The most obvious and important issue that needs to be looked at in light of the difficult health- care environment in the greater Philadelphia area 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. 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 two calendar years), the percentage may be too high since the overhead is almost certainly higher than in the past due to skyrocketing malpractice insurance rates and steady increases in health insurance premiums. If the buy-out is expressed as a percentage of the “net income” or W-2 compensation 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 finances 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.

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 ordinarily 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.

Malpractice insurance

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. In addition, since in Pennsylvania the MCARE Fund has provided for premium abatements in certain situations, a physician who does not stay in practice in Pennsylvania for the entire subsequent year may be assessed with the abated premiums plus administrative and legal costs. Thus, in order to avoid litigation, all contracts should now address the issue of the responsibility for any “tail” premium and MCARE assessment. A reasonable approach for an owner-physician would be to have the practice pay them and reduce the departing doctor’s buy-out by such payments.

Don’t put it off

Of course, 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 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 and MCARE assessment. However, it is important to try to reach a consensus for the betterment of the group as a whole. I represented 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 group dissolved and lost its hospital contract, all of which could have been avoided if the group had been willing to step back and reevaluate its buy-out structure.

Given how difficult it is to convince physicians not to leave Pennsylvania, another variation to consider in buy-out formulas is to reward long-term employment. For example, if the buy-out entitlement is one hundred percent of annual average W-2 compensation over the previous two calendar years, perhaps a physician should need to be with the practice for 20 or 30 years to reach that level, with a sliding scale for each year below that.

It is also important to make sure the practice buy-out 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 must withdraw from the real estate and surgery center entities as well.

Semi-retirement

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, the impact on co-ownership status, and the effect on the buy-out.

Net income division

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; whether productivity should be measured by collections, charges or RVUs; a different allocation of fixed and variable overhead; an administrative fee to one of the owners), 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).

New partner

When it is time to bring in a new owner, don’t just assume you can use the same documents and buy-in arrangements as used previously. I represent a gastroenterology practice which, because it was so difficult to attract an associate, brought in an associate as a partner a year earlier than promised and waived the buy-in altogether. We did, however, provide that the new owner’s buy-out would be nominal for several years so as to disincentivize him from leaving.

When a new owner is brought in, the voting dynamic should be addressed. If the ownership is going from one to two, what will happen upon a deadlock? If you are going from two to three, should there be a unanimous vote required in order to take certain actions such as the sale of the practice, purchase of a practice, hiring a physician, or a new office location? Should the senior doctor be able to be outvoted 2 to 1 on any matter? When there are several owners, do you want to require a majority vote on certain items, and a “supermajority” (e.g., 75 or 80%) vote for certain critical decisions? Should the President or managing partner have certain unilateral powers?

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.

*Reprinted as adapted with permission from Physician’s News Digest, www.PhysiciansNews.com.

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