Executive Compensation

Last month, the New York State Court of Appeals invalidated a state Department of Health (DOH) regulation that restricted certain health care providers contracting with the state from paying executives more than $199,000 annually, regardless of whether the funds came from the state or not. However, the Court upheld two other DOH regulations; one that limits providers from using public tax-payer money directly to pay executives in excess of $199,000 annually, and another that limits the amount of public funds used for administrative costs.

In January 2012, Governor Andrew Cuomo issued Executive Order 38 in response to media reports calling out high executive compensation rates among nonprofit health care organizations receiving funds from Medicaid. Executive Order 38 directed the DOH to regulate the use of state funds for executive compensation and administrative costs. Consistent with this executive order, the DOH implemented three regulations that imposed: (1) a “hard cap” prohibiting covered providers from using public funds directly to pay executives more than $199,000 (2) another “hard cap” limiting the percentage of public funds used for administrative costs to fifteen percent annually by 2015; and (3) a “soft cap” subjecting covered providers to penalties should they pay executives, with certain exceptions, more than $199,000, regardless of whether the money used to pay them came from public or private sources.

Shortly after the regulations were announced, a group of nursing homes, assisted-living programs, home-care agencies, and trade associations brought lawsuits challenging the DOH’s authority to issue the regulations. These lawsuits, arguing that the DOH exceeded its regulatory authority in promulgating the regulations, eventually made their way all the way up to the courts to the Court of Appeals.

The Court’s majority opinion in LeadingAge New York, Inc. v. Shah, authored by Chief Judge DiFiore, held that the hard cap regulations fell within the DOH’s regulatory authority and were valid agency actions. With regard to the soft cap, however, the majority concluded that the DOH did in fact exceed its authority, usurped the Legislature’s role, and violated the separation of powers doctrine. Accordingly, the soft cap regulation subjecting covered providers to penalties if they paid executives above the $199,000 threshold, regardless of the source of funds, was struck down by the Court.

In accordance with this decision, covered health care providers who contract with the state will no longer need to comply with the “soft cap” regulation or fear penalties for failure to do so. However, health care providers covered by the “hard cap” regulations will still need to comply with the limitations set under those regulations, absent an applicable exception.

When: Thursday, September 14, 2017 8:00 a.m. – 4:30 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Immigration
  • Global Executive Compensation
  • Artificial Intelligence
  • Internal Cyber Threats
  • Pay Equity
  • People Analytics in Hiring
  • Gig Economy
  • Wage and Hour
  • Paid and Unpaid Leave
  • Trade Secret Misappropriation
  • Ethics

We will start the day with two morning Plenary Sessions. The first session is kicked off with Philip A. Miscimarra, Chairman of the National Labor Relations Board (NLRB).

We are thrilled to welcome back speakers from the U.S. Chamber of Commerce. Marc Freedman and Katie Mahoney will speak on the latest policy developments in Washington, D.C., that impact employers nationwide during the second plenary session.

Morning and afternoon breakout workshop sessions are being led by attorneys at Epstein Becker Green – including some contributors to this blog! Commissioner of the Equal Employment Opportunity Commission, Chai R. Feldblum, will be making remarks in the afternoon before attendees break into their afternoon workshops. We are also looking forward to hearing from our keynote speaker, Bret Baier, Chief Political Anchor of FOX News Channel and Anchor of Special Report with Bret Baier.

View the full briefing agenda and workshop descriptions here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

In the wake of Hurricane Sandy, employers with employees and operations impacted by Hurricane Sandy are asking what types of tax and employee benefits relief may be available to them and their affected employees.  The Internal Revenue Service (“IRS”), the Department of Labor (“DOL”) and the Pension Benefit Guaranty Corporation (“PBGC”) have moved quickly to provide disaster relief guidance for affected employers and their employees.

