Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)
Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them
Physicians enter into a wide variety of contractual obligations, and they need to fully understand the implications of those obligations. This includes understanding the obligations and rights covered by the terms of the contract while it is in effect, as well as the rights and obligations of the physician after the contract is terminated. Potential costs both during and after a contract term can be imposed on a physician, and the ramifications of all the obligations and responsibilities imposed should be evaluated before entering into a contract.
Mistake 1 Not Assuming That the Contract Will Be Enforced As Written
During the negotiations, a physician negotiating a contract often deals with a particular individual representing the other party. There is a tendency to act as though the individual the physician is dealing with is the other party and will always be the other party. For example, the physician meets and works with a particular chief administrative officer (CAO) and the tendency is to assume that person will always be the CAO of the other party. If the CAO says that he or she will not enforce a particular contract provision or the CAO’s “management style” leads the physician to assume it will not be enforced, the tendency is to not worry about the particular contract provision.
Unfortunately CAOs do not stay forever. The CAO at the time of a dispute may or may not share the views of the CAO who negotiated the contract. Corporate cultures change. In the health care industry particularly, government regulatory actions can force an entity to change the way it has historically approached contracts.
Action Step Physicians should assume that the contract will be zealously enforced as written by a representative of the other party who is not the person the physician negotiated with initially.
Mistake 2 Failing to Understand the Significance of the Entire Contractual Provision Relating to an Issue As It Is Written in the Contract
The significance of the exceptions and qualifications to the general rule set out initially in a contract must by fully understood by a physician. A three-year contract that allows either party to terminate the contract after six months is not a three-year contract; it is a six-month contract.
Action Step Physicians should understand the exceptions or qualifications to a general pronouncement in a contract, or seek the advice and input of someone who does.
Mistake 3 Not Getting Background Information About the Other Party Before Entering into a Contract With That Party
Before contracting with an entity (or an individual), a physician should obtain as much background information as possible about the entity. Does it have a litigious culture? Is it facing any government regulatory issues? Are there any competitors or other economic forces at work that could alter the assumptions of the physician contemplating entering into a contract? A rural hospital, for example, may have impressive historical financial data but if another facility is planning to open in the same community, how will the financial performance be affected?
Action Step Physicians should undertake efforts to obtain as much information as possible about another party before contracting with it.
Mistake 4 Failing to Properly Evaluate the Manner and Effect of Exiting a Contractual Relationship
Physicians should, at the outset, fully understand the ability to exit and the effect of exiting a contractual relationship. If there is a notice requirement for terminating a contract, that date should be calendared, and well before that deadline the physician should evaluate the contract. This includes whether the contract should be renewed, renegotiated, or terminated.
Physicians should fully understand the effect of exiting a contractual relationship. Early termination may trigger liquidated damage provisions, or create legal exposure for the physician from claims as a result of the early termination.
Action Step Physicians should fully understand the manner and effect of terminating a contractual relationship, and calendar all deadlines associated with a particular contract.
Mistake 5 Failing to Properly Evaluate the Dispute Resolution Provisions, If Any, in a Proposed Contract
Physicians should fully understand the method of dispute resolution that is established by virtue of a particular contract. Many contracts contain arbitration provisions or mandatory mediation provisions. If the contract is silent on this issue, then a court will be the third party that ultimately decides a dispute that the parties to a contract cannot resolve. Legal counsel can advise physicians on the potential venues and fact finders that could ultimately determine the dispute, and whether that is favorable or unfavorable to the physician.
If the contract contains dispute resolution procedures, then those provisions should be analyzed by the physician and fully understood. The location of any dispute resolution procedures, the third person(s) who will likely be selected, and the authority given the third person(s) are all relevant to understanding what rights the physician truly has in the event of a dispute.
Action Step Physicians should assume there will be a dispute as to the contract for the purpose of understanding how the dispute resolution procedures relating to the contract will likely be applied.
Mistake 6 Failing to Understand the Liabilities Assumed by Virtue of Executing the Contract
Often, a contract will call on a physician to make representations and warranties. Additionally, the contract may call on a physician to expressly assume liabilities. Both types of contractual provisions can cause a physician to assume liability that the physician should fully understand before executing the contract.
A provision wherein the physician warrants that the contract complies with the Stark law and antikickback statute, coupled with a provision that the physician is in breach of the contract for violation of the warranties in the contract, means that the physician has assumed that exposure as between the parties to the contract.
