Hospital and Physician Employment Agreements a presentation by Poyner Spruill LLP

Wilson Hayman, J.D.PartnerSteven Mansfield Shaber, J.D.PartnerPoyner Spruill LLPRaleigh, Charlotte, Rocky Mount, and Southern PinesNorth Carolina

Hospital and Physician Hospital and Physician

Employment AgreementsEmployment Agreementsa presentation bya presentation by

Poyner Spruill LLPPoyner Spruill LLPunder the auspices ofunder the auspices of

andand

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Those who fail to study history are Those who fail to study history are doomed to repeat it.doomed to repeat it.

-- Winston Churchill-- Winston Churchill

If you are going through hell, If you are going through hell, keep going.keep going.

-- Winston Churchill-- Winston Churchill

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Hospital Employment – Strategic Hospital Employment – Strategic Planning IssuesPlanning Issues

No physician should sell his practice and enter an No physician should sell his practice and enter an employment agreement with the hospital out of fear employment agreement with the hospital out of fear or desperation. Instead, each physician and or desperation. Instead, each physician and practice should study and prepare a strategic plan practice should study and prepare a strategic plan which addresses his or her own needs in a changing which addresses his or her own needs in a changing marketplace. Initial questions to consider are the marketplace. Initial questions to consider are the following:following:

• What are the reasons you are considering hospital What are the reasons you are considering hospital employment?employment?

• Could your practice survive if you did not become Could your practice survive if you did not become employed by the hospital, especially if some of your employed by the hospital, especially if some of your partners do?partners do?

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Hospital Employment – Strategic Hospital Employment – Strategic Planning Issues Planning Issues (continued)(continued)

• Are you more interested in maximizing the benefits of Are you more interested in maximizing the benefits of joining, or making it relatively easy to get out of the deal joining, or making it relatively easy to get out of the deal if necessary?if necessary?

• How much would you want to be paid up front if How much would you want to be paid up front if termination of your hospital employment for any reason termination of your hospital employment for any reason would force you to leave the Asheville area?would force you to leave the Asheville area?

• What sort of governance organization is critical to you?What sort of governance organization is critical to you?

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Hospital Employment – Strategic Hospital Employment – Strategic Planning Issues Planning Issues (continued)(continued)

• Do you have faith in the hospital board and Do you have faith in the hospital board and administration that when given the necessary administration that when given the necessary information, they will make the right decisions as the information, they will make the right decisions as the ultimate authority over a hospital-owned practice?ultimate authority over a hospital-owned practice?

• What practice issues are critical to you?What practice issues are critical to you?

• What compensation issues are critical to you?What compensation issues are critical to you?

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Physician Organization GovernancePhysician Organization Governance

The IRS has recognized as eligible for tax-exempt The IRS has recognized as eligible for tax-exempt status only limited types of governance for status only limited types of governance for physician organizations in integrated health physician organizations in integrated health delivery systems.delivery systems.

• The IRS has The IRS has onlyonly approved corporations controlled approved corporations controlled and/or owned by physicians as a part of a tax-exempt and/or owned by physicians as a part of a tax-exempt integrated delivery system where the State’s corporate integrated delivery system where the State’s corporate practice of medicine doctrine required physician practice of medicine doctrine required physician practices to be organized in that way. Even in those practices to be organized in that way. Even in those instances, however, the IRS required either that the instances, however, the IRS required either that the practice’s governing board be made up of no more than practice’s governing board be made up of no more than 20 % employed physicians, or if the governing board 20 % employed physicians, or if the governing board was made up of physicians, then the hospital had to was made up of physicians, then the hospital had to approve all decisions of the board. approve all decisions of the board.

• In North Carolina, there is a recognized exception to the In North Carolina, there is a recognized exception to the corporate practice of medicine doctrine for nonprofit corporate practice of medicine doctrine for nonprofit hospitals which employ physicians, and presumably this hospitals which employ physicians, and presumably this exception would extend to a nonprofit controlled affiliate exception would extend to a nonprofit controlled affiliate of such a hospital.of such a hospital.

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Physician Organization Governance Physician Organization Governance (continued)(continued)

• In other letters determining exempt status (which are In other letters determining exempt status (which are very fact specific), the IRS has approved organizations very fact specific), the IRS has approved organizations where no more than 20% of the governing board would where no more than 20% of the governing board would be either be (a) physicians or (b) persons having any be either be (a) physicians or (b) persons having any past or present financial interest with the employed past or present financial interest with the employed physicians.physicians.

• Physician compensation committees are in most if not all Physician compensation committees are in most if not all cases required to have no physicians or other interested cases required to have no physicians or other interested persons.persons.

• Further research may reveal additional alternatives Further research may reveal additional alternatives which may be available. In addition, the IRS can be which may be available. In addition, the IRS can be approached for review of any proposed arrangement.approached for review of any proposed arrangement.

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Physician Compensation IssuesPhysician Compensation Issues

Fair Market ValueFair Market Value

•• A number of legal requirements require hospitals to A number of legal requirements require hospitals to provide only fair market value compensation to provide only fair market value compensation to physicians through either employment or other types of physicians through either employment or other types of services contracts. services contracts.

•• ““Fair market value” applies to total compensation Fair market value” applies to total compensation including base salary and any productivity bonus. including base salary and any productivity bonus.

•• Legal parameters include the requirements of the Legal parameters include the requirements of the employment exception to the Stark II law and the IRS’ employment exception to the Stark II law and the IRS’ requirements for tax-exempt organizations.requirements for tax-exempt organizations.

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Evidence of Fair Market ValueEvidence of Fair Market Value

•• Hospitals consider a range of compensation using Hospitals consider a range of compensation using national and regional median salaries in the physician’s national and regional median salaries in the physician’s specialty. specialty.

•• Salaries significantly in excess of the median salary can Salaries significantly in excess of the median salary can often be justified based on productivity or revenues, often be justified based on productivity or revenues, past productivity, and subspecialty skills which would past productivity, and subspecialty skills which would normally increase income.normally increase income.

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MGMA DataMGMA Data

Physician Compensation and Production SurveyPhysician Compensation and Production Survey published annually by the Medical Group published annually by the Medical Group Management Association (“MGMA”):Management Association (“MGMA”):

•• Includes limited median compensation data by Includes limited median compensation data by subspecialty for the four broad geographic regions of the subspecialty for the four broad geographic regions of the country and more comprehensive compensation country and more comprehensive compensation information (percentile, etc.) by subspecialty on a information (percentile, etc.) by subspecialty on a national basis. national basis.

•• Contains data about physician productivity, gross Contains data about physician productivity, gross charges, physician compensation and collections per charges, physician compensation and collections per both total RVUs and physician WRVUs worked, as well as both total RVUs and physician WRVUs worked, as well as many other data sets on a nationwide basis. many other data sets on a nationwide basis.

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IRS Requirements forIRS Requirements forTax-Exempt HospitalsTax-Exempt Hospitals

The amount of physician compensation paid by tax-The amount of physician compensation paid by tax-exempt hospitals raises issues under the law of tax-exempt hospitals raises issues under the law of tax-exempt organizations. exempt organizations.

