Contract Components

There are some essential components of physician/practice agreements that both parties should understand and agree on. One of the issues that can occur in contract negotiations is when attorneys represent the practice and physician as a substitute to the parties working through a contract together. I am not suggesting that the practice or physician neglect to seek legal advice. I am suggesting that the practice and physician need to understand not only what is in their agreement, but also why contents of the agreement are important to both parties.

Parties

It seems a little redundant to state that the agreement should clearly identify the parties, but who is party to the agreement is very significant, especially given that practices are business entities. This means that no one person is the practice. The practice is a separate and distinct business entity.

This protection from liability is one of the core reasons people form a business, (including the apt-named Limited Liability Company). If owners had to be personally liability for the legal exposure to their business, they would think twice about building business. By using an approved legal structure for their business, owners are able to basically eliminate their personal exposure for agreements that the business executes.

There are situations where individuals can be liable for damages in a business venture, (and when other businesses may also be liable), but those situations are not common. Physicians should expect that any recourse they have from an agreement will be limited to the business entity that is the party to the agreement.

Recitals

Recitals are the representations that both parties are relying upon to enter the agreement. The physician is or can be licensed to practice medicine in the state. The practice is appropriately licensed to provide clinic-based medical services in the community. The physician wants to provide medical services for the patients of the practice. The practice desires to contract with the physician to provide medical services.

Recitals should address representations relied upon at the time the agreement is entered. They shouldn’t consider what might happen in the future or what facts may be discovered in the future. If a practice conducts a professional background check or has the physician complete a pre-employment form that has the physician acknowledge a set of facts, such as that their CV is a complete and accurate reflection of their employment history and that they have never been fired from previous employment as a result of alleged criminal activity, these representations can then be included in the Recitals. The Recitals would simply state something like, “Physician has provided full and accurate disclosure as part of the Practice’s review process…”

Engagement

The Engagement section states that an agreement has been reached and provides a general overview of how the services will be performed, e.g. the physician will work full time during normal business hours for the practice, the physician will devote their full time and attention to the practice, the physician will work in this geographic area. “The physician shall exercise physician’s own professional judgement” is a standard term of engagement.

As part of the overview of how services will be performed, the Engagement section can identify that the practice shall set the fees, that all revenue generated by the physician for services at the practice belongs to the practice, all patients and records are property of the practice, etc. The Engagement basically says, “The practice agrees to hire the physician. Physician agrees to work for the practice. This is the job the physician is going to do. The job is for the practice.”

Duties

The Duties section gets specific about the job the physician agreed to perform in the Engagement. The general terms of the Engagement may be repeated or incorporated into the Duties section, but the Duties section will go into much greater detail. Examples include:

Provide professional medical services.
Share “on call” duties.
Keep and maintain appropriate patient and office records.
Promoting and utilize the practice’s products and services to patients.
Performing administrative duties, (such as provider meetings).
Maintaining training and education necessary to maintain professional skills.

The Duties section also contains specific representations that the physician commits to for the duration of the agreement, such as:

Maintaining an unrestricted license to practice medicine in the state;
Maintaining other necessary professional licenses, (medical, pharmacy, controlled substances);
Maintaining appropriate staff privileges at local hospitals;
Complying with the practice’s credentialing process.

With few exceptions, the Duties section won’t be explicit about the services to be performed for fear that any variance could be grounds for Breach, (discussed later).

Compensation and Benefits

The Compensation and Benefits section states the amount the physician will be paid, when they will paid, (every two weeks, semi-monthly), and identifies any benefits provided to the physician, including:

Employment taxes paid for employed physicians;
Any professional leave or vacation, including the process for the physician to utilize such leave or vacation, (how many days in advance is the physician required to request to be out of the office);
The amount the practice is providing the physician for professional training (CME) and the process for the physician to schedule and be reimbursed for CME.

The payment of malpractice insurance should be addressed, including the policy amounts required and how malpractice liability will be addressed upon the physician’s departure if the malpractice policy is not an occurrence policy.

Term and Termination

The Term and Termination section addresses the length of the contract from the start date, what happens after the initial term, how the agreement may be terminated by the physician and practice and what happens after the agreement is terminated. Agreements may have an automatic renewal provision built into the Term section so that if the Agreement isn’t terminated within a set period before the end of the initial term period, the agreement automatically renews for another set period of time.

Agreements usually address Termination for Cause and Termination without Cause. Termination for Cause means that one party may terminate the agreement based on a reason identified in this section. Typical grounds for the practice to exercise Termination with Cause include:

The physician loses their medical, pharmacy or controlled substances licenses;
The physician has their hospital staff privileges suspended;
The physician is unable to perform their duties for a set period of time;
The physician breaches a material provision of the agreement;
The physician is convicted of a felony;
The physician fails to maintain regular office hours;
The physician fails to maintain malpractice insurance;
The physician fails to report any investigation or inquiry by any regulatory agency or governmental authority;
The physician dies.

Typical Termination with Cause for physicians include:

The practice breaches a material provision of the agreement;
The practice becomes unable to operate as a business entity;
Bankruptcy or dissolution of the practice.

