As you know, I've preached for years about the importance of a periodic review of the provisions of the practice agreements so that there is greater assurance that the document is providing the protections and guidance that it was intended to. It helps the review process immensely to know in advance some of the areas that are most likely to require scrutiny. Here is an important area that should be looked at:
One of the more important aspects of a practice agreement, the valuation formula provides the definition of which assets will be included and how those assets are to be valued in the event of a physician’s termination of employment (and required disposition of their interest in the practice) whether by death, disability, retirement or any other termination.
Some agreements simply stipulate that a fair market valuation is to be determined by one or more appraisers. I am generally opposed to this type of valuation clause for several reasons. First, the fair market value of a practice (unless otherwise defined by the document) will value intangible assets to include but not be limited to workforce in place, going concern, and goodwill. Under such a formulation it can become financially difficult for a practice to provide the required consideration to a terminating physician. In fact, the corresponding buyout amount may be so high that it becomes a race for the door, meaning the first doctor out wins.
After the first valuation is completed this way the other doctors - seeing the resulting value and its consequences -, will frequently revert to a specific valuation methodology (as discussed below). Another weakness of using this type of overly-general valuation clause is that medical practice valuation experts will likely differ as to the value. As a result, a practice can spend a lot of time and fees with valuation experts in an attempt to come to agreement as to the fair market value.
Rather, consider having in place a more specific formula enumerating the specific assets that are to be included in the valuation and that the agreement provide a specific methodology on how those assets are to be valued. To wit; agreeing how the fixed assets are to be valued, will an intangible be valued as a percent of the physician’s prior collections, or maybe set the buy-out based on prior compensation taken out. The main point is that the agreement should provide the valuation formula so that the valuation calculation becomes a simpler more mechanical function; thereby avoiding significant fees, conflicts, and hard feelings over the myriad potential valuation issues.
Many medical practices are you tired of losing good employees to the competition? They are looking for ways to stop the revolving door of hiring one good employee only to have two others resign? As health care organizations strive to deliver quality health care, retaining key employees is an ongoing concern. Employers can begin to address the growing concern of how to retain good employees by asking employees, “What makes for a good place to work?”
A study conducted by the Gallop Corporation found the top responses to be:
Having the opportunity to do what I do best.
Having the sense that someone cares about me.
Knowing what’s expected of me.
Getting recognition for what I do.
Having opportunities to learn and grow.
A common thread runs through these responses — effective performance management. Physician practice managers do not intentionally ignore employees’ needs for recognition and professional development. Usually absent are both a system and accountability for ensuring employees understand expectations, receive feedback about their performance, receive recognition for good performance, and have a plan for professional growth and development.
Perhaps the most contentious area of a buy-sell agreement is the method for calculating buy out. One small misstep can lead to an overvaluation, costing the practice more money than it owes. However, if the practice undervalues the buy out, the departing partner may think he or she deserves more money, leading to an expensive and time-consuming legal battle.
Many groups still use a FMV approach, relying on lawyers and third-party appraisers to calculate the price of a buy out. Using FMV calculations gives lawyers and appraisers quite a bit of latitude to argue about what the buy-out price should be. One appraiser may value the practice significantly higher or lower than another, and this ambiguity can cause complications when a partner leaves.
Practices that opt to calculate a buyout using FMV should include language in the buy-sell agreement stipulating who can conduct the appraisals. You need to make sure that whoever does the valuation has demonstrated experience in valuations of physician practices.
In most instances I advise against using FMV in a practice that uses a productivity-based compensation formula, even if stipulations about the appraisals are included in the agreement. A FMV appraisal values the practice as a whole, overlooking the individual productivity and contributions of individual physicians. Thus, even if it isn’t time for an annual review, if you’re practice has recently revamped its compensation formula to emphasize productivity, it may be time to also revisit the buy-sell agreement.
A lot can change in a practice over the course of a few years—the group’s culture can shift, its financial standing may improve or decline, it may lose or gain physicians—and a practice may be setting itself up for financial or legal troubles if it doesn’t keep its buy-sell agreement up-to-date to reflect these changes.
Buy-sell agreements are the cornerstone of most private physician practices because they establish a process for bringing new owners onboard and outline the financial and professional obligations of each member when a physician leaves the practice. But many practices leave these crucial agreements sitting on the shelf to collect dust for years at a time, which can be a “ticking time bomb” in this rapidly changing healthcare environment.
It’s amazing how these things get executed but they don’t get looked at for years and years, and the only time they get looked at is when an event happens that forces them to do it. That’s when all the land mines start getting stepped on, and in some cases, that’s when the lawsuits start occurring. That’s why it’s important to conduct brief internal review of buy-sell agreements annually, and a more thorough audit if there’s a drastic change to the practice’s structure.
