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,
a 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 money actually spent by the
practice, 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 of 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.
Relative
Value Units (RVUs) have become a common component of productivity
bonus plans. Since the RVU is determined partially by provider time and
level of skill required, and since it is a term familiar to physicians,
its use in determination of productivity takes some of the mystery out of
the process. The hours you work and the procedures you perform are fairly
clearly reflected when your bonus is based partially on RVUs.
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 (1/24th 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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