Key Contract Issues for Emergency Physicians

Unlike many of our medical school classmates, emergency physicians (EPs) rarely own their practice. By its very nature, the practice of emergency medicine (EM) encompasses relationships with hospitals and with other EP. These relationships have legal significance.  A well-drafted contract will clarify your obligations to the hospital as well as the EPs with whom you work. It will provide for appropriate compensation and for a fair resolution of any problems that arise in the practice. This article is not intended to provide the EP with legal advice. Rather, the purpose of this article is to alert EPs to key contract issues. The physician will then be in a better position to work with their individual attorney in negotiating a satisfactory contract.

Use of Attorneys

Many physicians enter into employment contracts without seeking legal advice. In our opinion, this is risky. These physicians feel foregoing legal advice will avoid unnecessary expenditures at a time in their careers when money is scarce. However, the price of this upfront savings is considerable downstream risk with significant potential cost. Other physicians mistakenly believe it is antagonistic to tell their prospective employer they need to have their attorney review the contract. However, you can be sure the employer had the contract drafted by an attorney. It is routine business practice to have legal counsel before entering into an important contract, and no reputable employer will fault you for following this norm.

Your attorney can help you cut through the legalese and gain a clear understanding of the contract. The attorney cannot eliminate all risk. Risk is inherent in any business, including the practice of medicine. You may become disenchanted with the job, or your employer may not want you. The employer may lose the hospital contract and go out of business. If so, who will cover the malpractice “Tail”? There may be an EMTALA violation or a charge of sexual harassment. Who will cover the cost of defense and any resulting liabilities? Contracts can’t eliminate risk, but they can fairly allocate the cost of various events.

While I firmly believe you need legal counsel before entering into an employment contract, always remember good attorneys aren’t cheap. You’ll get the most for your money if you are well-prepared. Ultimately, you are the one who has to work for the employer or hospital.

Also, remember that the test of a good job is not the employment contract. Rather, the remuneration, schedule, working conditions and opportunities for growth are the substantive terms which are the main  determinants of your job satisfaction. These are all non-legal issues and you need to do your homework. Your attorney should be your counsel rather than your negotiator or agent. Read your contract several times and take notes, jotting down questions before speaking with your lawyer. The meter is running once you start your discussion with him/her.

Employee v. Independent Contractor

If you are going to work for a group or a hospital, you will either practice as an employee or an independent contractor. In general, the legal difference between the two is that of control. When you have a room addition built on your house, the carpenter, plumber and electricians are independent contractors. You tell them what needs to be done but you don’t tell them how to do their jobs, and you don’t restrict them from taking other contracts (as long as your project gets completed in a reasonable time). The tradesmen provide their own tools. Since the tradesmen are independent contractors, you don’t need to withhold taxes or cover their workman’s compensation insurance. Additionally, your ability to terminate the tradesman is dictated by the terms of your contract with him, not by employment laws. For these reasons, many groups and hospitals prefer independent contractor arrangements with their EPs.

Many EPs also favor independent contractor status. An EP who works at several hospitals can establish their own healthcare benefit package and retirement program as an independent contractor. They can also take tax deductions unavailable to the employed physician. However, the advantages of being an independent contractor come with a price. There are some overhead expenses such as accounting and legal fees. More time must be spent on the business formalities. Additionally, there is the risk of an IRS audit.

The IRS is not bound by the declarations you put in your contract. In a number of cases, the IRS has audited EPs and groups operating under ostensible independent contractor agreements. Many of these audits have resulted in the IRS retroactively declaring that, despite the contractual language, the EP was in reality an employee. As such, the EP’s earlier deductions for his retirement plan and business expenses are disallowed. Once these deductions are disallowed, the recalculation of the emergency physician’s tax return results in considerable tax consequences, to which the IRS adds interest and penalties. The group or hospital will also be held liable for not having paid payroll taxes (Social Security and Medicare) required in an employment relationship. This situation is why many independent contractor agreements contain a clause requiring the EP to indemnify the group if an IRS audit results in a reclassification to employment status.

