One question that comes up occasionally is, are physicians independent contractors? The answer to that is it depends on what kind of contract you signed. Really there are two types of contracts for doctors. You have employment agreements, and then independent contractor agreements. With an employment agreement, you’re an employee, and then the contract that you signed will kind of specify all the terms of what the physician needs to do, and what the employer needs to do. Then in an independent contractor agreement, many of those terms are the same, but there is kind of much less detail in an independent contractor agreement for some employment agreement. Let’s just briefly go through the two and then we’ll get back to when a doctor is an independent contractor.
Independent Contractor Agreement for Doctors
The main differences are one, in an employment agreement, the physician is paid via W-2, and then the employer will pay for most of the things necessary to be a doctor: licensing, DEA registration, credentialing, privileging, practice insurance, any kind of the expenses associated with being a doctor. In an independent contractor agreement, you’re not paid as a W-2 employee, you’re paid via 1099, meaning, the doctor would have to take out the taxes when they file their returns. Then the vast majority of the time, the entity that is contracting with the independent contractor will not pay for the dues and fees and all the other expenses. So, the physician will be the one that pays for the license, DEA, continuing medical education. There are also no benefits associated with an independent contractor agreement generally. So health vision, dental, life, disability, retirement, all that kind of stuff, simply won’t be provided to the independent contractor. Obviously, another question is, what’s better for me, and what’s the point of both. I find it’s kind of very specialty-dependent, anesthesiologists dermatologists, for whatever reason, have more independent contractor agreements than any other specialties. If a physician is self-employed, they are essentially taxed as an independent contractor, although they would not receive a 1099.
Medical Practice Tax Considerations
The reason why some of these practices only utilize independent contractor agreements is so they can avoid paying employment taxes. These are essentially quasi-employment agreements. The doctors kind of act as employees, their schedules set for them. They’re using the employer’s facilities and supplies and staff. However, if a physician isn’t an independent contractor, then generally what they would do is create an LLC and then they would run all of the payment through the LLC bank account. They would also be able to deduct the expenses, all the things that I went through before licensing CME, malpractice, insurance, tail, all that kind of stuff as well. I mean, if I had to weigh one versus the other, well, usually, if the physician does have the choice between the two, it would kind of depend upon the compensation structure of whether it would be worth it or not to accept an independent contractor agreement.
Physician Employee or Independent Contractor?
If it’s based purely on net collections, sometimes it is more lucrative to be an independent contractor, but if I have to give a percentage of which way a physician ultimately benefits more in the end, it’s probably like 80/20 employment agreements because all of the things that the independent contractor has to pay for, those provided by the employer, add up over time. Then another thing to think about is some individual physicians simply can’t get some of the things that a larger employer can. It’s difficult to get individual health insurance for feeling it’s expensive and then all the other things, vision, dental, life, disability, malpractice, tail insurance, that stuff adds up quickly. Anyway, if a physician’s kind of debating between the two, I wish I could give a better answer besides it. It depends, but that’s kind of an overview of whether doctors are independent contractors or not. Just depends upon what kind of contract they signed.
Can You Break a Physician Contract?
Every day, I deal with physicians who are either having new employment agreements that need to be reviewed or they’re on a current agreement that they need to analyze, usually due to wanting to terminate the agreement. One fairly frequent question, and it’s kind of like the base level question, is whether you can break a physician contract. Well, obviously, I think defining break is probably the most important part of that. So, can you break a physician contract? If we’re meaning, can I breach a contract, not following through on the terms of the contract? Sure, you can. But then you would open yourself up to liability. You could be sued and litigation could begin. If there’s an arbitration clause, then it could go to arbitration. The employer could come after you for damages, for recruitment fees for a new physician, lost revenue from you, leaving extra admin fees if there’s no physician to support. Can you breach a contract? You can, but it’s certainly not a good idea. For the purposes of this video, If we’re gonna say, can I break a physician contract? I think the best way of handling that would be, can I terminate the contract? And certainly, yes, you can. Every contract, at least every physician employment contract will have a section called termination. And in that section, it will dictate the terms of how the physician can terminate the agreement.
