Understanding The Nuances Of Negotiating Physician Contracts

Author(s): 
Jon A. Hultman, DPM, MBA, CVA

Whether you are starting out in a podiatry practice, haggling over a managed care contract or selling a practice you’ve had for years, there are many factors that go into being a savvy negotiator. Accordingly, this author focuses on strategies that address both the economic and emotional issues that play a part in negotiating physician contracts.

From the moment we complete the training and education necessary to “hang up our shingles” and seek an employment contract, our ability to negotiate becomes a skill that plays a significant role in our job satisfaction and success throughout long careers. Virtually every transaction we make involves some form of negotiation. In fact, successful negotiation is as important in our personal lives as in our business lives.

   Negotiating is not just something we do when making major financial transactions such as seeking employment, adding an associate, hiring staff, buying equipment, haggling over the terms of a managed care contract or selling a practice. It also comes into play daily in our offices when discussing procedures or fees with patients, and in our homes where we routinely negotiate with children and spouses. Since our overall effectiveness in both personal and professional pursuits depends on our ability to negotiate skillfully, working to improve our skills of negotiation should be a lifetime endeavor.

   Perhaps the greatest challenge for a negotiator is the fact that he or she must address emotional as well as economic issues. This complex combination of rational and possibly irrational factors can lead to outcomes that result in damaged relationships or less than optimal results. For transactions in which we are selling — say a home or a car — the subsequent relationship is irrelevant. For other transactions — such as when pursuing employment by a medical group, HMO or hospital; seeking surgical privileges; or working out the details of a managed care contract — maintaining good relationships amongst negotiating parties is crucial to future success.

   In the 1950s and 1960s, negotiating often involved a “hard-nosed” bargaining style that typically resulted in one party winning and the other losing. Such win-lose outcomes resulted in strained relationships and lost future opportunities. This style later gave way to “win-win” negotiating, which Roger Fisher and William Ury articulated well in the book Getting to Yes.1 Let us focus on some basic ideas that I have found helpful in developing negotiating skills that lead to win-win situations.

   While much of the discussion regarding negotiations would seem relevant specifically to younger practitioners who are just entering the workforce and are involved in working out their futures with potential employers, the reality is that many DPMs in their mid- and late careers are finding themselves in situations similar to those of younger practitioners who are just starting out. For example, many who are five to ten years from retirement are selling their practices and seeking employment by the new owners, or they are seeking employment by medical groups or orthopedic groups, clinics or hospitals. Mid-career DPMs are merging practices to form larger groups, groups that will function like business corporations. Even if they are partners in those businesses, they will need to negotiate such things as work hours, vacation time, call schedules, division of overhead, compensation formulas and benefits.

Exploring The Link Between Money And Satisfaction

We often perceive money as being the most significant issue in negotiations and while it is important, money actually may not be the most important factor in determining a practitioner’s job satisfaction. The 2014 Medscape Physician Compensation Report contains two interesting charts that are quite revealing when we compare them side by side.2

   The first chart lists the yearly compensation for 25 medical and surgical specialties in descending order.2 The range is from a high of $413,000 to a “low” of $174,000. As you may expect, orthopedics was at the top. This was followed by cardiology, urology, gastroenterology, radiology, anesthesiology, plastic surgery, dermatology, general surgery, ophthalmology, oncology, critical care, emergency medicine, pulmonary medicine, obstetrics/gynecology, podiatry, nephrology, pathology, neurology, rheumatology, psychiatry, internal medicine, endocrinology, pediatrics, family medicine, and HIV/infectious disease. Actually, podiatric physicians were not included in the survey but had they been, they would have fit in where I have listed them between pathology and neurology, based on information in my personal consulting database.

   The second chart lists results from responses to the question, “Would I choose medicine again?”2 Among the most satisfied were internal medicine, HIV/infectious disease, family medicine, pulmonary medicine and pediatrics. At the bottom of the list were general surgery, anesthesiology, radiology, orthopedics and plastic surgery. What stands out is that the order of specialties from top to bottom on this report’s satisfaction chart is almost exactly the reverse of that for the compensation chart — showing the lowest earners at the top and the highest at the bottom.

   You can draw your own conclusions from this comparison but anecdotally, the statistics appear to support the idea that earning more money (at least above $174,000) does not increase a physician’s level of satisfaction with his or her choice of profession. For purposes of improving your negotiations, the main takeaway from this information is that you should not focus solely on compensation when evaluating employment or other practice situations. Similarly, reimbursement rates should not be the sole focus when evaluating the merits of third-party payer contracts. Many issues that are non-money-related can be equally important and are often much easier to negotiate with the “other side.”

How To Gain Leverage In Negotiations

In many negotiating situations, it is typical to feel that the “other side” has more information and greater leverage than you, making you feel “trapped” in a “take it or leave it” situation. This is especially true when the other side is “large,” such as a hospital, insurance company or medical group. The reality is that you have more leverage than you might think. Otherwise, the other side would not be talking to you.

