The Journal of The DuPage County Bar Association

Back Issues > Vol. 28 (2015-16)

Physician Employment Agreements –A Brief Examination
By Andrew R. Kreamer

With more and more economic pressures resulting from the passage and implementation of the Affordable Care Act, more
physicians are closing their doors to their private practice and joining group practices or becoming employees of a hospital.1 As a consequence of this new trend, doctors are entering into employment agreements with their new employers. Without a doubt, the physician’s employment relationship with its employer should be in writing spelling out the details of the relationship. While no two-physician employment agreements are the same, this article will briefly examine (pun intended) a few of the important provisions that should be carefully considered and addressed in any physician employment agreement. However, before the examination, it should be noted that it is the author’s belief and best practice that a letter of intent be executed by the parties, shortly after the proverbial handshake or offer of employment is made, briefly stating basic terms discussed and agreed at that time, (i.e., scope of work, compensation, start date, term, etc.) with the understanding that these terms as well as other terms of the relationship will be flushed out in greater detail and an employment agreement shall follow shortly thereafter.

1. Compensation – the devil is in the details Compensation is probably the most important topic to any employment contract or commercial agreement. After all, the physician wants and needs to know what his services are worth, and the employer needs to know how the relationship will affect its operating expenses. Compensation can be as simple as a base salary or it can be complex providing for some sort of bonus structure based on various criteria (productivity such as billings and collections, quality). For the more complex payment structures, the devil will be lurking in the details which if not structured correctly can subject the employer and even the physician in trouble with state, federal, regulatory authorities for non-compliance with the complex Stark Law and Anti-kickback Statute (AKS). In fact, the Office of Inspector General (OIG) just recently issued a fraud alert warning physicians that physician employment agreements may result in significant liability.“Physicians who enter into compensation agreements such as medical directorships must ensure those arrangements reflect fair market value for bona fide services the physicians actually provide. Although many compensation arrangements are legitimate, a compensation arrangement may violate the anti-kickback statute if even one purpose of the arrangement is to compensate a physician for past or future referrals of federal healthcare program business.”2 OIG encourages physicians to carefully consider the terms and conditions of medical directorships and other compensation arrangements before entering into them. OIG’s website alerts physicians of hefty civil and criminal fines and penalties including jail time for violations of the Stark Law and AKS. See links on its website for more information.3

Stark Law. Stark Law prohibits a physician from making referrals for certain“designated health services” (DHS) payable to Medicare or Medicaid to an entity which the physician (or an immediate family member) has a financial relationship. A “financial relationship” under the Stark Law includes an ownership interest in the entity or a compensation arrangement between the physician and the entity.4 As with most rules and laws there are exceptions which may apply preventing a violation of the law. With regard to compensation arrangement, certain exceptions apply including but not limited to: rental of office space; equipment, bona fide employment relationships; personal service arrangements such as physician incentive plans; physician recruitment and certain group practice arrangements with a hospital.5 For purposes of this article only the bona fide employee exception will be discussed. However, the reader needs to closely review compensation arrangements involving group practice given the fact that special rules apply to physicians in such business relationships. Under the bona fide employment relationship exception, any amount paid by an employer to a physician (or immediate family member) who has a bona fide employment relationship with the employer for the provision of services shall be permitted if the following criteria is met: (1) the employment is for identifiable services; (2) the amount of remuneration under the employment: (a) is consistent with the fair market value of the services, and (b) is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician (this shall not prohibit payment of remuneration in the form of a productivity bonus based on services performed personally by the physician); (3) the remuneration is provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer; and (4) the employment meets such other requirements that may be imposed by regulation as needed to protect against program and patient abuse.6 According to Becker’s Hospital Review, to determine and establish fair market value compensation, after establishing the proposed compensation arrangement is commercially reasonable and serves a legitimate business purpose, it would be best practice for the employer to have an independent valuation expert assess fair market compensation using a market, cost or income approach.7

In sum, a physician employee’s compensation first and foremost must not be based or have the appearance of being based on referrals, is for identifiable services for fair market value and is commercially reasonable. Otherwise, both the employer and physician face impending hardship both financially and professionally.

Anti-kickback Statute. Next of concern for physicians in an employment compensation arrangement is the anti-kickback statute (AKS) and regulations. AKS prohibits anyone from knowingly or willfully offering, paying, soliciting or receiving anything of value (including kickback, bribe, rebate) directly or indirectly to induce or reward referrals or generate federal healthcare program business.8 Like exceptions found in the Stark Law, AKS has safe harbors protecting against criminal and civil penalties and fines against those who violate the AKS. One exclusion or safe harbor deals with employee remunerations. Any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items and services.9 Additional safe harbors were created through regulations adopted by the OIG to protect against prosecutions or civil sanctions over concerns the statute was overly broad.10

Failure to abide by the Stark Law and AKS can result in heavy sanctions and penalties including: exclusion from Medicare/Medicaid programs, False Claim Act liability, treble damages of the amount of remuneration; and civil monetary penalties ($50,000 per occurrence under AKS; $15,000 per service under Stark).11 Moreover, violations under AKS can carry a felony conviction with criminal penalties or fines up to $25,000 and up to a 5 year prison term per violation.12

2. The employment relationship flat lines, i.e., termination and covenants not to compete The second important consideration in physician employment contracts regard termination of the employment relationship. When it comes to termination of the physician employment relationship there are two important provisions to consider: (1) types of termination; and (2) covenants not to compete. First, with regard to types of termination there are two, either “with cause” or “without cause.” The employment contract should state with specificity grounds for dismissal “with cause”, i.e. breach of hospital rules or bylaws, suspension of state licensure, exclusion from federal health care programs, committing a serious crime, disability. Medical staff bylaws should include a due process procedure which includes a hearing and right to appeal upon termination. Accordingly, one should review the physician agreement and staff bylaws to understand those rights.

