Salary guarantee is actually a "forgivable loan"?

[nomindforfinance]

My partner is currently searching for his first job out of ob/gyn residency (starting summer 2017).  We've been pretty frustrated with it so far, as there are NO jobs in what we consider our hometown, so we are searching other areas of the country, and we aren't familiar with the groups we are talking to, etc.  he gets very overwhelmed by a lot of this financial stuff, so I'm trying to be the one to ask questions and keep things straight on this side, while he manages the actual job search.  In any event, he did his first two interviews with two small practices in a small metro area that we like.  They both serve different hospitals (owned by the same corp) and each practice/hospital setting has good/bad to go with it, but we think he would ultimately be happy at either one.  Where things get scary to us is in the contracts.  He would be signing a contract with the physician group that employees him, as well as a separate contract with the corporation that owns the hospital (which his employer is also on the hook for).  The hospital guarantees his annual pay (comparable to his resident classmates reported salaries) for the first two years in the form of a "loan" that is forgivable after 5 years.  Each month they would fill out a monthly statement of collections & expenses.  Collections minus "expenses incurred by the physician for the month" which include "rent, utilities, salaries, office supplies, repairs and maintenance, pharmaceuticals, purchased services, and the ominously named 'other'"  So collections minus these expenses, if left short what it takes to cover his monthly salary, the hospital corp "loans" the practice the money to make the difference.  I understand this in theory, he won't be producing a lot of collections at first, but he is probably the hardest working person I know, so I imagine that will change quickly.  I guess what makes my stomach a little queasy is, how do we know what these monthly expenses are, particularly since he wouldn't be a partner, would have no say in anything, etc?  Who is to say that his group decides to move to another office space, and suddenly his share of the rent doubles?  or what if she buys some expensive unnecessary equipment?  All of that would cut into his collections less expenses amount, and put him on the hook for more "loan" from the hospital.

At the end of the two year guarantee, whatever his "loan" balance is, then becomes forgivable over the next three years, if he leaves during that 5 year total, any loan balance would be due back to the hospital.  Also, at that two year point, his salary becomes solely collections minus expenses, no more guarantee.  Again, since he has no say in expenses, doesn't this open him up to all sorts of risk that his salary could be cut dramatically?
I know these contracts are not uncommon, but he doesn't know anyone who has been part of one, so it's hard to get advice.  Has anyone here done one of these?  The physician he would be working for seems really sweet and straightforward, and she told him she thought based on the amount of work she was having to turn away currently, she wouldn't be taking much of the hospital loan money at all.  What are the kinds of questions he should be asking?  we tried to come up with a list, but didn't know if it was too invasive (for example: based on today, what would my share of expenses be for this month?  when you started at this hospital, how long did it take you to pay off your "loan" amount?, etc.).   They also showed him a report that said this area had a "need" for 17 additional docs in his specialty, so that made us feel like the demand was there...  It's just not what we are used to.  Any thoughts?  is this the type of stuff that would be covered by a firm doing contract review?  I think we are interested in hearing real life stories and what the pitfalls might be.

[Son of a Doctor]

I've worked on many of these contracts and they are a landmine of problems. What if the employer terminates your partner, is he still on the hook for the loan? Are there any other situations in which the debt can be shifted to the employer? Can the loan be forgiven on a monthly basis instead of annual basis? Can the guaranty be capped at a certain amount per month for a limited number of months and only cover certain incremental expenses (to keep the debt down)? Who has access to the financials and can the physician contest them? Also, there are usually conflicts in the terms of the hospital guarantee compared to the employment agreement.  Each of these questions spins off many others, and there are many other concerns than just those.

It is overwhelmingly in the physician's best interest to not be subject to a massive liability, the trigger for which and amount of which are outside of the physician's control in many cases.  If the employer says that she has enough work to keep him busy, then she should just hire him without requiring the hospital guaranty.

I would like to hear from other physicians in this forum, but I would rather take a temporarily reduced salary, or have part of my compensation variable, than be subject to what is often times a $200,000-$400,000 debt that is outside my control.

