Physician Employment Contracts: The Good, The Bad and The Ugly

Last Updated on June 26, 2022 by Laura Turner

In both hospital[1] and group practice settings, physicians are regularly asked to sign employment contracts that the group or hospital may describe as “standard”. While physician employment contracts can define the terms of the employment relationship in helpful ways, they can and often do contain clauses and obligations that may have a long-lasting impact on the physician. When negotiating a contract with a potential employer, physicians are well advised to take a hard look at key contract terms, including termination provisions, non-compete clauses, professional liability insurance terms and indemnification obligations, and negotiate to remove or revise overly burdensome terms prior to the start of the employment relationship.
Termination Provisions
Often the last thing that a physician is focused on during contract negotiations are termination provisions, but the terms governing termination can have a lasting impact on the physician by triggering non-compete clauses and other restrictive covenants that limit the geographic area of future employment and the ability to treat current patients at a new employer’s office. Physician employment contracts generally include terms addressing termination “for cause” and termination “without cause.” “For cause” termination often permits the practice to terminate the physician with little or no notice for things like restrictions on the physician’s license, failure to maintain clinical privileges or medical staff membership at a particular hospital, disability, willful misconduct, criminal charges or convictions, exclusion from a federal health care program, or quality of care or improper billing determinations made by a government agency, among others. “For cause” provisions may also include more subjective terms such as “unbecoming conduct” or “undue absenteeism” as bases for “for cause” termination, in which case it may be prudent to remove or limit these provisions by incorporating an objective standard. In general, non-compete clauses and non-solicitation clauses will take effect if the physician is terminated “for cause”, making it important that the reasons justifying “for cause” termination be sufficiently narrow.
On the other hand, termination “without cause” typically requires no specific reason for the termination and may or may not include a notice requirement, such as 30, 60 or 90 days, on the party ending the employment relationship, regardless of whether it is the practice or the physician. This notice requirement can be helpful to the physician when the practice is terminating the relationship, by offering some lead time for the physician to secure a new position elsewhere. In contrast, if the physician is leaving the practice, the notice period can impact the timeframe in which the physician can start work with a new employer. Physicians should try to avoid signing agreements that allow an employer to enforce a non-compete provision where the employer terminates the relationship “without cause.” If the non-compete clause is drafted to cover both “for cause” and “without cause” termination situations, then the practice could terminate the physician “without cause” but still impose the limitations of the non-compete on the physician. This is often a place where negotiations are wise.
Non-Compete Clauses
In recent years, many if not most physician employment contracts contain non-compete clauses. Non-compete clauses in general are considered enforceable to the extent they are reasonable with regard to geographic scope, duration and restricted activity, but what is considered “reasonable” varies from state to state depending on statutory restrictions and case law. A non-compete clause will typically limit the geographic area in which the physician can practice after leaving the group for a set period of time. Non-compete clauses may also seek to limit the physician’s ability to work for a competing medical group that provides services in the same hospital or health system. In cases where a group operates multiple office locations, the non-compete clause may try to limit the physician from practicing within a certain radius of any of the practice locations. Depending on the physician’s specialty and the nature of the area (whether urban, suburban or rural) a broad non-compete clause can have a significant impact on the physician’s ability to practice elsewhere in the same locality. For this reason it is important to understand the proposed scope of any non-compete provision and make efforts to limit its scope to the extent the terms are overly broad. As discussed above, it is also advisable for physicians to limit the applicability of the non-compete to situations where the physician is terminated “for cause” or where the physician elects to end the employment relationship.
A similar restrictive covenant that may also be included is a non-solicitation clause. Non-solicitation clauses may prohibit the physician from offering to hire other employees of the practice or may limit the physician’s ability to solicit patients or contact referring physicians. It is important for the physician to consider the wording and ramifications of the specific non-solicitation clause in case he or she ultimately leaves the practice. If the impact would be significant, it may be possible to work with the group to incorporate a compromise for the physician to passively notify existing patients and referring physicians of the physician’s new practice location.
