Employment Contract That Lost Me A Hundred Grand
We all had to sign an employment contract before starting work. My first physician employee, I had a very brief two page agreement between us. Luckily, this first employee turned out to be amazing and it did not end up coming back to haunt me so far. I’ve unfortunately had the exact opposite experience with my second physician employee.
For my second physician employment contract I hired a lawyer. I wanted to make the agreement as formal as possible. However, even getting a lawyer to write up the agreement, I still left myself open to lots of loopholes by someone who borderline took advantage of my kindness.
By the time everything was said and done, I was out about $100,000 in salary plus overhead below what this person brought in for collections.
Here is what went wrong.
Deciding On Payment Structure
I decided to take the risk off my shoulders and put some of that risk on my employee. At least so I thought.
I made a deal with this physician employee #2. I would take 40% of collections for overhead and another 5% beyond this for my profit. Sounded pretty good to me at the time since my overhead was somewhere around 30% and as low as 25% some months. I thought it would leave me wiggle room for increased expenses as they would need their own monthly support in various financial ways.
The other payment structure that this physician was interested in was flat salary plus an incentive bonus. Since I did not have a lot of money coming in to support this at the time, I decided against the flat salary of around $10,000 a month with incentive bonuses on top of this.
Benefits To No Flat Salary
It turns out that the benefit to not paying a flat salary for employment agreements are as follows.
- Even if the doctor does not work, then my potential financial losses are limited.
- When getting a bank loan, not having a recurring guaranteed payment to a physician significantly improved my balance sheet in the eyes of the bank.
- I theorized that this would put more money in the physicians pocket and take some of the risk of my plate. This can work if the physician employee works regular full time hours.
What Went Wrong
In the middle the pandemic, there were numerous opportunities for locum’s shifts to be done at quite a high rate of pay.
It turns out that physician employee #2 was taking days off and saying that they were spending time with the family, only to in reality be taking shifts doing locums making even more money than they would in clinic.
I had a stipulation that this physician employee would have to get work “okayed” by me before doing the work. This physician employee #2 sent me an email asking if he could pick up some locum shifts on his time off and I said sure, as long as it does not interfere with your clinic duties when you are in clinic.
Well, taking “personal” time off to go work locums did not technically interfere with clinic work since they were taking time off for personal reasons.
Some Of The Loss Is On Me
Let me just take a break for a second since I’m telling you one side of the story. I am also so far putting 100% of the blame on physician employee #2. That is not completely fair to that individual.
During the pandemic, most medical practice had a decrease in patient volume. My practice was no different. Some of the loss did come from this drop in expected patient volume at the start of the pandemic.
I would like to take a moment to say that it is not 100% fair to blame the previous physician employee. I did my best to fill their schedule but there were days where they were not 100% full.
No one could predict a pandemic, and I didn’t predict one in my financial projections. That is part of why I lost so much money too.
Okay back to the article
Still Paying Overhead
This physician employee took 6 weeks off in the first 6 months of 2021.
That means that they did not work 25% of the work weeks in 2021! That is on top of the regular holidays. It is also on top of the week we were closed due to a snow storm. I estimate that this physician worked about 67% of a full time schedule.
Meanwhile I still had to pay overhead. This overhead for the doctor included:
- Malpractice Insurance ~$800/month
- Medical assistant ~$3,000/month (including all benefits)
- EMR ~ $150/month
- Billing Platform $330 / month
- Phone $40/month
- HIPAA Email / secure texting $50/month
- Dictation software $100/month
- Health Insurance ~$800/month
- Vision/Dental $60/month
- Their share of rent $3,000
Total = $8,300 /month
So while this doctor was out making more money doing locums, I still had to pay the overhead of almost $10,000 a month when you added up other small things that would come up that we would split overhead with the physicians.
My Employment Contract Did Not Account For A Full Time Physician Working Part Time
In my estimated overhead financial plans, I did not account for a physician who I was hiring as full time essentially working a 67% schedule. Of course, this would be a huge problem for paying the doctor and calculating profit.
Most full time jobs will have you “full time” at 80% of a 40 hour work week.
Since my assumptions were wrong, I was losing some months over $10,000 per month by employing this physician. A big financial oops.
I had no safe guards in my contract that if they were to drop below certain status, that the contract would need to be re-negotiated or a different pay structure would be valid.
Out Of Network
Since the physician employee was doing locums, other groups were trying to credential them to receive payment. Many insurance companies will kick you out of network with your previous group when you start the credentialing process with a new group.
Every time they tried to get credentialed, it seemed that at least one of the insurance companies tried to kick him out of their network in our clinic.
This meant that I had to have my biller and credentialing team spend many hours trying to get him back in network with these plans. Getting kicked out of a network meant delayed payments, upset patients, and lots of headaches.
It is hard to quantify the exact financial loss of time spent on this headache. I would estimate 100 hours worth of work for my group.
Protecting Myself Going Forward
My contracts all now have a contingency plan. I previously assumed everyone I hired full time would want to work full time. Since I had no paid time off for the physician employee, I figured they would want to work as much as possible to make as much money as possible.
I could not pay as much as some desperate hospitals who were dealing with COVID-19 surge who were willing to pay him locums to come work there. That really screwed me in the end.
I need a team player. It is a bit hard for me to be mad at this physician. He saw an opportunity in his contract, and he took it upon himself to take advantage of it to make as much money as possible for himself. After all, it is just business.
