue of you leaving town, the public's interest will be harmed, then the covenant won't hold."

Liquidated damages and Stark rules

Many groups now also include liquidated damage provisions in employment contracts as a remedy for breeching the noncompete. According to Mr. Parshall, these provisions can help settle noncompete issues when a physician leaves and help everyone involved avoid a messy court fight.

Liquidated damage provisions specify a sum that the departing physician will pay the practice if the doctor continues to work in the area, in violation of his or her noncompete. In some cases, physicians may agree to pay as much as $200,000 or 50% of fees earned the previous year, or 100% of their annual compensation.

And the final Stark II rule that took effect last summer has added a whole new wrinkle to the issue of restrictive covenants. Stark rules now prohibit practices from imposing post-termination restrictions on physicians if the practice or the physician received any form of recruitment support—a first-year salary guarantee, say, or moving expense contributions—from a local hospital.

Hospitals that provide recruitment support are now presenting their own contracts they want new physicians to sign. Those agreements—which go by a variety of names, including recruitment agreements, net income agreements or start-up agreements—obligate a physician to pay back either a portion of his or her income and/or the monetary value of the hospital's support if the physician makes an early departure.

"From the perspective of young physicians, these agreements are troublesome because physicians would have to pay back all the money that was part of the assist package the practice received to recruit the new physician," said Philadelphia's Ms. Roediger. This includes an obligation for the new physician to potentially pay back not only all the salary he or she received, but practice overhead items as well.

What wording should physicians negotiate instead? "That the practice pays it back," she said. These amounts were provided to assist the practice in its recruitment efforts and are not the new physician's liabilities.

Soliciting patients and personnel

Most employment contracts now address the issue of soliciting and notifying patients when you leave, including those you've treated. Most contracts stipulate that patient lists belong to the practice, a position that courts have consistently upheld.

Ethicists say that position may interfere with the physician-patient relationship. The College's "Ethics Manual Fifth Edition," published this month in the April 5 Annals of Internal Medicine, states that "patients must be notified and records forwarded according to patient instructions" if a physician leaves a group.

Lawyers and consultants, however, claim that groups are under no obligation to help you notify patients that you're setting up shop elsewhere, particularly if that shop is local.

"The whole notion of notification revolves around the concept of patient abandonment," said Mr. Parshall of The Health Care Group. "If the group says, 'We're still here,' then there's no abandonment of the patient. So contacting these patients may be considered solicitation, and gathering a list of their names may be considered stealing the group's trade secrets."

When it comes to notifying patients that you're leaving, employment contract language runs the gamut from joint notification to flat-out prohibition.

"I try to deal with that issue in terms of whether there's a joint notice that goes out," said Bruce Johnson, JD, a consultant with the Medical Group Management Association and a health care attorney with Faegre & Benson LLP in Denver. He's helped craft amendments to employment contracts that say no notification will be sent to patients if the physician leaves for any reason other than loss of license.

Even if your group agrees to notify patients if you leave, you need to negotiate how you'll split the costs of that notice with the practice. You should even specify the exact language to be used in the notice through an appendix to the contract.

Some practices also put language in the contract that prohibits departing physicians from accepting referrals from other practices or contracts with local insurers. Such language may not be reasonable, and you should work to exclude it.

"It's very difficult to enforce a nonsolicitation when the nature of the relationship is inherently nonexclusive," said Neil Caesar, JD, president of the Health Law Center, a national law firm for physicians and other providers headquartered in Greenville, S.C. An example of a nonsolicitation provision that would be hard to enforce would refer, for instance, to a health plan that contracts with any physician who qualifies.

You may also see nonsolicitation language in employment contracts that target the group's staff. "Nonsolicitation of personnel has increased in importance," said Denver's Mr. Johnson. "Many staff members, including echo technicians and radiology techs, are pretty hard to replace."

If the group insists on including nonsolicitation language, Mr. Caesar pointed out that nonsolicitation simply means that physicians can't actively try to persuade patients, physicians or personnel to follow them to their new location.

"If patients contact that physician for his whereabouts, that's not solicitation," he said. "Physicians can also send postcards to everyone in a certain zip code or to all the hospital medical staff, just as long as they're not targeting specific people they know because of their prior employment."

Tail insurance

Negotiating who pays for tail insurance coverage before you join a practice is a good idea, particularly if you're going to practice in a state—like Pennsylvania or Florida—with skyrocketing liability premiums. (Tail insurance covers you against future claims that may be made against you after you leave an employer.)

If your new practice doesn't agree in the contract to pick up the tab for tail insurance, broach the topic again before you leave to see what, if any, tail expenses the group will cover. Ms. Roediger said she tells clients that if the practice still refuses to pay for tail coverage, ask your new practice to cover it. (If you can't cover those costs and the new practice won't help out, Ms. Roediger advises physicians to think twice about taking the new job.)

One alternative: Stick with the same insurance company and negotiate a new retroactive date to when the policy first started. "But that works only if you're staying in the same state and with the same carrier," she said. Sometimes, she pointed out, a new carrier may allow you to backdate your retroactive date of coverage.

If the practice won't provide tail coverage, which would be optimum, Ms. Roediger said there are two common compromises: The physician and the practice agree to split the cost of the tail, or "the practice pays the tail if it asks the physician to leave, but the physician pays if it's his decision to leave." Either way, physicians should be prepared, Ms. Roediger added, to pay thousands (if not tens of thousands) of dollars for tail insurance if the contract isn't properly worded.