IRS Information Letter 02-0021 listed the following IRS Information Letter 02-0021 listed the following factors tending to show the fair market value of factors tending to show the fair market value of physicians’ compensation: physicians’ compensation:

•• compensation established by an independent board of compensation established by an independent board of directors or independent compensation committee directors or independent compensation committee

•• figures supported by reliable physician compensation figures supported by reliable physician compensation survey data for the physician specialty and geographic survey data for the physician specialty and geographic locale locale

•• arm’s-length relationship in negotiating compensationarm’s-length relationship in negotiating compensation

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IRS Information Letter 02-0021 IRS Information Letter 02-0021 (continued)(continued)

•• inclusion of a reasonable ceiling or maximum on the inclusion of a reasonable ceiling or maximum on the amount the physician may earnamount the physician may earn

•• the compensation formula takes into account measures the compensation formula takes into account measures of quality and patient satisfactionof quality and patient satisfaction

•• the compensation methodology does not transform the the compensation methodology does not transform the arrangement into a joint venture or impermissible arrangement into a joint venture or impermissible means of profit-sharing by a tax-exempt organizationmeans of profit-sharing by a tax-exempt organization

•• the compensation arrangement serves a real business the compensation arrangement serves a real business purpose as opposed to an impermissible benefit to the purpose as opposed to an impermissible benefit to the physiciansphysicians

•• compensation is based on services personally performed compensation is based on services personally performed by the physicianby the physician

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Compensation Methodologies – Compensation Methodologies – Fixed Total SalaryFixed Total Salary

A fixed salary may be available, particularly for the A fixed salary may be available, particularly for the first year or two of employment and for physicians first year or two of employment and for physicians new to the area. new to the area.

These arrangements are typically converted These arrangements are typically converted thereafter to a base salary with a bonus or pure thereafter to a base salary with a bonus or pure productivity.productivity.

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Compensation Methodologies -- Base Compensation Methodologies -- Base Salary with Productivity BonusSalary with Productivity Bonus

•• After first year or two, compensation may change from After first year or two, compensation may change from 100% guaranteed salary to a reduced base salary combined 100% guaranteed salary to a reduced base salary combined with a new productivity bonus. with a new productivity bonus.

•• Alternatively, a different division of compensation between Alternatively, a different division of compensation between guaranteed base and productivity bonus may be gradually guaranteed base and productivity bonus may be gradually implemented over a period of 5 or so years. implemented over a period of 5 or so years.

•• The bonus may be based on a percentage of revenue, net The bonus may be based on a percentage of revenue, net revenues (physician’s revenues minus office expenses and revenues (physician’s revenues minus office expenses and minus physician’s base salary), or physician work Relative minus physician’s base salary), or physician work Relative Value Units (“WRVUs”) as established by CMS.Value Units (“WRVUs”) as established by CMS.

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Compensation Methodologies – Compensation Methodologies – Productivity Bonus Productivity Bonus (continued)(continued)

•• The amount of total cash compensation will generally The amount of total cash compensation will generally contain a cap either at a certain dollar amount or by a contain a cap either at a certain dollar amount or by a percentage of base salary, adjusted upward annually by the percentage of base salary, adjusted upward annually by the increase in CPI. increase in CPI.

•• Cap may be based on a certain percentile (such as 90%) in Cap may be based on a certain percentile (such as 90%) in the then-current MGMA physician compensation survey. the then-current MGMA physician compensation survey.

•• Bonus may be calculated on a quarterly basis, with Bonus may be calculated on a quarterly basis, with payment of all or a portion of the bonus quarterly (less any payment of all or a portion of the bonus quarterly (less any withhold) and then an annual reconciliation.withhold) and then an annual reconciliation.

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•• Bonus compensation may fix a target volume of collections Bonus compensation may fix a target volume of collections or WRVUs which physician must meet to qualify for the or WRVUs which physician must meet to qualify for the bonus. bonus.

•• Physician WRVUs, as measured by the Resource Based Physician WRVUs, as measured by the Resource Based Relative Value Scale (RBRVS) method, include RVUs for all Relative Value Scale (RBRVS) method, include RVUs for all professional services and the professional component of professional services and the professional component of laboratory, diagnostic and surgical procedures. Thus, laboratory, diagnostic and surgical procedures. Thus, WRVUs can take into consideration revenue from some of WRVUs can take into consideration revenue from some of the ancillary services.the ancillary services.

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•• In the case of WRVUs, the physician would be paid a set In the case of WRVUs, the physician would be paid a set dollar amount per WRVUs personally performed by dollar amount per WRVUs personally performed by physician. The contract may increase the amount paid per physician. The contract may increase the amount paid per WRVU as the physician reaches successively higher ranges WRVU as the physician reaches successively higher ranges of WRVUs during the course of the contract year, as an of WRVUs during the course of the contract year, as an additional incentive to be productive.additional incentive to be productive.

•• Where a hospital-employed physician will be providing Where a hospital-employed physician will be providing substantial care to indigent patients or services at heavily substantial care to indigent patients or services at heavily discounted rates, bonus compensation based upon WRVUs discounted rates, bonus compensation based upon WRVUs may be attractive to physicians.may be attractive to physicians.

•• In addition, a payor mix multiplier of 1.0 or higher may be In addition, a payor mix multiplier of 1.0 or higher may be used to compensate for low-paying or non-paying patients.used to compensate for low-paying or non-paying patients.

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Compensation Solely Based on Compensation Solely Based on ProductivityProductivity

•• At some point, physician’s compensation may be paid At some point, physician’s compensation may be paid solely based on a percentage of his revenues generated or solely based on a percentage of his revenues generated or on WRVUs. on WRVUs.

•• This methodology may include a cap and/or payor mix This methodology may include a cap and/or payor mix multiplier as discussed above.multiplier as discussed above.

•• There should be some form of monthly draw with a There should be some form of monthly draw with a reconciliation at year’s end.reconciliation at year’s end.

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Stark II Requirements for Stark II Requirements for Employment CompensationEmployment Compensation

•• Stark II law prohibits referrals by physicians who have a Stark II law prohibits referrals by physicians who have a financial relationship with the entity receiving referrals financial relationship with the entity receiving referrals (including certain employment arrangements), if the (including certain employment arrangements), if the physician provides “designated health services” (“DHS”) as physician provides “designated health services” (“DHS”) as defined under Stark II which are reimbursed under Medicare defined under Stark II which are reimbursed under Medicare or Medicaid, unless an exception applies. or Medicaid, unless an exception applies.

•• These DHS include, among others, all hospital and These DHS include, among others, all hospital and outpatient services, clinical laboratory services, radiology outpatient services, clinical laboratory services, radiology and imaging, physical therapy, DME, prosthetics and and imaging, physical therapy, DME, prosthetics and orthotics, and home health services.orthotics, and home health services.

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Stark II Requirements for Employment Stark II Requirements for Employment

Compensation Compensation (continued)(continued)

Stark II employment exception only permits Stark II employment exception only permits payments by an employer to a physician who has a payments by an employer to a physician who has a bona fide employment relationship if they satisfy bona fide employment relationship if they satisfy the following requirements: the following requirements:

•• employment is for identifiable services. employment is for identifiable services.

•• the amount of remuneration is consistent with the fair the amount of remuneration is consistent with the fair market value of the services rendered and is not market value of the services rendered and is not determined in a manner that takes into account the determined in a manner that takes into account the volume or value of any referrals by the referring volume or value of any referrals by the referring physician (but may include a productivity bonus based physician (but may include a productivity bonus based on services performed personally by the physician).on services performed personally by the physician).

•• the remuneration would be commercially reasonable the remuneration would be commercially reasonable even if no referrals were made to the employer.even if no referrals were made to the employer.

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Stark II Requirements – Profit Sharing Stark II Requirements – Profit Sharing and “Incident to” Servicesand “Incident to” Services

•• If a physician refers DHS reimbursed by Medicare or If a physician refers DHS reimbursed by Medicare or Medicaid to his employer (or an affiliated entity), the Medicaid to his employer (or an affiliated entity), the physician may only receive a productivity bonus based physician may only receive a productivity bonus based on services personally performed by the physician. on services personally performed by the physician.

