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Understanding physician contracts in today’s environment can be a daunting task. Gone are the days of the simple, straightforward contract that clearly stated the physician’s annual salary. In the post-COVID era employers started transitioning to include salary reduction clauses or have gone entirely to a production-based system.
Physicians graduating from residency or changing employment will often have an employment contract signed prior to starting employment. This blog outlines the three basic types of physician contracts that may be submitted as documentation for disability insurance, notably recruitment agreements, independent contractor agreements, and employment contracts. In addition to summarizing what each of these contract types includes, we offer insights for determining insurable income from each.
The key elements of a contract would include type of medicine being practiced, the number of hours expected to work, compensation (guaranteed salary hourly rate or production formula), and benefits.
Physician recruitment agreements are typically provided to physicians who are opening a new medical practice in a town or neighborhood where there is a need. The contract is usually extended from a local hospital system or medical group that desires to expand into a new area. The contract typically allows a large sum of financial support for one or two years with the intention of the physician being 100% self-sufficient at the end of the contract term. Contracts can be set up to provide income assistance or, as loan proceeds, with loan forgiveness if the physician stays in the new practice for a set number of years, at which point the loan would be 100% forgiven.
The physician is generally responsible for 100% of the business expenses, including the rent, overhead, and employees, although the amount of expenses are typically unknown at the time of application. The insurable income would be the amount of income or loan proceeds remaining after business expenses.
For example, a physician is contracted to receive $600,000 of income assistance for a new practice for one year. It may cost $300,000 (undetermined at time of application) to cover the expenses of running the practice, which means the net income for year one would only be $300,000. The potential for large expense amounts should be considered when determining insurable income in these situations.
Use the guaranteed contract income or loan proceeds less business expenses (typically at least 50%).
Independent contractor agreements generally provide income to a physician working in a hospital setting who may or may not incur their own business expenses. The contract will typically define whether the physician is responsible for business expenses.
It is important to understand whether the client will have expenses, as you will need to take that into consideration when determining insurable income. The income is reported to the physician on form 1099, and the physician then uses the 1099 amount as gross revenue of their business for tax purposes, which is then reduced by business expenses attributed to the physician.
If the client is working in a hospital setting and the physician has little to no overheard expenses, then you would allow more of the income to be insurable income. However, if the client has expenses related to overhead or administration, then you would need to understand those costs before determining insurable income.
Use guaranteed minimum salary or hourly rate x minimum monthly hours less business expenses (typically 10%‑20%).
Employment contracts generally provide a guaranteed minimum salary, or the contract will detail production credits for each hour worked (RVU – Relative Value Unit), which is not guaranteed. The physician is less likely to be responsible for business expenses under this type of contract.
It can be difficult to determine insurable income when the income is production based if employment recently started.
In a situation where it’s difficult to determine insurable income, there are a few avenues to consider:
Physicians make up one of the largest groups in the Disability insurance pool.1 With changes to physician contracts recently, understanding the basics of the contracts, use of critical thinking, and stacking of multiple data points will help to determine the best offer when a contract is not straightforward.
