How to Avoid Legal Pitfalls in Hospital Employment Agreements

JAMES S. JACOBS, ESQ.brighter still(1)

In Maryland and elsewhere in the U.S., health reform and other factors are fueling the trend toward hospital employment of physicians. A 2013 survey by Jackson Healthcare found that 40% of physicians reported being a hospital employee or in a hospital-owned practice. If you are among those considering the sale of your practice to a hospital, think about the following issues before and during negotiations.

Assets, Goodwill and Accounts Receivable

Hospitals typically acquire your practice’s assets, and not the legal entity you own. Generally, the acquisition is for a nominal fair market value of the furniture and equipment acquired, which is determined by an independent appraiser. Hospitals no longer regularly purchase the goodwill of the practice with a large cash payment. Although goodwill payments may still be negotiated, they must be justified in the context of the total compensation, since all parties want to be inoculated from a government claim that any payments are being made for referrals.

Your accounts receivable generally are not included in the sale; you are responsible for collecting and retaining them. Unless there is an outside, third-party collection agency, you must contract with the hospital to collect the receivables on your behalf, negotiating a fee for this service, because the hospital now employs your former employees and owns your computer equipment.


Most agreements provide a base salary with specified productivity thresholds. Incentive compensation also is based on productivity. Compensation determined by a formula that uses work relative value units (wRVU), not cash collections, is becoming more prevalent. wRVUs address concerns about reduction of payment rates by Medicare and other third-party payers, and about the efficiency of hospital billing and collections.

If compensation is based on cash collections, be wary of whether the agreement specifies cash or accrual accounting. Cash accounting entails an initial lag in receipts, and the first year of employment includes only approximately 10 months of collections.

Regardless of the accounting method used, be careful about how the compensation is structured in your initial year of employment. You may ask that the hospital build in relief during the transition period, to make up for lower productivity resulting from practice changes that they’ve required.

The contract also should prorate the compensation formula upon termination. Avoid provisions that require you to be employed on the last day of the year in order to receive incentive compensation. Also consider requiring the compensation formula to address periods of disability.


Sometimes hospitals permit you to retain the existing malpractice policy, and agree to pay those premiums during hospital employment, especially when you are nearing retirement and are eligible for a free reporting endorsement (“tail”). If you’re not close to retirement and you retain your prior policy, be sure to specify who will have the responsibility for the payment of the tail upon the termination of employment. This is a heavily negotiated item.

In many cases, you are required to be insured under the hospital’s malpractice coverage. When the hospital provides coverage under its policy, specify that this is an “occurrence” policy, and no tail coverage is required. If a tail is necessary, it should be paid by the hospital.

Negotiating Restrictions

Negotiate employment agreement provisions that restrict where you can practice if the agreement is terminated. For example, hospitals should agree not to restrict your ability to continue to practice if they terminate the agreement without cause, or fail to renew it. Hospitals may also allow you to continue to practice within the same geographic area if you do not affiliate with or accept benefits from a competitor. You may be able to negotiate a release from the restriction upon payment of a specified cash amount when the agreement ends.

Group Practices   

A group practice purchase can provide more leverage to physicians. A group can maintain its identity, making the change appear seamless to patients. In a group, physicians can pool their compensation and determine how it will be allocated to each physician, subject to the reasonable approval of the hospital. This allows pre-existing compensation arrangements to be maintained and may allow the practice to be managed semi-autonomously from the hospital.

James S. Jacobs is a principal in the Maryland law firm of Jacobs & Dembert, P.A. He can be reached at

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