•• OnlyOnly if the employer meets the Stark II definition of if the employer meets the Stark II definition of “group practice” may it provide to physician employees “group practice” may it provide to physician employees (a) productivity-related compensation which takes into (a) productivity-related compensation which takes into account “incident to” services or referrals to in-office account “incident to” services or referrals to in-office ancillary services, and/or (b) a share of the overall ancillary services, and/or (b) a share of the overall profits from the medical practice.profits from the medical practice.

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Stark II Requirements – Income from Stark II Requirements – Income from In-Office Ancillary ServicesIn-Office Ancillary Services

•• Revenue from ancillary services may be an important Revenue from ancillary services may be an important component of a physician’s compensation comparable to component of a physician’s compensation comparable to his counterparts in private practice. his counterparts in private practice.

•• The “in-office ancillary services” exception permits a The “in-office ancillary services” exception permits a group practice as defined to order and provide DHS in group practice as defined to order and provide DHS in the office of the physician or group practice, if ancillary the office of the physician or group practice, if ancillary to medical services furnished by the group practice. to medical services furnished by the group practice.

•• The physician may also receive compensation from such The physician may also receive compensation from such revenues as a productivity bonus or profit share as revenues as a productivity bonus or profit share as discussed above.discussed above.

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Stark II Requirements – Income from In-Stark II Requirements – Income from In-

Office Ancillary Services Office Ancillary Services (continued)(continued)

•• In-office ancillary services must be personally provided In-office ancillary services must be personally provided by the referring physician, a member of his group by the referring physician, a member of his group practice or an individual who is supervised by a member practice or an individual who is supervised by a member physician. physician.

•• The services must be provided in the same building The services must be provided in the same building where the members of the group provide medical where the members of the group provide medical services on a full-time basis, or in space owned or rented services on a full-time basis, or in space owned or rented which meets certain other requirements. which meets certain other requirements.

•• If the hospital bills for the in-office ancillary services If the hospital bills for the in-office ancillary services rather than the group practice, then this exception rather than the group practice, then this exception would not be met. would not be met.

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Office Ancillary Services Office Ancillary Services (continued)(continued) •• In-office ancillary services which including DHS are only In-office ancillary services which including DHS are only

permitted by Stark for a group practice, so it is permitted by Stark for a group practice, so it is important for the employing entity to meet the “group important for the employing entity to meet the “group practice” definition.practice” definition.

•• For a group to be a “group practice,” Stark requires that: For a group to be a “group practice,” Stark requires that:

•• It must be organized as a single legal entity which is It must be organized as a single legal entity which is recognized by the State as capable of practicing recognized by the State as capable of practicing medicine (i.e., professional corporation, faculty practice medicine (i.e., professional corporation, faculty practice plan or nonprofit hospital-affiliated corporation).plan or nonprofit hospital-affiliated corporation).

•• Each physician member must furnish substantially the Each physician member must furnish substantially the full range of patient care services that he routinely full range of patient care services that he routinely furnishes through the joint use of facilities, equipment furnishes through the joint use of facilities, equipment and personnel.and personnel.

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Office Ancillary Services Office Ancillary Services (continued)(continued) •• At least 75 percent of the total patient care provided by At least 75 percent of the total patient care provided by

the physicians must be furnished through the group and the physicians must be furnished through the group and billed under a billing number assigned to the group and billed under a billing number assigned to the group and collected by the group.collected by the group.

•• The group is a unified business in that decisions are The group is a unified business in that decisions are made by a centralized body representative of the group made by a centralized body representative of the group practice that maintains effective control over the group’s practice that maintains effective control over the group’s assets, budgets and compensation. assets, budgets and compensation.

•• Overall profits may be divided only among a group or Overall profits may be divided only among a group or subgroup of at least five physicians and may not be subgroup of at least five physicians and may not be divided in a way that tracks designated health services divided in a way that tracks designated health services payable by either governmental or private payors. payable by either governmental or private payors.

•• A productivity bonus may be based on the services the A productivity bonus may be based on the services the physician has personally performed and services physician has personally performed and services “incident to” such personally performed services.“incident to” such personally performed services.

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Medicare and Medicaid Anti-Medicare and Medicaid Anti-Kickback StatuteKickback Statute

•• The Anti-Kickback Statute imposes no limitations on The Anti-Kickback Statute imposes no limitations on what a physician can be paid to practice medicine, fair what a physician can be paid to practice medicine, fair market or otherwise. market or otherwise.

•• A statutory exemption excludes all payments by an A statutory exemption excludes all payments by an employer to a bona fide employee “for employment in employer to a bona fide employee “for employment in the provision of covered items or services” for which the provision of covered items or services” for which payment may be made in whole or in part under any payment may be made in whole or in part under any Federal health care program.Federal health care program.

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Law of Tax-Exempt Organizations Law of Tax-Exempt Organizations Governing 501(c)(3) HospitalsGoverning 501(c)(3) Hospitals

and Affiliatesand Affiliates

•• IRS has expressed concern about a tax-exempt IRS has expressed concern about a tax-exempt hospital’s provision of compensation to physicians based hospital’s provision of compensation to physicians based on a gross or net revenue stream, which may endanger on a gross or net revenue stream, which may endanger the hospital’s tax exempt status. the hospital’s tax exempt status.

•• IRS has specifically addressed this concern with respect IRS has specifically addressed this concern with respect to the private activity bond rules of Section 141 of the to the private activity bond rules of Section 141 of the Internal Revenue Code. For qualified state or local Internal Revenue Code. For qualified state or local 501(c)(3) bonds, not more than 5 percent of the 501(c)(3) bonds, not more than 5 percent of the proceeds of a bond issue can be used in a trade or proceeds of a bond issue can be used in a trade or business carried on by a non-501(c)(3) organization.business carried on by a non-501(c)(3) organization.

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IRS Rev. Proc. 97-13IRS Rev. Proc. 97-13

•• In Revenue Procedure 97-13, the IRS set forth conditions In Revenue Procedure 97-13, the IRS set forth conditions under which a “management contract” using bond-under which a “management contract” using bond-financed property would not result in a “private business financed property would not result in a “private business use” under Section 141(b). use” under Section 141(b).

•• This generally required that the management contract This generally required that the management contract provide for reasonable compensation with no provide for reasonable compensation with no compensation based, in whole or in part, on a compensation based, in whole or in part, on a share of share of net profitsnet profits from the operation of the facility. from the operation of the facility.

•• The IRS opined that the revenue procedure would be The IRS opined that the revenue procedure would be satisfied, and the management contract would not result satisfied, and the management contract would not result in private business use, if among other things the in private business use, if among other things the compensation arrangement were based on a percentage compensation arrangement were based on a percentage of gross revenues (or adjusted gross revenues) from the of gross revenues (or adjusted gross revenues) from the facility or a percentage of expenses from the facility, but facility or a percentage of expenses from the facility, but not both.not both.

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IRS Rev. Proc. 97-13 IRS Rev. Proc. 97-13 (continued)(continued)

•• Although the IRS went on to list six permissible, “safe Although the IRS went on to list six permissible, “safe harbor” compensation arrangements with various harbor” compensation arrangements with various compensation, term and termination requirements, it did compensation, term and termination requirements, it did not sanction any arrangement containing an incentive not sanction any arrangement containing an incentive based on net revenues. based on net revenues.

