Most physicians in group practice understand the need to have their internal practice economic and governance-related arrangements documented in writing. If no agreements are in place, a junior physician could leave with no notice without a restrictive covenant and take a lot of patients with him or her. A senior physician, without the proper agreements, could retire or die with no entitlement to a buy-out. Even if certain documents do exist, they may be old and outdated in light of the current legal and economic environment. Thus, it is very important to examine your practice inter-doctor documents periodically, perhaps every two or three years or so, to see if any changes are warranted.
The form of the documents will vary depending upon the type of entity. If the practice is a professional corporation, the documents typically include Employment Agreements for the shareholders, a Buy-Sell or Shareholders’ Agreement and Bylaws. If the practice is a partnership, there would be a Partnership Agreement. If the practice is a limited liability company, an Operating Agreement would be the governing document.
The most obvious and important issue that needs to be looked at in light of the difficult healthcare environment is the buy-out. If the buy-out is a set dollar amount that was agreed to in better days, it should be reduced to a more realistic value today. If the buy-out is expressed as a percentage of the gross receipts for a period prior to termination (e.g., an annual average over the prior three calendar years), the percentage may be too high since the overhead is almost certainly higher than in the past. If the buy-out is expressed as a percentage of the “net income” or W-2 salary of the departing doctor for a period prior to termination, an adjustment may not be necessary as that figure would self-adjust depending on the bottom line financial state of the practice.
In some buy-out arrangements, practice debt is not factored in, perhaps because there was no debt at the time the documents were entered into. Clearly, times have changed, and any practice debt should reduce a departing doctor’s buy-out. On the other hand, when a physician retires, he or she should not remain as a personal guarantor or surety on any outstanding practice loans. Thus, the governing documents should provide that the remaining physicians shall use their best efforts to have the creditor bank remove the retired physician as a guarantor or surety, although ultimately that is up to the bank.
Notice of Termination
Another issue relating to the buy-out that should be reexamined is the required notice of termination. Since for many specialties it is very difficult to recruit a new physician, a physician who retires or leaves voluntarily perhaps should be required to give six-to-twelve months’ notice to the group, instead of what may now be three or four months’ notice. In order to put some “teeth” into this notice requirement, the documents should provide for a reduction in the buy-out to the extent such notice is not given. For example, the agreement can provide that if the physician only gives one month notice of termination as opposed to six, he only gets one-sixth of his buy-out amount.
Adjustments to the buy-out should also be considered due to the changes in the malpractice insurance industry. When the existing documents were drafted the practice may have had “occurrence” coverage for all the physicians. If the practice could no longer obtain or afford such coverage and instead now maintains “claims made” coverage, the issue then arises as to which party becomes responsible for the tail payment, the practice or the physician. It could be all one party’s responsibility in any situation, split equally, or dependent upon the reasons for departure and subsequent practice, if any. For owner-physicians, we would typically recommend that the practice pay the tail, but that any such payment would reduce the buy-out dollar-for-dollar.
Since audits by third party payors and Medicare are becoming more commonplace, perhaps the buy-out should be reduced by any such repayments made after termination which are caused at least in part by the departing physician.
Of course, with any of these issues, the sooner one or more of the owners are likely to be affected by a change in the documents, the more difficult it will be to reach agreement on any changes. For example, if a physician is very close to retirement, he or she will be less open to a reduction in the buy-out formula. Alternatively, a younger physician who may be contemplating moving out-of-state may be less open to a longer notice period or a reduction in the buy-out for the malpractice tail. However, it is important to try to reach a consensus for the betterment of the group as a whole. I have been through an unfortunate situation with an anesthesia group that carried forward a much higher than reasonable buy-out formula each time a new owner was brought in. When the senior physician died and another left with significant buy-out entitlements, the rest of the group ended up dissolving and losing the hospital contract, all of which could have been avoided if the group had been willing to step back and reevaluate its buy-out structure. They all felt that since the senior physician “got it”, so should I when I leave.
One final point on the practice buy-out is to make sure it ties into any affiliated entities. For example, if there is a separate entity that owns the practice real estate or an ambulatory surgery center, most of the time when a physician leaves the practice he or she must withdraw from the real estate and surgery center entities as well.
Another matter to consider addressing in the practice documents is semi-retirement or cutback options. Many practices do not address these matters unless and until one of the owners wishes to cutback. But others have a set methodology in place ahead of time. Issues to be dealt with include the length of notice to be given, an age and/or year of service requirement to be eligible, a minimum number of sessions to be worked, the extent of call, if any, a compensation formula, the length of the cutback arrangement before forced retirement, and the effect on the buy-out.
The practice’s compensation methodology and the documentation thereof also should be examined periodically. Besides consideration of actual changes to the methodology (e.g., shifting or redistributing between equality and productivity based formula, a different allocation of fixed and variable overhead, an administrative fee to one of the owners, responsibility for overpayments), it is important to ensure compliance with the Stark/Fraud & Abuse laws and regulations (e.g., not giving credit for “designated health services” that are not personally performed by the doctor or incident to such services) as well as the Internal Revenue Code and related regulations (e.g., with a C Corporation, trying to avoid a recharacterization of bonuses as non-deductible dividends).
In this ever-changing, challenging, heavily regulated “business” of practicing medicine, it is important to review your practice’s internal documentation periodically with your attorney to make sure it is still fair and legal.