Physicians joining private practices have a relatively new issue they should be aware of. As more practices are taken over by private equity, the traditional concerns of a physician joining a practice as an employee with the hope of becoming an owner are heightened.

Traditionally, the physician would join the practice as an employee, work for a few years, and get the “golden ring” of ownership after a few years. Often the compensation as an employee is not great. The idea is that you “pay your dues” for a few years and then you make the big bucks as a partner.

I have previously written about the concern that some practices appear to be leading physicians along with no apparent intention of making them owners. A select few practices I have dealt with over the years paid physicians poorly, then terminated them without cause shortly before they were due to be considered for partnership. These “bad apples” must be detected before the physician signs the initial employment agreement.

However, with private equity purchasing practices, honest physicians who have spent decades hiring employed physicians and making them partners may inadvertently cause the same situation for physicians who have not yet become partners. Obviously, if these physician owners no longer own the practice, they will not be able to admit the employed physician to partnership after he or she has completed the expected years of employment.

The upshot of this situation is the employed physician may have worked several years at below-median compensation, building “sweat equity” that can never be used. Perhaps even worse, the underpaying contract will be assigned to the new private equity owners.

I was recently contacted by a physician about this exact issue. The physician had signed an employment agreement with a private equity practice that provided that ownership would be offered after one year. At that time, the practice would dispense several hundred thousand dollars to be used to purchase equity in the overall private equity entity. The employment agreement also provided that if the entity were sold before the physician was made partner, the physician would be paid a lump sum (mid-five figures). The firm was in the process of being sold to a bigger private equity concern.

The physician who contacted me was aware that the current partners are each getting mid-six figures for their equity interests and inquired if there was anything that could be done.

For physicians in this situation, all is not lost. The purchasing entity almost certainly based its purchase price on a multiple of the revenue from the practice. Importantly, that revenue included the revenue the physician in question is generating. The selling entity will be very concerned about the potential loss of revenue (and concurrent probable reduction in sales price) if the physician departs. A physician in that position should have considerable leverage in attempting to obtain a large signing bonus or other consideration.

When negotiating physician employment agreements with a private practice (whether they are currently owned by private equity or not), I usually request a provision that if the practice sells to private equity, the employed physician will receive a bonus equal to the purchase price he or she would have received had they been owners at the time of sale. That provision is not always accepted by the practice, but it is a point well worth negotiating.

As a compromise, the practice is sometimes willing to include a provision to the effect that if it is sold to a private equity concern, the employed physician will be paid a bonus equal to the lesser of the amount a partner receives for that partner’s equity, or $X. Obviously, the physician will want “X” to be as large as possible.

There is no need to repeat all the horror stories that have been generated by private equity in health care (shorter patient visits, more patient contact hours, pressure to order unnecessary tests, etc.) Many physicians are extremely unhappy working for an entity that appears to value profits over patients.

But it is important to realize that not all private equity firms are the same. I have represented physicians who were quite pleased with working for a private equity firm. Some physicians have reported that there is now money for the latest technology, for example. Technology can improve both quality of care and profits, but many independent private practices do not have the resources to invest in the latest gear.

Physicians looking at employment by a private practice should not assume that a purchase by a private equity firm will be devastating to them. Without cause termination will still be available if things do not work out. At the same time, when considering private practice employment, physicians should protect themselves from the possibility that the practice will be taken over by private equity before they become partners.

Dennis Hursh is a veteran attorney with over 40 years of experience in health law. He is founder, Physician Agreements Health Law, which offers a fixed fee review of physician employment agreements to protect physicians in one of the biggest transactions of their careers. He can also be found on YouTube and LinkedIn.

Dennis is a frequent lecturer on physician contracts to residency and fellowship programs and has spoken at events sponsored by numerous health systems and physician organizations, including the American Osteopathic Association, the White Coat Investor, the American College of Rheumatology, the American Health Law Association, and the American Podiatry Association.

Dennis has authored several published articles on physician contractual matters on forums such as KevinMD and Medscape. He is also the author of The Final Hurdle – A Physician’s Guide to Negotiating a Fair Employment Agreement, which is considered the go-to resource on physician contract negotiation.