I was sitting across the table with a new family physician recruit for the third time. He was a particularly challenging recruit to work with, but we really needed family physicians. We had added several physician assistants and nurse practitioners and we needed qualified primary care physicians to collaborate with them. We were back to discussing tail coverage.

I had explained to the candidate that it was our practice to require tail coverage to be covered by the physician. It was one of the ways that we used to promote longevity of the relationship. We would be willing to waive the requirement in the event that we decided to terminate the agreement without cause, or if the candidate became disabled or died (to protect his or her estate). But those were the only exceptions.

He ultimately accepted the terms, after negotiating a higher sign-on bonus and student loan repayments. But I could tell he was unhappy about the tail coverage issue.

Attracting Good Candidates

Before you hire a new physician, you must first recruit viable candidates and then negotiate an acceptable employment agreement.

The recruitment process can be lengthy and costly. During the process, you will try to convince the worthwhile candidates that together you will have a long and prosperous relationship. You will attempt to project a welcoming, supportive and collaborative work environment.

But the demoralization begins during the negotiation process itself. There is one contentious legal provision that many employers continue to wage war over. It concerns the issue of placing the responsibility for payment of tail coverage (also called an extended reporting endorsement) on the new employee in the event he or she leaves the organization in the future. I gave the prospective candidates a review of this at Contract Doctor: Who Pays for Tail Coverage?

Why Do Employers Continue to Fight for This?

The cost for tail coverage can be quite high. I’ve seen rates of 50% to over 200% of the current annual premium amounts. The cost starts out very low during the first few years of practice, but quickly rises and reaches a plateau in a well established practice. It can easily reach $100,000 to $200,000 or more.

And employers would rather not pay it.

This is a cost that only occurs when the physician leaves, so there is no income to offset the cost (other than some residual accounts receivable). No more surgical procedures or consults. No more referrals for MRI or CT scans.

Because the cost is variable, it is difficult to predict. And it is not something an employer typically plans for. If several physicians leave at the same time, it can result in a huge bill to the employer.

It is also a potentially very powerful incentive to prevent physicians from leaving. Who would want to pay a $200,000 penalty for resigning? The employer is then spared the trouble and cost of recruiting a replacement.

Hospitals already lose money on physician practices (averaging over $100,000 per physician per year). It is a hard pill to swallow to shell out six figures when employed physicians that are just hitting their stride decide to move on.

It is especially annoying to pay the tail coverage when the physician is forced to leave after being dropped from Medicare or losing his or her license.

Why the Tail Coverage Conversation Is Upsetting

Let me explain to my non-physician colleagues, including the CFOs out there, why this issue is so demoralizing…

First, the majority of new hires are young physicians. While they understand the concept of medical malpractice and using insurance to mitigate its effects, most of them have never had to think about the reality of paying for it. And they certainly never needed to think about the consequences of not having tail coverage.

Then, here they are, having lived frugally for years, often with upwards of $200,000 in debt. And the new employer, a multimillion dollar organization, is trying to convince them that this future financial cost, that may be 5 times their current salary as a resident or fellow, will be their responsibility if things don't work out.

This does not create a warm, fuzzy feeling.

Also, it is literally impossible to work as a physician without liability coverage. The coverage is clearly a cost of doing business. Insurability is always a condition of employment. Appointment to most hospital medical staffs requires an agreement to purchase tail coverage when you leave.

The physicians are in the midst of the negotiation, trying to move forward with an employment agreement, being told that they're going to love working with your team. Meanwhile, you're trying to convince them that this is the way your contract works and is non-negotiable.

As a hospital executive involved in dozens of contract negotiations in the past, I can attest to the frustration and confusion this causes in candidates. I am sure we lost some good ones over this issue. And I know we started a long-term relationship off on the wrong foot.

Why Employers Should Abandon This Practice

This whole discussion is irritating and illogical. Accepting the responsibility for paying for tail coverage will, no doubt, have financial implications. But there are better ways to encourage long-term retention. And the financial consequences can be mitigated and planned for.

It is possible to actuarially predict the future costs of paying for it. You may need to adjust down loan repayment incentives or sign-on bonuses. But taking tail coverage off the table will actually be a competitive advantage when recruits compare your offer to organizations that still insist on saddling them with the uncertain cost of tail coverage.

Has your organization already abandoned this approach? Let us know in the Comments.

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