•• Since the Rev. Proc.’s definition of “management Since the Rev. Proc.’s definition of “management contract” includes “an incentive payment contract for contract” includes “an incentive payment contract for physician services to patients of a hospital,” the IRS has physician services to patients of a hospital,” the IRS has taken the position that this Rev. Proc. applies to a taken the position that this Rev. Proc. applies to a hospital’s hospital’s physician employeesphysician employees based on bond-finance based on bond-finance property, as well as to independent contractors and property, as well as to independent contractors and management contracts.management contracts.

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Percentage of Revenue Compensation on Percentage of Revenue Compensation on Non-Bond-Financed PropertyNon-Bond-Financed Property

•• Rev. Proc. 97-13 should not apply to the physician Rev. Proc. 97-13 should not apply to the physician employees of a hospital or hospital subsidiary who are employees of a hospital or hospital subsidiary who are not based (or use as their principal office) bond-financed not based (or use as their principal office) bond-financed property. property.

•• The IRS in exemption applications concerning The IRS in exemption applications concerning nonnon-bond--bond-financed property has approved paying incentive financed property has approved paying incentive compensation measured as a percentage of the net compensation measured as a percentage of the net revenues that the physician himself generated (including revenues that the physician himself generated (including revenues from allied health personnel such as nurse revenues from allied health personnel such as nurse practitioners working under this direction and control) practitioners working under this direction and control) where the total compensation is reasonable (generally where the total compensation is reasonable (generally with a cap) and where there are safeguards as to charity with a cap) and where there are safeguards as to charity and Medicare/Medicaid care. and Medicare/Medicaid care.

•• This would presumably allow compensation based on This would presumably allow compensation based on “incident to” and in-office ancillary services, consistent “incident to” and in-office ancillary services, consistent with the Stark requirements previously discussed.with the Stark requirements previously discussed.

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Percentage of Revenue Percentage of Revenue Compensation Compensation (continued)(continued)

•• The IRS may not approve payments of net revenue to a The IRS may not approve payments of net revenue to a group of physicians based on their collective efforts, group of physicians based on their collective efforts, since that is viewed as a division of the organization’s since that is viewed as a division of the organization’s net revenue. net revenue.

•• Similarly, payments based on gross revenue are Similarly, payments based on gross revenue are generally viewed as permissible if they are reasonable.generally viewed as permissible if they are reasonable.

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Requirement of ReferralsRequirement of Referrals

•• The Anti-Kickback Statute has been interpreted to The Anti-Kickback Statute has been interpreted to permit an employment contract to require a bona fide permit an employment contract to require a bona fide employee to refer patients to the employer’s services. employee to refer patients to the employer’s services.

•• Stark II permits a provider such as a hospital to require Stark II permits a provider such as a hospital to require that a bona fide physician employee (or a physician that a bona fide physician employee (or a physician contractor through personal services agreement) to contractor through personal services agreement) to refer to a certain provider, including the employer, but refer to a certain provider, including the employer, but only if the following requirements are met:only if the following requirements are met:

•• The compensation arrangement is set in advance for the The compensation arrangement is set in advance for the term.term.

•• It represents fair market value for the services It represents fair market value for the services performed and does not take into account the volume or performed and does not take into account the volume or value of referrals.value of referrals.

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Requirement of Referrals Requirement of Referrals (continued)(continued)

•• It complies with the Stark exception for bona fide It complies with the Stark exception for bona fide employees and/or another applicable exception.employees and/or another applicable exception.

•• The referral requirement is set forth a signed The referral requirement is set forth a signed agreement.agreement.

•• The referral requirement does The referral requirement does notnot apply if the patient apply if the patient expresses a preference for a different provider, the expresses a preference for a different provider, the patient’s insurer determines a different provider, or the patient’s insurer determines a different provider, or the referral is not in the patient’s best medical interests in referral is not in the patient’s best medical interests in the physician’s judgment (as required by N.C. Medical the physician’s judgment (as required by N.C. Medical Board).Board).

•• The required referrals relate solely to the physician’s The required referrals relate solely to the physician’s services pursuant to the employment agreement.services pursuant to the employment agreement.

•• The “referral requirement is reasonably necessary to The “referral requirement is reasonably necessary to effectuate the legitimate purposes of the compensation effectuate the legitimate purposes of the compensation arrangement.arrangement.

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Contract TerminationContract TerminationWith and Without CauseWith and Without Cause

•• Employment agreements typically have two sets of Employment agreements typically have two sets of provisions governing termination. One covers provisions governing termination. One covers termination without cause. One covers termination termination without cause. One covers termination with cause.with cause.

■■ Termination without CauseTermination without Cause. These provisions permit . These provisions permit either party to end the contract by giving the other either party to end the contract by giving the other party a certain amount of prior notice. The consent of party a certain amount of prior notice. The consent of the other party is not needed.the other party is not needed.

■■ Termination with CauseTermination with Cause. These provisions permit the . These provisions permit the employer to fire the employee or the employee to quit employer to fire the employee or the employee to quit because the other party has done something so because the other party has done something so serious that it breaks a key term of the contract. serious that it breaks a key term of the contract. Again, consent of the other party is not needed.Again, consent of the other party is not needed.

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Basic Termination ProvisionsBasic Termination Provisions

The Right to CureThe Right to Cure

• CureCure. Sometimes the “for cause” provisions in the . Sometimes the “for cause” provisions in the contract allow the other party to cure the breach and contract allow the other party to cure the breach and avoid the termination, provided the cure is begun avoid the termination, provided the cure is begun and completed within a set time.and completed within a set time.

• No CureNo Cure. Even contracts that have cure provisions . Even contracts that have cure provisions will usually list some violations that are so serious will usually list some violations that are so serious they cannot be cured.they cannot be cured.

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Contract TerminationContract Termination

Termination without CauseTermination without Cause

• Employment contract provisions that allow Employment contract provisions that allow termination without cause are essential. They allow termination without cause are essential. They allow either party to escape an unacceptable professional either party to escape an unacceptable professional situation without having to prove the other party has situation without having to prove the other party has done something bad.done something bad.

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Termination Without Cause: Time FramesTermination Without Cause: Time Frames

Termination without Cause, GenerallyTermination without Cause, Generally• Termination without cause clauses typically allow Termination without cause clauses typically allow

either party to end the agreement by giving the other either party to end the agreement by giving the other party somewhere between 30 and 180 days prior party somewhere between 30 and 180 days prior notice. Periods of from 60 to 120 days are most notice. Periods of from 60 to 120 days are most common. From the employee’s perspective, a longer common. From the employee’s perspective, a longer notice period is usually better than a short one. Only notice period is usually better than a short one. Only the employee can decide what period is the best the employee can decide what period is the best under his or her circumstances. We would suggest under his or her circumstances. We would suggest that although a 60 day notice period is fairly common, that although a 60 day notice period is fairly common, it is usually too short for the employee’s maximum it is usually too short for the employee’s maximum benefit.benefit.

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Time Frames Time Frames (continued)(continued)

Termination without Cause in the First Year, a Termination without Cause in the First Year, a Special SituationSpecial Situation

• In North Carolina sometimes an employment In North Carolina sometimes an employment contract is not terminable without cause during the contract is not terminable without cause during the first year. This protects the employee from a first year. This protects the employee from a precipitous change by the employer. It also precipitous change by the employer. It also protects the employer from a precipitous change of protects the employer from a precipitous change of heart by the employee. The best possible heart by the employee. The best possible arrangement for the employee would be for the arrangement for the employee would be for the employee alone to have the right to terminate the employee alone to have the right to terminate the agreement without cause during the first year.agreement without cause during the first year.

