Provider/Practice Relationship

Relationship Structure

The two basic types of relationships in the provider/practice relationship are employee or independent contractor. By definition, employers have greater control over employees, while independent contractors have more control regarding how they accomplish their work. Imagine if you wanted to have your house painted. If you hired an employee, you would pay them an hourly rate to paint your house. You would set the hours the painter would work. You would provide the paint and the painting supplies.

If you hired an independent contractor to paint your house, you would most likely pay them one fixed fee to paint your house, (regardless of how many hours they took). They would determine the hours they would work to paint the house. They would provide the paint and painting supplies. They would basically be “independent” from your direct control.

There are benefits to both types of structure, so knowing when to use each relationship is important. And because there is a big tax benefit to the independent contractor, the IRS investigates whether or not companies are “misclassifying” employees as independent contractors. As discussed below, this isn’t generally a concern for medical practices in the provider/practice relationship, (although I have seen some practices be noncompliant by classifying lay staff as independent contractors to save on taxes).

Provider Professional Judgment

One of the reasons that providers typically can be classified as employees or independent contractors is that providers are required to use their own best professional judgment. The standards of care dictate that a provider’s training makes them capable and responsible for upholding medical standards. The “exercising of professional judgment” makes the provider/practice relationship different from a home owner/painter relationship.

Imagine that at the conclusion of having your house painted, you discovered that your new paint job failed to dry properly because an oil-based paint was used to paint over the previous latex paint job. Now, besides the costs incurred to complete the paint job, there are costs to mitigate the damage. The oil based paint has to be removed. Everything has to be cleaned up. And the house still needs to be painted again.

If you hired a painter as an employee, you would most definitely be footing the bill for the paint mitigation. As the employer, you had the responsibility to appropriately manage your employee. If the employee was using the wrong paint, you should have noticed and made a correction. Any mistake the employee made, (other than an intentional act), would ultimately be your mistake.

If you hired an independent contractor, they would most likely be paying the cost to power wash the house and repaint because they had the responsibility to use their best professional judgment. Professional house painters know not to paint over latex finishes with oil-based paint because it won’t dry properly. You may not have known this—that’s why you hired an independent contractor to paint your house.

For providers, there is no escaping the use of their best professional judgment. Providers are always professionally responsible for the care they provide to patients. In this regard the distinction between “employee” and “independent contractor” doesn’t have the same implication on liability for providers. Regardless of how they are contracted, providers always have to use their best professional judgment.

Employee Provider/Practice Relationships

As previously mentioned, one of the big implications of an employee provider/practice relationship is that the practice pays employment taxes on the provider’s compensation. Employment taxes include Social Security, Medicare, Federal Unemployment Tax (FUTA) and state employment and unemployment taxes. Employers are also responsible for carrying workers compensation insurance on their employees.

The employment taxes are a percentage but some have maximum amounts. A practice in Nevada paying a provider $150,000 annually would pay something like $9,500 in employment taxes, while that same practice would pay something like $10,300 in employment taxes on a provider earning $200,000. These numbers are rough estimates, but they make the point that the maximum amount of some taxes makes it difficult to predict taxes using a fixed percentage.

Employed providers are salaried. They tend to have a fixed base salary. The practice may track their productivity and performance and pay them bonuses as set forth in the agreement. The payment of compensation should be addressed in the provider/practice agreement and be compliant with state law. Base salary and bonuses may be payable on different terms, e.g. base salary may be paid every two weeks, while bonuses are paid quarterly, ten days after the end of the quarter. Employed providers should make sure that the method of reporting and calculating the bonus is addressed in their agreement.

Because employees are under the control of an employer, practices with employed providers set the hours the provider is expected to work in the office, including vacation time. Practices set the working conditions for employed providers, including office space, supplies and staffing. Unless otherwise specified, the practice should pay for the cost of the position, including licensing, credentialing, CME and malpractice, (including tail).

The practice can offer benefits to providers as an employee, such as group health insurance, disability insurance and retirement plans. This is a major benefit of working for a large employer with lots of employees. Most benefit plans are expensive to administer and heavily regulated, making it difficult for small offices to compete with the benefit plans offered by large employers.

Employment disputes are subject to state employment regulations. A practice that fires a provider, for example, may have to provide the compensation earned to date on the date of termination. Failure to do so may expose the practice to financial penalties from the state.

Independent Contractor Provider/Practice Relationship

While practices pay a portion of taxes on employed providers, practices do not pay any employment taxes on independent contractors. The independent contractor pays self-employment taxes if they work as an individual. All of the providers Sparks Family Medicine has hired as independent contractors have set up their own professional corporations for employment, which means that the provider actually works for their own company and then that company provides professional services to SFM.

The key concept is that employment taxes, unemployment taxes and workers compensation are basically removed from the practices side of the equation with an independent contractor. Instead, these issues are shifted to the provider side of the equation for the provider to address. Providers who enter into an independent contractor agreement with a practice should make sure that they understand the tax, workers compensation and other issues arising from this relationship.

Compensation to an independent contractor can vary. It could be a set amount, a fixed percentage, a sliding percentage or a base plus performance bonus. The payment of compensation to independent contractors, including the methodology of determining payments, the schedule of payments and any reporting to calculating payments should all be address in the provider agreement. Independent contractors aren’t able to participate in any benefits offered by the practice, such as group health insurance, disability insurance and retirement plans.

While in theory independent contractors have greater control over their work hours, the practice of medicine typically requires that these hours be set in advance and occur during normal business hours. If a practice has typical nine-to-five hours and an independent contractor prefers to work nights, the practice probably isn’t going to be interested in incurring the additional cost being open nights to accommodate the provider. The independent contractor may have more ability to negotiate some flexibility in their hours, however, especially if a significant portion of their compensation is the result of productivity.

Providers who are independent contractors most likely have more responsibility for the cost of their position, such as licensing, CME and malpractice. An independent contractor provider could be responsible for renewing their license, even if the cost is reimbursed by the practice. If the license isn’t maintained, it would be the provider’s fault. With an employed provider, the practice would most likely be responsible for supervising the license renewal.

Disputes between practices and independent contractors are contract disputes—not employment disputes. As such, state agencies typically won’t intervene in the dispute. The avenue to resolving a dispute would be litigation or the dispute resolution method included in the provider/practice agreement, (if any). If a practice doesn’t pay an independent contractor, the independent contractor may be forced to retain an attorney to file a claim in court, arbitration or mediation.

Comparing Employee and Independent Contractor Positions

Independent contractors generally have more control over their positions than employees. While the practice is still responsible for office space, supplies and staffing, an independent contractor may be able to exert more influence over these factors. In essence, independent contractors have been hired to do a job and, as a result, can be more vocal about the criteria and conditions necessary for them to do the job successfully.

In thinking back to the painting analogy, imagine if your house had a row of large lilacs growing along one side that you did not want to cut down. If you employed someone to paint your house,   they would probably be more inclined to paint around those lilacs and not complain, (“I’m just being paid to do a job”), while an independent contractor would probably tell you, “This paint job won’t be complete until I can cut those lilacs back and paint behind them.”

While both employed providers and independent contractor are required to exercising their best professional judgment regarding patient care, an independent contractor may have more power to express their judgment about other issues, especially office management issues. If a medical assistant assigned to an employed provider arrives late to work every day, that provider may not have much control over that situation, as the responsibility for office management lies with the employer. In that same situation, however, an independent contractor could send notice to the practice that their ability to perform their contractual agreement is being impacted by the medical assistant’s performance.