The agreement can assign “cure periods” to certain reasons for cause. The physician may have 30 days to have the suspension of their hospital privileges lifted, for example. Both parties may have five days to correct any material breach of the agreement (discussed later). During the cure period, the agreement cannot be terminated for that cause.

Termination without Cause allows for a party to exit the agreement without having a reason. Parties are normally required to provide 30-90 days’ notice to terminate the agreement without cause so that the position can “wind down.” Effect of Termination identifies how issues to the wind down period will be handled, including malpractice, billing and compensation.

Right to Bill

The Right to Bill is a standard section of a physician agreement that provides that the practice will bill for the physician. All patient payments will be paid to the practice and the practice will submit and receive payments for all claims. The physician will agree to assign their benefits from Medicare and other programs to the practice. All manage care payments for the physician services belong to the practice.

Again, this seems obvious, but without the right to bill, a physician might claim that they can resubmit open claims, collect payments from patients, etc. after their departure.

Noncompete and Liquidated Damages

Noncompete clauses may or may not be supported in your market or state. These clauses prevent the physician from practicing in a certain geographic area or practice territory for a set period of time after their departure. Practices love noncompete clauses. Physicians do not love noncompete clauses.

Noncompete clauses may not be enforced against physicians in some states or they may be limited in their enforcement. This means that states may limit the scope of the protected practice territory and/or the duration of the prohibition. In Nevada, noncompete clauses can be challenged if they are too restrictive. Our contract defines the practice territory as a 10 mile radius from the practice. The practice territory is protected for one year.

A clause for Liquidated Damages allows the physician to practice in the practice territory during the protected period provided that they pay for the damages resulting from the physician’s competition. Liquidated damages can be a set amount or arrived at by a calculation set forth in the agreement.

Confidentiality

The Confidentiality section addresses HIPAA compliance, trade secrets and proprietary information. As health care professionals, providers are required to comply with HIPAA, but a HIPAA clause in the provider agreement offers protection for the practice in the event the provider discloses protected health information.

Trade secrets and proprietary information address the “secret sauce” of the practice. This confidentiality of information only applies if the information is really a secret sauce. If the information is known or available to the general public, becomes available from third-parties or developed independently, confidentiality wouldn’t apply. The patients of a practice are confidential, so a departing provider would be in violation of this clause if they downloaded a practice’s patients and phone numbers to solicit for their new practice. Departing and departed providers may also be prohibited from recruiting or hiring employees of the practice.

The consequence of breaching confidentiality is normally making injunctive relief available to the practice. This allows the practice to go to court and getting an injunction—a court order to prevent the departing physician from utilizing the confidential information. Practices should also seek to protect confidential information and branding material through patents, trademarks, service marks, fictitious firm name filings, etc.

Dispute Resolution and Mediation

The Dispute Resolution section addresses how disputes related to the agreement will be addressed. If not specified, the dispute resolution will be civil litigation with the jurisdiction determined by the location of the dispute or the Governing Law, (addressed later in Miscellaneous Section). One party will file a lawsuit against the other party and the legal process will begin.

Dispute Resolution sections may require that the parties engage in Mediation before the more formal processes of litigation and arbitration. Mediation usually involves a neutral third-party helping to resolve the conflict to the mutual satisfaction of both parties. Mediation is not a binding process in general, but parties could agree on a binding mediation where a range of acceptable outcomes are available for both sides.

Breach of Contract and Mitigation

There are two ways that a contact can end: Nonrenewal or Termination, both of which were previously covered in the Term and Termination section. Nonrenewal occurs when one party notifies the other party that they are terminating the contract at the end of the current term, (so the contract doesn’t automatically renew), or lets the contract term end, (when renewal isn’t required).

Termination can be “without cause” or “with cause.” Termination without cause occurs when one party provides notice that they are terminating the contract per the terms of the agreement.

Termination with cause is occurs when someone alleges that the other party has committed a Breach of the agreement. This is a big deal for a number of reasons.

First, when one party breaches an agreement, they may not be able to enjoy the benefits of that agreement. The entire agreement may actually be set aside in dispute resolution. The non-breaching party may be able to move forward from breach as if the contract never happened. A physician whose contract was found to be breached by a practice would be free of any agreement in the contract to leave the practice territory, not solicit patients, provide proof of malpractice insurance, etc.

Second, when a party breaches an agreement they may be liable for damages and legal fees to the other party. A physician that ignores a noncompete clause to compete in the practice territory may have to pay the practice for lost revenue. A practice that fires a physician without following the terms of the agreement may have to pay the physician for their lost income. Legal fees may be tacked onto both payments as well.

Parties are required to mitigate their damages, however, which means that reasonable steps are taken to minimize losses. If a physician ignored a noncompete clause and practiced in the practice territory, the practice would be required to keep operating in a way to minimize their damages. The practice couldn’t just close their doors and seek to recoup all of their lost revenue from the physician. If a practice terminated a physician without notice, that physician would also have to mitigate their losses by seeking other employment. If a party does not take steps to mitigate damages, any award that party receives may be reduced by an estimate of what damages should have been with mitigation.

