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Contractual Caution

From: The Hospitalist, April 2007

Two provisions that require careful consideration

by John Nelson, MD, FACP

John Nelson, MD, FACP

Several times a week, I hear from doctors or administrators who want to discuss solutions to the latest crises occurring in their practices. There are three contractual issues that come up regularly in these conversations. One is how to handle the contractual provision for vacation time, and I addressed that in last month’s column.

This month, I’ll discuss the other two issues: payment for malpractice “tail coverage” and the inclusion of a non-compete clause in hospitalist employment contracts.

Malpractice Tail Coverage

Not long ago, I got a call from the worried administrator of a growing and successful hospitalist practice. She described a crisis that had started when a doctor decided to leave the practice to pursue fellowship training. The doctor was happy with the practice and enjoyed the time he had spent as part of it. Yet his departure had set off a wave of threatened resignations that risked the collapse of the practice.

It turns out that the doctors’ employment contract specified that the employer would pay malpractice tail coverage for any doctor who left the practice before completing two years of employment. After the two-year anniversary, the doctor would have to pay for tail coverage. Most doctors in this young practice were nearing their two-year anniversary, and they began to worry about having to assume this responsibility.

I spoke with one such doctor. The physician was happy with the practice and had not spent time thinking about leaving until faced with the issue of tail coverage. Like many hospitalists, she tended to think of her commitment to the practice more in terms of dating than as a marriage. She wanted to keep her options open to pursue other work in the future and thought there might be some chance she would move if she experienced a major life change like marriage. So—like several of her colleagues—she thought about leaving the practice ahead of the two-year anniversary, thus avoiding committing to paying tail coverage that could be as much as $25,000 per year, depending on how long she stayed with the practice. To her, assuming the risk of paying the tail coverage felt like punishment for staying in the practice for longer than two years rather than a reward for her loyalty.

Ultimately, the hospitalists and the multispecialty group that they were part of negotiated for the practice to pay the tail coverage regardless of the duration of a departing doctor’s employment with the group. The group paid for this in part by paying beginning hospitalists a lower salary; in a sense, the doctors were still paying a portion out of their own pockets, but it seemed less painful this way.

It is reasonably common in any specialty for a group to assume the risk of paying tail coverage if one of its doctors leaves the practice within the first two or three years because a doctor who decides to leave that quickly often does so after concluding that the practice is not as it was described during the recruiting process. But a doctor who departs later than that is more likely to do so because she has simply decided to pursue other options, and it seems reasonable that she should pay the expenses related to her departure. This is a reasonable approach, but there are several issues that might cause a practice to approach the issue differently for hospitalists than for other doctors.

  1. Hospitalist practice is likely to have a somewhat higher turnover in staffing than other physician groups for several reasons that I won’t enumerate here. So, like the woman in the anecdote above, everyone should acknowledge that the fact that a hospitalist is willing to stay longer than two or three years does not mean he or she will stay for a career. With this in mind, payment of tail coverage may be a bigger issue for hospitalists and may require a different approach than for other specialties, though whether the practice or the hospitalist should pay for it is still up for debate.
  2. Nationally, about half of hospitalists are employed by the hospital in which they work, and—in this case—malpractice insurance is usually provided by the employing hospital. Many or most hospitals have decided it is in their interest to pay for tail coverage for a departing doctor regardless of his duration of service. If a doctor were to decide not to buy tail coverage himself, then the hospital might become the deep-pocket target of a malpractice suit, instead of the doctor. For this reason, many hospitals have decided to go ahead and pay for the coverage instead of facing the risk that the doctor won’t buy it.
  3. Some hospitalists (most commonly those employed by hospitals) have an occurrence malpractice policy that doesn’t require tail coverage. Claims-made policies, which do require tail coverage, are much more common overall, but it is worth thinking about whether an occurrence policy might be better in your situation. If you’re unfamiliar with the differences between these policies, a good discussion can be found at www.physiciansnews.com/business/405.html, or just put “claims made + occurrence” in a search engine and you will find some good explanations.

The right approach to this issue will vary from one place to the next. In the current environment, with more hospitalist positions than there are doctors to fill them, many practices may need to agree to pay tail coverage for departing doctors.

Non-Compete Clauses

Non-compete clauses are common in physician contracts. They generally specify that a doctor who leaves a practice may not practice the same specialty of medicine within a defined geographic region for a specified period of time. The rationale for their inclusion in any specialty of medicine is complex but can be illustrated by an example that I watched play out while I was a resident.

With much fanfare, the hospital where I did my residency training in the 1980s recruited its first cardiac transplant surgeon, then bought new equipment and hired new staff to support the program. After about two years, the surgeon decided to move his practice to a hospital about 30 miles away, and the teaching hospital had made a big investment in a transplant program that it could no longer operate. Even if the hospital could have found a new transplant surgeon quickly, the original surgeon had developed relationships and referral sources from around the state, and most of these referrals would follow him to his new hospital.

I was only a resident and don’t know anything about why the doctor left or whether his contract had a non-compete provision. But it was clear to me that the hospital had made a big investment building the program around him and would now need to start over, working to recapture the referral relationships the departing doctor had taken with him. The hospital would have been smart to have a non-compete clause in place that would prohibit the surgeon from practicing in its market. It wouldn’t be fair to prevent the surgeon from leaving or practicing transplant surgery elsewhere, but it seems reasonable for the hospital to require that he not practice in a place that would be geographically close enough to interfere with its referrals.

There are better sources for the overall rationale of non-competes than this column, but some of the principal reasons they’re written into contracts include:

  • To prevent a doctor from developing referral relationships—with the help of the employer practice—and then taking them across town to a competing group;
  • To prevent a departing doctor from taking trade secrets about the way business is conducted—or future business plans—and using that information to benefit a competing practice; and
  • To provide a means to reduce the chance that a practice incurs the expense of recruiting and getting the doctor established in practice, only to have the doctor quickly “jump ship” to a competing practice.

In most, but not all, cases, it is hard to argue that hospitalists can redirect referral sources or steal trade secrets when they leave a practice. Accordingly, these issues are rarely a good reason to include a non-compete.

Including a non-compete simply to prevent a doctor from jumping ship to a new practice has always struck me as the least legitimate reason; your practice should keep doctors from leaving because they like it there rather than because of a contractual provision that makes it difficult to switch to a different practice in the area. And including a non-compete clause comes at a cost of potentially scaring off the people you are trying to recruit, which could mean that it is hurting the practice more than helping it.

I’m not suggesting that non-competes have no place in hospitalist practice; they may be important and appropriate in some situations. But each hospitalist practice should take the time to think critically about whether to include one or not. Simply including it because it is common practice in other physician contracts may do more harm than good.

If you are a hospitalist and are considering signing a contract that includes a non-compete, don’t let this column lead you to believe that the practice is trying to treat you unfairly. But it is reasonable for you to ask the group representative why they see it as necessary. You might get lucky and find that they’re willing to delete or shorten it.

Conclusion

When it comes to hospitalist contracts, no one formula can apply to all practices or to all physicians. Careful analysis of the contract by both parties, however, along with a few well-thought-out questions, might prevent future problems. TH

Dr. Nelson has been a practicing hospitalist since 1988 and is a co-founder and past-president of SHM. He is a principal in Nelson/Flores Associates, a national hospitalist practice management consulting firm. This column represents his views and is not intended to reflect an official position of SHM.


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