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Termination Without CauseTermination Without Cause

Notice ProvisionsNotice Provisions

• Termination Without CauseTermination Without Cause. Termination without cause . Termination without cause may run from the day notice is given or received; may run from the day notice is given or received; contracts differ in this respect. There is occasionally a contracts differ in this respect. There is occasionally a problem proving the actual date of receipt. The notice problem proving the actual date of receipt. The notice provision should say something such as this:provision should say something such as this: “Notice to a “Notice to a party is effective on the date of delivery to that party party is effective on the date of delivery to that party personally or to that party’s home or office. The date of personally or to that party’s home or office. The date of delivery may be proved by any reasonable evidence, but delivery may be proved by any reasonable evidence, but if there is no evidence of the date of actual delivery, then if there is no evidence of the date of actual delivery, then delivery will be presumed to be on the (third) (fourth) delivery will be presumed to be on the (third) (fourth) (fifth) day following transmission, by mail or otherwise, (fifth) day following transmission, by mail or otherwise, unless the party to whom the notice is addressed proves unless the party to whom the notice is addressed proves a later date.”a later date.”

4040

Contract Termination Contract Termination (continued)(continued)

•• Termination for CauseTermination for Cause. Termination for cause is an . Termination for cause is an essential element of any employment agreement, but it essential element of any employment agreement, but it can be abused or overstated and needs to be carefully can be abused or overstated and needs to be carefully considered.considered.

•• Common Causes for Termination, Incapable of CureCommon Causes for Termination, Incapable of Cure. . The following terms are common and – if true – are The following terms are common and – if true – are clearly acceptable reasons for termination for cause, clearly acceptable reasons for termination for cause, without possibility of cure.without possibility of cure.

Death or permanent disability, best defined with regard to Death or permanent disability, best defined with regard to the applicable disability insurance policy.the applicable disability insurance policy.

Loss of license to practice medicine, following a hearing.Loss of license to practice medicine, following a hearing.

Suspension of license to practice medicine for more than Suspension of license to practice medicine for more than (30) (60) (90) days, following a hearing.(30) (60) (90) days, following a hearing.

Exclusion from Medicare or Medicaid, following a hearing Exclusion from Medicare or Medicaid, following a hearing and any available appeal.and any available appeal.

4141

Common Causes for Termination, Common Causes for Termination, Capable of CureCapable of Cure

• Failure to maintain proper medical records.Failure to maintain proper medical records.

• Failure to prepare medical records in a timely fashion.Failure to prepare medical records in a timely fashion.

• Failure to bill and code correctly.Failure to bill and code correctly.

• Repeated disruptive behavior, as identified and Repeated disruptive behavior, as identified and described in the employee handbook.described in the employee handbook.

• Repeated failure to cover call.Repeated failure to cover call.

• Breach of a material provision of the agreement.Breach of a material provision of the agreement.

4242

Common Causes for Termination, Common Causes for Termination, Capable of Cure Capable of Cure (continued)(continued)

Cure ProvisionsCure Provisions

•• A cure provision in an employment agreement A cure provision in an employment agreement should say something such as this: should say something such as this: “The party “The party accused of conduct that would constitute good cause accused of conduct that would constitute good cause to terminate this agreement shall have 15 days to terminate this agreement shall have 15 days following receipt of specific notice of this conduct in following receipt of specific notice of this conduct in which to cure the stated cause for termination. If it which to cure the stated cause for termination. If it is not reasonably possible to complete the cure is not reasonably possible to complete the cure within 15 days, then so long as the party has taken within 15 days, then so long as the party has taken reasonable steps to begin the cure, and so long as reasonable steps to begin the cure, and so long as the party is continuing those steps and other the party is continuing those steps and other reasonable steps that may become necessary, then reasonable steps that may become necessary, then the party will have the additional time reasonably the party will have the additional time reasonably needed to complete the cure.”needed to complete the cure.”

4343

Termination for Cause Termination for Cause (continued)(continued)

Dubious Reasons for TerminationDubious Reasons for Termination. Ambiguity is the . Ambiguity is the principal problem with many provisions in a principal problem with many provisions in a contract allowing termination for cause. contract allowing termination for cause.

• Common Vague ExpressionsCommon Vague Expressions. The following . The following expressions and others like them may not adequately expressions and others like them may not adequately describe the conduct that is forbidden, or they may describe the conduct that is forbidden, or they may not adequately separate serious instances of bad not adequately separate serious instances of bad conduct from trivial ones. conduct from trivial ones.

Unprofessional conduct.Unprofessional conduct.

Conduct tending to place the practice or hospital in a Conduct tending to place the practice or hospital in a bad light.bad light.

Conduct injurious to the reputation of the practice or of Conduct injurious to the reputation of the practice or of the hospital.the hospital.

Disruptive behavior.Disruptive behavior.

4444

Dubious Reasons for TerminationDubious Reasons for Termination

Restrictions on Vague Reasons for TerminationRestrictions on Vague Reasons for Termination. If . If you are not able to remove such vague language you are not able to remove such vague language from a contract, you should – if possible – take the from a contract, you should – if possible – take the following two steps:following two steps:

• Include a cure provision for such terms, such as is Include a cure provision for such terms, such as is described above.described above.

• Modify such terms to require repeated and serious Modify such terms to require repeated and serious conduct, such as this: conduct, such as this: “Repeated conduct seriously “Repeated conduct seriously injurious to the reputation of the hospital.”injurious to the reputation of the hospital.”

4545

Dubious Reasons for Termination Dubious Reasons for Termination (continued)(continued)

Tension between Employment Agreements and Tension between Employment Agreements and Medical Staff MembershipMedical Staff Membership. Ordinarily, employees . Ordinarily, employees do not have a right to a hearing before they can be do not have a right to a hearing before they can be fired. The employment agreement can confer this fired. The employment agreement can confer this right on the employee, but usually does not. right on the employee, but usually does not. Promises made in an employment handbook can Promises made in an employment handbook can create this right, but they usually do not. Promises create this right, but they usually do not. Promises made and rights conferred in the Medical Staff made and rights conferred in the Medical Staff Bylaws might create a right to a hearing before Bylaws might create a right to a hearing before being fired, but they usually do not. There are two being fired, but they usually do not. There are two consequences to this:consequences to this:

• Assume that the only rights you have are the rights Assume that the only rights you have are the rights stated in the employment agreement.stated in the employment agreement.

• Put all the rights you want to have into the employment Put all the rights you want to have into the employment agreement.agreement.

4646

EMTALA, Emergency Room Call EMTALA, Emergency Room Call and Compensationand Compensation

Basic Sources of Call RequirementsBasic Sources of Call Requirements

•• Medical Staff Bylaws and RulesMedical Staff Bylaws and Rules

BylawsBylaws. Medical Staff bylaws universally address the staff . Medical Staff bylaws universally address the staff member’s obligation to provide on-call coverage. One member’s obligation to provide on-call coverage. One typical provision might say something like this: typical provision might say something like this: “Each “Each member of the Medical Staff will participate in emergency member of the Medical Staff will participate in emergency service coverage to the extent required by the Governing service coverage to the extent required by the Governing Body, the Medical Staff and the Department.”Body, the Medical Staff and the Department.”

RulesRules. Call requirements are often delegated by rules to . Call requirements are often delegated by rules to the departments. the departments.

Role of the Governing BodyRole of the Governing Body. From the physician’s . From the physician’s perspective, it is better to have the question of call perspective, it is better to have the question of call decided by the Medical Staff, usually acting through the decided by the Medical Staff, usually acting through the Department, and not have it decided by the Governing Department, and not have it decided by the Governing Body.Body.

