Small businesses of all kinds have struggled to stay afloat during the COVD-19 pandemic, and healthcare practices are no different. The pandemic has brought about many changes to the healthcare industry, with particular impact on smaller, privately held practices. Larger, more financially sound entities were better equipped to face the fallout from the pandemic – implementing adaptations, offering telehealth, effectuating novel clinical protocols, etc. – and in many cases the larger entities have stepped in to acquire those smaller businesses that were floundering. Therefore, it is not surprising to learn that in 2020 alone there were seven “mega mergers,” which the healthcare industry defines as a merger involving two entities with over one billion in annual revenue (RevCycle Intelligence).
While mergers and acquisitions are common – 2019 saw a recent high number of transactions with 94, while 2010’s “low” was 74 – it appears that we are on track for a continued upward trend. Healthcare CFOs were recently surveyed, and 44% agree that the pandemic will cause an increase in partnerships, and 41% expect increased consolidation (BDO). While the average patient may not necessarily even notice a change or disruption to their healthcare, this transactional atmosphere begs the question, what happens to the physician-employees when their employer is bought out?
When a physician is employed, the terms of that employment are governed by an Employment Agreement, aka a contract. The contract will explicitly state the nature of the relationship between the specific provider/physician and the entity that employs them. Because contracts appear to be so specific to the respective parties, many would assume that if the entity changes or is acquired by a completely separate entity, then a new contract would be required. But surprisingly, this is not the case. When mergers or acquisitions take place, essentially changing who the “employer” is, contracts are actually very easily transferred or “assigned” to the new party. It generally all boils down to just one provision of the original contract.
Physician employment agreements are by their nature personal services contracts. Rather than a general contract for the supply of goods, the contract is an agreed-upon bargain for the performance of actions. In other words, the employer has specifically hired the physician for his ability to perform agreed-upon duties. As such, physician employment agreements fall outside of the general business contract rule whereby contracts are freely assignable. Accordingly, physician employment agreements always contain a provision governing “Assignment” in order to make clear the fact that it is not freely assignable. The Assignment provision will state whether, and to what extent, the contract may be assigned by either party. Very commonly, the Assignment provision in a physician employment agreement will read as follows:
This Agreement shall not be assignable by the Physician without the prior written consent of the Employer. The Employer may assign its rights and obligations under this Agreement to an entity under common control or to a successor in interest without the consent of the Physician.
As you can see, Assignment provisions are more often than not more flexible and favorable to the rights of the employer, ensuring their ability to freely “pass the torch” if and when a merger or acquisition takes place. This is the standard approach and employers generally are not willing to amend this language. One slight exception is that some employers are willing to ensure their employees’ right to advanced notice in the event of an assignment. This is a favorable adjustment to request, being that a physician might find herself working for an entirely new company without any prior knowledge. Further, the right to have advanced notice puts the physician in the position to terminate the Agreement without cause (which usually requires 90 – 180 days’ notice) if they do not wish to be a part of the future organization.
The impacts of an employment agreement’s Assignment provision is only one of numerous items that should be analyzed prior to signing a contract. Physicians are well-advised to seek the counsel of attorneys who are experienced with these terms and the most favorable approaches to pursue.