New Ventures, New Risks: Review all possibilities before affiliating with a hospital

In my January 2011 column (“A Seller’s Market: How to prepare your practice for sale to a hospital”), I described the growing trend of physicians selling their practices to hospitals and large health systems and then working for the hospital or health system. This trend is expected to continue in full force through 2012. As I noted in my January article, the physician’s post-sale arrangement is the driver for the growth of the physician’s practice within the hospital or health system.

In the physician-affiliation arrangement, there is a worrisome trend in the compensation models offered by hospitals in which the hospitals are shifting their financial risks to individual physicians. I have recently reviewed a number of contracts that contain provisions that hold the physician personally responsible for the success or failure of his or her practice within the hospital or health system.

In a financially strong year with high patient billing and collection rates and efficient hospital management processes, this language may prove financially beneficial to the physician-employee, through bonuses and distributions. In a year with low collections coupled with aggressive allocation of overhead expenses, however, this language could become a damaging clause in an otherwise attractive contract.

There’s a worrisome trend in the compensation models offered by hospitals in which the hospitals are shifting their financial risks to individual physicians.

Employment Agreements

One such recent hospital employment agreement I reviewed was for an otolaryngologist who had been an owner of his five-physician private practice for the past two decades. Historically, he had received a steady, competitive salary and bonus, and his practice had distributed a significant portion of its profits at year-end. He and his colleagues were approached by a hospital and asked to join the otolaryngology department. The hospital presented the doctors with seemingly attractive compensation packages, as well as identical proposed employment agreements.

In reviewing the contract, I agreed that the terms were fair and reflected the agreed upon business terms of the relationship, with one exception: Under the section “Salary,” the contract stated “Except as otherwise set forth herein, Physician will receive a base salary of X amount per year and a productivity bonus in accordance with this Section.” The base salary and productivity bonus amounts were greater than what my client had historically made as an owner of his private practice. However, the “except as otherwise set forth herein” caveat created substantial concern a few pages later. The contract contained a provision that stated, in short, that in the event that the physician’s share of the hospital’s expenses exceeded the revenue produced by his professional services, he would be responsible for payment of the deficit. Further, the definition of “hospital expenses” included his salary. In a poor financial year, this could mean that his seemingly guaranteed base salary would not only be reduced by his share of the loss amount incurred by the hospital, but that the loss could actually fall below zero, requiring him to personally pay the hospital above and beyond the amount he was compensated. Moreover, even in the event that he were to cover his compensation with collections, hospital-allocated expenses, including overhead well beyond his control, could result in a deficit.