AAEM’s review of a number of cases has led us to the conclusion the IRS generally favors employment rather than independent contractor arrangements. From the IRS’s view, EPs work scheduled shifts, often wear uniforms, have their “tools of the trade” provided and sometimes follow detailed Policy and Procedure Manuals unique to the institution. It is easier to support an independent contractor status if the physician works at multiple hospitals or for several different groups and is free to accept or decline shifts offered. Ultimately, whether an EP is an independent contractor or employee is a fact-dense analysis made on an individual basis. This is not to discourage you from being an independent contractor; as stated, many EPs favor this arrangement, and practice their whole careers without difficulties. Just keep in mind, the fact that the risk of an IRS audit with resultant tax consequences is most prevalent in an independent contractor arrangement.

One other consideration is the potential protection which comes with employment. Under the legal doctrine of Respondeat Superior, an employer can be held liable for malpractice awards against one of its employed physicians. Consequently, a plaintiff’s attorney armed with a $5 million judgment against you is most likely to collect from your insurance carrier and then obtain the rest from the employing hospital or group rather than go after your personal assets. There are also a number of state and federal laws which protect employees from discrimination or retribution for “whistle-blowing.” These protections may be weakened or inapplicable if the physician is an independent contractor.

In summary, it is administratively easier to be an employee. There is certainly less risk of an IRS audit as an employee. Finally, there is more security as an employee. However, independent contractors may benefit from greater tax deductions and have the ability to customize their benefit and retirement programs. The choice is an individual one, but the consequences are great enough to merit considerable review with your attorney and possibly a tax advisor.

Termination and Due Process

Every employment and independent contractor agreement contains some provision for termination. Usually it is the EP who terminates for a better job or a more desirable location. Other times it may be the hospital or employing group who wants the EP terminated. Many EPs have felt their termination was triggered not by quality of care issues, but rather for political or business concerns. Many other EPs have felt the threat of termination limits their ability to advocate for change in the practice or business arrangement. Since your rights to a “due process” hearing are integrally related to an involuntary termination, these issues will be covered together in this section.

Due Process

Both the JCAHO and the Health Care Quality Assurance Act of 1986 require hospitals to give physicians appropriate due process before taking an adverse action on their privileges. In the case of an involuntary termination from the staff, such a drastic action would require a hearing in which the physician is apprised of the reasons for the pending termination and is given a chance to respond before an appropriate decision-maker. As a member of the hospital medical staff, the EP is entitled to this protection. However, hospitals and groups employing EPs will frequently require the physician’s prospective waiver of the right to due process as an integral part of the employment or independent contractor agreement.  Frequently, a hospital staffing its ED through a contract management group (CMG) will require the group to secure a waiver of due process in its physician contracts. Consequently, the waiver of due process may be very difficult, but not impossible, to negotiate.

The hospital’s main interest in requiring the waiver of due process is facilitating a “clean sweep,” should the ED staffing contract be later awarded to another group. If there were a change of groups the hospital would not want to deal with an individual physician from the previous group who refused to leave and tried to assert their staff privileges by seeing patients in the ED. Such a scenario is more than speculative, as this has played out in various legal challenges won by pathologists, radiologists and EPs. However, the hospital’s interest in this regard can be protected by a more limited waiver of due process rights. The physician’s employment agreement can simply acknowledge the hospital’s right to award an exclusive contract for ED staffing with no right to a due process hearing, should there be a change in vendors.

CMGs and even democratic groups may also ask for a waiver of due process in the event of an involuntary termination. Successful negotiations to limit the scope of the due process waiver here will require an understanding of the group’s need for this contract provision. There may be a legitimate reason for requiring a limited waiver of due process. However, the EP should realize the importance of the right, and should not agree to relinquish this wholesale without legal counsel. Remember, contracts are all about “what if” scenarios. If your contract leaves your boss with the power to terminate you at any time without so much as a requirement to give a valid reason, they may treat you differently, and you may behave differently, than you would if your supervisor was required to articulate a rational reason for an involuntary termination of your employment. 

