NEGOTIATING LETTERS OF INTENT FOR PHYSICIAN EMPLOYMENT CONTRACTS: TIPS AND TRAPS

Negotiations leading to physician employment often begin not with a draft contract, but with a “letter of intent” from the employer, spelling out—usually not in a very detailed way—the anticipated terms and conditions of the employment agreement.


Letters of intent (and their siblings, memoranda of understanding and term sheets) are favored by employers because they allow them to gauge a prospective employee’s commitment to the position before going to the trouble and expense of drafting a definitive employment contract.


A letter of intent can be valuable to the prospective employee as a tool for comparing competing employment offers. The best way to for an employee to get what he or she wants in an employment negotiation is to have alternatives; and having sufficiently detailed letters of intent for each employment offer provides an easy way to make apples-to-apples comparisons among them.


But a letter of intent, if not entered into thoughtfully by the employee, can impair the employee’s ability to negotiate better terms at the contract drafting stage. This is especially true where compensation is concerned. (Asking for a rate of pay in an employment contract that is higher than what you already agreed to in a letter of intent won’t endear you to your prospective employer, and may even end the negotiation.) Worst case scenario: the letter of intent may be drafted in such a way as to constitute a binding contract. In that case, backing out of the arrangement later, without liability, if you decide that it isn’t acceptable may not be an option at all.


It’s imperative that you closely review and negotiate any letter of intent that a prospective employer presents to you before you sign it. Here are a few things to know about negotiating a letter of intent for physician employment.


1.  Know What You Want.


You can’t properly evaluate an employment offer outlined in a letter of intent unless you know what you want out of the position. Are you looking for more money, or for a greater work-life balance? Do you welcome greater volatility in earnings if it means you might make money, or do you prefer greater predictability? Are you looking for a pathway to partnership? Do you want an academic appointment along with clinical responsibilities? Do you want administrative or teaching responsibilities in addition to clinical responsibilities, or do you want to eliminate clinical or non-clinical responsibilities from your work entirely? You can’t effectively negotiate until you know what you want out of the deal. Preferences that are material to your decision whether or not to accept the offer should be addressed in the letter of intent to your satisfaction.


2.  Know What You're Worth.


Benchmark compensation for physicians of your specialty and in the area where the job will be located, using recent physician compensation survey data. The American Medical Association (AMA), the American Medical Group Association (AMGA) and various national physician recruiting firms all publish annual surveys of what doctors are paid. But the survey with the greatest currency and reputability in the U.S. healthcare industry is probably the Physician Compensation and Production Survey conducted annually by the Medical Group Management Association (MGMA). You can purchase this data yourself—but it can be costly. Better to work with a recruiter, consultant or attorney who has access to this data, and engage him or her at the letter of intent stage to provide you with this data.


3.  Know What You’ll be Paid.


For some physicians (a number that is probably shrinks with each passing year) how much you’ll be paid will be obvious from the face of the letter of intent. You’ll be compensated on a straight salary basis, with no incentive pay or other contingencies based on quality or productivity that might cause that figure to go up or down in any given year.


For all other physicians, knowing what you’ll be paid will depend first on knowing how you will be paid: You must understand the prospective employer’s compensation model. The subject of physician compensation models is one I’ll leave for a future (and probably longer) article. It’s enough to say that at the beginning of your employment, your compensation will be based at least partly on one or more contingent factors relating to quality or productivity. The most common private-sector physician compensation models are a salary or net-income guarantee with a potential bonus or incentive add-on.
For the purpose of comparing employment opportunities, you’ll need to know what the basis of that incentive or bonus is, and how it will be triggered. Gross collections, net collections, quality measures, relative value units (RVUs), or some combination of them? If your pay will be based at least in part on RVUs, you’ll want to know the value the employer will apply to convert those RVUs into a dollar amount. You will want to benchmark this conversion figure against compensation survey data.  


Keep in mind that might be able to negotiate a change to the numbers in a particular model, but you are very unlikely to negotiate a change to the model itself. That’s because compensation model design is a complicated and risky process for the employer, involving complex business tradeoffs (preserving competitiveness in the employment market while also preserving the appearance of uniform and fair treatment among the employer’s existing workforce), and the need to comply with Federal and state anti-kickback and anti-referral laws.


