Difference Between a Physician Offer Letter and a Contract | Contracts

What’s the difference between an offer letter and an actual employment contract? Is the offer letter binding? Some employers will ask that the physician sign an offer letter that dictates the basic terms of the agreement. Generally, the basic terms in an offer letter include:

• Salary
• Any other kind of compensation
• Signing bonuses
• Relocation assistance
• Getting into the benefits of PTO
• What they’ll pay for as far as dues and fees
• The basic terms of the non-compete are
• PTO will be 30 days
• Base compensation in year one will be $300,000

Many physicians don’t want to go through the hassle or expense of drafting an employment agreement. If they can’t at least come to terms on the basic level of what will be in the employment agreement itself.

Offer Letters From a Practice

Many physicians will ask, okay, I have signed the offer letter. I now have the employment agreement. After reviewing it, I don’t like what’s in there. Maybe it’s substantially different than what was in the offer letter. Am I bound to the offer letter? And the answer to that is no. However, the basic terms have been agreed to and incorporated into an employment agreement. Many complicated and nuanced things could be in an employment agreement. After reviewing the basic terms, the job looks great. But I was then getting into the exact details of the employment agreement. The job doesn’t look so great anymore. Usually, the areas that might not be in the offer letter but might make an employment agreement terrible. That would be the nuts and bolts of the non-compete and non-solicit.

Suppose the offer letter says it’s one year and five miles when you get into the agreement and get into the details. In that case, it’s one year, but then it’s five miles from every facility a healthcare network owns. One location for five miles is usually reasonable. 100 locations for five miles is not. And that could be, for a physician, an absolute no. I’m not signing this agreement because it has this. Or maybe if someone’s on a net collection-based compensation structure for a contract and the offer letter says you’ll get 40% of all net-collections. Still, in the actual agreement, it’ll say that when the contract terminates, you won’t get any collections. The physician in that scenario would be working for free for the last three months. That is because they wouldn’t get anything they produced and collected after the contract ends.

Offer Letter vs. a Contract

And that can be an absolute no. I’m not signing this. So, in short, no, the offer letter is not binding. Things can change from the offer letter to the details of the actual employment agreement. And it is well within the physician’s rights to tell the employer after reviewing the agreement details. I’m not going through or negotiating some changes to make it palatable to them and saying. However, I signed the offer letter, but I’m not signing this agreement. And there’s not much the employer can do about that.

Other Blogs of Interest:

• Family Medicine Contract Negotiation Tips | Negotiate Physician Contracts
• What is Without Cause Termination in a Physician Contract? | Physician Termination Agreement
• Physician Contracts Negotiating Tips | Hospitalist Contract Negotiation

Can a Physician Back Out After Signing an Offer Letter?

What happens if I sign an offer letter but don’t want to go through with signing the actual contract? Due to a change in circumstances, or family issues, maybe you got a better job offer somewhere else. Perhaps you decided to move home instead of moving to a different city. The question is, can a physician back out after signing an offer letter? The short answer is yes, probably, unless there’s binding language in the offer letter, which there seldom would be. The physician can back out. The offer letter has some basic terms.

Signing With a Physician Practice

Usually, it would be like, okay, here’s what your compensation is. Maybe a brief review of benefits, the term length. Things on how to terminate the contract and a brief mention of a non-compete. It is normally like a one-page document that briefly describes what it will look like for your employment. There are times when I’ll have a physician get an offer letter, and just the kind of cursory terms look great. And then, when we get the actual agreement, it could change whether it’s a good offer or not. And so, until the employee signs an agreement, it will not be a binding document. Let me give some instances of maybe why the job opportunity looked okay with the offer letter. Still, once we got the actual employment agreement, it changed.

One thing could be how to terminate the agreement. I would say it’s probably rare to put into an offer letter. Typically, a physician would have to provide 60- or 90-days’ notice to terminate the contract without-cause. They can get out of the agreement for any reason with the amount of required notice. Let’s say the contract had a 12-month without-cause termination notice. Well, nobody wants that. Once you give notice, relationships change within the organization. You’re on your way out. You’re no longer building a practice. If someone had a 12-month requirement, there’d be an entire year of potentially awkward relationships. I would never suggest that a physician would have to give a year’s notice.

Physicians With a Letter of Intent

On the back end of that, you must give 12 months’ notice if you’re currently in practice. Very few practices are willing to wait 12 months for the physician to give notice and be able to leave. It just doesn’t happen that way. Sometimes, if the physician is in training and an organization forecasts that they will need them a year or two, that’s a different story. But if a physician is currently practicing and switching to a new job, they’re seldom going to wait two months. 

