UNDERSTANDING PHYSICIAN PARTNERSHIP/SHAREHOLDERS'/OPERATING AGREEMENTS
Stacey Lipitz Marder, Esq.
For many physicians there are several benefits associated with partnering with one or more physicians- You can share administrative costs involving the operation of the practice, have built in coverage when you are away, and plan for the future to name a few.1 Although there are many benefits associated with entering into a partnership with other physicians, prior to entering into such relationships physicians must carefully evaluate the arrangement in order to ensure that the arrangement is indeed appropriate based upon the physician’s goals and current situation. In the event that you do enter into a partnership arrangement with other physicians (either through ownership in a PC, PLLC or LLP) it is imperative that you enter into an agreement outlining the terms of the relationship with the other physician(s). This agreement is referred to as either a Partnership Agreement, Shareholders’ Agreement or Operating Agreement (hereinafter “Agreement”) depending on what type of entity the physicians render services through (ie LLP, PC or LLC).2 The parties must all be on the same page prior to entering into such a relationship or else it will not work out. We have outlined some key concepts that need to be addressed prior to physicians entering into partnership arrangements with other physicians.
When a physician joins forces with other physicians, decisions regarding the practice will no longer be made solely by that physician. Since decisions will now be made by all of the physicians, it is important to dictate how such decisions will be made. For instance, will decisions regarding the practice be made by a majority vote or by a unanimous vote of the physicians? If there are more than two (2) physicians in the practice and decisions are made by a majority vote, there is always a chance that a majority of physicians can team up against the minority physicians. Even if ordinary decisions are to be made by a majority vote, the parties can agree that certain decisions are to be made by a unanimous vote including for instance admitting new physicians, dissolving the practice, changing the compensation of the physicians, terminating physicians, entering into litigation regarding the practice, selling the practice, and purchases exceeding a certain amount.
The physicians must also all be on the same page regarding compensation and expense reimbursement. With respect to compensation, the physicians need to determine how they will be compensated and how net profits will be divided. It is important that the physicians look at the practice’s cash flow in order to ensure that the practice is able to make such payments and pay administrative costs involving the operation of the practice. Prior to determining compensation structure it is advisable to speak with your accountant regarding the practice’s cash flow. Additionally, the physicians need to determine what expenses and benefits will be paid for by the practice (ie CMEs, automobile allowance, cell phone, conferences, books, license and registration fees, disability, health and life insurance). In the event the physicians’ expenses would be vastly different, it may be advisable for each physician to have a predetermined expense account.
Physicians must also be cognizant of termination provisions in the Agreement. Physicians should especially be concerned if the Agreement allows for the physician owners of the practice to be terminated without cause upon a majority vote of the other physician owners. In order to protect the physician, the Agreement should allow for termination only in limited circumstances including for instance if the physician loses his/her license to practice medicine. Additionally, the Agreement should outline the specific terms involving termination/withdrawal, including the amount of notice that must be provided in the event a physician voluntarily withdraws from the practice, as well as the practice’s and withdrawing physician’s responsibilities upon withdrawal.
Physicians must also consider whether or not there will be a buy-out in the event of termination (including for retirement, death, disability, voluntary or involuntary withdrawal), as well as whether such buy-out will be deminimis or significant. The buy-out can differ depending on the reason for withdrawal. For instance, the buy-out for death or disability can be the value of the physician’s life insurance or disability policy, while the buy-out for a voluntary withdrawal can be the withdrawing physician’s share of the accounts receivable of the practice. The parties should also discuss when such buy-out payments shall commence, as well as how payments will be made and over what duration. Furthermore, it is important to have a provision in the Agreement to protect the practice from having to make several buy-out payments simultaneously which could place a significant financial strain on the practice. This provision is often in the form of a cap, and payments exceeding such cap are deferred.
This is especially important in the event a physician has a “claims made” policy, which only offers protection to a physician while the policy is in effect. If a “claims made” policy is discontinued, the physician would have to obtain “tail” coverage, which is very expensive. As such, the physician should ensure that the Agreement indicates that upon withdrawal the practice will be responsible for paying for such tail coverage if such situation arises.
Physicians also need to consider the scenario in which one of the physicians is no longer affiliated with the practice. Specifically, physicians need to ensure that the practice is protected, and it is often recommended that there be a restrictive covenant which restricts the former physicians from competing with the practice within a specified time and location. However, if several established physicians in an area are joining together to form a practice it may not make sense to have a restrictive covenant if the physicians already were established in the community.
In the event a physician is offered the opportunity to buy-in to an existing practice and become a partner, the physician must review the terms of the buy-in, including how much the physician is required to pay to become an owner in order to ensure that the buy-in is financially worthwhile. Furthermore, before buying into a practice, the physician must do his/her homework so the physician knows exactly what he/she is buying into and that the practice is financial sound. It is recommended that the physician obtain a valuation of the practice by a certified healthcare appraiser or accountant.
Being presented with an offer to enter into a relationship with other physicians can be very exciting, however, there are many issues that need to evaluated both from a business and legal standpoint. To that end, it is in the best interest of the physician to retain a team of professionals specializing in health care – attorneys and accountants– to ensure that the partnership arrangement is appropriate and in the best interest of the physician.
1As per New York State Law, physicians can only partner with other physicians with respect to provision of professional services.
2Many physicians who are owners of a practice also have an employment agreement with the practice which dictates certain terms including for instance termination and compensation.
Kern Augustine Conroy & Schoppmann, P.C., Attorneys to Health Professionals, www.DrLaw.com, is solely devoted to the representation and defense of physicians and other health care professionals. The authors of this article may be contacted at 1‐800‐445‐0954 or via email at info@DrLaw.com.