You may see provisions where the group expects physicians to help defray tail coverage costs. "The practice may very well buy the policy because it's the practice that's at risk," pointed out Denver's Mr. Johnson. "But that doesn't mean the practice won't try to go after the physician for those costs by reducing it from accounts receivable or deferred compensation."

Departure-related expenses

Transition costs will arise, so try to identify them in advance and agree on who pays.

One example would be photocopying costs for patient records. While most contracts stipulate that patient records are to be kept by the group, departing doctors are often entitled to photocopies. But those costs can reach $7,000, said Mr. Johnson, who suggested the two parties split costs. Make sure the contract spells out the terms.

When it comes to buy-outs, a standard yardstick for buy-out payments is a certain percentage of a practice's revenues. Accounts receivable (AR) were once a core issue in buy-out agreements, but as electronic payments have speeded up payments, the average AR window has dropped from 75 days to 30 days, diminishing their sum, said Mr. Parshall. While you might have once been able to count on an $80,000 AR payment, you'll likely receive a small fraction of that amount in today's practice environment.

Goodwill, which is the value that exists beyond tangible assets, remains a sticky and hard-to-define issue when it comes to buy-outs, he added. Goodwill takes into account a departing physician's contributions to the practice, many of which are hard to quantify.

According to Mr. Parshall, there is no straightforward way to calculate goodwill, but you should still make sure your contract covers goodwill themes pertinent to your contributions. You should also update that contract language as necessary, such as every two years, he suggested.

Finally, Mr. Parshall offered one more piece of advice. "For those who are heavily sought after, there's a temptation to clear everything off the table," he said, referring to that negotiating tactic as "the scorched earth approach."

"'They were so desperate for me that they gave in on everything'—but now you have to go in and work there when they resent you because you drove too hard a bargain," he said. "The first rule in recruitment is that there has to be a happy ending."

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Protecting your practice

The same advice that applies to physicians taking new positions also holds true for the medical groups hiring them: Use employment contracts to plan ahead.

"Groups that have not learned to address and resolve transitioning issues prior to when they actually arise are more likely to get burned," said Neil Caesar, JD, president of the Health Law Center, a national law firm headquartered in Greenville, S.C.

Experts say one way to get a handle on potentially looming departure problems is to take a hard look at the age range of your physicians.

"Physicians in their 50s could retire at any time," said Bruce Johnson, JD, a consultant with the Medical Group Management Association and a health care attorney with Faegre & Benson LLP in Denver. If your practice demographic is slanted to physicians age 50 and older, he added, "the group can be really put into jeopardy with the departure of one or two physicians, because the younger doctors are taking more calls."

To help protect the practice, Mr. Johnson recommends building an appropriate notice period into employment contracts. While contracts typically stipulate that departing physicians to provide a 90-day notice, a contract may have a provision saying the practice requires a 180-day notice for the physician to get the full buy-out.

"The objective here is to give the physician an incentive to think about it," Mr. Johnson said.

Practices also need to keep their contract language up-to-date to accurately reflect the group's business. If your overhead has increased from 35% to 65%, the valuation of that business in terms of gross revenues has changed dramatically, said Michael Parshall, a consultant at The Health Care Group, a practice management and consulting firm in Plymouth Meeting, Pa. To keep current with such changes, groups need to regularly revise their buy-out language.

As far as defending against the loss of patients, the first line of defense is a well-drafted noncompete clause. To protect a practice, Daniel Bernick, JD, MBA, principal with The Health Care Group and with its sister corporation, Health Care Law Associates, gave these tips:

  • Make sure the noncompete is signed prior to a physician's start date, and include an "evergreen" clause that automatically renews the contract. If you have a one-year contract that does not include an automatic renewal, you'll inevitably face a situation in which a physician leaves, and it's unclear if the noncompete is in force.

  • Include a provision that departing physicians must resign their privileges at key hospitals and cannot reapply for them. "That's legal and can be done," Mr. Bernick said, "though it's sure to be resisted."

  • If noncompetes are politically unacceptable to your group (or not permitted in your state), Mr. Bernick suggested contract language that makes final payments contingent on whether the departing physician is not competing locally.

    "That makes sense," Mr. Bernick said. "The pay-out is predicated on the assumption that the physician is leaving patients behind who will continue to generate office visits."

  • Safeguard your patient list. Make sure office employees know the list is company property and that no one should get a copy. You also can include nonsolicitation provisions to head off a potential loss of patients.

At the same time, think twice about withholding the new whereabouts of departing physicians from patients trying to find them.

Such ploys can backfire because patients who are determined to track down their physician will do so, Mr. Bernick said, and they'll remember the obstacles you put in their way. "When a patient calls for a departed doctor," he explained, "say 'Dr. X is no longer with our office. May I schedule you with Dr. Y?' " But if patients insist on seeing their former physician, he added, give them that contact location.

And while groups are certainly entitled to take reasonable steps to safeguard their practice, owners should think long and hard about playing real hardball with a physician who's leaving. Don't plan to withhold a paycheck or bonus, which could lead to serious legal consequences.

When departures become bitter or hostile, "There's a negative impact on physicians and on staff morale," Mr. Bernick said. "Physicians who later approach your practice may ask about people who have left recently and what their gripes were. If there were a lot of bitter circumstances about a prior departure, that may come back to haunt you."

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