Another thing could be the terms in the non-compete. Maybe you’re expecting a reasonable non-compete like one year, 10 miles from your primary practice location. The reasonableness of non-competes varies from state to state. Pretty much is one of the only things that vary in physician contracts. Let’s say, for instance, it’s one year, 5 to 10 miles from your primary practice location.

That’s what you’re expecting. And then you get the contract, and it’s a two-year non-compete. And 25 miles from every location you practice in a while employed with the employer. That can change things substantially. Suppose someone is married to a town where they grew up there. In that case, the family’s there. They want to raise their kids there. Then they have some terrible non-compete. Forcing them to move for a period that can make a great offer a terrible one. And that’s a term that could change. That’s not explicit in the offer letter that could then make a great offer a bad one. 

The Earlier the Notice, The Better

Generally, there’s no specific recitation of all the benefits offered. What if the employer doesn’t offer health coverage, disability, or life or retirement? They won’t pay for your medical license and DEA registration. They won’t give you anything for continuing medical education. Perhaps the time off is bad. The average amount of total time off is 30 days. That would include sick days, holidays, and vacation CME. Let’s say they offer you 15 total days. Almost no physician has that small amount of time off. And that could change substantially whether the offer is good or bad. So, in short, yes, you do not have to go forward, even if you’ve signed an offer letter because the employment agreement terms could change the offer substantially. It can start in awkward conversations.

And the sooner you notice to the employer that you will not start, the better. People also ask, what could be the absolute worst-case scenario? In this case, if it’s just an offer letter, I would say it’s a low downside risk. Suppose you sign an employment agreement and then wait until a week before. You’re about to start and then say, hey, I don’t want to start the contract. The employer can undoubtedly say that they’ve suffered some damages and could potentially come after you. Suppose you just signed the offer letter without seeing the employment agreement. In that case, I’d say the physician is safe in backing out of it and looking elsewhere.

What to Know Before Signing Your First Physician Contract | Contracts

What should you know before you sign your first physician employment contract? This question is a broad topic, but we’re going to hit the main areas, things to think about before signing your first employment agreement. 

Ways to Determine if Compensations Offered Are of Fair Market Value

First, determine whether the compensation you’re being offered is fair market value. There are a couple of, I guess, good ways of going about trying to find that. Well, the MGMA, the medical group management association, collects annual salary data from across the country. If you can access that, they have a lot of good information about total compensation, average net-collections, and average RVUs generated by specialty. It’s hard to get that info sometimes.

I mean, if you Google around, you might be able to find some of the compensation data that’s a couple of years old. Or you can talk to someone who has access to the data, like for our firm, we have access to the data. So, we can tell the physician exactly what the numbers say. Now, that’s certainly not the be-all-end-all. There are other services out there that offer something similar. But I also think it’s limited because some specialties have a tiny sample size. In addition, just total compensation should not be the determining factor when looking for a job. Alright, so that’s compensation. 

Another way of thinking about it would be, if you have classmates in your training program, you need to ask them what they’re receiving. It’s going to vary based upon geography and then setting. Are they going into a hospital network? Are they going into the federal facility? Or are they going into private practice in some way? It is good to speak to people you train with to see what they’re being offered. And then mentors are another excellent place. 

How To Terminate Contracts

If someone is already out and maybe they’ve been a teacher for you or a mentor, ask them if they’re willing to talk about the type of compensation they’re receiving. Next would be how to terminate the agreement. Something you need to consider. There are four ways to terminate a contract if the initial term ends. Let’s say you have a two-year contract, and no language states it automatically renews. It just ends, and the contract terminates. You can complete a contract by mutual agreement. Then you can also terminate a contract with-cause. So if one of the parties breaches the contract, either party can terminate the contract if the other party doesn’t fix the breach. It’s called cure. And then lastly, and this is what I want to hit on, is without-cause termination. 

Every contract you sign must have without-cause termination in it. There are minimal circumstances where no without-cause termination would be okay. If you’re a J-1, that one would probably benefit you not to have that in there. But without-cause termination means you can terminate the contract at any point, for any reason, with a certain amount of notice to the other party. Contracts that don’t have without-cause termination, meaning you must work out whatever the initial term is. There’s no way of terminating the contract for any reason. They would have to breach it if you wanted to get out of it.

Why Do I Need No Cause Termination on My Contract?

The reason why you need that is, let’s say you start with the job, you’re paid on productivity, and the volume is not there. It’s not your fault, or maybe the employer brought you in telling you it was going to be one way, and the call is just excessive. Or perhaps it’s just a terrible personality fit; whatever reason you’re not happy in that job, you need the ability to get out of it if you want. So, it would be best if you had without-cause termination in the contract. Somewhere between 60 to 90 days is standard for physicians.