[Son of a Doctor]

These types of contracts do not make much sense in your situation, especially if there is an established practice that can absorb a loss on the physician for a month or two.  I have certainly seen a single OBGYN hire another OBGYN without an income/revenue guaranty.  Once you get above 2 or 3 physicians, it becomes much more manageable.

These types of agreements make sense when a community needs a physician to start a practice but the physician cannot afford the start up costs and the hospital doesn't want to employ the physician.  The hospital steps in and provides the financing in the form of the guaranty in exchange for keeping the physician in the community for 5 or more years. The problem is that physicians get churned in these settings, especially in primary care in rural areas, as the patient mix makes it hard to be profitable (and its hard to share overhead with yourself), and so when the guaranty ends, the physician isn't making any money. Then, do you stay in the community and not make any money while you wait out the debt, or do you bite the bullet and try to negotiate a settlement with the hospital? It used to be that the hospitals rarely enforced the loan provisions, but now they have to at least try from a compliance standpoint.

I forgot to mention the taxes in my first comment.  The forgiveness of debt is considered taxable income and you will likely receive a 1099 from the hospital as the debt is forgiven. It is highly preferable to have the contract require the 1099 to be issued to the employer instead, since the employer usually receives the money from the hospital, but everyone will likely balk at that suggestion.  There is potentially a way around this to not pay income tax on the forgiven debt, but it often results in an audit, which can be won (but who really wants to invite an audit).

[nomindforfinance]

This is exactly the kind of information I've been looking for.  Something about it never sat well with me.

I re-read (much closer this time) the contract draft in the last hour.  It answers some of the concerns above, but not all.

There is an expense cap (to be determined) per month, and it specifies expenses are only for incremental expenses related to brining him on, so that's good.  he would have no rent since the group isn't moving and already has the space for him.

The forgivable loan taxes are sent on a 1099 to the group, not the physician, so that's good, unless whatever taxes they pay on that are expenses that count against his income in the future, which isn't clearly laid out.

The hospital specifically quotes that they pay his relocation expenses, malpractice during the two year guarantee, and sign on bonus as freebie benefits essentially, but they specifically exclude the recruiter fee from that list, so I'm assuming that would be put into his expense column.  No thanks.

There is a clause that says the physician is responsible for his own due diligence in making sure there is enough work in their practice area and that he can make a viable practice, that they make no guarantees of any future income.  Again, how would anyone know enough about it at this point without having access to their billing records, etc?  I think this is our main concern - the income guarantee for two years is great - but if you are tied down by some sort of loan, you would be at their mercy for future pay.  Like you said, if she's that busy, why can't she just guarantee a salary without all this nonsense loan agreement?  If he fails to perform within a certain amount of time, just fire him!

And in your other post you asked what happens to this agreement if the other physician is dismissed for some reason - it's interesting that you ask that, because that's exactly what happened to the physician he would be working with, although no details were given on what steps were taken when that happened.

Thanks to both of you.  These are great discussion points.

 

 

[Zaphod]

This is similar to my friends contract when he joined a rather large practice. It was nice at first since the hospital guaranteed his income for the first year or so, but the group racked up so many charges that when that fell off he would literally at times be bringing in more money than anyone else, and OWE money at the end of the month to make up for the groups shortfalls. Everything SOD talked about happened. I couldnt believe the stories he told, and couldnt believe how well he handled the craziness.

Suffice to say he is currently doing great in solo practice, with everyone telling him he was crazy when he just saw a highly mismanaged group falling apart. Shortly after that the group basically dissolved and many of the former partners call him for work.

I actually took a deal like this but very slimmed down, just that I asked for a small guarantee for the first 6-12 months that was a "loan" and hopefully I collected greater than that quickly. It only took 2 months to make more than that, but again, in the details there was junk that ended up really eating into my take home. Luckily I wasnt on the hook for anything else and it was an easy negotiation to get those funny owner controlled charges dropped.

Its tough when you have little control, these could be the majority of the contracts you see. Definitely sucks to be not in a position of power. Good luck.

