Productivity and termination: what physicians need to know when reviewing contracts

Recently, I worked with two different physicians who faced termination scenarios. In both instances, my clients were terminated without cause while being compensated based on production and were not permitted to work during the notice period. Many physicians are compensated based on pure production, while others may have combination of a base salary plus some type of bonus based on production. When reviewing a physician contract (or drafting it), the following are some issues to take into account as it relates the relationship between productivity compensation and termination.

Although we like to think that both physician and employer will continue to meet their obligations during a notice period, some employers may not want a physician to work, perhaps because they wish to reallocate patients, resources, etc. or perhaps for other less business-related issues.  However, it is important to understand that during a notice period, the physician is still employed and his or her compensation formula and/or productivity bonus formula is dependent on production.  As a result, not allowing a physician to work during a notice period can cause significant financial harm to the physician.  Moreover, during a notice period, the physician also likely cannot work elsewhere due to exclusivity, non-compete and similar provisions.

To address this issue, some contracts will properly include language that states the physician will be paid the same average compensation that the physician was paid in the 90 day period prior to the date the notice period started to run.  Other alternatives might include an average of monthly compensation over the past 12 months, a per diem rate based on the physician’s average production, etc. No matter what approach is used, some mutually agreeable and fair compromise is appropriate.

Unfortunately, sometimes contract drafting can be rather sloppy.  Indicating the physician will “continue to receive compensation” does not address the issue. Similarly, stating the physician will continue to be paid “draw” during the notice period is also not ideal. Often, a physician’s contract sets a fixed amount called a “draw” which is then reconciled against actual productivity, quarterly or annually, resulting in bonus being paid to the physician when they exceed the “draw”.  Most physicians set their draw fairly low so as not to “overdraw” and be in a deficit situation. When a contract only allows a physician to be paid “draw” during a notice period, this can substantially reduce the compensation which the physician could have earned had he or she been allowed to work.

While some employers make it clear a physician is not permitted to work during a notice period, others pretend the physician is welcome to work, while simultaneously sabotaging such efforts.  In my recent situation, the employer reassigned patients asking for my client by telling them he was unavailable, retired or planned to leave. Referral sources were told the physician was leaving and referrals needed to go to other physicians  Staff was reassigned away from my client making it hard for him to perform, and his patient’s calls went unanswered and unreturned, causing damage to his reputation.   

While some of these activities may arguably put the employer in breach of contract, most contracts do not go into enough detail to make these clear breaches and the physician’s claims are quickly dismissed.  This can be a tough situation to address in a contract, but requiring that both parties continue to perform their normal duties and prohibiting a change in patient and employee assignments, etc. during the notice period can help with this situation and allow the physician to be productive.

Regardless of whether a physician is paid based purely on productivity or receives a productivity-based bonus, it’s essential that the employment contract clarify that financial documentation regarding all amounts billed and collected (or RVUs performed) be shared with the physician on a regular basis, during the term of the agreement, the notice period and following termination.

For physicians who only receive a production bonus, it is also important to clarify in a contract when payment will be made.  Sometimes a productivity bonus can be lost if the physician is not present for the entire productivity period (i.e. the full year) or when the bonus is to be paid. I like to argue that if the physician is terminated without cause, or the employer breaches, for example, the physician should always be paid an earned bonus prorated through the date of termination.

Compensation formulas based on productivity can become a major source of friction between physician and employer when termination occurs.  Making sure language in the physician contract addresses these issues in advance can help both parties achieve a smoother end to the relationship.

Ericka L. Adler, JD, LLM has practiced in the area of regulatory and transactional healthcare law for more than 20 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. She also works with providers on a wide variety of compliance issues such as Stark Law, Anti-Kickback Statute, and HIPAA. Ericka has been writing for Physicians Practice since 2011.