The Doctor as Independent Contractors
There are usually three ways: One, by mutual agreement. Meaning, if you and the employer can come to some kind of an agreement, then the contract can be terminated and then maybe you can work out how long the physician will stay. That does not happen very often, to be honest. The second way the contract can be terminated is with cause. And it goes both ways. For the most part, most of these employment contracts are highly slanted towards the employer, as far as what they can fire the physician for. And honestly, most contracts are completely silent on what the physician can do if the employer breaches the contract. Some normal things that the employer can terminate a physician for immediately, for cause at their option. So, the physician loses the license, DEA registration, they’re uninsurable, they’re on the OIG list, those types of like obvious, right?
Like you can’t practice as a doctor, so you can’t fulfill the terms of the contract. The employer can fire the physician immediately for that. Now, the most important section is, can a physician break a contract? If we’re assuming break means terminate, there should be a section that’s called without cause termination. In that section, it will state, normally either party can terminate the agreement with a certain amount of notice to the other. I’d say, the industry-standard amounts are between 60 to 90 days. So you would just give the employer notice as it’s written. And there’s also a notice section that says how you can give effective notice. So you’d write them a letter and then note go through the notice section properly, usually a certified mail, hand delivery, or email which is not very often. If you just verbally tell your boss, Hey, I’m leaving. That won’t be effective notice. So, if it’s 60 or 90 days, you give them 60 days’ notice. Wipe your hands of it, you’re gone. Now, there are some considerations, however, if you do break the agreement, terminate the agreement, in this case, if you’re kind of a new physician and you were given a signing bonus or relocation, usually there would be some kind of forgiveness in the first couple years. Meaning, if you leave before the initial term, you would have to pay back some kind of amount of the signing bonus and relocation assistance. The second consideration is, are you gonna have to pay for tail insurance? Most contracts, at least for the smaller physician owned groups, will have some kind of clause that states, if the physician terminates the agreement without cause, they’ll be responsible to pay for tail.
If you don’t know what tail insurance is, I have some other videos that kind of discuss that you can look at. The last consideration is all of the restrictive covenants that will apply. If you terminate the contract without cause, those restrictive covenants are going to apply. Restrictive covenants would be the non-compete nons. It is non-disparagement like all the things you can’t do after the contract ends. Just because you terminate an agreement doesn’t mean that you don’t have either responsibilities or obligations once the agreement ends. In summary, yes, a physician can obviously break a contract, but I would suggest doing it properly, how it’s written in the termination section. And then once you decide to terminate, you got to think about all the things that you’ll be responsible for. One more thing that just came to mind, the contract will also state the payment responsibilities after the contract ends.
Independent Restrictive Covenants
I just had something like this come up yesterday. They were on a net collections compensation structure. Meaning, they were only paid what was collected, but the contract stated that they would only be paid through the end of the date of termination. With a normal 90-day accounts receivable cycle and getting reimbursed for claims, the physician missed out on essentially 90 days of collection. If you think of it this way, they almost worked for free for the last two or three months, which nobody wants to do. Moving forward, physicians absolutely need to be certain that if they’re on a net collections model, it states that there will be some kind of collection period after the contract terminates. So that they don’t lose out on all that money. I mean, it’s absolutely sled towards the employer. It’s not fair, but a lot of physicians simply don’t think about that when the contract is terminated.
How to Negotiate a Physician Contract?
How to negotiate a physician contract. In my mind, there are three different scenarios. One, you’re just coming out of training. Two, you’re switching jobs to an area of the country that you’ve never been to before, or three, you’re moving from somewhere within the area where you already live. So, negotiation is always based upon leverage. Do you have it or do you not? Let’s just take coming out of training, for instance. For the most part, the only leverage someone has, when they’re coming out of training, are they in a specialty that’s hard to recruit for? I mean, that’s just the truth.
