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.)
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At its most basic construction, a contract consists merely of a mutual agreement between two or more parties and consideration paid for the services performed or goods delivered. In many cases, a bare document simply reciting the nature of the agreement and compensation may be enough to “get the job done.” Unfortunately, contract drafting is a complex art, and the reality is that contracts exist not to marshal the “easy deals,” but rather to define the rights and responsibilities of the parties when the deal is not so “easy.” Contract law takes into account not only what is contained in the document, but also what the document does not contain. For these reasons, it is important to be careful in negotiating and documenting the terms of any contractual agreement. Some physicians feel that the majority of contracts can be negotiated by laypersons, such as their office managers. However, it takes only one poorly worded agreement causing a physician to incur thousands of dollars in unnecessary legal fees to convince that physician otherwise.
Mistake 1 Not Getting an Attorney Involved Early Enough and Failing to Completely Disclose After Doing So
Some physicians choose to consult counsel only when a problem arises in the performance of contractual duties. That’s like calling the building inspector after the house has fallen down. A good contract is built on a strong legal foundation that protects the physician’s interests and furthers his or her intent in entering into the contract. Without that foundation, no matter what the representations of the other parties to the contract, it can be very difficult (and expensive) to force each party to live up to what the physician believes their respective duties to be; and, in some cases, the physician may be denied the benefit of the contract entirely. In the long run, it is much less expensive (in terms both of dollars and aggravation) for physicians to have their counsel review proposed contractual arrangements, and to comment on the written documents memorializing them, than it is to call their attorney when they are not paid money they believe they are owed or do not receive goods or services that were paid for.
After physicians retain an attorney, it never pays to withhold relevant information from the lawyer who is negotiating or drafting a contract on the physician’s behalf. A contract may not be effective to protect a physician against conditions that he or she knew of, yet remained silent regarding, even if an attorney drafted the contract document. Physicians should be honest and forthcoming with their counsel, and not waste money by having the attorney negotiate or draft documents in ignorance of all of the facts.
Action Step Physicians should cultivate a relationship with an experienced health care attorney. They should be upfront and open regarding their expectations of service and costs. In addition, physicians should use their attorney to help them negotiate and document equitable contracts before entering into any deals with their contracting partners. In addition, physicians should make sure that their attorney knows everything they know about the deal before the attorney takes substantial action to negotiate the deal. When a physician receives new information about the deal, he or she should get it to the attorney as soon as possible. Physicians should not withhold anything from their lawyer; they do “need to know.”
Mistake 2 Not Using the Correct Business Entity
Physicians enter into many types of contracts during their professional lives. Managed care contracts, employment contracts, real estate contracts, and professional service contracts are but a few types of the contracts that a typical physician will execute over the years. It is important to remember that each state offers several types of individual, partnership, and corporate entities within which to do business. Often, business entities of one type will not be permitted to do the same sorts of business or enter into the same sorts of contracts as business entities of another type. In the same vein, two business entities may legally be permitted to enter into the same types of contracts, but the physician might materially be better situated (at little or no additional cost) by positioning the contract with one type of business entity rather than the other (e.g., sole proprietorship versus limited liability company). Finding out after the fact that an LLC was not permitted to enter into the contract that it did (or to engage in the business that the contract requires) may bring not only financial liability, but, in some cases, sanctions against the contracting physician’s license. A physician’s counsel and financial advisers, working together, can help the physician to understand which types of business entities work best in the contractual relationships he or she wishes to enter.
Action Step Physicians should seek the advice of counsel and financial adviser as to the most appropriate type of business entity to use before starting negotiations. The type of entity chosen may dictate how negotiations are conducted.
Mistake 3 Not Including Antifraud and Abuse Provisions in All Contracts
Given the federal government’s recent pronouncements that, for the first time, a majority of cases involving enforcement of the False Claims Act concern health care fraud, all physicians should do what they can to avoid fraud and abuse liability in contractual relationships. Whether discussing the antikickback statute, the False Claims Act, state insurance laws, or other provisions, is it relatively inexpensive to review contracts for compliance with applicable fraud and abuse provisions and to insert appropriately drafted antifraud and abuse provisions into the agreements. With such explicit antifraud and abuse provisions, compliant physicians will have a good defense to claims that they were involved in a “fraud and abuse conspiracy” with another party to the contract; especially where the other party was not compliant. For example, merely stating that a transaction reflects “fair market value” when it does not isn’t an effective way to protect the contracting physician from fraud and abuse liability. Attaching documentation to the contract reflecting the due diligence by which fair market value was arrived at is a good way of forestalling such liability.
Action Step Physicians should operate a compliant physician practice and make sure that their counsel and compliance officer are satisfied with each contract’s antifraud and abuse provisions before signing an agreement.
Mistake 4 Not Including HIPAA Provisions in All Contracts
Implementation of the Health Insurance Portability and Accountability Act (HIPAA) and its associated regulations has raised the public’s awareness of medical information privacy and security issues. When a contract creates a HIPAA “business associate relationship,” it is vital for the covered entity physician to insert business associate agreement language in the contract. When a contract does not create such a relationship, but when the disclosure of protected health information is possible within the contractual relationship, the contract should contain such confidentiality, security, and indemnification provisions as necessary to adequately protect the physician from HIPAA liability.