IRS Relief.  In response to Hurricane Sandy, on November 2, 2012, the IRS in IR-2012-84 declared Hurricane Sandy a “qualified disaster” for federal income tax purposes under Section 139 of the Internal Revenue Code of 1986, as amended (the “Code”).  The IRS then acted to institute the following relief measures:

  • Qualified disaster relief payments.  The designation of Hurricane Sandy as a “qualified disaster” under Code Section 139 allows employers to make “qualified disaster relief payments” for expenses resulting from or attributable to Hurricane Sandy.  Qualified disaster relief payments are excluded from the employees’ federal gross income and are not wages for purposes of employment taxes.  Qualified disaster relief payments are defined as payments that are not covered by insurance made for personal, family, living or funeral expenses resulting from the qualified disaster, including the costs of repairing or rehabilitating personal residences damaged by the qualified disaster and replacing their contents.
  • Sharing and/or donating accrued vacation, sick and PTO leave.  On November 6, 2012, the IRS announced in IR-2012-88 and IRS Notice 2012-69 that employees will be permitted to forego vacation, sick or personal leave and contribute the value of the leave as a cash payment for the relief of victims of Hurricane Sandy.  The cash payments may be contributed to a Code Section 170(c) private foundation, including an employer-sponsored foundation, for the relief of victims of Hurricane Sandy, as long as those amounts are paid to the organization on or before January 1, 2014.  The leave contributed by an employee will not be included in the employee’s gross income or wages and the right to make a contribution will not result in constructive receipt for purposes of income or employment taxes.  Electing employees, however, may not claim a charitable contribution deduction under Section 170 for the value of the cash payment.  On November 6, 2012, the IRS also announced in IR 2012-87 an expedited review and approval process for Code Section 170(c) private foundations that are newly established to help individuals impacted by Hurricane Sandy.
  • Delay of tax filing deadlines to February 1, 2013.  On November 2, 2012, the IRS announced in IR-2012-83 that certain taxpayers affected by Hurricane Sandy will be eligible for filing and payment federal tax relief.  Affected individuals and businesses located in certain counties of the States of Connecticut CT-2012-48 (effective October 27), New Jersey NJ-2012-47 (effective October 26), New York NY-2012-47 (effective October 27) and Rhode Island RI-2012-30 (effective October 26), as well as relief workers working in those areas, will have until February 1, 2013 to file certain tax returns and pay any taxes due.  This includes the filing of the fourth quarter individual estimated tax payment, payroll and excise taxes for the third and fourth quarters, and Form 990 and Form 5500 if the deadlines or extensions occur during the applicable extended filing period.  The extension does not apply to Forms W-2, 1098 and 1099, or Forms 1042-S and 8027.  The IRS is also waiving failure to deposit penalties for federal and excise tax deposits on or after the applicable disaster area effective date through November 26, 2012 if deposits are made by November 26, 2012.
  • Expansion of hardship distributions and participant loans under 401(k) plans, 403(b) plans and 457(b) plans.  On November 16, 2012, the IRS announced in IR-2012-93 and IRS Notice 2012-44that a qualified retirement plan will not be treated as violating any tax qualification requirements if it makes hardship distributions for a need arising from Hurricane Sandy or loans to employees or former employees whose primary residence or place of employment is in a qualified disaster area.
    • Hardship distributions and loans also may be made to employees who have relatives living in the qualified disaster area impacted by Hurricane Sandy.  Relatives for this purpose include an employee’s grandparents, parents, children, grandchildren, dependents, or a spouse.
    • Certain documentation and procedural requirements, and other limitations, are not required if the plan administrator makes a good-faith diligent effort to satisfy those requirements and the plan administrator, as soon as practicable, uses reasonable efforts to assemble any forgone documentation.
    • If the plan does not provide for loans or hardship distributions, the plan may be amended to allow for Hurricane Sandy distributions no later than the end of the first plan year beginning after December 31, 2012.
  • Code Section 409A deferred compensation plans.  Hurricane Sandy may qualify as an “unforeseeable emergency” affecting a service provider that allows for a distribution under a nonqualified deferred compensation plan subject to Code Section 409A.  Though not clear, it may be possible for a plan to be amended to allow for payment upon an unforeseeable emergency after the occurrence of the emergency.