   An interesting career survey that I think sheds some light on this concept compared the salary expectations of two groups — professionals hiring new graduates and the new graduates being hired.3 The survey asked the hiring professionals how much they expected to pay entry-level college graduates. The average response to this query was $48,700 a year. On the other hand, the average response of the recent college graduates on how much they expected to earn at their first jobs was $38,500. The reality is that the employers were expecting to pay 26.5 percent more than the typical graduate was expecting to ask for. Similarly, you may have more leverage than you realize. It is important that you know your worth.

   From this example, we see that there is a range of outcomes within which both sides will be satisfied, even when one side appears to have the advantage. In some negotiations, the range of these win-win outcomes can be quite wide.

   The movie Pretty Woman shows an example of the win-win scenario. In a classic scene, a wealthy businessman played by Richard Gere is negotiating for the services of an attractive escort played by Julia Roberts. He wants her to accompany him to various business/social functions and he offers to pay her $2,000 for one week of her services. When she counters with $6,000, Gere’s character ups his offer to $3,000 and she comes back with $5,000. When he offers $4,000, she capitulates and they strike a deal. Following the negotiations, Roberts’ character quickly lets him know that she would have accepted $2,000. He smiles and tells her that he would have paid $6,000. In this example transaction, a win-win “deal” existed anywhere between $2,000 and $6,000, which is a wide range of outcomes that would have been acceptable to both sides.

   While this movie example might seem extreme, I have seen similar scenarios in medicine. A DPM who was working part-time for a clinic came to me asking advice. He was going to quit because he felt the hourly rate he was being paid was too low for the amount of work he was being referred and the quality of care he was delivering. Since this doctor thought he had no leverage to negotiate a “better deal,” he had contemplated quitting. I discussed the Pretty Woman example with him, pointing out that his “leverage” was quality (based on the fact that he had high patient satisfaction ratings as well as the respect of referring physicians). After a relatively quick negotiating process, he received a rate that was more than double what he had been paid before.

   A take-away from this example is that quality matters and you have greater leverage to negotiate when the other party perceives you as being prepared to “walk away.” The same holds true when exploring employment opportunities or when one is involved in payer contract negotiations.

Understanding The Endowment Effect

When negotiating a contract to buy into a practice, acquire or buy out a retiring doctor, or merge with other practices, you need a reliable, “scientific” method for objectively measuring the value of a practice. Such methods do exist. However, emotion regarding “sale price” often derails the ultimate negotiation for a partnership, acquisition or merger that would actually be in the best long-term interest of all parties involved.

   While it is impossible to remove all emotion from the equation, I would like to relate an interesting study that I feel explains how buyers and sellers often evaluate value from very different perspectives. Awareness of the seemingly simple concept revealed in this study can go a long way toward getting all negotiating parties on “the same page.” The following two paragraphs, taken from “Know the Value of Your Practice,” chapter ten of my book, The Medical Practitioner’s Survival Handbook, help to explain this phenomenon.4

   “An interesting experiment conducted by Eric Johnson, the Co-Director of the Center for Decision Sciences at Columbia University, gives valuable insight into why the perception of value can vary so widely between buyers and sellers.4 In this experiment, Johnson divided one of his classes into two groups, asking the first group how much they would pay for a coffee mug he was holding. The typical response he received was $4. He gave the second group the same mug for free and then asked, ‘How much would I have to pay you to part with it?’ What is important to recognize at this point is that Johnson is basically asking the same question of both groups, which is, ‘How much is this mug worth to you?’ Surprisingly, the average response from the second group was $8. Researchers refer to this phenomenon as the endowment effect, which Johnson explains in the following way: ‘Simply owning something increases its value.’

   “This experiment can help us to understand why negotiations involving practice buy-in and buy-out situations are difficult and often defy logic.4 If two groups can disagree this much over the value of a simple coffee mug, it is no wonder that the difference in the perception between buyers and sellers of the value of a more complex entity such as a medical practice can be so extreme with each party feeling that the other is being unreasonable. When negotiating price, it is helpful to understand that these issues of ‘behavioral economics’ are an unspoken factor. Yet, ultimately, we must approach practice valuation in an objective way, one that leads the buyer and seller to come to a reasonable agreement as to a practice’s fair value.”

   In this example, “sellers” perceived the value of a specific commodity, the coffee mug, to be double what its “buyers” perceive. Little emotion was involved in this valuation because the mug was basically a commodity to which neither party had much attachment. Value should, therefore, have been relatively easy to agree upon, and yet, even in this “simple” negotiation, a large discrepancy was present. When negotiating any sale or merger, all involved must recognize the possibility of this endowment effect’s influence.

   When we are valuing a medical practice, the “endowment effect” plays an even bigger role with perceived value easily differing by as much as 200 percent. When valuing a practice, emotions are often intense. The owner feels he or she has put in years of “blood, sweat and tears” building the practice and its solid reputation in the community. How does one place a value on the time he or she has invested? Since an associate or an acquiring entity can never match this investment of time and emotion, he or she will not value this practice at the price the owner does.

