What are Different Types of Physician Contracts?

What are the different types of contracts physicians can sign? There are two: You have an independent contractor agreement, and then you have the employment agreement. So, what are the differences between the two? An employment agreement means an employer and the physician an employee. They are a W-2 employee, meaning tax deduction is out of whatever compensation they have. And then, the employment agreement will go through the general terms of the relationship. How long the contract lasts, how it’s terminated, the process of compensation, the liability insurance, restrictive covenants, non-compete, non-solicit, that type of thing. In an independent contractor agreement, you are not a W-2 employee. You’re a 1099 employee, meaning no tax deduction of whatever the physician received via compensation.

Physicians Being an Independent Contractor

The physician will be responsible for paying their taxes quarterly at the end of the year. Another big difference is for most independent contractor agreements. The physician will be responsible for all of the ancillary costs associated with the practice: 

• Medical license
• DEA, registration
• Professional associations
• Privileging and credentialing
• Malpractice insurance
• Whether they have to pay tail insurance

Those things are generally the cost of the independent contractor, not the person they’re working for. Sometimes, the employer utilizing the independent contractor will pay for certain things. Still, I guess another key point is that an independent contractor will also rarely get benefits. Health, vision, dental, disability, life insurance, and retirement are unavailable. So,  why would someone, if given the choice of being an employee or an independent contractor, choose to be an independent contractor? 

Employment Agreement From the Practice

The entire point of an independent contractor agreement is that it’s easy to get into and out of. And theoretically, the independent contractor should be able to make their schedule work when they want, that type of thing. However, that doesn’t honestly happen very often. An independent contractor, if they’re smart, they’ll create an LLC. Then they’ll have any money paid and set up a bank account. They can expense all of those things I talked about previously. I find that most employers who, I don’t know if force is the right word, only offer the independent contractor agreement option. Maybe they’re not solely doing that, but they’re doing it often to avoid paying employment tax to the physician. 

Honestly, an independent contractor agreement for a physician does not have many benefits. A long notice is a requirement to terminate the agreement if it still includes restrictive covenants.

Physician Employment Contract Depending on Specialties

As I said, they don’t get paid benefits or other licensing. Let us take anesthesiologists and dermatologists. Those are specialties that frequently use an independent contractor. Some radiologists as well, but primary care, peds, cardiology, that type of thing, are almost always going to be employees. And then, if you are working for a hospital or healthcare network, 100% of the time, you’ll be an employee rather than an independent contractor. Maybe you’re working at a hospital, but you’re working for a group contracted with the hospital to provide services. I guess that’s possible where you’d be an independent contractor, but it doesn’t happen often. So, the two types of physician contracts are independent contractor agreements and physician contracts of employment.

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Is a Physician an Independent Contractor?

One question that comes up occasionally is, are physicians independent contractors? The answer to that depends on what kind of contract you signed. 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. Then the contract you signed will 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. Still, there is much less detail in an independent contractor agreement for some employment agreements. Let’s 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 gets paid via W-2. The employer will pay for most of the things necessary to be a doctor: 

• Licensing
• DEA registration
• Credentialing
• Privileging
• Practice insurance
• Any expenses associated with being a doctor

You’re getting paid as a W-2 employee in an independent contractor agreement. You’re paid via 1099, meaning the doctor would have to take out the taxes when they file their returns. Then, most of the time, the entity contracting with the independent contractor won’t pay the dues, fees, and other expenses. So, the physician will be the one that pays for the license, DEA, and continuing medical education. There are also no benefits associated with an independent contractor agreement generally. So health vision, dental, life, disability, retirement, all that stuff, won’t be provided to the independent contractor. Another question is, what’s better for me, and what’s the point of both? I find it’s very specialty-dependent. Anesthesiologists and dermatologists, for whatever reason, have more independent contractor agreements than any other specialties.

Healthcare Practice Tax Considerations

Some of these practices only utilize independent contractor agreements because 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, they would generally create an LLC. Then they would run all of the payments 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 insurance, all that kind of stuff as well. I mean, if I had to weigh one versus the other. Well, usually, if the physician has the choice between the two, it would depend upon the compensation structure. That is whether it would be worth it or not to accept an independent contractor agreement.