4747

Basic Sources of Call Requirements Basic Sources of Call Requirements (continued)(continued)

•• ContractsContracts

Employment agreements between individual Employment agreements between individual physicians and private physician groups physicians and private physician groups typically address the question of call.typically address the question of call.

4848


Federal Legal Requirements: EMTALAFederal Legal Requirements: EMTALA

• BasicsBasics. The Emergency Medical Treatment and . The Emergency Medical Treatment and Active Labor Act (EMTALA), 42 U.S. Code § Active Labor Act (EMTALA), 42 U.S. Code § 1395dd, requires hospitals to provide an 1395dd, requires hospitals to provide an appropriate medical screening examination, by appropriate medical screening examination, by a qualified person, to any person who comes to a qualified person, to any person who comes to the hospital emergency department, provided the hospital emergency department, provided the hospital has the capacity to treat that the hospital has the capacity to treat that person.person.

• On-Call ListsOn-Call Lists. Each hospital must maintain a . Each hospital must maintain a list of on-call physicians from its staff that best list of on-call physicians from its staff that best meets the needs of its patients. 42 C.F.R. § meets the needs of its patients. 42 C.F.R. § 489.24(j).489.24(j).

4949

Federal Legal Requirements: EMTALAFederal Legal Requirements: EMTALA

Flexibility under EMTALAFlexibility under EMTALA. The federal government . The federal government understands that hospitals vary greatly in size and understands that hospitals vary greatly in size and services, so there must be – in principle – a lot of services, so there must be – in principle – a lot of flexibility in the EMTALA requirements.flexibility in the EMTALA requirements.

• No physician is required to be on call all the time. CMS No physician is required to be on call all the time. CMS State Operations Manual, Pub 100-07, Appendix V, State Operations Manual, Pub 100-07, Appendix V, Interpretive Guidelines for § 489.24(j)(1). However, Interpretive Guidelines for § 489.24(j)(1). However, physicians may not “cherry pick” call. physicians may not “cherry pick” call. IdId..

• Senior physicians may be relieved from call. Senior physicians may be relieved from call. IdId..

• There is no minimum number of physicians on staff There is no minimum number of physicians on staff that triggers a requirement that the hospital provide that triggers a requirement that the hospital provide call coverage 24/7. CMS Director’s Memo, “On-Call call coverage 24/7. CMS Director’s Memo, “On-Call Requirements – EMTALA.” (Jan. 28, 2002).Requirements – EMTALA.” (Jan. 28, 2002).

5050

Federal Legal Requirements: Federal Legal Requirements: EMTALA EMTALA (continued)(continued)

Physicians may, in some circumstances, be paid to Physicians may, in some circumstances, be paid to take call on a per diem basis. OIG Advisory Opinion take call on a per diem basis. OIG Advisory Opinion No. 07-01. However, payments to take call may No. 07-01. However, payments to take call may very well, in some circumstances, violate the Anti-very well, in some circumstances, violate the Anti-Kickback Statute. Kickback Statute. IdId. For example, violations may . For example, violations may occur if:occur if:

• Compensation is for more than fair market value.Compensation is for more than fair market value.

• The physician is paid an amount out of proportion to The physician is paid an amount out of proportion to the physician’s usual income.the physician’s usual income.

• The physician is somehow or other paid “twice” for the The physician is somehow or other paid “twice” for the same time.same time.

• The physician is paid without performing identifiable The physician is paid without performing identifiable services.services.

5151

Basic Sources of Call Requirements Basic Sources of Call Requirements

Additional Contractual Issues for Hospital-Employed Additional Contractual Issues for Hospital-Employed PhysiciansPhysicians

• Bylaws and ContractsBylaws and Contracts. The call provisions in an . The call provisions in an employment contract between the physician and the employment contract between the physician and the hospital may be more onerous than the provisions in hospital may be more onerous than the provisions in the Medical Staff bylaws and Departmental rules. the Medical Staff bylaws and Departmental rules. Physicians need to face this as a negotiable point in the Physicians need to face this as a negotiable point in the proposed contract. We would suggest the agreement proposed contract. We would suggest the agreement say something like this: say something like this: “Physician shall provide “Physician shall provide emergency call on a reasonable basis, as determined emergency call on a reasonable basis, as determined by ____________ , but in any event no more frequently by ____________ , but in any event no more frequently than as required by the Medical Staff Bylaws and than as required by the Medical Staff Bylaws and applicable Departmental Rules.”applicable Departmental Rules.”

5252


Reasonableness of CallReasonableness of Call

• Call provisions need to be reasonable in both directions. Call provisions need to be reasonable in both directions. The issue of reasonable frequency is mentioned above. The issue of reasonable frequency is mentioned above. The issue of reasonable scope of services needs to be The issue of reasonable scope of services needs to be addressed also. For example, a sub-specialist may addressed also. For example, a sub-specialist may have core privileges that would suggest competence in have core privileges that would suggest competence in a range of procedures that the sub-specialist in fact a range of procedures that the sub-specialist in fact does not perform. (An orthopaedic surgeon may does not perform. (An orthopaedic surgeon may specialize in joint replacement surgery and not be specialize in joint replacement surgery and not be current in spine surgery.) These informal arrangements current in spine surgery.) These informal arrangements may need to be addressed in the employment contract may need to be addressed in the employment contract when the physicians become employed by the hospital.when the physicians become employed by the hospital.

5353


Compensation for CallCompensation for Call. To the extent physicians may . To the extent physicians may seek and get specific compensation for taking seek and get specific compensation for taking emergency call, it may be harder to do so after the emergency call, it may be harder to do so after the physicians are employed by the hospital. The best physicians are employed by the hospital. The best time to address this is when the agreement is time to address this is when the agreement is negotiated. Then, at that time, the economic value negotiated. Then, at that time, the economic value of these services can be factored into the physicians’ of these services can be factored into the physicians’ compensation package. The agreement will need to compensation package. The agreement will need to address the following issues:address the following issues:

• Fair market value of the total compensation.Fair market value of the total compensation.

• Parity between any compensation for call and Parity between any compensation for call and compensation for work generally.compensation for work generally.

• The services being provided by the physician while on The services being provided by the physician while on call.call.

5454


Relief from CallRelief from Call. If the physicians wish to be . If the physicians wish to be relieved from call upon reaching senior status, that relieved from call upon reaching senior status, that right needs to be included in the employment right needs to be included in the employment agreement.agreement.

EMTALA ComplianceEMTALA Compliance. One might expect the . One might expect the hospital would include in the employment hospital would include in the employment agreement certain specific requirements and agreement certain specific requirements and standards by which the physician would be required standards by which the physician would be required to comply with EMTALA and judged on that to comply with EMTALA and judged on that compliance.compliance.

5555


Participation in Hospital’s Managed Care ContractsParticipation in Hospital’s Managed Care Contracts..

• Hospitals generally want physicians providing Hospitals generally want physicians providing coverage to have contracted with payors with which coverage to have contracted with payors with which the hospital has agreements. Hospitals are often in a the hospital has agreements. Hospitals are often in a stronger bargaining position than individual physician stronger bargaining position than individual physician groups, which may extend to assisting hospital-groups, which may extend to assisting hospital-controlled groups and assist employed physicians. controlled groups and assist employed physicians.

• Generally, physicians employed by a hospital or its Generally, physicians employed by a hospital or its subsidiary are required by contract to participate in all subsidiary are required by contract to participate in all hospital managed care contracts. If physicians’ hospital managed care contracts. If physicians’ compensation is based on collections, then the levels compensation is based on collections, then the levels of reimbursement should be explored with this in of reimbursement should be explored with this in mind. mind.