Termination

Most physician employment contracts provide for termination for a material breach of the contract. Make sure the events which constitute a material breach are defined with as much specificity as possible. The contract should also allow for a reasonable opportunity to cure the breach prior to termination. In reality, however, these clauses are seldom used by a group or hospital because most contracts also allow for termination without cause.  Under these clauses, the contract can be terminated by either party simply by giving notice within the time frame specified in the agreement (typically 90 days).

Because these terminations without cause provisions are ubiquitous in EP employment contracts, it is difficult to negotiate them out. Moreover, there are some legitimate business reasons for termination without cause. Such a termination may be appropriate during a probationary period. It may also be necessary to terminate an EP if there is a loss of volume requiring a staffing adjustment. However, giving the employer the ability to terminate you for any reason whatsoever creates an unfortunate dynamic in your working conditions. Many EPs have expressed a concern that the underlying veiled threat of job loss blunts their ability to advocate on quality issues such as staffing levels, the use of physician extenders or even issues of patient safety. You can imagine that an employer who is being questioned about billings, cash flow and profits may be tempted to expeditiously get rid of the “rabble rouser.” 

In AAEM’s experience, the “termination without cause” section can be appropriately softened in negotiation. It is reasonable to require a reason to be given for any involuntary termination. The contract can state terminations for pure business reasons do not require a due process hearing. However, terminations based on quality concerns or prompted by legitimate advocacy on a quality issue (i.e. staffing levels, equipment availability, nursing issues, etc.) should require some due process protections. Some may feel this does not provide any real protection, as they believe the contract holder could always simply state the termination is for “business reasons,” and therefore, no due process protections apply. However, to the extent the stated “business reason” is pretext, the terminated physician would have legal recourse for breach of contract. Just the possibility of this recourse changes the dynamics between the contract holder and the employed physician.

Non-Compete Clauses

Most EP employment contracts come with some type of non-compete clause. These clauses range in scope from limited to overly broad. Many physicians mistakenly believe these clauses are unenforceable so they give them little thought. In reality, while some states do not enforce non-compete clauses in physician contracts, most will if the limitations are reasonable in scope and are legitimately required to protect the employer from unfair competition.

A hospital’s interest in seeking a non-compete clause is simply to protect it from unfair competition. For instance, if a hospital spends money recruiting a physician and advertising her services, it does not want that physician to later go to work for a competitor in the hospital’s market. However, a hospital that has awarded an exclusive ED staffing contract to a group has no interest in preventing the EPs from continuing to practice in its ED if the contract changes hands.

Both CMGs and democratic groups worry about one of their employed physicians “stealing” the contract. Consequently, the employment contracts generally prohibit the physician from providing services to the hospital, should the staffing contract change hands. While stealing contracts is a legitimate concern, the non-compete clauses used to prevent this are usually overly broad. Our suggested approach has been to substitute the non-compete with a non-interference clause. The non-interference clause simply recognizes the business relationship between the hospital and the contract holder. It prevents the employed physician from unfairly undermining the contract holder as a means of taking over the staffing arrangement. In reality, even if this provision were not in your contract, the common law claim of tortuous interference with contractual relations would likely be an available remedy for pirating a contract. 

Don’t underestimate the impact of the non-compete clauses. Single physician contract holders and CMGs frequently use these clauses as a means of maintaining a substantial profit stream without adding much administrative value. Frequently, a hospital finds itself in a situation in which it is unhappy with the contract holder, but it can’t terminate the staffing arrangement without losing some very well-respected EPs. If the contract given to you contains a very broad non-compete clause, ask to add the following language: “Not withstanding any other provisions in this contract, if the employer (CMG) loses the staffing contract through no fault of the physician, he/she may continue to provide emergency services at the hospital without penalty or delay.”