Legal Mistakes Physicians Make are not going through Non-Compete.

Alright, next, the non-compete. A non-compete says the physician can’t work after the contract terminates for a period within a specific area. For example, most non-competes are one year, sometimes up to two.

And then, a reasonable mileage would be 10 to 15 miles from your primary practice location. Often, the employer will try to tag multiple locations. So, maybe if you worked in three outpatient clinics in a hospital or something. They try to attach it to all four of those, or perhaps the employer has many facilities in the area. You’ve only worked at one of them, and they might try to attach it to all the facilities they own. That’s not fair either. You want to try to get it to one year, 10 to 15 miles from maybe at most two locations. Anything beyond that would be considered unreasonable. There are a few states where it’s entirely unenforceable to have a non-compete. But for the most part, most states allow non-competes for physicians.

Health Care Malpractice Insurance, Do Not Accept Without It

Lastly, the employer should almost always pay for your underlying annual premium with malpractice insurance. How much must they pay each year to insure you? Depending upon the policy, whether it’s a claims-made or an occurrence-based approach, it will determine if you must pay what’s called tail insurance.

If it’s a claims-made policy, tail insurance is necessary. A good rule of thumb is that tail insurance costs about twice your annual premium. In some specialties, it can be costly. OB-GYN, some of the higher-level surgical things could have tails that are fifty to a hundred thousand dollars. You want to avoid having to pay for that. So, make sure that there’s either a fair split between the employee and employer or having the employer pay the total cost of the tail insurance, or there’s also insurance called occurrence-based coverage. And in that scenario, tail insurance is not needed at all. It’s about a third more expensive than claims-made, but you won’t have to pay for tail insurance in that scenario.

Now, you probably need to think about dozens of other things. I would say, in my mind, those are probably the foremost important. But you have benefits, bonus structure, contract length, other restrictive covenants with the non-solicitation agreement, non-disparagement, confidentiality, your hours worked, and the call. I mean, you need to think about a ton of things. So, I would suggest reaching out to someone with experience reviewing contracts. I mean, when you’re signing a contract that could be worth a million dollars, at least in my opinion, it would be foolish not to get it looked at by someone who knows what they’re doing.

What Can You Negotiate in a Physician Contract?

What can a physician negotiate in an employment contract? The short answer is everything. It ultimately depends upon the willingness of the employer as to whether they’re willing to negotiate terms or not. Extensive hospital networks are less likely to change an employment contract agreement significantly. Unlike if a physician is looking into a physician with a smaller physician-owned practice, there’s much more leeway for significant changes. What are the things that are important to the physician, and then what are the things that they can get changed?

In my mind, when I’m talking to a physician, the things that stick out as the most important would be:

• The signing bonus, 
• Relocation assistance, 
• How to terminate the contract agreement, 
• Making certain there’s without-cause termination that’s a reasonable length, 
• Compensation, 
• Productivity bonuses, 
• Non-compete, 
• Tail insurance and,
• Who pays for tail insurance if it’s a claims-made policy?

Physician Contract Negotiations

Let’s go through each of those and come up with some tips on negotiating. First, as far as compensation goes, the physician needs to know their and their specialty’s value. Getting the MGMA data is helpful. It is beneficial to talk to colleagues about what they’re being offered or what they’re currently making in different organizations. Sometimes, the associations for each specialty can provide information on your specialty’s average salary. That’s one way to look at it. As far as productivity goes, this is a little more difficult. It’s going to be completely based upon, I guess, the arrangement. Is it kind of a hybrid between a base salary and RVU production? A base salary and net-collections? Is it all RVU? Is it all net-collections?

This one is dependent upon the type of structure. You’re getting a base plus a certain amount if it’s net-collections or a hybrid model. Let’s say. For instance, the expectation was 20,000. Anything collected is over 20,000 by the practice, and the physician will get 15 to 25% of that. That would be a standard percentage. If the physician is purely on net-collections, around 40 to 45% is average. As far as RVUs go, there are two things you can negotiate: the threshold, meaning how many RVUs you must generate to get a certain amount, and the compensation factor, which is the monetary value associated with the RVUs. That has some leeway as well. Regarding signing bonuses and relocation assistance, the main things are the actual number, obviously, but more importantly, what’s the repayment schedule? 

