Hospital-Physician Relationships Growing More Complex

May 9, 2005

Contractual provisions in today's regulatory environment reflect legal and economic factors.

The relationship between hospitals and physicians is a symbiotic one that is supposed to benefit both parties. Without physicians, hospitals would not be able to provide a full range of health care services to individuals; without hospitals, doctors would be limited in their ability to fully care for their patients. Hospitals offer the environment - including sophisticated (and costly) equipment, technology, support staff and management systems - in which modern medicine can be practiced, while physicians have the patients, knowledge, ability and skill to utilize all that today's hospitals make available to them.

On another level, the hospital-physician relationship also can be an adversarial one. At the least, there are economic pressures facing both parties, which can put them at odds. These "pressures" have been significantly increased by managed care and lower reimbursement rates. It should not be surprising, therefore, that the hospital-physician bond is subject to numerous different contracts and contractual provisions. It also should not be surprising that, in today's regulatory environment, these agreements must comply with a wide range of federal and state statutes and regulations. The healthcare delivery system has changed a great deal from the time when most physicians were solo practitioners, or had only a partner or two, and the developments in hospital-physician contracts reflect the growing complexity of the health care system in this country.

Types of Relationships

There are many types of relationships that exist between physicians and hospitals. For example, a physician may be in private practice, either individually or as part of a group, and may merely have privileges at a hospital; this may mean that the physician is not an employee of the hospital, but has authority to admit and treat patients there. Another example is where the physician is a hospital employee and is not in private practice. Here, the physician employee may have various administrative, teaching, research and/or professional obligations.

In other cases the relationship between the hospital and the physician may be an independent contractor/consulting relationship. Or the hospital may have a professional service relationship with a group of physicians, which may even be exclusive. Yet in other instances, the physician may be employed by a faculty practice plan or by a professional entity which is controlled by the hospital.


The type of relationship between the hospital and the physician dictates the scope of restrictions that the hospital will seek to impose on the physician. Where the relationship is just based on admitting privileges, there typically are no restrictions. However, where there is a full-time employment relationship or an exclusive professional services agreement, the hospital will seek to impose a variety of restrictions. Whether the hospital is able to impose restrictions depends on each party's leverage.

For example, a full-time employment agreement is likely to include a restrictive covenant limiting the doctor's ability to compete during the course of the physician's relationship with the hospital. Perhaps more significantly to physicians, a hospital also is likely to seek to impose non-compete restrictions on them in the event that they leave the hospital. Moreover, a hospital may seek to have its agreement with a physician include "non-solicitation" provisions that limit the physician's ability to solicit patients and referral sources of the hospital for a period of time after termination. In addition, the hospital may seek to provide that upon termination of the employment agreement, for any reason or no reason, the hospital will have authority to revoke the physician's privileges without any due process.

It should be noted that, absent specific language to the contrary, a New York physician may be entitled to continue to admit patients to a hospital even after his or her employment is terminated. That is because New York law protects physicians from the withdrawal or diminution of privileges for reasons that are not stated or that are "unrelated to standards of patient care, patient welfare, the objectives of the institution or the character or competence [of the physician]."[1] The scope of all of these restrictions will be governed by each side's leverage.

These agreements can be tough medicine - they may authorize injunctive relief and they often include liquidated damages clauses that may be in amounts that are higher than the financial benefit to a physician of breaching the non-compete or non-solicitation provision.

From a philosophical perspective, these restrictions generally seem appropriate - recruiting a physician for a key position at a hospital can be an expensive and time consuming process. The details, however, are subject to careful court review,[2] and have been rejected[3] when the court deems the hardship to the physician, and harm to the public, to be too great.

On other occasions, courts will modify[4] a restrictive covenant that is too stringent to be enforced as written, such as by cutting back the geographical or time constraints; this may be more likely to happen when the agreement itself provides that a court may enforce it in whole or in part.

Compensation Arrangements

Compensation arrangements between a physician - employee and a hospital may take several forms depending on the type of physician and the services rendered by him. Typically, administrative teaching and supervisory services are compensated with salary while professional services may be paid for based on the physician's productivity (i.e., collections generated from the work of his/her hands). However, productivity and percentage arrangements implicate many statutory and regulatory issues.

Both federal and New York state law, as well as laws in other states, prohibit the payment of fees to doctors for referring patients to a hospital and bar physician referrals to entities (such as clinical labs or radiological facilities) in which they have a financial interest (subject to a variety of exceptions and safe harbors).[5] These rules must be considered when the parameters of the hospital-physician relationship are being established.

For example, hospitals may not agree to pay a physician income based on the volume or value of referrals the doctor makes to the hospital. This does not necessarily mean, however, that a hospital cannot pay fair market value to a physician who sells a practice to the hospital. It also does not prohibit a hospital from paying a physician a percentage of the professional component of collections generated by the physician from the work of his/her hands.

These rules may affect salary and payment questions from the beginning of the hospital-physician relationship, including at the recruitment stage. Indeed, hospitals must be certain to comply with these statutes and regulations when seeking to persuade a physician to relocate to the hospital's staff while joining a group practice, and paying the doctor for that relocation. Now, among other things:

• a written agreement must be signed by the party who receives the relocation payment, such as the physician's professional corporation;

• the hospital's payment must be passed through to the physician in full, except for actual costs incurred in recruiting the physician;

• only the actual additional incremental cost attributable to the recruited physician may be allocated to that physician when the hospital provides an income guarantee; and

• the payment from the hospital must not take into account directly or indirectly the volume or value of any actual or anticipated referrals by the recruited physician.

