Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)
Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them
It has become difficult enough for physicians to navigate the legal, regulatory, clinical, liability, and economic issues that confront most medical practices. Intertwining all of these issues in an unhappy relationship among medical practice partners invariably results in total gridlock.
Mistake 1 Getting Together for the Wrong Reasons
The state and federal self-referral laws provide a number of exceptions and some distinct advantages to properly structured physician group practices. The desire to join forces in an effort to capture ancillary service revenue has, unfortunately, resulted in the merger or consolidation of physician practices when the physicians involved simply do not belong together or the physicians are from specialties that have little or no synergy from a patient care perspective. This lack of synergy, other than with respect to one particular source of revenue, can be completely destructive and, in many cases, a nonstarter for many groups.
Action Step Physicians should not enter into mergers or an acquisition simply because they are trying to increase cash flow. There should be some other levels of synergy as well.
Mistake 2 Not Meeting with Experienced Counsel Early in the Process
It’s a story that unfortunately plays itself out time and time again when two or more physicians decide they want to associate with one another: One will say, “Don’t worry, I know someone who can set up the corporation for us cheaply,” or “I’ll just go online and file the organizational documents myself.” The failure to use experienced counsel (whether an attorney, an accountant, or a practice management consultant) can often be the biggest mistake a practice can make.
Action Step Physicians should use experienced counsel who can guide them through the organizational process, point out pitfalls, provide options and, most important, start a dialogue that will either lead to a meeting of the minds (which can then be documented) or expose gulfs that may never be gapped.
Mistake 3 Not Entering into Written Agreements or Not Updating Existing Agreements
Organizing a medical practice can be a daunting task that involves at least negotiating leases and third-party payer contracts, setting up billing systems, and hiring personnel. While all of these steps are critical, an organization that lacks a proper foundation—reflected in its organizational documents, shareholders agreement, and employment agreements—will likely find itself in trouble at the first sign of friction.
Action Step Organizational documents, shareholders agreement, and employment agreements should be put in place early and revisited periodically or as the organization’s constituency changes.
Mistake 4 Not Creating a Governance Structure and Failing to Centralize Management
An organization that fails to centralize its management is unlikely to succeed. Without a consensus, without common goals, and with various individuals moving in different directions, infighting is inevitable.
Action Step Any group practice, no matter how large or how small, needs to create a decision making process and employ centralized management with a chain of command. Doing so includes establishing a board of directors or other governing body that makes policies and oversees major business decisions and assigning one more individuals to be responsible for implementing and administering these policies and decisions.
Mistake 5 Not Meeting on a Regular Basis
Aside from the many issues that confront any business, medical practices face a host of other challenges. Whether the challenge comes from laws and regulations at the state and federal level, liability issues (including difficulties obtaining malpractice coverage), or being at the mercy of third-party payers, a practice’s fortunes can change virtually overnight. Physicians in medical practices that deal with these issues infrequently and casually will invariably face uphill and costly battles (and disagreements among each other).
Action Step Physicians in practices who meet on a regular and formal basis and gather and consider opinions from their advisers are more likely to anticipate potential problems and address them before those problems swing out of control.
Mistake 6 Creating a Voting Structure That Is Too Divisive or Can Result in Deadlock
Perhaps one of the greatest challenges in creating a governance structure for any business is preserving the voice of the minority without allowing the minority to put a stranglehold on the business. Partners in a medical practice who are outvoted at every turn are unlikely to be around for very long.
Action Step In seeking to circumvent this mistake, some practices create “major decision” provisions whereby a higher voting threshold is established for certain enumerated decisions. Practices must be careful when establishing the voting structure to avoid setting this threshold too high; for example, to the extent unanimity is required with respect to a particular decision, the vote of one individual could potentially result in a deadlock.