Contractual Issues Surrounding Medical Malpractice

A section on medical malpractice liability coverage will be a part of your employee or independent contractor contract. As an employee, your employer will likely provide malpractice coverage for you. As an independent contractor, you may be required to obtain your own malpractice insurance with a predefined amount of minimum coverage, typically, one million per occurrence and three million in aggregate (1MM/3MM). 

Medical malpractice insurance typically falls into one of the following two types of policies: occurrence-based policies or a claims-made policy. Occurrence-based policies provide coverage if the event that caused the injury occurs within the policy period, regardless of when the claim is filed. Claims-made policies provide the insured coverage only if both the alleged negligence and the claim is filed within the policy period. A typical claims-made policy will contain a “prior acts” clause or a “retroactive date,” which excludes events occurring prior to the start date of the policy.

Your contract should also contain language regarding whose responsibility it is to purchase a “tail policy.” Only claims-made policies require a tail policy purchase. Typically, tail policies extend insurance coverage for a period of time, usually three years to life. This “tail” coverage insures you for future claims of alleged negligence as long as the care provided occurred before the termination of the original policy. Some plans include a three-year tail provision as part of the contract; others provide complimentary tail coverage for providers who are retiring. A typical tail policy costs 150 percent of the last year’s malpractice premium. Some plans offer prior acts coverage. These policies cover medical malpractice acts or omissions which occurred prior to the date of inception. If you have a claims-made policy, you will need to purchase either “prior acts” or “tail coverage” to ensure there are no gaps in your malpractice coverage.

As an employee, you will have little success in negotiating changes in your employer’s malpractice coverage terms. Most employers have had their trial-by-fire, and they are appropriately recalcitrant to change insurance options for one provider. Some employers will pay for the tail policy provided the employee has worked a predefined number of years. This area is one that may be open for negotiation. Your employer may provide tail coverage as an incentive to hire you.

Some practices have utilized two different “types” of claims-made policies. In one policy, the employer pays a “per patient” rate that increases over three years until becoming a mature or fixed rate during the fourth year. Such a policy may cover any physician employed by the contract holder. Certainly this type of policy is attractive to a group using moonlighters or experiencing a high turnover of physicians. However, the physician should understand that the policy will not cover him for claims arising subsequent to termination if the group discontinued the policy and failed to purchase “tail” coverage.

The second type of claims-made coverage utilized is to purchase individual policies for the group members, naming the corporation as an additional insured. Under this scenario, individuals are responsible for their tail if they discontinue coverage with the insurer. However, the contract may provide for reimbursement of the “tail” premium by the employer, depending on the length of service and reasons for leaving. If the physician maintained the insurance policy, he/she could move from group to group without incurring a tail. 

Physicians who elect not to purchase tail coverage, or who have gaps in their insurance history, are often difficult to insure despite their willingness to not have their prior acts covered. My suspicion is that insurers still believe they have exposure, despite a prior acts clause.

All malpractice insurance policies have coverage limits. Generally these are expressed as two numbers, such as $1mil/$3mil. The first number is the maximum amount your insurer will pay out on any one claim. The second number is the maximum amount the insurer will pay out on all claims against you in one year. Some policies have three numbers, such as $1mil/$3mil/$5mil. Here the first two numbers express the coverage limits as described above. The third number is the maximum the insurer will payout in any year on all claims filed against group members. If the policy you are shown has a third number, you’ll need to know how many physicians are covered so you can assess the risk you are taking in accepting the insurer’s maximum exposure.  

Here are some specific steps to take when reviewing the medical malpractice coverage in your contract:

In many respects, malpractice coverage is the most crucial aspect of your contract. Without adequate coverage, your personal assets can be exposed, and your ability to secure future malpractice insurance can be compromised.

Remember that AAEM and AAEM/RSA are with you all the way, from the time you consider EM to your residency to your practice!

Author: Joseph Wood, MD JD FAAEM
Edited by Robert McNamara, MD FAAEM; Stephanie Gardner, MD, AAEM/RSA Vice President; and Leana Wen, MD MSc, AAEM/RSA President