Second, physicians should be wary and on the lookout for covenants not to compete in a physician employment agreement. In an ethical opinion by the American Medical Association concerning its Code of Medical Ethics issued in November 2014, it stated its position that, “Physicians should not enter into covenants that: (a) unreasonably restrict the right of a physician to practice medicine for a specified period of time or in a specified geographic area on termination of a contractual relationship; and (b) do not make reasonable accommodation for patients’ choice of physician.”13 The AMA goes on to state:“Competition among physicians is ethically justifiable when it is based on such factors as quality of services, skill, experience, conveniences offered to patients, fees, or credit terms. Covenants-not-to-compete restrict competition, can disrupt continuity of care, and may limit access to care.”14 However, the Il linois Supreme Court does not
concur with the AMA’s opinion. In Mohanty v. St. John Heart Clinic, 225[3] Ill. 2d 52, 66 N.E.2d 85 (2006), the court held that the AMA’s opinion does not provide a clear expression of the public policy of this state and therefore covenants not to compete in physician agreements which are not against public policy.15 The court noted that historically, covenants not to compete have been held valid and enforceable in Illinois as long as their durational and geographic scope are reasonable taking into account the effect on the public and any undue hardship on the parties to the agreement.16 Depending on the facts of each case, restrictive covenants preventing a physician practicing his specialty have been upheld as reasonable. The rationale is that a physician is still licensed to practice medicine just not the specialties within a reasonable geographic restrictions.17 The court also noted that given size and heavily populated Chicago metro area, a 5
mile geographic restriction is not unreasonable.18

3. Scope of work. Finally, understanding the physician’s scope of work is important. Knowing the minimum and maximum hours to work, location of the employer if located in multiple places, information regarding requirements for being on call are all important. A physician will likely want to know how often he/she should place the phone by his/her bed at night when required to be on call. Identifying and understanding the physician’s scope of work required and actually performing them are necessary because failure to do so subjects the physician to breach of contract liability. Moreover, failure could result in loss of the bona fide employee exception subjecting the physician to Stark Law liability because
compensation received by the physician would not satisfy the fair market value for those services.19

Conclusion. In conclusion, great care is necessary when reviewing, drafting and negotiating physician employment agreements. Failure to examine and address the parties’ wants and desires can lead to an ill relationship that may eventually flat line. Moreover, failure to identify issues involving Stark Law and anti-kick-back statutes can have serious legal issues for both hospitals and physicians resulting in heavy fines and penalties which may include a prison sentence. Given constant changes in healthcare laws and regulations it would be prudent to review the OIG website for regulatory updates, fraud alerts and advisory opinions. Finally, careful consideration and foresight, at the time of preparing the employment agreement, should be made by the parties regarding termination rights and the terms to any covenant not to compete. With great care and consideration, a long living relationship between physician and employer can be made possible.

1. Robert J. Mills, New AMA Study Reveals Majority of America’s Physicians Still Work In Small Practices,
AMERICAN MEDICAL ASSOCIATION (July 8, 2015). Available at
2. “Fraud Alert: Physician Compensation Arrangements May Result in Significant Liability.” Office of Inspector General of Department of Health and Human Services (June 9, 2015). Available at
3. Id.
4. 42 U.S.C. §1395nn(a). “Designated health services” is defined in part (h)(6) and includes services such as: clinical laboratory; physical therapy; occupational; radiology; radiation therapy; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics; home health; outpatient prescription drugs; inpatient and outpatient hospital services; and outpatient speech-language and pathology services.
5. 42 U.S.C. §1395nn(b) and (e).
6. 42 U.S.C. §1396nn(e)(2).
7. Ayla Ellison, Valuation of physician employment contracts: Q&A with VMG Health’s Jonathan Helm, BECKERS HOSPITAL REVIEW (July 15, 2014). Available at hospital-physician-relationships/valuation-of-physician-employment-contracts-q-a-withvmg- health-s-jonathan-helm.html.
8. 42 U.S.C. §1320a-7(b).
9. Id.
10. 42 CFR 1001.952.
11. 42 U.S.C. §1395nn(g) and 42 U.S.C § 1320a-7a(a)(7).
12. 42 U.S.C. §1320a-7b(b).
13. Opinion 9.02 - Restrictive Covenants, AMERICAN MEDICAL ASSOCIATION, found at (November 2014).
14. Id.
15. Id. at 67. Mohanty v. St. John Heart Clinic, 225 Ill. 2d 52 at 67, 866 N.E.2d 85 (2006)
16. Mohanty at 67.
17. Id. at 77.
18. Id.
19. David L. Haron, Suzanne D. Nolan & Mercedes Varasteh Dordeski, Stark Law Update: Determining Whether Compensation is Fair Market Value or Takes Into Account the Volume or Value of Referrals, ABA HEALTH eSOURCE (April 11, Vol. 7 No. 8).Available at
aba_health_law_esource_1104_haron.html citing to U.S. v. Campbell, 2011 WL 43013, No. 08-1951 (D. N.J., Jan. 4, 2011).

Andrew R. Kreamer is an experienced attorney with a private practice in Montgomery, Illinois and serves as Of Counsel for Kreamer Law Group, LLC in Naperville. He received his J.D. from the University of Tulsa College of Law concentrating
in health law, and graduated from Coe College with a bachelor’s degree in both political science and history. Andrew is a member of the Illinois Association of Healthcare Attorneys.

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