Physicians who join a hospitalist practice often have the opportunity to purchase an equity interest after some period of employment. The future possibility of the physician-employee becoming an owner of the practice is sometimes addressed in the physician’s employment agreement. The amount of detail in the employment agreement regarding potential ownership will vary depending on the practice and the negotiating power of the individual physician. Clearly, the more specificity found in the contract, the better the hospitalist is served.
Because the circumstances of the individual parties will govern the terms of the buy-in, there is no standard contract language universally used in physician employment agreements. Specific aspects exist in many buy-in provisions contained in physician employment agreements, however. Such issues include: (i) the opportunity to purchase an ownership interest; (ii) performance reviews; (iii) how the interest will be valued; and (iv) payment terms.
The employment agreement should specify whether and when the employee-physician will be eligible to acquire an interest in the practice. The idea of remaining an employee may be attractive to some physicians who prefer to have less involvement in the business and financial aspects of the hospitalist practice. Sometimes cost becomes a critical issue.
However, if the parties do intend for the physician to have the right to purchase an ownership interest, the timeframe and conditions for exercising that right should be specified in writing. The following is an example of a provision addressing the opportunity to purchase an equity interest:
“The parties agree that it is their intent that upon X years of continuous employment pursuant to the terms and conditions of this Agreement, Hospitalist shall be given the opportunity to purchase [a partnership interest or stock] in Practice.”
One condition precedent to the right to purchase an equity interest may be satisfactory performance reviews by senior physicians. Although these reviews frequently are based on subjective standards, the employee-physician should seek a contractual commitment describing the criteria to be evaluated in order to make the reviews as objective as possible. Standard criteria include statistical analysis (e.g. number of patients seen a day), the quality of patient care rendered, and contributions to the practice’s operations (e.g. marketing, community outreach).
In addition, the physician’s employment agreement should specify the frequency of performance reviews. Physician reviews commonly occur on an annual, and sometimes semi-annual, basis, especially during the initial years of employment. Regardless of how often the reviews are conducted, it is highly beneficial to both the practice and the physician-employee that the time periods for evaluations be strictly enforced. Consistent, formal performance reviews promote improvement and synergy between the physician and the practice.
Typically, an employment agreement will either provide an exact purchase price or, more often, state the future method to be used for calculating the buy-in price. Ordinarily, the buy-in price will be a function of the valuation of the total equity of the practice and the percentage of that equity, which is represented by the interests to be acquired by the purchasing physician. While there are a few formulas for valuing the equity of a hospitalist practice, the most common method is discounted present value of net revenue stream.
The appropriate valuation method will depend on a number of factors unique to the individual practice. Therefore, the practice should seek the assistance of an accountant or practice valuation specialist when determining the value. Stating an agreed-upon valuation method in the employment agreement will limit surprises and “sticker shock” to the buy-in price when the ownership decision is made down the road.