Mistake 7 Not Having a Vehicle to Resolve Disputes
In some states, a voting deadlock may allow a physician shareholder to petition a court to force the dissolution of the practice. This action can yield unexpected and disastrous results, particularly where there is no written agreement regarding the specifics of the breakup. A court can decide which of the owners ultimately will get the various assets of the practice, including telephone numbers, contracts (including, potentially, the lease for the practice’s office space), and other key assets.
Action Step In scenarios in which there is a potential for a deadlock (50/50 ownership or where unanimity is required for certain decisions), the operative documents should include some mechanism for either resolving a dispute or creating an orderly mechanism for a dissolution. Such mechanisms include:
- Mediation or arbitration provisions
- Empowerment of one individual to cast a “tie-breaking” vote
- Waiver of the statutory right to seek judicial dissolution
- Use of blind options (also referred to as double shotgun) whereby, in the event of a dispute, an owner extends an offer to buy and an offer to sell to other owners along with the corresponding right on the part of the other owners to either sell or purchase in accordance with the offer extended
- Clear identification of the manner in which the assets of the practice will be distributed in the event of a dissolution.
Mistake 8 Implementing a Compensation Plan That Creates Too Much Competition
On the continuum of choices for compensating owners of a medical practice, the options range from an equal sharing of all revenue to an “eat what you kill” approach, whereby physicians are compensated based on their own production. While for many practices some element of productivity-based compensation is desirable (rewarding physicians who work harder), a compensation formula that is too heavily weighted toward the productivity element can potentially create unhealthy competition among physicians within a practice and lead to infighting over certain issues, such as scheduling, allocation of patients by payer class, and types of procedures.
Action Step While it is desirable to have some element of productivity-based compensation to reward the harder working physicians, it is also desirable to have some portion of the practice’s revenue shared on an equal basis to create a unity of ownership among the physicians.
Mistake 9 Not Agreeing on How the Expenses of the Practice Will Be Shared
Just as destructive as the issues surrounding the sharing of revenue, if not more, are disputes over the manner in which the expenses of a practice are shared. Typically, these disputes arise in practices in which some physicians use greater resources of the practice than others. For example, some physicians use more equipment, space, and personnel compared with other physicians, who may see more patients off-site, such as in hospitals and other facilities. While some practices attempt to track every penny that may be attributable to a particular provider (which can create infighting in and of itself), others take a simpler path and simply divide the overhead equally among the physicians within the practice.
Action Step Physicians in a practice should have a clear understanding of how the overhead and expenses of the practice will be shared. Such an understanding should involve identifying expenses that are true direct expenses of each physician (such as insurance, retirement plan contributions and other benefits and expenses for continuing education, entertainment, and automobiles among other costs), as well as expenses that are common to all of the physicians in the practice (such as rent and related expenses, personnel costs, and consultant fees). In the end, to the extent one or more physicians within a practice use more of the practice’s resources, physicians should give some consideration to allocating a greater portion of the practice’s overhead to such physicians. In lieu of attempting to track each expense to a particular physician, the practice may be better served by allocating overhead using a formula similar to that suggested in Mistake 8 (that is, allocating a portion of the overhead equally and another portion based on relative production).
Mistake 10 Not Treating Partners Equally
Many physicians who join existing medical practices with the understanding that they ultimately will be brought in as equity holders often discover that what they are ultimately offered falls well short of their expectations. This result is typically the fault of both parties: the practice not fully disclosing what it means to be a “partner” and the incoming physician not asking the right questions. Too often, physicians are offered equity interests that carry with them rights inferior to those of the other owners (ranging from the percentage interest offered, unequal treatment in terms of compensation, benefits, time-off, call obligations, differences in severance packages and post-termination restrictive covenants).
Action Step New physicians should ask exactly how they will be treated so that they can eliminate any misunderstandings before they begin work.
Many of the disputes in which physicians in group practices find themselves can be avoided if issues are discussed in advance and properly documented. Moreover, costly legal battles can often be avoided through open communication and the establishment of a means for resolving disputes.
Mark A. Coel, Esq.
Peer reviewed by:
Rodney H. Dusinberre, Esq.