The anti-kickback and anti-referral rules also affect a range of other matters, such as a physician's rental of space and equipment from the hospital. If the charges are significantly below market, or if they are tied to the value or number of referrals between the parties, they could violate the law.

Billing And Collections

The payment for a physician's services is of course a crucial issue for hospitals. The contract between a hospital and a physician therefore typically will deal with this issue in depth, including with respect to billing for Medicare and Medicaid services.

In most instances, hospitals are responsible for billing and collections, even though the physician's services must be billed in his or her name and with his or her provider number. A hospital's contract with a physician therefore will provide for the physician's assignment or delegation of the billing process to the hospital and will bar the physician from billing for services himself or herself. In addition, physicians will be required to provide all information in their possession to the hospital that is related to or will assist the hospital in billing and collection.

Physicians have an interest in making certain that the hospital complies with all federal and New York state rules governing billing and collection. Toward that end, it is not unreasonable for physicians to require, and for hospitals to agree, to a provision in their agreement that obligates the hospital to conduct its billing and collection actions in compliance with all applicable laws and regulations. Further, physicians have an interest in making sure that the billing and collection services rendered by the hospital are performed in a satisfactory manner if any part of their compensation is based on collections. Since many hospitals have historically had difficulty managing their billing and collections, it would not be unreasonable for the physician - employee to request language which sets forth a "standard of care" for these services.

Other Responsibilities

When a physician has teaching or administrative obligations at a hospital, the agreement between the hospital and the physician should make clear that these obligations comply with Medicare and Medicaid rules, which contain provisions regulating reimbursement for these services. One key issue: the manner in which the administrative obligations are characterized can affect the hospital's reimbursement. For instance, Medicare will treat reimbursement differently if a physician's administrative services are for the benefit of the hospital's total patient base rather than for an outpatient section for which the hospital receives reimbursement on a cost basis. Emergency room services are billed, and reimbursed, differently, too. Therefore, it is important that the exact nature of a physician's services are set forth in the contract between the hospital and the physician.

Teaching responsibilities at a teaching hospital may be reimbursable under Medicare - at least where the teaching physician is involved in the care of a patient. A decade or so ago, audits at major teaching hospitals brought this issue to the forefront, and contractual provisions between hospitals and physicians should be particularly detailed to meet the applicable standards.

These are just a few of the provisions that will be included in the contract relating to teaching and administrative matters. In most instances, a hospital-physician contract also will make certain that the physician meets all applicable legal and regulatory requirements, and will specifically explain the physician's responsibilities and reference the amount of time that the doctor is required to expend on these functions.

Termination Provisions

Although many physicians work at one hospital for all or most of a career, many leave, or are asked to leave, for one reason or another. Contracts between hospitals and medical doctors therefore include provisions that allow them to be terminated in various circumstances.

For instance, the hospital will want to be able to terminate the physician's employment agreement in the event the physician's license is suspended or revoked, or restricted in any fashion. The hospital will also want to be able to act if the physician loses Drug Enforcement Administration or Medicare or Medicaid privileges or board certification. Certainly, the hospital will want to have the right to act where a physician is convicted of a crime, abuses alcohol, or is found to be a user of illegal drugs. The physician may ask for a cure period, which is a negotiable item.

By the same token, physicians will want an opportunity to walk away from their commitments under certain circumstances, such as a bankruptcy filing by the hospital or the hospital's failure to maintain compliance with applicable federal and New York state laws.

It also is possible to have an agreement for a set term, which expires on its own, or one that provides that either party may terminate on notice. An agreement for a set term can automatically renew unless either party notifies the other that it wants to end the arrangement.

Privacy Issues

With both federal and state laws focusing on patient confidentiality, it has become common for contracts between physicians and hospitals to contain provisions relating to the confidentiality of patient and hospital records. These provisions may explain that the patients seen by the doctor are the hospital's and not the physician's, and that the records therefore are the hospital's as well. Typically, the contract will incorporate provisions of the federal Health Insurance Portability and Accountability Act (HIPAA) and applicable state rules, requiring compliance by both sides.


There are other provisions that often are contained in hospital-physician agreements; frequently, they are tailored to individual circumstances. There also are other contracts that both hospitals and physicians enter into with third parties, including third party payers. Much of the practice of medicine today is based on these agreements, and both hospitals and physicians should carefully consider their implications and their positions on the various issues that these contracts present.

[1] See N.Y. Public Health Law § 2801-b.
[2] See, e.g., Gelder Med.Group v. Webber, 41 N.Y.2d 680 (N.Y. 1977) (surgeon barred for five years from practicing within 30 miles of rural village).
[3] See, e.g., Lowe v. Reynolds, 75 A.D.2d 967 (3d Dept. 1980).
[4] See, e.g., Muller v. N.Y. Heart Center, 238 A.D.2d 776 (3d Dept. 1997).
[5] See, e.g.,; 42 U.S.C. § 1395nn; 69 Fed. Reg. 16054; N.Y. Public Health Law § 238-a.

Reprinted with permission from the May 9, 2005 issue of the New York Law Journal. All rights reserved.



David A. Manko, Partner


Corporate & Commercial

Health Services