Action Step Physicians should evaluate the liability assumed not only as to the other party to the contract but also as to third parties as a result of the contract.
Mistake 7 Failing to Understand Obligations and Responsibilities That Exist After the Contract Has Terminated
Physicians should understand all of the obligations imposed after the contract has terminated. Nondisclosure or confidentiality provisions should be scrutinized closely as to whether those types of provisions are even relevant to the purpose of the contract. Vague and nebulous obligations concerning nondisclosure that survive the term of the contract are rarely of any benefit to the physician.
If patient information is exchanged as a result of the contract, then any privacy compliance issues under the Health Insurance Portability and Accountability Act (HIPAA) should be analyzed and addressed. Who is responsible for retaining patient information and complying with the HIPAA privacy regulations as to that information after the term of the contract? The regulations impose on the parties obligations as to patient information that should be addressed in any contract.
Additionally, the effect of any provision that purports to limit the physician’s ability to practice medicine or engage in commerce should be analyzed. This specifically includes any noncompete, nonsolicitation, or restrictive covenant provisions in a contract.
Action Step Physicians should list the obligations imposed on a party to the contract after it has been terminated, and fully understand the costs and liabilities associated with those obligations.
Mistake 8 Not Causing the Economic Provisions of a Contract to Be Clear and Understood by All Parties
Many physician contracts are executed to document economic transactions. The contract should clearly address the economic issues. While at times there is good reason to be vague, generally the physician is better served with a contract that clearly addresses the formulas and calculations the parties plan to use. If one (or both) of the parties has always calculated an amount using a specific method, then that method should be defined in the contract. Including an example of a calculation is a good way to document the parties’ understanding if complex definitions become too cumbersome or are susceptible to different interpretations.
If intellectual property issues are relevant, the method of allocating rights and revenue should be addressed. A contract should clearly address what party has the rights to any intellectual property that is arguably covered by the contract.
Action Step Whenever possible, physicians should have a third person in health care review the economic provisions of a contract if there is any doubt as to the interpretations of those provisions.
Mistake 9 Failing to Fully Understand and Review Other Relevant Agreements and Laws
Contracts often refer to other agreements or laws that are susceptible to revision. The status of those laws and agreements should be analyzed at the time the contract is executed. Additionally, the effect of future changes should be analyzed and addressed in the contract. For example, if the physician is executing a contract with a hospital that obligates the physician to comply with the provider agreements the hospital has entered into, then those agreements should be reviewed. Alternatively, the hospital should make representations concerning the effect of those provider agreements on the contract. It should be understood that laws are constantly subject to change by legislative action, executive rulemaking, and judicial interpretation.
Action Step If a contract references another agreement or a law, the referenced documents should be reviewed and the implications of those documents as to the contract should be analyzed.
Mistake 10 Not Remembering That When Negotiating From a Position of Strength, the Longer the Contract the Better and When Negotiating From a Position of Weakness, the Shorter the Contract the Better
If the physician is in a position of strength, then all of the reasonable foreseeable issues—including but not limited to those addressed above—should be expressly addressed in the contract in a manner that is beneficial to the physician. The effect of addressing all the foreseeable issues in such a manner is to make the contract long and some would say exhaustive. If, however, each area of potential dispute has a contract provision addressing how the issue is to be dealt with in the agreement between the parties, then there should be very little room for credible disagreement. This theoretically eliminates potential disputes because, as between the parties, the issue has been addressed.
Conversely, if the physician is negotiating from a position that is not strong, a short contract is better. A third party will determine issues that are not expressly dealt with in the contract if a dispute should arise. That will most likely provide the physician with a better chance of a positive result than if the parties had expressly dealt with the issue at the time the contract was executed.
It should be emphasized this is a merely a rule of thumb that is not absolute. There are many contracts that are concise and very efficient in addressing all contractual issues within a limited amount of space.
Action Step If the physician is negotiating from a position of strength, every issue and potential area of dispute should be expressly addressed in the contract.
There are a number of issues that a physician should consider before entering into a contract, regardless of the context. Failing to consider all the rights and obligations associated with a contract can cause costs to be imposed on the physician both during the contract term, and after the contract has ended.
Mark E. Stipe, Esq.
Peer reviewed by:
Joel Babineaux, Esq.