The ideal time to do this is during the practice’s annual corporate meeting when a lawyer and accountant are present. It can take as little as five minutes to make sure the stipulations of the agreement still match up with the goals and realities of the practice. You’re not necessarily going to solve it at that meeting, but it’s an easy opportunity to take five minutes to see if you need to update your agreement.
Established multiphysician practices typically have succession plans that are driven by the opposing interests of the entering and exiting owners, who might be shareholders, partners, or LLC members. Consider the following:
1. Buy-in and buy-out. Entering physicians seek the lowest possible buy-in and exiting physicians want the highest possible buyout. That is not to say that either seeks an unfair deal, just that they have opposing interests. Therefore, structuring a reasonable buy in and buy out is critically important and often difficult in today’s healthcare environment. The biggest issue here has to do with assigning a value to practice goodwill. Does the practice have value in excess of its net assets?
2. Malpractice insurance. If a practice’s professional liability insurance is claims-made insurance, then the exit plans must include payment of the malpractice tail. Some insurance companies waive the tail in the event of the physician’s retirement. If this issue is not addressed, there could be significant dispute among the physicians because the tail cost is rising along with malpractice premiums in general. Both the practice and the physician must be aware of the potential for uninsured liability if the tail is not purchased.
3. Restrictive covenants. Practice departures that are real retirements do not usually raise restrictive covenant issues. Physician practice owners should not pay practice buyouts to physicians who leave or retire only to set up competing practices. This issue must be covered in the transition documents.
4. Real estate. Practices that lease offices from third parties may not be confronted with this issue. However, real estate investment is often a component of a physician practice and is usually not part of the professional corporation that serves as the practice entity. If the ownership is linked to the practice, then a buyout provision in the transition plan should be included. If not, then the remaining physicians must be prepared to deal with the real estate owners as independent third-party owners.
Planning can ensure that your family and medical practice (or any other healthcare entity) business are protected. The long term survival of any business like a medical practice—and the well-being of your family—are factors that you should consider if you haven’t already.
The main goals of creating an estate plan for your business are:
• To establish a business continuation plan that can help provide benefits for your practice and your heirs.
• To meet your objectives for asset distribution.
• To potentially reduce taxes for your heirs.
To make sure that an business estate plan is up-to-date and effective, these are some of the concerns that you should document on an annual basis:
Make sure that you have issued detailed instructions to an executor. It is important to document everything relating to your medical practice and personal assets (e.g., the locations of all safety deposit boxes and investment accounts), even if your heirs will not actively run the business. This document should discuss management plans, shareholder agreements, buy-sell agreements and other issues vital to the company’s future. By keeping this information up to date, you will make it much easier for someone to take over or liquidate.
Planning today could go a long way in helping alleviate asset distribution headaches for your heirs and partners. Creating a proper estate plan requires careful planning and input from trained legal, tax and financial professionals.
With a written plan in place for transitioning into retirement, you'll find it much easier to communicate jointly about that touchy issue. As always, you must consider the group's needs as a whole above the needs of the individual physician. Here are just some of the questions to address in formulating the retirement policy:
I meet and talk with many physician sole practitioners. Honestly, I find them fascinating and have many as clients. Being solo provides a variety of challenges. One is succession. One thing I see out there is that solo practitioners have no contingency plans in plan should something happen to them like a disability or a death. Of the two, disability is the most common occurrence.
So to me, the biggest question they face is: What would happen if you were unable to work for a period of time, or permanently? Would your physician practice continue to operate as usual during your absence, or would it be chaos? This is why sole practitioners need a practice continuation agreement in place right now.
We all know how patients will leave the practice the longer the physician is away from it. And if the physician passes away suddenly without a practice continuation agreement in place, the value of the practice immediately drops to zero. That leaves nothing to provide for a spouse and family. The estate could also be sued if returns aren't filed in time due to a lack of a succession plan.
Do you have a practice continuation agreement in place? If not, find a colleague who would be willing to take over your practice in the event of a permanent disability or death or will cover your practice during a period of temporary disability. Protect yourself and your family.
You cannot effectively impose penalties against non-compliant partners without clear provisions for punitive action. Our experts, thus, urge providing for sanctions, and specifically for monetary penalties, within your group documents.
Ask your attorney if your present contracts permit assessing penalties for non-compliant behavior. If they do, undertake partner-level adoption of a specific penalty system. Among other reasons, just doing so (and following it whenever necessary) helps prove the group's intent to carry out an effective Medicare compliance program, possibly mitigating any fines in case of audit.
These days, effective groups' documents should specifically address performance expectations and permit penalizing for failure to meet them. You are better served to improve your legal structure before a problem arises than to find yourself hamstrung when you need to act.