DOL Relief.  The DOL is providing disaster relief by allowing plans to take certain actions that otherwise could be a violation of Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  The DOL will not consider the following events to be a fiduciary violation under ERISA:

  • The plan provides for loans and hardship distributions in compliance with the IRS Hurricane Sandy disaster relief guidance described above.
  • There is a temporary delay under the plan in forwarding participant contributions and loan repayments from payroll processing services in the Hurricane Sandy qualified disaster area and the affected employers and service providers act reasonably.
  • There is a blackout period under a retirement plan related to Hurricane Sandy and the plan is not able to comply with the requirements to give participants and beneficiaries 30-day advance written notice of the blackout.
  • Group health plans make reasonable accommodations due to Hurricane Sandy for plan participants and beneficiaries for deadlines and documentation in filing claims for benefits, including COBRA elections.
  • Group health plans and issuers are not able to comply with pre-established claims procedures and disclosures due to the physical disruption to the plan or service provider’s principal place of business from Hurricane Sandy.

PBGC Relief.  The PBGC is providing limited disaster relief for a plan or plan sponsor located in the qualified disaster area, specifically Connecticut, New Jersey, New York and Rhode Island, or a plan or plan sponsor that cannot reasonably obtain information from a service provider, bank or other person whose operations were directly affected by Hurricane Sandy.  The PBGC relief includes the following:

  • Any premium payment required to be made on and after October 26, 2012 and on or before February 1, 2013 (the “PBGC disaster relief period”) will not be subject to penalties if made by February 1, 2013.
  • Single-employer standard terminations and distress terminations deadlines required to be made during the PBGC disaster relief period are extended to February 1, 2013.
  • Reportable event post-event notice deadlines for the PBGC disaster relief period are extended to February 1, 2013.  Pre-event reportable event notice deadlines may be extended on a case-by-case basis.
  • Annual financial and actuarial information reporting for certain large underfunded plans, missed contributions or funding waivers may be extended on a case-by-case basis.
  • If information is requested under an allowable extension of a Form 5500 filing date, and the Form 5500 is eligible for a filing extension under the IRS guidance for Hurricane Sandy, the allowable extension will commence on the last day of the qualified disaster extended deadline.
  • Requests for reconsiderations or appeals are extended through the PBGC disaster relief period.
  • Multiemployer plans’ premium deadlines will be extended as described above.  The PBGC will not assess a penalty or take enforcement action for the failure to comply with multiemployer plan deadlines during the PBGC disaster relief period.

All employers with employees and operations impacted by Hurricane Sandy directly or indirectly should take immediate action to review the relief available for their businesses and employees.

For further information on employment considerations for qualified disasters such as Hurricane Sandy, please see our client advisory entitled HR Guide for Employers – Responding to Natural Disasters.

For a physician who has spent his or her whole professional life developing and growing a medical practice, the process of selling that practice can be a traumatic experience.  Typically, the physician may focus on the short term, attempting to maximize the price at which the practice will be purchased and the applicable payment terms.  However, the long term happiness of the selling physician may depend less on the size of the purchase price at which the practice is sold, and more on how well the physician negotiates the terms and conditions of employment following the acquisition, most notably where the physician is moving from a smaller medical practice setting to a larger institutional setting, such as being employed by a hospital system or large, multi-specialty medical practice.  [NOTE:  While this blog focuses on physicians, the same issues would also apply to other health care practitioners, such as dentists and oral surgeons, podiatrists, chiropractors and the like.]  

This blog takes a closer look at the issues which may be of critical importance to the selling physician, as he or she enters into the new, post-acquisition employment arrangement with the purchasing hospital or medical practice.  Unlike most of our blogs, which provide answers, this blog is designed primarily to provide questions – – questions that should be answered as part of negotiating the final employment agreement.