Professional Liability Insurance 
Physicians should also review contract terms addressing professional liability insurance with scrutiny. Often the contract will indicate that the practice agrees to maintain professional liability insurance on the physician’s behalf. As an initial matter, it is important to know the coverage limits of the policy the practice agrees to maintain as well as the deductible amount. In addition to ensuring adequate protection against potential liability, state law or hospital staff privilege criteria may require that a physician maintain a minimum amount of insurance coverage.
Understanding the type of professional liability coverage provided is also imperative. Professional liability policies usually fall into one of two categories: “claims made” or “occurrence” policies. “Claims made” policies protect the physician from claims made while the policy is in effect. Absent an extended reporting endorsement (often referred to as a “tail”) a “claims made” policy will not cover any claims submitted after the policy term ends, even if they occurred during the policy period. In the case of “occurrence” coverage, the policy covers claims made for events that occurred during the policy period, regardless of when they are reported. It is important to understand which type of policy the practice maintains because it will impact whether there is a need for “nose” or “tail” coverage if the physician leaves the practice. Due to the structure of a “claims made” policy, the physician will only have coverage if (1) the event occurs while the policy was in force; and (2) the event is reported to the carrier while the policy is in force. As a result, it is often necessary to purchase “tail” coverage (an extended reporting endorsement) from the insurance carrier in order to include claims reported in the future after the policy period has ended. Another option is to purchase “nose” coverage, also referred to as prior acts coverage, which allows the physician to transfer the start date (or retroactive date) of their existing policy to a new insurance carrier so the policy period extends back. Purchasing “nose” coverage eliminates the need for “tail” coverage.
In the context of the employment contract, the agreement will likely indicate whether the physician or the practice bears the burden of maintaining professional liability insurance after termination of the employment relationship. This can be a considerable cost if the obligation falls on the physician. It is important to evaluate whether the contract provides the specific coverage limits the physician must maintain and the duration of coverage, which may vary depending on the applicable statute of limitations for potential claims. Another consideration is whether the contract requires “tail” coverage or gives the physician the option of purchasing “nose” coverage from a different insurance carrier. First, there is often a difference in the cost of “tail” versus “nose” coverage. Likewise, it may be possible in some cases to negotiate the inclusion of “nose” coverage premiums into the physician’s agreement with his or her next employer. If the practice is the party obligated to provide “tail” coverage, the physician will want to include language in the contract requiring the practice to provide proof of coverage from time to time after the relationship ends.
A troubling term being incorporated into physician employment agreements more and more often is indemnification. Indemnification is a legal concept that requires one party to pay for losses sustained by another party. For example, an indemnification clause might provide that “the physician will forever indemnify and hold the practice harmless for any claims, actions, losses damages, costs and expenses, including attorney’s fees, resulting from the physician’s acts or omissions while employed.” These provisions create considerable liability on the part of the physician and often amount to uninsurable risk for which the physician would not be able to purchase insurance coverage. If included, the physician will want to make efforts to have an indemnification provision removed. If it is not possible to completely remove the clause negotiating to narrow application of the indemnification provision to intentional or willful conduct, rather than negligence, can serve to limit potential liability.
At the outset of a new employment relationship, the future is hopeful and neither party is anticipating enforcement of termination provisions or non-compete clauses. Yet this is precisely when the physician needs to understand how the terms of the contract will function in a variety of scenarios. In cases where the terms are overly restrictive, there are often ways to negotiate with the practice to more reasonably define the scope and address both the physician’s and practice’s interests. It is often helpful to obtain a copy of the proposed employment contract early in employment discussions, ideally before finalizing salary and key benefits in stone.
Physicians, particularly those undertaking their first job outside of residency, may be concerned that involving an attorney on his or her behalf makes the relationship adversarial from the start. The terms of the agreement impact both the physician’s and practice’s livelihood and it is safe to assume that the practice has an attorney that prepared the contract on its behalf. Engaging an experienced attorney who is familiar with the unique provisions often incorporated into physician employment contracts as well as the regulatory limitations on healthcare transactions can prove invaluable in the long term. Independent review ensures that the physician understands the impact of the contract terms as well as identifies those terms that may serve as “deal breakers” in the relationship.
[1] The contract terms discussed in this article can be found in employment contracts with both hospitals and group practices. For ease of reference, we will refer to the employer as “the practice” and the employee as “the physician”.