A Hundred Grand Lost On an Employment Contract

The Investment Doc has chosen the road less traveled in recent years. He’s building and growing his own medical practice in Texas as an internal medicine physician.

Roughly five years into this venture, he’s seen some growth, and along with growth comes growing pains. Sure, he’s had difficulties with insurance, billing, and coding, and the usual headaches that physicians deal with.

He did not anticipate having major issues with another physician, but that’s what happened. He tells the story of how and why the contract he had with this doctor set him up for failure, and what changes he’s made to ensure it will never happen again.

This post originally appeared on Investing Doc.

 

 

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.

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Benefits To No Flat Salary

 

It turns out that the benefit to not paying a flat salary for employment agreements are as follows.

  1. Even if the doctor does not work at all, my potential financial losses are limited.
  2. 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.
  3. I theorized that this would put more money in the physician’s 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 of the pandemic, there were numerous opportunities for locums 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 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.

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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 practices 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 the reason why I lost so much money.

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 workweeks in 2021! That is on top of the regular holidays. It is also on top of the week we were closed due to a snowstorm. 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 workweek.

Since my assumptions were wrong, in some months, I was losing over $10,000 per month by employing this physician. A big financial oops.

I had no safeguards 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 as a locum 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 it’s 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.

 



 

What has been your worst financial mistake? Have you ever found a big loophole in your contract? 

 

11 thoughts on “A Hundred Grand Lost On an Employment Contract”

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  2. I appreciate all the feedback everyone. I post a lot on my blog about the trials of running a practice. I’m not perfect and do not pretend to be and have learned a lot from this deal gone wrong. To this day I would like to think that this doctor and I have now a pretty good relationship all things considered.

    I blog to show the struggles about starting up a practice from scratch plus the problems that arise. I use it as a time of self reflection to help decompress the tough times I just went through. Plus, when I was starting my practice I could not find any blogs that really went into this type of detail…so I decided to just start my own.

    This experience has taught me a lot about how to hire my next physician and how to add a lot more wording in the contract to protect both of us in the event something goes wrong. It has reinforced to me that no one likes surprises.

    My initial goal with my docs was to really figure out how little I needed to take out and take a small profit margin to run as lean as possible. That way I could offer my docs two possibilities for hire. A flat salary plus benefits or a RVU based contract with more percentage of money going in their pocket since they were in theory taking off a lot of the risk off my plate. Everyone so far has accepted the RVU based contract.

    It is an internal struggle as a boss between giving more RVU pay benefits in terms of a greater percentage of pay back in the physicians pocket vs flat salary. For my other doctor it worked out fine which didn’t make me think twice about this contract. My other doctor has made >$300k in 2021 seeing on average 17pts a day and took over 3ish weeks in 2021.

    However, this employee that I talked about in my post that cost me a lot of money highlighted the problem. When the problem doctor was averaging 10-12 patients a day, taking more time off that I envisioned, and the pandemic worsened patient visits to outpatient docs for a while, I was losing a lot of money. Asking a doctor who is not a partner to shoulder the load of hard times is not right, and I should have gone about this totally differently as a boss.

    Now that 6+ months has passed I can see many of the sides that the above posters are saying and how one sided I was when writing the initial post. I currently am going through the process of hiring 2 more doctors. I have made my contracts structured much more differently for these two new physicians. Thanks everyone for the feedback.

    Reply
  3. If you want someone to be a team player, get a partner. If you want someone to follow the rules and punch a clock, hire an employee.

    Reply
  4. So much wrong here, and almost none of it is with the employee.
    How did you get the 67% figure?! Did you add up forced snow days, holidays, and days you couldn’t fill the clinic to pad your numbers? He took 6 weeks off over 6 months. Many jobs have 10-13 weeks off per year. Did you expect him to have 0-4 weeks off per year like a resident?

    You wanted unreasonable expectations and someone that would go above and beyond without paying for it.

    Reply
    • I did actually estimate 2-4 weeks off per year in my contract with him, which reflected the high RVU pay that I offered the doctor. At the time of my post, I sure felt like I was paying for the doctors help. They were on tract to make about $200-225k a year seeing 10-12 patients a day based on the high RVU pay that I was paying out. I was a bit emotional while writing my initial post since it stings to lose that much money.

      It was a hard financial lesion that I learned and can definitely see how I made a lot of assumptions that were wrong or one sided assuming they would have the same priories that I had. It was a six figure lesion that has hopefully taught me well. Thanks for the feeback.

      Reply
  5. I’ll agree with other comments that I don’t think you are taking the right lesson from this. What you wanted was “a team player” to make “the” (but actually your) business successful. What you arranged in the contract was an employee with no stake in the success of your business, no stake even in working there, except insofar as they couldn’t do work elsewhere for better money.

    You mention in the comments on your own blog that you recognize incentives need to be aligned for both parties to be happy… but I think you underestimate how badly aligned the contract you set up is with your own goals and what you want / expect out of employees. While low patient volume may have exasperated and accelerated the problem with this employee, it will always be true when you expect to have “team players” but write contracts to protect yourself from having any obligation to them.

    Reply
  6. Everyone needs to make money. If you’re a good boss, in addition to thinking about making $Xk/year off the employee, you should also be thinking that this person needs to be making at least $Yk/year (whatever their target is). In some ways this comes first.

    So, to me, this post is sensationalizing what seems like a small window of time during a pandemic. I would take a longer view and ask if I made money over the last year or two with the person and applaud him/her for helping out in a time of medical need.

    Reply
  7. The physician employee did nothing wrong here. He even asked permission first. I pretty much assume every day could be my last day at my employer. I negotiated the wording of my contract for 6 months. I have so many stipulations in my contract for a variety of scenarios for this exact reason. There should be zero gray area in an employment contract. This is a business. My Dad sat me down and told me this when I started negotiating my first contract. It’s cold. The only thing that matters is checks being deposited in your account. The people who cut your checks are not your friend. This doc could have been laid off for all he knew. It kind of stinks, but this is the reality and it’s why fully understanding an employment contract is so valuable. I have clauses for war, natural disaster, pandemic, my death etc in my contract.

    Reply
  8. So if he took time off to spend with his family, it was ok. But when he worked his vacation and did some extra work on the side it wasnt???

    The Physician is totally not in the blame for anything here imo.

    Reply

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