  • Term – What is the initial term of the employment agreement?  Are there automatic renewal terms, or can the physician get out at the end of the initial term?  Negotiating the term of the new employment agreement may be complicated by the nature of the physician group being acquired.  For example, the more senior physicians may not be willing to make a long-term commitment to the new employer (e.g., 5-10 years), while the more junior physicians may be looking for that exact type of job security.  It is also important to keep in mind how the term of the employment agreement can be impacted by the other items discussed below.  (A five-year agreement that can be terminated without cause at any time on 30-days written notice by either party is not a five-year agreement; practically speaking, it is a rolling 30-day agreement.)  Similarly, while the agreement may have a term of five years, compensation adjustments may occur more frequently.
  • Duties – Negotiating the duties for the employed physician generally does not get intense, but there are some critical issues on which the physician should focus.  Can the physician be relocated to one or more other offices during the term of the agreement, without his or her consent?  What are the call coverage obligations?  Will the physician be authorized to moonlight, or take on medico-administrative responsibilities, such as medical or service line director positions?  In the end, the physician and the employer group should have a clear, mutual understanding of the employee’s day-to-day duties on behalf of the group.
  • Compensation – Even something as simple as a guaranteed base salary can be complicated in fact, so particular attention should be paid to all aspects of the compensation arrangement.  Beyond base salary, as we have previously described, it is critical to understand fully how compensation may be calculated, such as where compensation is based on wRVUs.  It is also important to understand how other aspects of compensation may work, such as bonus calculations (e.g., are bonuses prorated for partial years?), medical or service line director fees, speaking fees or honoraria, expert witness fees, royalties, etc.
  • Benefits – For the most part, employee benefits will not be controversial, as the employer is likely to have a standard package of benefits (health, dental, disability and perhaps group life insurance, pension/profit-sharing plan, etc.) for all physician employees.  However, benefits may also encompass non-standard items, and it is important for the employee to make sure that all promises made by the employer are included in the written employment agreement; this could include items such as use of a company car (or, alternatively, an automobile allowance), purchase and/or use of a smart phone (including monthly service fees), support services (e.g., physician extenders), etc.  Maternity/family leave may also be an important issue to pin down, during negotiations.
  • Restrictive Covenants – Typically, the post-acquisition physician employment agreement will contain several types of covenants – – (i) a covenant not to compete, which would keep the physician from practicing medicine within a certain geographical area for a certain period of time, following termination of employment; (ii) a no-pirating covenant, which would keep the physician from soliciting or employing the practice’s other employees following termination; (iii) a non-solicitation covenant, which might be aimed at post-termination solicitation of patients, or referral sources, or both; and (iv) confidentiality and non-disclosure covenants, which might also deal with access to patient medical records following termination of employment.  Each of these covenants should be understood fully by the physician, so that there are no surprises down the road, should the employment arrangement not work out as planned.  Also, any necessary exceptions to the covenants (e.g., maintaining privileges at a particular hospital or surgery center) should be hammered out up front.  [NOTE:  Some states prohibit the use of non-compete agreements as applied to physicians, primarily for public policy reasons, although this is less common where the non-compete agreement is made in conjunction with the sale of the medical practice.]
  • Termination – We have previously discussed the importance of the termination provisions in a physician employment agreement.  On the front end, the physician should be clear on the different types of terminations (with cause, without cause, non-renewal), and, related specifically to termination for cause, the objective (e.g., loss of license or DEA number) or subject (e.g., engaging in any act detrimental to the best interest of the employer) nature of the specific grounds for termination.   The physician should also understand precisely what consequences attach to each type of termination:  Will accrued but unpaid bonuses be forfeited if the physician resigns or is fired for cause?  Who pays for tail coverage?  Will all of the restrictive covenants apply, if the physician is terminated without cause by the employer?
  • Dispute Resolution – Many physician employment agreements contain an arbitration, mediation or other form of dispute resolution, which may restrict the parties’ ability to go directly to court, should a contract dispute occur.  While there is typically not a lot of back and forth concerning these dispute resolution provisions, it is important for the physician to understand the dispute resolution process:  Which issues require arbitration or mediation?  Who pays the costs?  Where does the arbitration or mediation take place?  What rules apply?  Is the arbitration or mediation binding on the parties, or just a preliminary step before a suit is filed?
  • Post-Termination – Dealing with obvious post-termination issues is better done prior to the start of the employment arrangement, rather than in real time at the end of that relationship, when emotions can run high and the “practice acquisition euphoria” has worn off.  So, it pays to negotiate the basics into the employment agreement up front:  What degree of cooperation is required between the parties, following termination?  What happens if the employer is hit with a recoupment action by a payor, based on the coding practices of the employee prior to termination?  Who pays for tail coverage?  how are medical records handled?