5656

Non-Competition and Non-Competition and Non-Solicitation ProvisionsNon-Solicitation Provisions

Basic Non-Competition RulesBasic Non-Competition Rules

•• Not Favored. Non-competition agreements are Not Favored. Non-competition agreements are restraints on trade and are strictly construed. restraints on trade and are strictly construed. North Carolina courts dislike non-competition North Carolina courts dislike non-competition agreements, but courts will enforce them in proper agreements, but courts will enforce them in proper casescases. .

5757

Non-Competition and Non-Competition and Non-Solicitation Provisions Non-Solicitation Provisions (continued)(continued)

RationalesRationales. The rationale for non-competition . The rationale for non-competition agreements depends on the nature of the underlying agreements depends on the nature of the underlying deal.deal.

• Employer and EmployeeEmployer and Employee. The justification for non-. The justification for non-competition agreements between an employer and an competition agreements between an employer and an employee is the belief that the employer has taught the employee is the belief that the employer has taught the employee the “secret” to running the business and employee the “secret” to running the business and introduced the employee to business contacts.introduced the employee to business contacts.

• Buyer and SellerBuyer and Seller. The justification for non-competition . The justification for non-competition agreements between the buyer and the seller of a agreements between the buyer and the seller of a business is the buyer’s expectation that he is getting the business is the buyer’s expectation that he is getting the seller’s book of business and the opportunity to keep it, if seller’s book of business and the opportunity to keep it, if he can, without the seller’s interfering.he can, without the seller’s interfering.

5858


• Mixed RationalesMixed Rationales. To the extent the buyer acquires . To the extent the buyer acquires the business and keeps its old employees, both the business and keeps its old employees, both rationales may apply.rationales may apply.

Written AgreementsWritten Agreements

• Non-competition agreements have to be in writing. Non-competition agreements have to be in writing. The rest of the agreement may be oral, but the non-The rest of the agreement may be oral, but the non-competition provisions must be written. (Of course, competition provisions must be written. (Of course, there may be other legal reasons why the remainder of there may be other legal reasons why the remainder of the agreement needs to be in writing.)the agreement needs to be in writing.)

5959


The Rules of ReasonThe Rules of Reason. The non-competition . The non-competition provisions in an employment agreement can only provisions in an employment agreement can only be enforced if they are reasonable. There are some be enforced if they are reasonable. There are some fairly well marked limits.fairly well marked limits.

• Reasonable as to TimeReasonable as to Time. The provisions cannot last for . The provisions cannot last for more than a reasonable amount of time. more than a reasonable amount of time.

In a physician employment agreement, one year is In a physician employment agreement, one year is almost certainly reasonable. almost certainly reasonable.

Two years is most likely reasonable. Two years is most likely reasonable.

Three years is problematic, but might be defensible in Three years is problematic, but might be defensible in certain special circumstances. certain special circumstances.

6060


Reasonable as to TerritoryReasonable as to Territory. The provisions cannot . The provisions cannot cover an unreasonable area. They may cover the cover an unreasonable area. They may cover the area in which the employee actually does a area in which the employee actually does a significant amount of work and the area from which significant amount of work and the area from which the employee actually draws significant business.the employee actually draws significant business.

• The two common methods of defining the non-The two common methods of defining the non-competition territory are:competition territory are:

by city or by city or county, and/or county, and/or

by drawing a circle with its center at a particular place of by drawing a circle with its center at a particular place of employment, such as a hospital or a medical office. employment, such as a hospital or a medical office.

• In medicine, the practice area for a sub-specialist may In medicine, the practice area for a sub-specialist may be larger than the practice area for a primary care be larger than the practice area for a primary care physician.physician.

6161


The Rule of Public PolicyThe Rule of Public Policy

• Need to Serve the PublicNeed to Serve the Public. Courts recognize that no . Courts recognize that no physician should be able to deprive the public of physician should be able to deprive the public of needed medical services for personal economic needed medical services for personal economic reasons. reasons.

• Specialists’ ServicesSpecialists’ Services. Courts sometimes refuse to . Courts sometimes refuse to enforce a non-competition agreement because a enforce a non-competition agreement because a medical specialist has shown that if the non-medical specialist has shown that if the non-competition agreement were enforced, patients in the competition agreement were enforced, patients in the area would have to do without needed services.area would have to do without needed services.

6262


The Rules of ConsiderationThe Rules of Consideration. Contracts have to be . Contracts have to be supported by “consideration.” supported by “consideration.”

• What is ConsiderationWhat is Consideration. Consideration is the lawyer’s . Consideration is the lawyer’s name for something given by one person to another to name for something given by one person to another to make an agreement binding between them. make an agreement binding between them.

ExampleExample. At a restaurant, the promise to pay a dollar is . At a restaurant, the promise to pay a dollar is consideration for the cup of coffee, and the cup of coffee is consideration for the cup of coffee, and the cup of coffee is consideration for the dollar. If you do not promise to pay consideration for the dollar. If you do not promise to pay the dollar, there is no contract. If the restaurant delivers the dollar, there is no contract. If the restaurant delivers the coffee and you do not pay the dollar, there is a the coffee and you do not pay the dollar, there is a breach breach of contractof contract. .

• New Contracts Require New ConsiderationNew Contracts Require New Consideration. Once you . Once you have a contract you cannot change it without giving the have a contract you cannot change it without giving the other person new (additional) consideration. other person new (additional) consideration.

6363


Consideration and Non-competesConsideration and Non-competes. The rules of . The rules of consideration have two common effects on non-consideration have two common effects on non-competes.competes.

• In the Original Employment AgreementIn the Original Employment Agreement. If there is a . If there is a non-competition clause in the original agreement, the non-competition clause in the original agreement, the fact of employment, the salary and the benefits are all fact of employment, the salary and the benefits are all consideration for the non-competition clause. Even if consideration for the non-competition clause. Even if they are also consideration for all of the employee’s they are also consideration for all of the employee’s other contractual duties, they bind the employee’s other contractual duties, they bind the employee’s promise not to compete after leaving the job.promise not to compete after leaving the job.

• Not in the Original Employment AgreementNot in the Original Employment Agreement. If the . If the non-competition clause is not in the original non-competition clause is not in the original agreement, it cannot be added to the agreement agreement, it cannot be added to the agreement unless it is “paid for” with additional consideration.unless it is “paid for” with additional consideration.

6464


Liquidated DamagesLiquidated Damages

• It is common for a non-competition agreement to let It is common for a non-competition agreement to let the employee, who is subject to the non-compete, the employee, who is subject to the non-compete, “buy” the right to continue working in the area by “buy” the right to continue working in the area by paying an agreed amount of liquidated damages to the paying an agreed amount of liquidated damages to the employer. A physician should always try to negotiate employer. A physician should always try to negotiate such an arrangement as the exclusive remedy for such an arrangement as the exclusive remedy for physician’s breach of the non-competition clause.physician’s breach of the non-competition clause.

6565


Non-Competition in Hospital-Physician Employment Non-Competition in Hospital-Physician Employment AgreementsAgreements

• Purchase of PracticesPurchase of Practices. The purchase of a practice will . The purchase of a practice will usually lead to employment of the physicians, and usually lead to employment of the physicians, and several issues come up following the purchase of the several issues come up following the purchase of the practice by a hospital.practice by a hospital.