   This gap in perception is the obstacle that often derails a partnership or merger that would over the long-term actually benefit both parties to a far greater extent than if they were to retain the status quo. Ultimately, in successful negotiations, reason prevails. This is more likely when all parties are aware of the potential influence that this “endowment effect” can have and deal with it at the onset of the negotiation process.

Emphasizing The Value Of Listening During Negotiations

Many issues are unknown at the onset of negotiations. We only uncover much significant information during the process through listening, which is something most people, especially doctors, do very poorly. One of the most important points Fisher and Ury make in their book, Getting to Yes, is as follows: “Since the other side will say yes for its reasons, not yours, agreement requires understanding and addressing your counterpart’s problem as a means to solving yours.”1 The only way to learn the other side’s “reasons” is to ask the right questions, listen carefully and determine what the other side is trying to accomplish.

   Since key contract negotiation issues are both economic and non-economic, there is likely to be a wide range of solutions that could result in successful negotiations. For example, an associate looking to affiliate with a practice may have a range of compensation levels he or she is willing to accept because he or she can balance the ultimate agreed upon dollar amount with non-economic factors such as work hours, practice location, and/or future opportunities (that might be even more important to him or her than the initial compensation). We cannot give the significance of these factors their proper weight without first asking questions and listening carefully to the answers. G. Richard Shell, author of Bargaining for Advantage, cites studies showing that the most successful negotiators “happen to be the most persistent question-askers and listeners.”5

   When starting any negotiation process, I find it most useful to go in with an open mind and a blank sheet of paper. This is a signal to the other side that I have no predetermined position and that I am sincerely interested in listening in order to gain a better understanding of their interests and ideas. I find this to be a valuable tool in arriving at a range of mutually acceptable solutions.

Focus On Interests Rather Than Positions

One of the best distinctions made in the book Getting to Yes is that between interests and positions.1 The book defines a position as something you have decided upon while interests are what caused you to so decide. Individuals often enter negotiations having already decided on a position. This will only serve to slow or block the process. Since the goal of any negotiation is to satisfy the negotiators’ collective interests, it is important that each focuses on the interests of “the other side.” This is far more productive because there are often multiple positions that could satisfy any given interest. This is a critical skill when working in a group situation.

   Even when negotiators have interests that are quite different, they may be complementary. For example, when a doctor considers taking on an associate, the two may hold different and incompatible positions regarding the first year’s salary. However, if they enter into negotiations that focus on interests rather than positions, they might find that most of their interests are actually compatible (i.e. both want the practice to grow and prosper but the owner wants to “slow down”). A focus on these common interests would be likely to stimulate each side to find a mutually beneficial solution.

   Even though the issue of salary can be contentious, a focus on the skills and attributes the new associate will bring to the practice can make salary less of a roadblock in negotiations. For example, the associate might be able to demonstrate how he or she will contribute in ways that would support his or her proposed salary.

In Conclusion

Physician contract negotiations are seldom single issue, one shot deals. More typically, they are complex, include multiple relationships, are both economic and non-economic, and are spread over an extended period of time. One of my favorite Harvard Business Review cartoons depicts failed negotiations. It features a group of despondent business people assembled around a conference table with the following caption: “The key difference with the new plan is that what we once feared most is now our best case scenario.”

   To avoid this type of outcome when you are negotiating, it is critical that you understand the importance of the following key points.
• Money isn’t everything.
• You have more leverage than you think.
• You must know your value.
• You must listen carefully.
• Negotiations should focus on mutual interests in order to find win-win solutions.
• There is a range of mutually acceptable outcomes.

   Ultimately, we get what we negotiate.

   Dr. Hultman is certified by the American Board of Podiatric Surgery and the National Association of Certified Valuation Analysts. He practiced podiatric medicine and surgery for 25 years at UCLA Medical Center, is a Past President of both the California Podiatric Medical Association and the California College of Podiatric Medicine, and is a former CEO and Chairman of the Board of Integrated Physician Systems. Dr. Hultman currently serves as Executive Director of the California Podiatric Medical Association and provides independent consulting services for physician practices. He is the author of St. Anthony’s Reengineering the Medical Practice and The Medical Practitioner’s Survival Handbook.

References
1. Fisher R, Ury W. Getting to Yes: Negotiating Agreement Without Giving In. Penguin, New York, 1981.
2. Available at http://www.medscape.com/features/slideshow/compensation/2014/public/over... . Published April 15, 2014. Accessed July 2, 2014.
3. Available at http://about.americanexpress.com/news/pr/2011/millenials.aspx . Published Sept. 19, 2011. Accessed July 14, 2014.
4. Hultman J. The Medical Practitioner’s Survival Handbook. Medical Business Advisors, chapter 10, Rockville, MD, 2011, pp. 253-4.
5. Shell RG. Bargaining for Advantage: Negotiation Strategies for Responsible People. Penguin Books, New York, 2006.

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