The Bottom Line:  While it is certainly important to focus on the purchase price and payment terms, where the physician is selling his or her medical practice, it is just as important for the physician to focus on the post-acquisition employment relationship, so that, in the years following the acquisition, the physician can enjoy both the proceeds of the sale of the practice and the post-acquisition employment arrangement.

A significant majority of all professional liability coverage available to physicians these days is provided on a “claims-made” basis, with a claim being covered only if (i) the claim arose out of professional services rendered during the term of the professional liability policy, and (ii) notice of the claim is provided by the insured during the term of the policy. (This is in contrast to “occurrence coverage,” where a claim is covered if it related to professional services rendered during the term of the policy, regardless of when notice of the claim is provided by the insured.)  Where termination of the physician’s employment results in termination of the claims-made professional liability insurance policy, there may be a break or gap in coverage, depending upon the new professional liability coverage put in place with the physician’s new employer. Specifically: 

  • The physician’s prior coverage would no longer protect the physician, since that coverage terminated; any claim subsequently brought against the physician, relating to professional services rendered while an employee, would be asserted outside of the policy period.
  • Conversely, the physician’s new coverage, if also a claims-made policy, would only cover professional services rendered while an employee under the new employment arrangement; it would not cover claims arising out of services rendered under the former employment arrangement, even if asserted while the new policy was in place.

In some cases, this gap or break in coverage can be handled without the need for “tail coverage” – – or, in formal terms, an “extended reporting endorsement,” which extends the time during which a claim can be filed under the old malpractice policy for an additional period, ranging from one year through forever, depending upon the additional premium paid.  For example, some insurers are willing to provide “nose coverage”, which would involve the new insurer agreeing, for a relative small premium increase, to look backwards and cover the physician for claims arising prior to the start of the new coverage, if the claim is asserted while the new policy is in place.  Or, even better, some insurers agree to use the physician’s original “retroactive date” – – the date on which the physician’s prior coverage started – – as the agreed upon start date for coverage under the new policy.  (This normally occurs with relatively new physicians who have not yet had time to establish a claims history.)  Finally, some insurers provide free “tail coverage” for physicians who retire or who practice for a minimum number of years under the same policy.

In the absence of one of these special cases, however, the physician will need “tail coverage” in order to be fully protected against malpractice liability.  (Note that the employer will want this coverage to be in place as well, as the absence of such coverage might expose the employer to additional risk, should the employer be sued as a result of the professional services rendered by its former physician employee.)  This may be an expensive proposition, however, as “tail coverage” premiums  can be equal to or as much as double the amount of the annual premium on a mature claims made policy.

Under the physician’s employment agreement, who pays for that coverage, following termination of employment?  In some cases, the employer will require the physician employee to pay, regardless of the grounds for termination.  This is becoming less likely, though, as physician recruitment becomes more competitive and the cost of bringing in a new physician employee increases.  Conversely, the employer may agree to pay the cost of the “tail coverage,” regardless of the grounds for termination.  This is relatively rare.  In between, there are any number of “fault based”  or “no fault” provisions which may be included in the physician’s employment agreement, to deal with payment for necessary “tail coverage”:

  • If either party terminates without cause, that party is responsible for paying the cost of the “tail coverage”.
  • If either party terminates with cause, the other party is responsible for paying the cost of the “tail coverage”.
  • The physician employee pays in most cases, but not if he/she is terminated without cause or if he/she retires.
  • The parties split the cost 50/50, regardless of the type of termination.
  • A phase-in arrangement can be used, where the percentage of the premium cost paid by the employer increases, as the physician employee remains with the practice for a longer period of time.

The Bottom Line:  There is a lot of misinformation floating around about “tail coverage.”  From this article alone, it should be clear that “tail coverage” is only needed to cover a break or gap in coverage, and only if another option (such as “nose coverage” or use of an earlier “retroactive date”) is not available.  When “tail coverage” is needed, however, it should be dealt with specifically in the physician’s employment agreement, with provisions identifying who is responsible for paying the costs associated with that coverage, and what happens if the responsible party fails to do so.