Changed RationaleChanged Rationale. When a hospital buys a physician . When a hospital buys a physician group, one basic rationale for a non-competition agreement group, one basic rationale for a non-competition agreement turns upside down. The hospital is not the person who built turns upside down. The hospital is not the person who built

the practice.the practice.

6666


ConsiderationConsideration. Because the hospital is not the founder of . Because the hospital is not the founder of the practice, if it includes a non-compete in the agreement the practice, if it includes a non-compete in the agreement when it buys a physician group and starts to employ the when it buys a physician group and starts to employ the physicians, it is pretty clearly “buying” the practice’s physicians, it is pretty clearly “buying” the practice’s patients.patients.

Referral IssuesReferral Issues. Regardless of the boilerplate and caveats . Regardless of the boilerplate and caveats in the employment agreements, there will be referral issues in the employment agreements, there will be referral issues in any employment agreement between a hospital and the in any employment agreement between a hospital and the physicians who sold it their practice if that agreement physicians who sold it their practice if that agreement contains non-competition provisions. contains non-competition provisions.

6767


Practical PointsPractical Points. Here are several practical tips with . Here are several practical tips with respect to non-competition clauses in this situation.respect to non-competition clauses in this situation.

• Refuse Non-competesRefuse Non-competes. Physicians may refuse to enter . Physicians may refuse to enter into a non-competition agreement with a hospital that into a non-competition agreement with a hospital that buys their practice and employs them. This will affect buys their practice and employs them. This will affect the economics of the deal, but it may be worthwhile.the economics of the deal, but it may be worthwhile.

• Limit The TimeLimit The Time. Physicians may insist on a non-. Physicians may insist on a non-competition agreement that does not begin to take competition agreement that does not begin to take effect until some time after the purchase. This would effect until some time after the purchase. This would allow the physicians to unwind the arrangement in the allow the physicians to unwind the arrangement in the first few years if it proves unworkable. Again, this may first few years if it proves unworkable. Again, this may affect the economics of the deal.affect the economics of the deal.

6868


• Limit the Triggering EventsLimit the Triggering Events. Physicians may insist on . Physicians may insist on a clause that says the non-compete will not take effect a clause that says the non-compete will not take effect if:if:

the physician terminates the employment agreement the physician terminates the employment agreement for for causecause against the hospital, or against the hospital, or

the hospital terminates the employment agreement the hospital terminates the employment agreement without causewithout cause against the physician. against the physician.

• Get a Compliance ReviewGet a Compliance Review. Someone needs to review . Someone needs to review the proposal to be sure it complies with that anti-the proposal to be sure it complies with that anti-kickback statute and Stark. While the physicians kickback statute and Stark. While the physicians should not rely on hospital counsel entirely, they should not rely on hospital counsel entirely, they should ask the hospital to provide assurances that the should ask the hospital to provide assurances that the arrangement is legal.arrangement is legal.

6969


•• General ReasonablenessGeneral Reasonableness. Be sure that any non-. Be sure that any non-competition terms are reasonable as to time (one competition terms are reasonable as to time (one year if you can get it) and territory (the smaller the year if you can get it) and territory (the smaller the area the better). area the better).

• Liquidated DamagesLiquidated Damages. Make every effort to agree to a . Make every effort to agree to a liquidated damages clause that would allow you to liquidated damages clause that would allow you to continue to work in your specialty and in the area continue to work in your specialty and in the area and without interruption, provided you pay the and without interruption, provided you pay the hospital a certain amount of money as damages for hospital a certain amount of money as damages for your breach of the non-competition clause.your breach of the non-competition clause.

7070


•• Privileges and MembershipPrivileges and Membership. Even if the . Even if the physician is not bound by a non-physician is not bound by a non-competition agreement, the physician competition agreement, the physician would be thwarted if the agreement would be thwarted if the agreement required him or her to give up medical required him or her to give up medical staff membership or clinical privileges if staff membership or clinical privileges if he or she were to cease to be employed he or she were to cease to be employed by the hospital.by the hospital.

7171


Non-Solicitation ProvisionsNon-Solicitation Provisions

• Non-solicitation provisions prevent an employee from Non-solicitation provisions prevent an employee from opening a new business and (a) hiring the former opening a new business and (a) hiring the former employer’s other employees or (b) soliciting the former employer’s other employees or (b) soliciting the former employer’s customers. Just as a physician whose employer’s customers. Just as a physician whose practice is purchased by a hospital ought to structure practice is purchased by a hospital ought to structure the arrangement so it can be unwound and allow the the arrangement so it can be unwound and allow the physician to resume private practice, at least in the physician to resume private practice, at least in the early years, so should it let the physician (a) bring early years, so should it let the physician (a) bring former employees back into the practice and (b) contact former employees back into the practice and (b) contact patients with information about resuming the private patients with information about resuming the private practice.practice.

7272

Due Diligence When Considering Due Diligence When Considering Hospital EmploymentHospital Employment

HistoryHistory

• Other PhysiciansOther Physicians. What is the experience of the . What is the experience of the hospital’s current physician employees who would be hospital’s current physician employees who would be in an analogous situation to you?in an analogous situation to you?

• ManagementManagement. What is the history with the hospital’s . What is the history with the hospital’s management of physician practices? Does the hospital management of physician practices? Does the hospital appear to understand the operations and economics of appear to understand the operations and economics of physician practice.physician practice.

• Strategic GoalsStrategic Goals. Does history indicate that the hospital . Does history indicate that the hospital can help the physician accomplish its mission through can help the physician accomplish its mission through strategic planning, investment in equipment, etc.?strategic planning, investment in equipment, etc.?

7373

Due Diligence When Considering Due Diligence When Considering Hospital Employment Hospital Employment (continued)(continued)

• TrustTrust. Do you have faith in the hospital’s Board and . Do you have faith in the hospital’s Board and administration, based on a track record of cooperation administration, based on a track record of cooperation and fair dealing which would indicate the hospital and fair dealing which would indicate the hospital deserves your trust?deserves your trust?

• GovernanceGovernance. In light of the very different modes of . In light of the very different modes of operation and cultures of hospitals and physician operation and cultures of hospitals and physician organizations, does the structure allow for significant organizations, does the structure allow for significant physician input into governance of the physician physician input into governance of the physician organization and autonomy in clinical matters?organization and autonomy in clinical matters?

7474


• CompensationCompensation. What will be the effect of the proposed . What will be the effect of the proposed compensation provisions?compensation provisions?

• TerminationTermination. What are consequences of the . What are consequences of the termination provisions for the practice or the individual termination provisions for the practice or the individual physician? In the event of termination, can the physician? In the event of termination, can the physician:physician:

Continue to practice in the community?Continue to practice in the community?

Purchase the right to continue to practice in the Purchase the right to continue to practice in the community?community?

Remain on the medical staff of the hospital?Remain on the medical staff of the hospital?

Retain most or all clinical privileges at the hospital?Retain most or all clinical privileges at the hospital?

7575


• FairnessFairness

Are all the contract provisions fair?Are all the contract provisions fair?

For an established physician in the community who joins a For an established physician in the community who joins a hospital affiliate, is any non-compete linked to the hospital affiliate, is any non-compete linked to the hospital’s purchase of the practice’s good will and value hospital’s purchase of the practice’s good will and value as an ongoing business. Did the physician share in that as an ongoing business. Did the physician share in that purchase?purchase?

•• Legal ReviewLegal Review

Has there been a full legal review of all contract Has there been a full legal review of all contract provisions to ensure there are no surprises?provisions to ensure there are no surprises?

Documents

Hospital and Physician Employment Agreements a presentation by Poyner Spruill LLP