Patient Protection & Affordable Care Act - Part II

October 5, 2010, 3:56 PM

As a follow up to the previous post, I will discuss key contractual protections that are must haves in transaction documents involving the sale of a private medical practice to a hospital-system medical group. These key contractual protections are as follows:

Compensation Guarantees and Bonuses. Since hospitals generally refuse to pay for a physicians professional goodwill in these types of transactions, it is imperative that the selling physician receive an appropriate amount of compensation to pay him for his ongoing contributions to his new employer. This compensation is usually represented by a guaranteed base salary for a fixed period of years (e.g. 3 to 5 years), a sign-on bonus and a retention bonus. In light of the economic downturn and the PPACA changes, hospitals have been more reluctant to pay sign-on and retention bonuses. The physician should insist on a significant severance payment if the hospital-system medical group terminates his employment without cause prior to the end of the salary guarantee period. The base salary should also be subject to an escalator clause based on any increases in the cost of living index. If the base salary is contingent on maintaining productivity or a level of expenses, the physician should not be responsible for any drop in productivity or increase in expenses outside of his control. If there is a sign-on bonus, the physician should not have to repay the bonus if his employment is terminated for any reason other than his breach of the agreement or his departure from the medical group without cause. Finally, the retention bonus is usually paid at the end of each employment year and the physician should receive a prorated portion of the bonus if his employment is terminated during an employment year. It is important to note that for compliance and tax reasons, the total compensation paid to a physician under his employment agreement must be within a fair market value range.

Benefits. Since benefits are a crucial component of compensation, a physicians benefits should not be modified without his consent or, at a minimum, unless the change applies to all of the medical groups physician-employees. The employment agreement should also avoid giving the physician the option of receiving cash compensation for a particular benefit because the benefit is taxable if such an option is granted.

Restrictive Covenants. As discussed in my previous post, all hospital-system medical groups insist that onerous restrictive covenants be included in their physician employment agreements. The key is to limit the triggering events for these restrictive covenants to (i) termination by the physician without cause or (ii) termination by the medical group for cause. The geographic scope should not encompass areas outside of the hospitals care catchment area and the duration of the covenant should not exceed 2 years.

Repurchase Option. One of the most important contractual protections is the physicians (or his collective groups) right to repurchase the practice from the medical group. This right should extend through the salary guarantee period at a minimum and preferably beyond that period. This right is essential because it gives the physician (or his collective group) some leverage to keep the medical group from changing the working conditions materially or treating the physician (or his collective group) unfairly to the point the physician(s) would want to leave the medical group. The purchase price should be based on the same formula used by the hospital-system medical group in buying the assets.

Maintenance of Working Conditions. If possible, the employment agreement should contain a promise that the medical group will not change the physicians working conditions in a material, adverse manner (e.g., change in the office location, reduction of staff, etc.).

Protection Against Unavoidable Absences. Each physicians employment agreement should provide him with an appropriate amount of leave for disability and other unavoidable absences. During any such periods, the physician should continue to receive his compensation (or a reduced portion thereof).

Protection Against Gutting the Group. If the physician is part of a larger group that sells to a hospital-system medical group, he should insist that the termination without cause of a material number of his colleagues will be tantamount to a termination of his employment without cause. In such event, the physician should have the right to receive severance pay and should not be subject to any restrictive covenant. In short, this provision prohibits the medical group from gutting the physicians former group.

Change In Control. If a physician has decided to take this avenue, he has chosen to become affiliated with the hospital system. If the hospital system decides to sell its medical group to a third party, the players may change completely and suddenly the physician is faced with a new employer. To prevent this occurrence, the employment agreement should prohibit any assignment of the agreement without the physicians consent or treat any such assignment as a termination without cause giving the physician the right to receive a severance payment.

Although the above contractual protections are not an exhaustive list of such protections, they are the salient ones that every selling physician should insist be included in his employment agreement with a hospital-system medical group. --T. Braxton McKee