Chelle Law will provide a physician contract review to identify the areas and assist you in negotiating the best contract possible. 

Physician Employee or Independent Contractor?

If it’s based purely on net-collections, sometimes it is more lucrative to be an independent contractor. Still, suppose I have to give a percentage of which way a physician ultimately benefits more. In that case, it’s probably like 80/20 employment agreements. That is because all the things the independent contractor has to pay for, which the employer provides, add up over time. Then another thing to think about is some individual physicians can’t get some of the things that a larger employer can. It isn’t easy to get individual health insurance feeling it’s expensive. Then all the other things, vision, dental, life, disability, malpractice, tail insurance, that stuff adds up quickly. 

Anyway, if a physician’s debating between the two, I wish I could give a better answer besides it. It depends, but that’s an overview of whether doctors are independent contractors or not. It just depends upon what type of contract they signed.

What Should Be Included in a Physician Contract?

What should a physician contract include? Well, a lot, but let’s hit the highlights of what should every physician contract include. Remember that each physician has needs and wants in their specialty dependent. We’ll just hit the main points in any contract. One, what are the terms of the agreement? How long does it last, how is it renewed, and then how is it terminated? The ‘how is it terminated’ part is vital. You can terminate the contract by mutual agreement, or the term could end, and it’s not renewed. It could get terminated for-cause.

It means that someone violates the agreement, or lastly, and this is the most important part: without-cause termination. Any physician contract should have without-cause termination that allows either party to terminate the agreement with a certain amount of notice, usually 60 or 90 days. If you’re on an employment contract and you’re not a J-1 waiver employee, if your employment contract does not have without cost termination, do not sign the agreement. You do not want to get locked into a job you 100% hate working at or going to every day. And you’re stuck for a term, one year, two years, three years. So, you need the ability to terminate the contract if things are not going well. Unfortunately, every job may look amazing from the outside. Still, things can change once you get into it and work there daily.

If that’s the case, then you need to be able to get out. Anyway, that’s about it regarding the termination of what needs to be there. It must include compensation. Suppose it’s productivity computation. How is it calculated, either RVUs or net-collections? How is payment handled after the contract gets terminated at the restrictive covenants? 

Paying Close Attention to the Non-Compete

The non-compete, the non-solicitation agreement, and non-disparagement. All the terms of that need to be included as well. A couple of things about the non-compete that sometimes is missing are, one, it needs to identify the specialty. Some physicians are either double-boarded or maybe RIM but working as a hospitalist. The specific specialty of what you do for the employer should be there. How long it lasts, usually a year, sometimes two, but one year is considered reasonable. What’s the geographic limitation? Is it five miles, 10 miles, or 15 miles? And then, more importantly, what is it attached to? Is it just your primary office location? Is it a hospital, or is it multiple hospitals? Or is it every facility that the health network or hospital owns? 

These are complete details that need attention in any physician contract. They need to be there. 

The Benefits

A couple of other things that need to be present are sometimes benefits. Some employers will have a benefits summary, like a PDF that lists all their benefits: Health, vision, dental, life, disability, and retirement. Do they pay for your dues and fees? How much do they pay for your CME? All of that. The specific details like the health plan don’t need to be included in the employment contract. But signing bonus, relocation assistance, and how much time off you get should most likely be included in the employment agreement. The bonuses need to be included, or maybe an offer letter. 

Then finally, what kind of miscellaneous provisions, what state law applies, how do you give notice, and can you assign the contract? At the end of every contract, there’ll be a section of 15 to 20 small paragraphs. That goes through many different things. And it would help if you looked at all of them. Many of them won’t make sense to a non-attorney, but they’re important to be there. I’m not going through all of those right now, though. So, those are the broad strokes of what should be included in a physician contract. I think it’s a great idea to have an attorney review your agreement. You can assign a contract worth, in some cases, over a million dollars depending upon salary. It just makes sense to have a professional look over. Make sure you’re covering all your bases.

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. The MGMA, the medical group management association, collects annual salary data nationwide. 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 private practice in some way? Speaking to people you train with to compare their offers is good. 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 get 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 to have 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 Practice-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, ensure 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.

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. When you’re signing a contract that could be worth a million dollars, I think it would be foolish not to get it looked at by someone who knows what they’re doing.