Changing Lanes


    Private practice doctors considering employment should first review the legal issues.

    By Jeffrey Segal, M.D., J.D., and Michael J. Sacopulos, J.D.

    People don’t like uncertainty. Sociologists teach us that structural ambiguity motivates individuals to seek security and certainty. Well, it’s difficult to imagine an industry with a more uncertain future than health care. Congress passes laws and regulations by the ream. Third-party payers behave more and more like slot machines in the Las Vegas airport. Patients misinterpret the complexity of medical care with Google searches and then want to bargain for fee reductions. What a mess. Who wouldn’t want to hit the Staples “Easy” button?

    Because of the health care sea change, many physicians wish to trade the risks and rewards of private practice for the “safety” of hospital or salaried employment. Better the devil you know, right? There is no universally correct answer to the question of what path you should choose. Lifestyle, finances, and maybe most importantly, legal considerations must all be factored into the analysis. I cannot speak to lifestyle choice, and others have addressed financial implications of transitioning to the status of a “salaried” employee. Here, we want to look at the legal consequences of trading private practice for hospital employment.

    The first and most obvious relinquishment of legal rights comes from the “non-compete clause.” This contractual term prohibits physicians from going back into private practice in the community their hospital employer serves. The idea is that the hospital provides patients and helps develop the physicians’ practices within the hospital system. The hospital ensures physicians don’t depart from the facility with patients and a practice that are the hospital’s property.

    Non-compete clauses have three parts; 1) description of services covered, 2) duration, and 3) geographic area. The description of services is rarely an issue. Most non-compete clauses define services as “the practice of medicine.” This means that a physician cannot claim a different specialty and move across town to open a private practice. Next is the length of time a physician must wait to practice after leaving employment at the hospital. Typically, a physician must agree not to practice for one to two years after terminating employment. Finally, the geographic area usually is determined to be a radius around the hospital of a certain number of miles. It is not uncommon for the radius around the hospital to be set at 25 to 50 miles.

    Typical non-compete clauses prevent physicians from practicing medicine for a given length of time and within a 50-mile radius of the hospital that previously employed the physician. This effectively means that the physician will be forced to relocate to another community to continue practicing medicine. The non-compete clause is a major downside to becoming a hospital employee. Non-compete clauses intentionally foreclose opportunities that may arise for the physician to leave the hospital-based practice. The trading away of potential future opportunities and benefits for near-term certainty could be a bad deal.

    A word of caution: Do not discount the likelihood of a hospital enforcing a non-compete clause. Some physicians wrongly assume that they will be able to negotiate their way out of a non-compete clause when exiting hospital employment. Physicians sometimes have a myopic analysis of the non-compete clause: “The hospital won’t fight me on this because I will continue to refer some cases to the hospital.” The problem from the hospital’s perspective is that it is a party to dozens of non-compete clauses. If one physician leaves without consequences, it could encourage others to do the same. The financial implications for the hospital are larger than any one individual contract.

    Further, hospital non-compete clauses typically have boilerplate language. Should one individual void the non-compete clause through litigation, others will have a strong argument that the clause in their contract is also not valid. This puts the hospital in the position of having to litigate fiercely to defend the validity of any individual non-compete clause. All this means that physicians hoping to get out of a non-compete clause either voluntarily or through litigation should prepare for a long, expensive fight. During the fight, the physician should also be prepared to be court ordered (enjoined) not to practice in violation of the contested non-compete clause. This means the physician will be legally prohibited from practicing medicine pursuant to the terms of the non-compete clause, even while he or she is challenging the non-compete clause in court. As one physician in a non-compete clause fight put it, “This is a total disaster. Even if I win, I still lose.” 

    Often times physician/hospital employment contracts do not specify where the physician will see patients. With many hospitals having satellite facilities, a physician may be surprised to learn that he or she can be legally assigned to treat patients at satellite locations. The physician, who has for some years been on staff at a hospital, may reasonably assume that his or her employment at that hospital would mean a practice based in a familiar setting. Imagine that physician’s surprise when he’s informed that he will be seeing patients twice a week at a satellite facility 35 miles away in an unfamiliar community. This is symptomatic of the general autonomy loss physicians experience when trading their private practice for hospital employment. It is telling that the law formerly refers to the employee/employer relationship as a “master/server” relationship. 

    Perhaps one of the more problematic areas rarely discussed in an employment contract deals with medical malpractice. Physicians becoming employed by a hospital can expect to receive professional liability coverage as a part of their employment benefits. This looks great on the surface. Who wouldn’t want to have others worry about the future premium increases for liability coverage? But, not all policies are the same. Most physicians in private practice have a “consent to settlement” provision in their liability policy. This provision states that a medical malpractice claim pending against the physician may not be settled without the physician’s consent. This prevents a liability carrier from settling a claim at low dollars to avoid costly defense expenses. Not all policies provided by hospital employers contain the “consent to settle” provision. This means that should an employee physician be sued for medical malpractice, the claim against that physician could be settled without his or her consent or even prior knowledge. 

    So, what’s the big deal? Does it really matter if a medical malpractice claim is settled without the physician’s consent? It does. Settlement of a medical malpractice action against a physician must be reported to National Practitioner’s Data Bank. This means that there will be a permanent record of the physician being sued, along with the settlement awarded as a result of the suit. The National Practitioner’s Data Bank can be accessed by a number of different organizations including potential future employers and accreditation committees. Also note that anytime the physician applies for privileges, new liability coverage, or for a medical license in a new state, the settlement will have to be disclosed and explained. The whole idea of a “consent to settle” clause in a liability policy is to allow the physician to have some control over his or her permanent record. Hospital employment may strip away this right.

    There are additional liability considerations. Some argue that hospital employment increases the likelihood of being named in medical malpractice actions. Physicians should also be aware that moving from private practice to hospital employee status means that they will need to purchase “tail” coverage. This is insurance for actions that may arise after the physician has left his or her private practice. Should a physician become dissatisfied with employment at the hospital, he or she will again need to purchase “tail” coverage after terminating hospital employment. All of this equates to large expenses, which many physicians do not calculate into the cost/benefit analysis of transitioning from private practice to hospital employment.

    For the legal reasons listed above and others, physicians should take careful consideration before becoming salaried employees. For many physicians, it is seductive to think of transferring administrative duties and financial risks to a hospital. Physicians know the downside of private practice. What is unknown are some of the risks and potential lost opportunities that occur upon signing an employment contract. Remember your father’s advice: “If it sounds too good to be true, it probably is.”  


    Jeffrey Segal, M.D., J.D., is founder and CEO of Medical Justice Services. Mike Sacopulos, J.D., is general counsel for the organization. Run by physicians for physicians, Medical Justice is a membership-based organization that offers proactive services to deter frivolous medical malpractice lawsuits, prevent Internet defamation, and to provide proven strategies for successful counterclaim prosecution.