Also keep in mind that once you sign a letter of intent with a certain dollar amount for your base salary, negotiating an increase in that amount under the definitive employment agreement will be tough. Although letter of intent are usually non-binding, they are a terrific tool of moral pressure, especially in the hands of an employer.


If you’ll be working for a private practice, and your compensation will be guaranteed by a hospital under a hospital recruitment agreement, you’ll want to know this at the letter of intent stage as well. It means you will need to review and sign a hospital recruitment agreement that will be among you, your employer and the hospital, in addition to the employment agreement between you and your employer.
The letter of intent stage is also the right time to negotiate other dollar-denominated inducements like signing bonus, student loan subsidies, relocation expense reimbursement and CME allowance. If any part of these benefits are subject to recapture in the event that you leave, you’ll want to what that “vesting” schedule is for them.


And although you’ll also want the letter of intent to spell out other fringe benefits to which you’ll be entitled—health, life and disability insurance, 401(k)/403(b) match—the best you’ll usually get is a statement to the effect that you’ll get whatever group benefits the employer makes available from time to time to its other professional employees. If that’s the case, ask for a separate summary of the benefits which the employer currently offers. 


4.  Know How Much You'll Be Expected to Work.


The letter of intent stage is the perfect time to talk about the length of your average work week. How many hours will you generally be expected to work, and how will your time be distributed among your various clinical, academic, and/or administrative responsibilities?


A significant contributor to your overall workload will be your call coverage responsibilities. You’ll want to negotiate a “not to exceed” figure for the number of nights and weekends you will be on call (with an allowance for additional call, if needed, to cover for your colleagues who are on vacation). It’s easier to do this at the letter of intent stage than it is when negotiating the definitive contract. Be warned that many employers will only provide in the letter of intent that you will share in call on an “equitable rotating basis” with the employer’s other physicians. This provides little assurance that you won’t be saddled with crushing call responsibilities sometime in the future if your employer decides to reduce the size of its professional staff.   


Finally, you’ll want to know how much paid leave you’ll be entitled to. You’ll want to know whether any of that leave, if unused in a given year, can be transferred to a subsequent year, or if it can be cashed out instead.  


5.  Know Your Malpractice Coverage.


An employer will usually cover your medical malpractice insurance premium during the term of your employment. You’ll want the letter of intent to stipulate the applicable coverage limits, usually expressed in “per claim/in the aggregate” numbers.


Most malpractice claims are made on a claims-made basis; as such, they will only cover claims that arise during the term of your employment. To cover claims arising after you leave which relate back to alleged errors or omissions during your employment, you’ll need a “prior acts endorsement”—more commonly known as “tail coverage.” When you leave the job, will the employer pay the premium for tail coverage, which is typically 150-200% of the policy’s then-current premium? Will there be any conditions on your entitlement to tail coverage? For example, will you need to remain employed for a certain number of years before your employer will pay it? You’ll want this spelled out in the letter of intent.


6.  Know What Should Stay Out.


There are some things you usually won’t want a letter of intent to mention. Generally, the less said in your letter of intent about a post-employment non-compete, the better. This is because these geographic restrictions on employment are usually tightly negotiated and should get an attorney’s review. Employees typically do not have their letters of intent reviewed by attorneys (although there is no reason why they shouldn’t). The exception to this is if you are dead-set against a non-compete, and will not entertain the offer any further unless the employer is willing to forgo the protection of one in the definitive agreement. In that case, get it in writing at the letter of intent stage.


You also don’t want any language in the letter that suggests that it is a binding arrangement, or an exclusive one. You want the letter to make clear that it is non-binding in nature. Even the inclusion of a binding paragraph to the effect that you will negotiate in good faith with the employer toward a definitive employment contract should be avoided. Keep your options open and your right to play the field unburdened.


The Law Office of David M. Briglia represents physicians, physician assistants, nurse practitioners and other professionals in the health care industry in the negotiation of employment contracts, separation agreements, practice buy-ins and partnership and shareholder agreements, and in litigation involving employment and contract disputes in Maryland and Washington D.C. The article above is for informational purposes only, and is not intended, nor can it be relied upon, as legal advice. It is also not intended as an advertisement, solicitation or invitation to enter into an attorney-client relationship.