The ability to essentially “void” a contract through breach can be really attractive to a party who feels trapped or taken advantage of in the relationship. Breach is also attractive when one party thinks they have a found a superior opportunity. Suppose a physician found another job that paid significantly more, but they can’t accept this position due to their current contract. If they wait for the period where nonrenewal is available, they will miss the opportunity. Termination without cause isn’t an option because either the notification period is too long or the contract includes a noncompete clause.

The physician’s only option to get out of their agreement is to allege that the practice has breached the contract in hopes that the contract could be set aside or the practice would agree to let them leave. If the physician provided a breach notice to the practice, any cure period would apply, but cure periods for breach are significantly shorter than the typical notification period, (like 5 days versus 90 days). The physician’s hope would be that they provide breach notice to the practice, the practice doesn’t make any attempt to fix the issue in the cure period and then the physician terminates the contract with cause. In theory, the physician could be out of the contract days after the breach notice.

Most parties are simply not going to let the cure period pass, though. They are going to respond to the breach notice by either denying or attempting to correct the alleged breach. The most likely result is an impasse. One party believes the contract has been breached, while the other party maintains there has been no breach of the contract. The parties are most likely headed towards dispute resolution.

What could constitute breach of a contract between physicians and practice? For clarification, there are conditions that are grounds for termination listed in the Term and Termination section. The contract can be terminated if the physician loses their license, hospital privileges, malpractice insurance. The contract can be terminated if the physician is unable to perform duties, fails to maintain office hours, is convicted of a felony or fails to report an investigation or dies. The contract can be terminated if the practice ceases operations, becomes bankrupt or is dissolved.

A breach of the contract can be based on one of the above provisions, but they can also focus on the material provisions of the agreement between the parties; essentially, what each party is to receive from the contract. For the practice, the physician is expected to perform their professional duties in a professional manner. For the physician, the practice is expected to compensate the physician and provide a professional practice setting. A material breach of a contract alleges that the basis of the agreement is not being performed by a party.

In a professional service contract like between a physician and practice, both parties rely upon some fairly nebulous terms. What does it mean to perform physician duties in a professional manner? What is a professional practice setting? This is where parties find grounds to allege a material breach of the contract. The physician wears sweat pants to work. The office décor is dated. The physician makes negative statements about the practice to patients. The practice routinely is understaffed.

Parties can claim almost anything as a material breach of the contract; “I thought I was getting this, but I go that—and that is unacceptable.” The more routine the claim, the less chance that the party will prevail on their breach claim. A practice claiming that a physician breached professional conduct by getting a tattoo probably has a weak claim. The more outrageous the claim, the better chance the party will prevail on their breach claim. If the physician’s tattoo is visible and says, “This practices sucks,” the practice probably has a pretty solid beach claim.

Miscellaneous

The Miscellaneous section of the contract addresses all of the applicable details not addressed elsewhere in the agreement, such as:

“Notices” identify the method communication required by the agreement should be sent. Parties may have multiple contacts for Notices. SFM’s agreement provides that Notices should be sent to both Amy and me. The method of delivery should be addressed, e.g. personally delivered, certified mail with return receipt, email with return receipt.
“Assignability” identifies whether or not parties can “transfer” the agreement, and, if so, the conditions. Assignability is generally not provided to physicians, but is often provided to practices in case of acquisition.
“Governing Law” states the jurisdiction that will govern and interpret the agreement. When both parties are in the same geographic area, both parties will typically want the same Governing Law. If a practice has a main office in another state, however, the practice may want that state to be the jurisdiction for any disputes. This could be a problem for the physician, as they could have to hire an attorney in another state and have the expense of travel and lodging to attend dispute resolution or litigation.
“Enforceability” provides that if any one part of the agreement were to be held invalid, the rest of the agreement would survive. This prevents any future arguments that mistakes in the agreement or changes in law cause the entire agreement to be unenforceable.
“Entire Agreement/Amendments” states that the agreement represents everything that the parties agree to upon execution. Nothing that the parties discussed or agreed to prior to executing the agreement will apply to the relationship going forward. Any future agreements must be memorialized in written agreements executed by both parties. If a practice told a physician that the practice would pay a $5,000 signing bonus but this wasn’t in the agreement, practice could deny that they owed this physician this money.
“Signatures” identify the representative for each party signing the agreement.

There are other details that may be included in the Miscellaneous section to provide clarity and security to the agreement. Both parties participated in the negotiation of this agreement. Both parties had the right to be represented by attorneys. Gender specific common nouns and pronouns shall not be interpreted to identify any person or be limited in gender. The agreement may be signed in copies or counter parts.

These details are necessary to prevent someone from trying to circumvent the intent of the agreement by making claims like, “I didn’t know I could have a lawyer review this agreement;” “This contract refers to “him,” but I’m a woman so it doesn’t apply to me;” or “We didn’t sign the same copy of the agreement.” If a physician doesn’t understand one of the Miscellaneous provisions, they should ask for the purpose of that provision.