Action Step Physicians should operate an effective HIPAA privacy and security plan, and make sure that their counsel and privacy and security officer are satisfied with each contract’s business associate agreement/confidentiality provisions before signing the agreement.
Mistake 5 Relying on “Whereas” Clauses If Not Incorporated
On the front page of most contracts are a series of clauses that start with the term “Whereas.” These clauses often set forth the basis on which the contractual agreement has been negotiated. However, even though these clauses are physically part of the contract document, they are not part of the contract itself unless they are expressly “incorporated” into the contract. For example, an incorporation provision looks something like this: “Whereas Clauses: The Whereas Clauses preceding this document are hereby incorporated and made a part of this document by reference.” If physicians want the “Whereas” clauses to be part of their contract, they have to make sure that the contract expressly includes them. If they aren’t made part of the contract, they are most likely unenforceable.
Action Step Physicians should make sure that their counsel negotiates incorporation of the “Whereas” clauses into their contracts, as appropriate.
Mistake 6 Believing Less Is More
Many physicians believe that the shorter a contract is, the less “trouble” it can get them into. The reverse is actually true. Voluminous contracts are long because they reflect myriad prior court cases, each of which created an “exception” or other judge-made rule that must be complied with in later contracts. To avoid being ruled by these judge-made exceptions (which may run completely counter to one’s intentions), it is best for physicians to expressly set forth expectations regarding as many eventualities as possible in writing. Otherwise, if litigation results from the contract, a judge will have to insert his or her discretion where the physician’s express provision could have been placed, but was not.
Action Step Physicians should not insist on “short and sweet” contracts against the advice of counsel. A physician should allow the attorneys to do their job, and make the contracts as long as they need to be to adequately protect the physician, within the bounds of their negotiating ability.
Mistake 7 Not Including Choice of Law and Choice of Forum Clauses
Sometimes contracts must be litigated. Where and how they are litigated is often the choice of the first person to get to the courthouse. In a large state (or in multistate or federal matters), that choice can significantly disadvantage the other party, who may have to travel for hours to get to court, and, even worse, have to pay their attorneys for hours of nonproductive travel time. A “choice of forum” clause can help prevent that result by setting forth the mutually agreed-upon location where disputes regarding the contract will be heard. Equally as important in multistate agreements is a “choice of law” forum. A physician in state A may conform his or her contractual behavior to state A law only to find later that a court has decided that state B’s law applies to the contract. A “choice of law” clause sets forth, in advance of any dispute, which state’s law controls.
Action Step Physicians should insist on negotiating an appropriate choice of forum and choice of law clause in each and every contract they sign.
Mistake 8 Relying on Boilerplate Forms and Leaving Blanks
Some physicians use preprinted “boilerplate” forms to document their contractual relationships. In some cases, use of such a form may not be a problem; in most cases, the “generic” nature of the forms is simply a lawsuit waiting to happen. Worse yet, some physicians use the boilerplate forms and fail to “fill in the blanks” that must be completed to make the documents effective. If a boilerplate form does not include enough terms to govern a dispute, or contains blank lines, then a judge will have to use his or her discretion to decide what the rights of the parties are. Physicians should protect themselves by having qualified counsel draft their contract documents.
Action Step Physicians should forego the use of boilerplate agreements and have their counsel draft their contractual agreements.
Mistake 9 Not Identifying Upfront the Intent of the Parties
The intent of the parties in negotiating the agreement is one of the single most important items of information used by courts when adjudicating contract disputes. However, in most cases, the parties must try to prove their intentions “after the fact.” Drafting a simple “intent of the parties” clause and inserting it into the written contract can help ensure that the court interprets the contract as the parties envisioned when they negotiated the agreement. For example, a triple net real estate contract intent clause might read:
Intent of the Parties: The parties intend this contract to provide net cash flow to the landlord in the amount of $10/square foot leased, per year. All other costs of operating the premises are to be paid by the tenant as additional rent. In the event that unforeseen circumstances cause extraordinary costs in operating the premises, the parties intend that such extraordinary costs NOT conflict with the landlord’s right to collect $10/square foot, net income, each year, from the tenant.
Action Step Physicians should include an appropriately worded intent clause in every contract they sign.
Mistake 10 Not Including a Termination Without Cause Provision in New Contracts
All new contractual relationships should permit the parties to go their separate ways after a trial period. When the parties do not know each other and are not sure that the relationship will work out, the physician should be able to terminate the contract without cause, upon specified notice (usually 60 or 90 days), without damages. Physicians should beware of any negotiation in which the other party resists such a provision. A counterproposal may be to provide for liquidated payments in the event of such a termination, so as to make the parties whole for monies spent in operationalizing the contract, rather than excluding a termination without cause provision. However, there are few things worse than being forced to engage in business with a party that is loathed. All new contracts (and renewals, if possible) should include a termination without cause provision, if possible.
Action Step Physicians should include a termination without cause provision in all new contracts, and, wherever possible, in all renewal contracts.
Contract negotiation and drafting are specialized skills. Just as physicians would not expect an automobile mechanic to perform orthopedic surgery, wise physicians should not expect to be able to negotiate and draft contracts that provide them with the maximum benefits and protection available under the law. Physicians should retain experienced health care counsel to help them negotiate and draft the best contracts possible, and to avoid unnecessary litigation and headaches in the future.
Marc D. Goldstone, Esq.
Peer reviewed by:
Margaret Keavney, Esq.