Forgiveness Period in Physician’s Contract

Almost every contract is going to have a forgiveness period. Let’s say the physician gets a $20,000 signing bonus, and the initial term of the contract agreement is two years. Usually, they’ll have to stay for that initial two-year term to have the entire $20,000 forgiven, so they don’t have to pay anything back. The same goes for relocation assistance. Between $10,000 and $15,000 should be the cost of relocation assistance. The signing bonus can vary widely from 10 to 75. That one is specialty-dependent. As far as non-compete goes, this does vary state by state on what’s considered reasonable. There are a few states where it’s wholly unenforceable; California and Mexico, for instance. Usually, the non-compete shouldn’t be any longer than a year. The geographic restrictions should be 5 to 15 miles from your primary practice location. Where to negotiate with this?

Terms That Matter for Physician Contracts

You want to keep the length at one year or shorter. You want the non-compete to only apply to a few locations. Some employers will say the non-compete applies to every facility we own in the city. Instead of having one office within 10 miles, you could have 30. So, that’s very important. And then specialty as well. Some specialties can do multiple things. Let’s say you are in internal medicine. You can be a hospitalist, and you can go into family practice. You can do urgent care. If the non-compete states that you can’t practice medicine within that geographic restriction, you’re out of luck. Whereas if you keep it to the specialty of what you’re providing to that employer. Specifically, in this case, let’s say you are a hospitalist. 

You could go to family practice or urgent care for a year, and then when the non-compete ends, go back to being a hospitalist. That’s something to consider. And then malpractice insurance is always a considerable discussion with the physicians’ coworkers. First, you must identify whether it is a claims-based or occurrence-based policy. If it’s a big hospital, they might be self-insured. And after you determine what type it is, if it is a claims-made policy, tail insurance will need to be purchased after the contract terminates. And then who pays for that? Most of the time, if you’re in a small private physician-owned practice, the physician must pay for tail insurance when they leave. You rarely have to pay for tail insurance with an extensive hospital network. Now, tail insurance usually costs about twice what your annual premium is.

Physician Employment Contracts & Negotiation Tips

Your family practice’s annual malpractice premium is somewhere between $6,000 to $8,000. If you had to pay for tail insurance, it’s somewhere between 12,000 to 16,000. One thing you can negotiate is who pays for tail insurance coverage. Sometimes an employer will say if you’ve been with us for one year, we’ll pay for a quarter, then two years, half, and then three years, 75%. Some ways of getting out of having to pay the entire amount depending on the situation. Now, the first thing I talked about was whether the employer was willing to negotiate or not. Some employers will say this is a take-it or leave-it deal. I don’t think those employers will be great for getting together. If an employer is unwilling to budge on anything, it will likely be challenging to team up.

It means they’re not going to accommodate the physician somehow. So, I caution any physician who has been given a job offer. We ask for some clarification or certain concessions, and they say no, this is it. That’s usually a red flag. And I tell the physician that you may want to continue looking for a job because this might not be a good fit for you. Anything in the contract is negotiable. You need to figure out what’s most important to you. Sometimes, a non-compete is absolutely the number one thing. For others, it’s the compensation. For others, they do not have to pay tail insurance. It depends upon the physician’s wants and needs and then tailoring the negotiations to get them to that point.

How to Negotiate a Fair Salary Contract for Physicians

How can a physician negotiate a better salary? As an initial matter, I don’t personally believe that the salary should be the driving factor in a decision for a physician. Now, clearly, if there’s an enormous gap, a hundred thousand dollars, maybe 50, but if it’s $10,000 just going with the job that offers the most when maybe the benefits are different, the work environment is different, the ability to learn, have a good mentor, a good teacher. I think all of those things are probably more important than just the absolute base salary amount, but it certainly is important. And so when someone asks me, all right, well, what do I do?

Physician Compensation Negotiations

How do I get a better salary? There are a couple of ways of doing it. One, you need to know your worth. How does a physician find out what’s a reasonable salary? Well, there’s data. The MGMA medical group management association is, I would say, probably the industry standard as far as compensation numbers go, but it is absolutely not the be-all and end-all of whether something is fair or not. They break it down into regions: West, East, Midwest, Southwest, and those kinds of quadrants have different salary numbers associated with them. But just the base salary could be great or could not be great depending upon if there’s some kind of productivity compensation in the agreement as well, or there’s maybe potential for partnership. So, there are many scenarios where a physician is out of training, and they’re given a two-year, three-year agreement.

Physician Contract Salaries

That’s probably below what’s a reasonable or average amount for someone just coming out of training, kind of with the carrot on the stick of, well, if you take below market for these two or three years, then you’ll get away above-market. Once you become a partner, be careful of the situation. You need to find out how many people are partners. How many people have they not offered partnership to? And then what are you gonna make once you’ve become a partner? That’s certainly something that’s important. Now, as far as the MGMA numbers go, they are kind of hard to find. I mean, you can Google around and find, I would say data from maybe a year or two old. I found that people are relying on 2020 numbers. They’re completely screwed up due to COVID.