Employment between Physicians and Hospitals

By: Michelle D. Bayer, Esq.
Featured in Michigan Medical Law Report, 8 M.L.R. 3 (Fall 2012).

View the original article.

The business of the practice of medicine is again changing. Back in the early 1990s many hospital groups purchased physician practices and consolidated physician groups in an effort to maximize profitability. The trend changed after many of these groups were not successful and private practice again became the preferred practice model.

Now, following health care reform, hospitals and physician groups are again looking for ways to maximize the business of the practice of medicine; increasing profits and lowering risk, capturing a larger amount of the patient populations, gaining negotiation leverage for higher reimbursement rates, and dealing with rising malpractice costs. This way of thinking has again brought delivery and payment system programs to the forefront, making integrated delivery systems a more desirable alternative to small private practices, and such integrated systems are being advocated and incentivized by the health care reform system. More and more physicians are looking to be employed by hospitals.

There are a number of different models through which a physician can become affiliated with a hospital such as: direct employment, physician practice acquisition, clinical integration, medical directorships, compensated on-call coverage, pay for performance, and accountable care organizations (ACOs).

Working relationships organized under any of these models should be memorialized through a negotiated written contract or agreement and reviewed by an attorney with health care expertise. Any contracts or agreements for these models should all include careful consideration of the following provisions:

1. Defined job responsibilities and accountability. What roles are the physician expected to fulfill at the hospital (clinical and administrative)? These should be defined in any written contract or agreement. How much autonomy and independence will the physician have? Who does he/she report to? Can the physician still retain an outside practice?


2. Moonlighting activities, inside the hospital and outside. Will the physician be permitted to moonlight for other departments or cover other physicians? Is locum tenens outside of the hospital entity permitted? What activities require advance permission and from whom? Who will receive the royalties if the physician writes a book or invents a new medical device? What if the physician is paid for a speaking engagement? Who gets the fee?


3. Privileges. Are the physician’s hospital privileges (if applicable) linked to the contract or agreement such that if the contract or agreement is terminated, the hospital privileges end?


4. Hours worked and On-Call Requirements. Minimum hours worked requirements and on-call responsibilities should be clearly defined, realistically achievable, and should include administrative and all other non- clinical duties. Is on-call time compensated separately? On call responsibilities that are open ended or variable based on the demand by a hospital administrative entity should be avoided, and the call coverage should be shared equally amongst all physicians in the same practice area. Similarly, work site locations should be specified to the extent that the hospital has numerous locations or branches or satellites spread across far distances.


5. Compensation (i.e., fair market value, productivity, quality based, or some other arrangement). What ever the form of the compensation, it is essential that the physician understand how his/her compensation will be calculated.

Today, it is common for compensation arrangements to be based on RVU (relative value units) formulas which are tied to achieving and maintaining certain annual productivity levels. With RVUs, a physician may be guaranteed certain compensation only if they meet a specific annual RVU benchmark, such as the RVUs during the recent 12-month period prior to the start of hospital employment. If RVU targets are not met, then compensation typically is reduced. If RVU targets are exceeded, depending on the agreement, a bonus may be paid.

Thus, the formula for calculating the RVU and the RVU benchmarks, or any other compensation formula, should be reviewed carefully by a CPA or accountant with expertise in health care compensation to ensure that they are realistic and appropriate. It is also essential that the services being used by the physician to evaluate the RVU or other compensation formula are the same as the services being considered by the hospital.

6. Subsidies and shared savings. For a physician who is integrating his practice into a hospital or selling his practice’s assets, who receives the benefit for government subsidies for electronic medical records (EMRs)? In an ACO, will the physician participate in any shared savings?


7. Terminating the relationship. The duration of any contractual relationship should be specified, as well as renewal notice requirements, and the circumstances under which the relationship can be terminated. For cause terminations should be defined. How much notice is required for non-cause terminations? If the contract is terminated early or if production benchmarks are not met, does the hospital have the right to seek the return of any compensation or bonuses paid?


8. Restrictive covenants. Physicians should carefully consider the scope of any restrictions, which could, depending on their breadth, require that the physician uproot his family to a new city or worse, state. The contract or agreement should delineate the situations under which any non-compete or non-solicitation clause will and will not apply. If the physician is terminated without cause or if the hospital breaches the employment agreement, the restrictive covenant should not necessarily apply. If a physician’s employment or arrangement ends, what access will he have to patient records?


9. Malpractice, continuing legal education, supplies, and equipment. Who is responsible for paying these things? Who pays tail coverage? Working for the hospital can mean more performance management and standardizing equipment as part of cost saving strategies. How much control will the physician have over his methods of clinical care, choice of supplies and equipment, scheduling, and staff?

In conclusion, no matter what form it takes, if you are considering employment with a hospital or integrated entity, it is imperative that you discuss the arrangement with legal counsel who specializes in health law and can review and negotiate any written contract or agreement, as well as a CPA or accountant who can evaluate the financial aspects of the arrangement and the compensation being offered. Such experienced professionals can help you evaluate what form of relationship is best suited for your needs and concerns and ensure that the relationship undertaken meets your short and long term expectations.