What New Doctors Need to Know About Contract Negotiation

October 28th, 2013 12 Min read What New Doctors Need to Know About Contract Negotiation Blog
Coming out of residency, many doctors are eager to join a private practice. Though their schooling prepares them to work with all kinds of patients and medical conditions, they may not feel equally confident navigating through the process of physician contract negotiation. SEE ALSO: Physician contract negotiation: A comprehensive guide In the following video, Dr. Koushik Shaw of the Austin Urology Institute shares a few things doctors should understand before signing on the dotted line, including:
  • Overhead-to-Revenue Ratio
  • Income Distribution
  • Payor Mix
  • The Buy-in and Buy-out Process
  • Salary vs. Compensation
Prefer reading? Find the complete video transcript below: Contract Negotiations Presented by Dr. Koushik Shaw, Austin Urology Institute What New Doctors Should Know about Contract Negotiations Dr. Shaw: A lot of residents are somewhat afraid. They’ve been in the mentor student role for a long time. Now they’re getting out of that resident mode and going out into the private world of medicine and they may be a little embarrassed to ask the right questions. They may have a little reticence to ask those right questions. One of those is that about, the reluctance to ask a lot of sensitive information especially when it comes down to finances etc. See a lot of resistance in that. Residents shouldn’t really feel embarrassed. You are entering the private practice world and you are entering a contract negotiation process. It’s important to ask questions of your future employers. Knowing About Contracts Just as in the residency process you learn a lot about medicine along the way, you are now entering another world where a lot of terms will be thrown around, a lot of acronyms, which are not going to be familiar to you. It’s very, very important not to glide over those if you don’t understand negotiation points or terminology, because they may come back to haunt you later. Negotiate. Get it in Writing. Take Time. Don’t Assume. Attach it. A lot of residents in the physician salary negotiation process may be promised a variety of things. Your call may be one in three; it may be one in five. You may get to be in the new office, etc. But then they find out number one, it’s not in the contract when they get that final written contract -- only to find down the road when they do sign the contract and start their work that those things may not bear fruit or they may have been misled. I hate to be skeptical about this, but if it doesn’t exist in the contract, it doesn't exist. And you can’t just take their word for it. Discussing the Finances. Overhead to Revenue Ratio. Productivity and Compensation Income Distribution. In terms of financial due diligence, a lot of residents may ask or wonder how much information am I entitled to receive. The first interview is to get an idea of the fit. Can I work with these people? Once you kind of bridge that, you get through that and said, “Hey, I can work with these people.” Then you’re going to ask the follow-up questions in subsequent meetings. Then you can get into the nuts and bolts about money. Again, most practices should be forthright about those dollars and cents. If they don’t, it may signify one of two things. Number one, that they again are not managing their finances well and so they don’t know those answers honestly, or number two, they may have something to hide -- and that’s also not good. In some situations, a group may not be able to give you the right answers in terms of the finances of a practice. That may not necessarily be dishonesty or anything like that, but certainly may speak of this practice might not have the appropriate accountants in place, the appropriate financial tools in place, so it may be representative of a practice that doesn’t really handle their own business too well. Another excellent question to ask is about the group’s long-term and short-term outlook and goals. First of all, find out if you take them for a loop when you ask that question. They may not have an outlook or goal, but having said that, if they have one that’s good. That means that the group has a bit of foresight, a long-term growth plan. As part of that growth plan, it will also be interesting to find out what their capital expenditure plans are. You may be joining them at some point in the practice, and lo and behold they’re about to open a new practice that’s a $10 million office, and you’re going to be on the hook for your percentage of that. Looking at a balance sheet of an organization is certainly an interesting question to ask, and it kind of depends on your comfort level with the group you’re negotiating with. It’s certainly understandable if they don't want to share that with you, because it is the heart of the finances of the group. However, if they can provide you with that information or a general outline of that, that would be invaluable. In that balance sheet you’re going to find out one important thing, which is cash flow. Do they have the cash flow in the organization to meet their monthly obligations to the employees as well as the partners in the practice, pay the light bills? Another part of that is the debt sheet. There’s good debt and there’s bad debt. Good debt is debt that is used to finance different things like buildings, instructors, investments in dialysis centers. Things like that that generate revenue. Bad debt could be debt that is used to pay day-to-day finances, day-to-day operations. Overhead to Revenue Ratio Most practices are going to run in a band of overhead somewhere between 40 and 60 percent. If a practice is running really lean, they’re able to be very efficient, not hire too many staff, and they may be a little bit lower than that -- and that’s great. If the practice’s overhead is a little bit higher, greater than 60 percent, you may want to find out where those expenses are coming from and why those expenses are so high and see if there’s room for improvement. But that could be signs of a practice that could be doing better in terms of efficiency. Discussing Medicare and HMOs. Knowing the Payor Mix. Another thing you’re going to want to look at is the payor mix. Is there a lot of Medicare in that particular area? Is there a lot of private insurance in the area that you’re going to practice? What about HMOs? What type of contracts are they negotiated at? Income Distribution The income distribution will fall into usually three categories. One is that it is an even distribution plan, i.e., there are five practice partners, $1 million in revenue, and then each person gets $200,000. It’s an even distribution plan. The second one is based on productivity. You will be compensated as a percentage of productivity that you bring to the practice. The third