You are not bringing in any established patient base. You’re also relatively new to being out on your own. So, there is a learning curve that will go into moving into any position. If you are either in an area that’s very difficult to recruit to that could apply to any specialty, or you’re in a specialty that’s difficult to bring in and is super profitable. Those are two things. When you’re looking into, how do I negotiate? And when people say negotiate, most of the time, they think about the bottom line, what is my base salary. But I think that’s kind of a narrow mind. And this will apply to anybody. When you’re looking at a job, there are some, at least in my mind, things that are more important than just the base compensation. One, what are the restrictive covenants?
If someone lives in an area, they have family in the area, they have kids in the area, they absolutely cannot move after the contract ends. Sometimes, the non-compete could be the most important thing in a contract. A non-compete says you cannot practice for a period within a specific area. Another important piece is who pays for tail insurance. Depending upon specialty, this could be an enormous part of a contract. If you’re an OB-GYN and you must pay for your own tail and your underlying premium is $40,000 a year, your tail’s probably going to be around 80,000. So, who pays for tail certainly could be the most important thing in an employment agreement for an OB-GYN. If you’re being paid on production, let’s just say you’re in a contract that’s just pure net collection.
Like an average range for a physician is 35 to 40% of net collections is your total comp. Is there language in the contract that states, when the contract terminates, you’re going to be able to collect for a 60-to-90-day window after the contract terminates? If you don’t have that, then you literally worked for free for two or three months, which nobody obviously wants to do. Going back to what is important, it depends upon the person. When you’re looking just at base compensation, obviously having the numbers is important. So first, they’re not always easy to obtain. Most places or most of the places use MGMA numbers. That’s a medical group management association, and most of the time you must pay for that and it’s expensive. So, no physician, at least most physicians are not going to do that.
You could either find someone who has access to those numbers and try to get them. Or if you kind of Google around on the internet, sometimes you can find them, the average RVUs production, average compensation. It is broken down into areas of the country. I honestly don’t think those are accurate when it comes to determining exactly how much and what part of the country, there’s just kind of like a feel for what someone is getting in this area. But then you also have to take into account all the other things I just said. If someone has a base that’s $10,000 less, but they don’t have to pay for tail, or the non-compete is extraordinarily small, well, that’s worth way more than $10,000 in some instances. That’s kind of a few factors to think about.
If you’re just coming out of training, let’s say you’re established in the community, either you’re a primary care PE, it’s cardiology, you have an established space and you’re just moving into a new practice. Well, this is the highest leverage you can have. There’s going to be no, or at least there shouldn’t be a lot of time needed to ramp up the practice. You’re just bringing people with you. Plus, when you have numbers in a community, these were my net collections, or these were the RVUs I produced, or these were the patient encounters I had on a weekly basis. Those are absolute hard numbers that you can use to negotiate compensation, moving to a different practice.
And in that case, you have the highest leverage possible. Then obviously, you can negotiate all the ancillary things I’ve already spoken about. The last thing would be, if you’re moving, you’re out of training, you’ve been in practice for a while and you’re moving from one city to another, you don’t have an established patient base, that takes away some leverage. There are two factors that kind of work for you. One, are you moving to an area of the country that’s difficult to recruit to? Very rural communities certainly pay more, simply because it’s harder to find physicians in certain specialties to come and move and live in those areas. Or two, if you’re in a specialty that is just simply hard to recruit to or extremely profitable. So obviously, surgeons are difficult to find or some of the other GI sub-specialties are always difficult as well.
If you’re moving to a different part of the country, then the same analysis applies to kind of coming out of training. However, you have the benefit of having some numbers of what you produced in your previous position. You can tell them; this was the net collection that I generated in my last position. Now, it doesn’t always translate from one state to another or one situation to another, and maybe you’re going from private practice into an employed group. But having any kind of data to back up what your production was, is essential in determining what your new total compensation would be in a new position. So hopefully, those are some tips on things to think about. I mean, honestly, just doing this video, I can think of this could be broken down into 10 different videos, but this is just kind of an overview on how to negotiate.
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