Physician Employment Contracts Part II: The Story Continues

Last Updated on June 26, 2022 by Laura Turner

Make sure to check out Part I here!
Today’s article takes a closer look at several key terms in employment contracts that can have a significant impact on a new physician – compensation methods, incentive compensation and outside work or “moonlighting”. Building on our first article that examined termination provisions, non-compete clauses, professional liability insurance and indemnification, we will identify key issues in evaluating compensation models and moonlighting and outline some of the questions to consider before signing on the dotted line. 
Compensation Methods and Incentive Compensation
While the amount of compensation is certainly a key subject that both the employer and new physician employee will focus on, it is important to look deeper than just the dollar amount. Physician compensation can take several different forms including annual salaries, base salary with incentive bonuses, or productivity-based formulas, among others. It is important to understand the nature of the compensation method proposed and how it will play out in practice.
A fixed annual salary may be preferable for a physician in the first couple years of his or her career for several reasons. First, physicians in private practice are often just starting to build their patient base early on. Likewise, billing and collections may lag initially while the physician goes through the credentialing process with various payors and plans. Productivity and efficiency in providing patient care will likely improve with experience over time making other compensation models more attractive after several years of practice. One consideration with a fixed annual salary arrangement is whether the employment agreement provides for periodic performance evaluations to allow for adjustment to one’s annual compensation.
Some base salary arrangements also provide for bonus compensation if a certain productivity threshold is met. In this case, it is prudent to note whether the calculation is based on billings or collected payments. While billing-based calculations will likely favor the physician employee, most employers utilize a collections-based formula to account for the fact that some accounts receivable will remain uncollectible. While negotiating changes to a formula that is used for all physician employees in a group or hospital may not be possible, it is important for the physician employee to understand how the formula will function in practice in order to evaluate whether the base salary offered is sufficient.
Productivity-based compensation may also involve a formula based on work Relative Value Units (wRVUs), which are designed to take into account the physician’s effort in providing a particular service. As part of the Medicare Physician Fee Schedule, the Centers for Medicare and Medicaid Services (CMS) sets a wRVU value for fee-schedule services, which are intended to reflect the time and intensity associated with providing that service.[1] Compensation formulas utilizing wRVUs can take several forms, including multiplying wRVUs by a conversion factor or establishing a minimum number of wRVUs that must be reached in order to earn the base salary and then become eligible for bonus payments. wRVUs may also be used in a compensation pool model, where a physician’s percentage of the total wRVUs generated by all the physicians in a group or practice is then multiplied by the money available in the compensation pool.
In cases where base or bonus compensation is formula-based, it is often helpful for a specific example of the formula calculation to be included in the contract to better understand how the calculation will work in practice. When presented with productivity-based compensation, it is also important to consider what duties or expectations of the position could impede your ability to meet or exceed these thresholds. For example, are there administrative responsibilities that may cut into the time spent providing direct patient care? If so, has that been accounted for in the thresholds? Likewise, it may be helpful to ask whether other physicians have had challenges meeting the base requirements.
The ability to take on outside work or “moonlight” is an important consideration for some physicians, especially in cases where one may be accepting a part-time or contingent position. Moonlighting can take different forms, from picking up extra shifts at a local hospital or clinic to engaging in research or teaching opportunities or providing expert testimony. Some employment contracts prohibit the physician from practicing medicine anywhere else during the term of the contract; whereas others may limit the type of outside work in which the physician can engage. If the ability to take on outside work is important, it may be necessary to craft reasonable limitations that both parties can live with. One way to do this is to specify exactly what outside work activities are permitted or narrow the scope of what is prohibited. For example, while a physician group may not want its physician employee to take on work from a competing group or from the hospital it services directly, they may be open to lecturer or research positions. One key consideration when taking on outside work is the scope and limits of your professional liability insurance coverage. In many cases, your employer’s policy will only cover you while performing services in the course of your employment, thereby making it necessary to obtain separate malpractice coverage in connection with outside work.
While compensation is always a key consideration when accepting a new position, it is crucial to fully understand the compensation methodology to be applied or whether moonlighting is permitted before agreeing to the terms of an employment agreement. Given the limitations that may be imposed by a non-compete clause or other restrictive covenants, it may be difficult to get out of the agreement after the fact if the compensation calculations work out unfavorably in practice. It is important to understand the terms, ask for examples with sample figures and negotiate specific terms where necessary.