Now, my contracts all have stipulations about time off, what happens if they no longer meet full time criteria, and plans for sharing overhead should someone take more time off than planned.
I also do not provide any blanket statements anymore and better phrase my words when giving the okay for work outside of the office.
Not Willing To Throw Good Money At Bad
You might be asking yourself, well, why don’t I try to legally enforce the contract about getting outside work “okayed” by me which he didn’t really do?
Technically he has an email from me with a broad stroke of me saying that if he is off from work and its not interfering with his job when he is in the office I don’t care. Huge mistake making a general statement of “okay” on my part.
Technically, one might interpret that email as I only care if he does some other job while physically in the office. Since he was not in the clinic and took the time off, only for me to find out later he was doing locums, this is a huge gray area. There is nothing in the contract about maximum amount of time off allowed to be taken.
I’d personally rather move on instead of trying to get into some legal argument about the gray zone here.
My Worst Financial Loss To Date
By the time I calculate overhead into the equation, I’m about $100,000 down from collections minus payments to the doctor + overhead.
I thought the Aetna debacle of tens of thousands of dollars would be my worse loss, but sadly that is not the case.
It is honestly a bit depressing to think of all the extra work and stress I took on to make the clinic stay afloat during the pandemic, only to have a physician employee do locums or tele-med instead of working my clinic to put more money in their pocket.
I believed the best in people and assumed this physician employee would want to do what I wanted in every way to make the business successful. Wrong. They have their own life, their own financial obligations, and needs. They at the end of the day had to look out for their own interests, and I’m not at all mad at that.
I can’t lie though. This one experience might leave a bit of a scar. I am not sure I will ever allow a contract like that again. One that exposes myself to someone who is supposed to work full time but essentially make themselves part time.
This whole experience has hardened me to think of this solely as a business. I thought I was doing something “friendly” letting this person have time off to be with their family. In reality, some of that time they were simply working elsewhere to make more money while I was still paying all the overhead.
It is a business.
Medicine is a business.
I can be friendly and even friends with my employees to some degree. However, at the end of the day, it is just business. I have a six figure lesson here to remind me of that.
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Wow. I’m on your employee docs side. Being upset that they wanted work/life balance?! Either make them eat-what-you-kill with reasonable overhead buy-in, or make them a equal partner.
Thanks for the comment and feedback. The employee was essentially eat what they kill minus what I estimated their overhead percentage to be. I actually figured they were doing pretty well since they were on a pace to make about $225k a year seeing 13 patients a day for a while there.
What lost me a lot of money is that I didn’t anticipate them taking time off to do locums due to the pandemic, make more money doing locums, while making no money in my office while they were gone. Keep in mind that while they are gone, I still have to pay their malpractice, their medical assistant, their licensing fees, their EMR monthly fees etc. I also screwed myself by not having more tight clauses in my contract with them about what happens if they decide to not work a full time schedule since the estimated overhead that I was taking out would drastically change.
Lets say overhead is 50%. Well, if a doc works 2 weeks out of every 4 week month, they technically make no money since all that money just goes to support staff for the office. If your contact with this doctor as an employer says you are taking out 50% of their salary for overhead and they work only 2 weeks, you are losing money each month as a business owner since there is a deficit when covering overhead.
I made assumptions that they would want to work for me full time since my first doctor is making over $300k a year full time in out patient medicine. At the end of the day, the employee did what was best for themselves. I’m not mad at them. Just trying to show that if its not in the contract, you can get burned not only as an employee, but as a business owner too. It was a 6 figure lesson to put clauses in the contract for future physician employees and make no assumptions.
Agree with the above poster—I don’t blame physician 2 and this article sounded one sided and selfish, and I hope this employer cares more about their employees than what this article implies. Incentives need to be aligned for both parties (or else it will end up in situations like this and cost much more in the long run—people can only be taken advantage of for so long), and they very clearly were not for physician #2. This seems like a very “old school”/unsustainable way of doing business (married to a CEO and also asked his opinion on this). Residents and med students reading this, know your value and don’t let this article convince you otherwise. Don’t be afraid to negotiate so incentives are aligned for both parties. You and your employer will be much better off for it.
I always value feedback and appreciate your thoughts. I absolutely agree that incentives need to be aligned for both parties to be happy. Things started to diverge severely in terms or expectations during the unique situation (covid lockdowns), and I believe that lead to the degradation of the work relationship.
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I’m curious. What were your stipulations in the event that a future employee taking time off, whono longer meets full time criteria, and paying for overhead should someone take more time off than planned??
My previous contract did not stipulate anything about time off since that employee was based on a RVU only model. I learned a significant financial lesson that I needed to include time off in my contracts as above.
My current contracts stipulate 3 weeks paid time off for new hires for first year, 4 weeks for second year. Excluding paid time off, if they drop below 0.8 full time status or 32 hours per week then they will be switched over to part time status. Anything more than 5 business days in a row of them taking a vacation needs to be approved not only by the office manager but by me as well.
That is how I protect our office in the future for paid time off and unexpected time off for physician or APP employees.
FWIW, I’m on your side of this. It’s not like Physician 2 didn’t know you were paying staff and overhead whether they showed up or not. If they’d always worked in a hospital, maybe they’d never thought of it. You’re not the asshole. Thanks for posting. I have a long way to go until I start my own clinic, but I’m paying close attention.