may involve some sort of mix where there's an element of your salary that is productivity-based, and part of it that is based on an even distribution to all physicians. An example of that is, say, in a urology practice, where one doctor may be doing cancer surgery. He may be involved in three-, four-, five-, six-hour cases all day. He may not generate the revenue as a doctor who is in the office who’s seen 30 or 40 patients that day. So you need to be able to compensate each one equally for the amount of work that they’re doing, but also allowing for the different types of work each physician is doing. When you look at income distribution plans, whether even or productivity-based, you need to make sure that most of the physicians are pulling their own weight in the practice. There may be an older or senior doctor who doesn’t necessarily pull her weight. Sometimes that can be a point of contention in a group, especially if they are on even distribution plans. Becoming a Partner. The Buy-in Process. The Buy-out Process. When do you become a partner in a practice? Usually the salaried employee-to-partnership track is also a safety mechanism for the practice, because they can evaluate you as an employee and subsequently as a partner -- and usually this will be offered to you in the one-, two- or three-year time frame. If it’s earlier, certainly that’s a good option. You do need to be a little cautious or careful if the partnership track is made vague to you or if it’s a prolonged partnership track greater than three years. Usually in the first-year practice, you are going to be losing money to the practice as you kind of ramp up. Your second year of practice, you are usually starting to build up and maybe you’re making your income. The third year, typically in most practices, is when you’re really starting to build up your own reputation and your practice is really going. There should be a buy-in clause as well as a buy-out clause. You’ll want to find out what that buy-in entails, and that could be as much as just the fixed assets of the practice. What you’ll want to keep an eye on is if the buy-in also potentially includes an element of goodwill, because that’s hard to quantify or qualify, especially in this day and age when insurance contracts can go up in smoke overnight. The goodwill of a practice could also evaporate overnight or dissolve for any odd reason, so ultimately the best buy-ins are a fair portion or proportion of the fixed assets of a company. Goodwill does have a monetary value, but it can also be a very esoteric or vague term, and it’s hard to really put a proper price on that. Contract Negotiation for the Long-term The important thing to know about contract negotiation is that this should be looked at as a cooperative process. You’re not here to buy a car or get the best deal and walk away without an ongoing relationship. You’re here to join a physician or a group of physicians and hopefully enter a long-term relationship, and it starts with the contract negotiating process. After you get an idea that you like these people and you’d like to spend more time with them and enjoy working with them, you need to start looking at the nuts and bolts of the contract. Knowing Before You Sign Just like if you’re going to be negotiating in a sports contract, your best point of negotiation is going to be before you sign. The second you sign, it’s going to be harder for you to negotiate the things that you want. Not everything, of course, can be negotiated. There are going to be certain sticking points or fixed points that the group is not going to budge on, and you’ll get a pretty rapid feel for what those are, but it doesn’t hurt to ask. Understand that as a partnership goes, this involves a fair amount of compromise. You’re not going to get everything that you want and, in fact, you’re probably going to need to make a list of what you really need and what your deal-makers and deal-breakers are. Working With a Physician Contract Negotiation Lawyer At some point in the contract review process, and certainly before you sign anything, you do need to have a healthcare attorney involved in that process. That healthcare attorney needs to be from that geographic area, because the rules and regulations for contracts will change state by state or area by area. Dr. Catherine Frances: At this point, I wouldn’t even consider signing a contract without a contract attorney who absolutely knows how to keep my best interests as a physician in mind. I have had many people warn me, “Be sure you understand coverage. Be sure you understand licensing. Be sure you understand not to sign a contract until you really have an attorney look at it and know that your best interests are protected.” Then there are the surprises with imminent student loan payments as soon as you finish graduation. I want to have something in play, and I want to be able to make good decisions with the contracts, because I’ve heard too many people come and say, “I wish I had known.” Dr. Ariana Peters: Do not sign anything until you have an attorney look at it, because there’s so much legal wording. I’ve gone over a contract with an attorney at one point, and he picked up on things that I would never in a million years have caught. Sometimes it’s little minor points, but they do turn out to be something that can be very important later on. Even if you just end up working for your dad’s practice or this is a friend of the family, you still have to treat it like it’s a business -- you cannot take anything personally, and you have to do this with a private party. You just have to have it looked at by an attorney. It’s of the utmost importance. Salary Versus Compensation. Knowing the Difference. Dr. Shaw: Depending on the type of practice that you join, some places may give you a sky-high salary especially if they’re backed by a hospital or something like that. So you’ll have to be careful if they offer you a high-in-the-sky salary the first year, because that second year might not be so pretty once you come away from that income support from the hospital or the group. You’ll have to look at what your first-year salary is from that group but also have a realistic expectation of what your second-, third-, fourth-year salaries are going to be. There’s a difference between your salary and your compensation. Salary is just that number that you’re getting, and compensation implies the entire package. That can be your 401K, your disability plan, malpractice coverage, all of those things. You need to look at not only the salary but the compensation plan all together. Getting Down to the Offer If you’ve liked everything that you’ve seen and heard and looked at, you can now seriously go into phase two, which is to say, “Let’s talk about the nuts and bolts of this. What is a potential offer to me?” Then start going down the financial track.