According to the 2011 Medical Group Management Association’s Physician Compensation and Productivity Report, more than one-third of physician group practices in the U.S. are using some type of “work relative value unit” (commonly known as a wRVU) structure for compensation purposes, and more than 60% of physicians are paid on the basis of some type of wRVU metric. So, physicians clearly have some familiarity with the wRVU concept and its application in calculating physican “pay for productivity” compensation.

However, while wRVU models generally provide compensation based on the productivity of the physician (multiplying the number of wRVUs by one or more dollar multipliers to calculate compensation), there are a number of ways to define exactly what is and what isn’t a wRVU. For example, a wRVU definition may tie productivity to:

  • Billable procedures that may be properly and compliantly billed to and collected from third party payors; or
  • Billed procedures that not only may be properly and compliantly billed to and collected from third party payors, but are actually billed by the employer hospital or physician group; or
  • Billed and collected procedures that not only may be properly and compliantly billed to and collected from third party payors, but are actually billed and collected by the employer hospital or physician group.

So, depending on the definition used in the employment contract between the physician and the employer, not all procedures worked by the physician may end up generating wRVUs and being counted for purposes of compensation. More importantly, as the physician moves from “billable” to “billed” to “billed and collected” wRVUs, he or she moves further away from things within his or her control.  In other words, while the physician typically controls whether or not to perform a procedure, the employer typically decides whether to bill for that procedure or not, and the third party payor typically decides whether and how much to pay for that procedure.  In all three cases, the physician performed the same procedure; but, in two of the three cases, the physician may not get paid for that performance, if the employer doesn’t bill for it or the payor doesn’t pay for it!  Needless to say, a physician is far better off if the amount of compensation earned results from things within his or her control, rather than rests in the discretion of the employer or third party payor.

The Bottom Line: If a physician wants to get paid fully for his or her productivity, then the starting point is to make sure that the employment contract contains a clear and concise definition of a wRVU, one that is based on billable, rather than billed or billed and collected procedures. Here’s one example highlighting how this can be accomplished:

“Employer and Physician agree that, for purposes of determining compensation to which Physician is entitled, a wRVU shall include only those procedures which may be properly and compliantly billed to and collected from a managed care company, insurance company, HMO, governmental payor or other third party payor. Physician understands that certain services rendered by Physician will not result in allowable, contractual or legal charges and, thus, Physician will not receive wRVU credit. However, so long as Employer may legally bill and collect for Physician’s services, Physician will receive wRVU credit for all such services, regardless of whether or not Employer actually bills and collects for those services.”

For a more detailed look at this issue, as well as ten recommendations for determining physician compensation through wRVUs, consider this recent Merritt Hawkins Report on RVU Based Physician Compensation and Productivity (pdf).

A monthly breakfast law briefing and networking series specifically  designed for health care and wellness company executives and human resources professionals.  This informative series will address labor and employment issues during these challenging times and offer solutions.

For additional information and to register,  contact Carla Llarena or by tel: (404) 869-5363.

February 8, 2012 
Today’s OSHA: What Healthcare Companies and Practices Need to Know

March 14, 2012
It Can Hurt to Ask: TMI in the Digital Age
(Focusing on Social Media & Background Checks)

April 11, 2012
Best Practices to Avoid Wage and Hour Liability

May 9, 2012
What You Need to Know About the Americans with Disabilities Act,
and How Your Managers are Likely Getting it Wrong

June 13, 2012
E-Verify and Complying with Federal and State Immigration Law

July 11, 2012
Selling a Physician’s Practice

August 8, 2012
Employee Handbooks: How to Draft Them to best Protect Your Company and Communicate to Your Employees

September 12, 2012
Alternate Dispute Resolution: Is Mediation and/or Arbitration Preferable to Litigation for Healthcare Employers?

October 10, 2012
The 2012 Presidential Election and How it Will Impact You as an Employer

November 14, 2012
Doctor and Executive Compensation and Benefits

December 12, 2012
The Top 10 Biggest Mistakes that Health Care Employers Make
and How to Avoid Them

Epstein Becker Green
Resurgens Plaza
945 East Paces Ferry Road, Suite 2700
Atlanta, GA 30326-1380

8:30 a.m. – 9:00 a.m. Registration, Breakfast, and Networking
9:00 a.m. – 10:00 a.m. Program, Including Q&A Session