[nomindforfinance]

I think he would be willing to do a setup with a small guarantee for a shorter time period, but when we are talking about uprooting our lives (I have a professional career I would be giving up or altering in some way, we have a house, etc.) and moving cross country, you want to make sure the income will be worth it.  I don't want to do this again in two years!

[Hatton]

This deal stinks.  You should be able to look at some numbers as to expenses if you are "taking out a loan" to help pay for them. One of the hospitals in my area does this.  One guy retired early because he made so much from these "partners" who left very early.

[Zaphod]

hatton1 wrote:

This deal stinks.  You should be able to look at some numbers as to expenses if you are “taking out a loan” to help pay for them. One of the hospitals in my area does this.  One guy retired early because he made so much from these “partners” who left very early.

Click to expand...

Drives me crazy that physicians can be so parasitic and greedy in regards to one another, all the while the real damage is done by trial, hmo, pharma, emr lobbyists that alter everyones future. Its so narrow minded and cold. While one guy is worried sick that the receptionist is steering patients to a partner, they totally lose focus of everyone doing well, I do well and the big scythe from special interests takes an ever larger cut.

[RocDoc]

I would try to do a lot more job searches before you make a final decision. I thought there was a big shortage of OB which should translate into a good offer for you. The deal you have mentioned sounds terrible. There are too many hidden land mines in that contract and if they all explode you could be financially killed.  There must be a better offer out there for OB. Keep looking!

[FIREoneDay]

I agree with RocDoc.  The contract has too many landmines.  Your salary shouldn't be a "loan".  The expenses that occur (rent, utilities etc) shouldn't be taken out of your salary.  You are doing work for them and bring in revenue.  The additional expenses (rent, utilities) is a given and they should cover that.  It sounds like they want to pay as little as they can as well as have you foot the bill on expenses.  I would look around for a better job offer.  Most doctors don't stay at their first job and if you want to leave, you should be able to make a clean break.  Your contract doesn't allow that.  If you still want to take the job, I would get a lawyer to review your contract.  Good luck in the job hunt!

[PhysicianOnFIRE]

That is an odd setup, for sure.

I did once receive a large signing bonus equal to 2.5 months' salary that was set up as a forgivable loan. The bonus was delivered early on, to be forgiven over 5 years. I decided to leave for a better job closer to friends and family after two years. I had to pay back 3/5 of the loan, plus interest at a reasonable rate.

 

 

[childay]

Certainly sounds questionable.  I guess supply and demand but our hospital was willing to give salary guarantee for a year or two for a private group doc.  They do this frequently.  None of this loan business.  It is going to be impossible for you to really predict whether there will be a "loss" that first two years.  I would almost rather start out collections-expenses with a decent signing bonus...

[Son of a Doctor]

PoF, that is much more common, and I do not have as much of a problem with it. Usually, I try to haggle over having the loan forgiven if the employer terminates the agreement without cause, and have it forgiven monthly instead of annually. There are some other parts to fight over as well, but those two are often successful.

[Bartl007]

"Again, how would anyone know enough about it at this point without having access to their billing records, etc? "

Ask for a copy of their billing records. Also ask for a copy of a profit and loss statement for the previous 3 years and ask about the billings and collections per physician for the last 3 years. What is their overhead like? You can tell alot about a practice from the way they handle their money.

Any group that you are serious about joining should supply this information readily (after a confidentiality statement is signed)

Typically a lot of these things are brought up and asked about at the practice buy in stage, but I think that's stupid. Why wait? I suspect this has a lot to do with why so many docs straight out of training end up leaving their first gig.

All the groups I was serious about signing a contract with supplied this info without hesitation.

Joining a practice is a big decision and it's helpful to know as much as possible about the group you're joining BEFORE you sign.

Just to play devil's advocate: What if this group is exactly the right fit, you love the docs you'll be working with, the hospital is great, you'll make a ton of money right out of the gate and be super busy ( assuming you want to be), but the contract sucks? Then ask for them to change it. Or if you're uncomfortable, pay someone to negotiate a better deal on your behalf.