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          Audrey Becker 
          2341 Seven Pines Suite 5
          St. Louis, MO 63146

Phone: 314.878.6888
Toll-free: 877.583.3255
Fax: 314.878.1827
Audrey@ObOnly.com

By the time you emerge from residency, you have completed at least eight years of training beyond college. You have worked more hours per week than most of us remain awake; your loan total ends with a frightening string of zero’s; you drive an old car and live in a small apartment. You are understandably eager to begin making real money.

The first contract in your hands is tangible evidence that you are in the homestretch. Loans will be repaid, houses will be bought and decorated, and you will ride in an automobile made in this decade. Don’t let your eagerness make you myopic.

Physicians before you have learned the hard way: Get it in writing. No matter how sincere the promise, no matter how firm the hand-shake: Get it in writing.

The contract should cover all reasonable contingencies from your first day of employment to the time you become a partner.

Term of Employment

The contract should clearly state the length of time you will be employed by the practice. Traditionally, terms range from one to three years. Employment will be contingent upon your gaining state licensure, hospital staff privileges, and liability insurance.

Almost all contracts allow the employer to terminate you with or without cause. “Cause” generally means “a good reason,” such as dishonesty, loss of hospital privileges, or inability or unwillingness to follow directions and/or meet patient obligations.

“Without cause” generally means for any or no reason. This is reciprocal, and the contract may state that your employment is “at will.” In other words, either party may terminate the agreement after giving sufficient notice, usually between 45 and 90 days - the longer, the better. The notice period should give you adequate time to change your behavior, or to find a new position. You can minimize the adverse impact of these clauses by requiring the employer to specifically and unambiguously spell out behaviors or conditions that would be unacceptable.

Some contracts set out regular evaluation periods, as well as the criteria by which you will be judged. Typical of the list are commitment, level of productivity, efficiency, overall contribution to the practice, and interest in the practice from an entrepreneurial standpoint. Interpersonal factors may be considered, including your relations with other physicians and staff, and your ability to earn the confidence and respect of physicians and referrers. This type of review, with the criteria laid out in the contract, is in your best interest, especially if the evaluation is used to determine an eventual co-ownership offer.

Work Expectations

This is not included in contracts as often as it should be. However, it is important to find out the approximate number and type of procedures you will perform. This is especially true if you are preparing for Board Certification and must compile a list of cases.

Beware the contract that makes no mention of call. Will call be shared equally, including holidays? Is one of the current physicians planning to drop out of the OB rotation after you arrive? You should know what your obligations will be, and get those obligations in writing.

Compensation

There are basically three ways in which you may be compensated: a base salary, an percentage of production, or a combination of the two. If you have an entrepreneurial bent, you may like the idea of a production-based contract, one that has a relatively small guaranteed amount with a large allocation for productivity. Because production is typically measured by cash collected (as opposed to services billed, hours worked, or patients treated), you must keep in mind that it takes time to collect cash. This is especially important in your first year. You may be busy from your first day, but because of lag time in the collection of payments, your year’s production will be based upon nine or ten months of collections.

Practices use different types of incentives. In the break-even formula, a practice pays you a percentage of the income you generate in excess of the practice’s cost to employ you and profit from your efforts. The break-even point maybe determined according to the practice’s actual costs to employ you, which could include the cost of staff, supplies, equipment and rent, in addition to your take-home compensation.

The threshold formula focuses on the group productivity, so you have less control over the incentive bonus you receive. The most typical use the threshold provides that when the practice’s net income (after covering your salary and expenses) exceeds a set percentage, perhaps 110% of last year’s net, you are entitled to some portion of the excess. By setting the threshold at 110% of the previous year’s net, the group is guaranteed at least a 10% return before you receive a bonus. Another threshold formula states that if your efforts help the practice generate gross revenues in excess of a specified amount, you will receive a percentage of that excess.

Incentives based on personal discretion are the least secure. You have little control over this type of bonus, which can be given or withheld for any number of reasons. In other words, the bonus is based on a subjective assessment of your overall contribution to practice success.

On the other hand, some practices offer no incentive pay or regular bonuses whatsoever. This should not automatically rule them out as poor opportunities. If the practice is an appealing long-term opportunity for you, then an appropriate salary can be sufficient inducement to join. Once employed, the goal of building the practice in order to be promoted to partnership could also be sufficient motivation.

Many practice relationships today involve revenue guarantees rather than salaries. This is most common in rural areas, where there is a short supply of physicians; however, it is becoming increasingly common in suburban areas as well.

Generally, a revenue guarantee takes the form of a per month amount to be paid to the physician by a hospital. For example, a hospital may guarantee gross revenues of $25,000 per month for 12 months. When the Ob/Gyn begins practicing and receives no fees in the first month (because of a lag in collection), the hospital pays the doctor $25,000 to cover take-home pay and office expenses. If in the second month, the Ob/Gyn collects $7,000 in revenues, the hospital pays only $18,000 - the difference between the “guaranteed amount” and the amount actually collected. If by the tenth month the physician collects $26,000, the hospital pays nothing.

To induce the doctor to remain practicing near the hospital, the hospital often agrees to forgive the repayment of advances, provided that the physician remains in the area for a certain number of months. This arrangement gives rise to interesting tax consequences. The hospital’s advances are generally deemed loans, which are non-taxable. Thus, in the above example, the Ob/Gyn receives up to $25,000 per month tax free for the initial period of 12 months. However, if the physician is required to stay in the area an additional 24 months to have the loan forgiven, and the loan is forgiven on a prorated basis (1/24^th as each month passes), the doctor will be taxed upon the forgiveness of the loan, as it occurs.

Assume the physician receives $100,000 from the hospital as a loan in the first 12 months, and that the loan will be forgiven if the physician practices in the hospital’s region for an additional 24 months. The loan can be repaid either by money, i.e., $100,000, or by 24 months of service in the community. In this example, the physician would have no tax liability in months 1 through 12 for receiving the $100,000 loan, but would have tax liability not only on his or her earnings in months 13 through 36, but also on the amounts advanced in months 1 through 12 but not forgiven until months 13 through 36.

Assuming that the Ob/Gyn satisfies the service commitment over a 24-month period, he or she would recognize $50,000 in income in each of the second and third years, even though the $100,000 loan was advanced in the first year. Thus the physician must save money in months 1 through 12 to meet the tax obligations caused by receiving “phantom income,” i.e., taxable income for which there is no corresponding cash, in months 13 through 36.

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