Physicians often enter into practice ownership arrangements on the best of terms with colleagues. Unfortunately, there are many times when such rosy relationships turn sour. For this reason, regardless of how “friendly” an arrangement may begin, it is essential the parties sign a proper document in advance that sets forth how they will address disputes and how the arrangement can be terminated and/or dismantled, if necessary.
Because emotions often run high when relationships fall apart, having a written document can help resolve a situation more quickly and hopefully with minimal legal fees.
Here are four issues to consider when drafting an agreement among owners:
How to walk away
Can a physician owner simply elect to walk away from the relationship? Many documents do not allow somebody to simply leave or dissociate from the relationship, which can cause the parties to be stuck without a viable resolution. I always recommend that exit strategies outline:
- The length of notice an owner must provide before leaving. I typically suggest at least six months to allow for proper transition. This provision should also outline whether an owner can be voted out by other owners, how that process would work, and what vote count is required.
- The document should specify whether the entity or remaining owners must buy out the departing physician. If there are related entities (real estate or other companies), they should all be tied to the same outcome, unless the parties intentionally decide otherwise.
- If the departing physician is to be paid, calculation of payment should be detailed. An agreement between the owners can provide for a purchase price that varies based on the reason for departure, the amount of notice provided by the departing physician, and even how long a physician worked in a practice before departure. These are all items to consider. Additionally, if the practice will be financially harmed by a physician’s departure, language requiring a departing physician to remain personally responsible for certain expenses (e.g., leases or loans) for a certain time period is not unusual.
- A physician’s departure can greatly impact cash flow in a practice, as well as many other operational aspects of the business. Severance formulas in the parties’ document should always account for such concerns by allowing for payment over an extended period of time. The formula should be subject to adjustment if more than one physician is being paid out by the practice at the same time.
What the parties can and can’t do
The document between owners of a practice should clearly outline what appropriate restrictions will be placed on a departed physician. Can the physician use a similar trade name? Can he or she solicit practice patients, staff, vendors, or others? What can either party say about the reason for the split?
If one physician is the senior member of a relationship, the parties may also consider a founder’s provision. This provision requires the parties try good faith efforts and/or mediation to resolve their differences, but then allows the practice’s founder to declare irreconcilable differences. The founder retains the practice while the other party must depart.
In these circumstances, I also like to clarify the amount of notice, whether the covenant will apply, and the purchase price, among other considerations. This approach is not intended to unfairly treat the non-founding party. Instead, it sets a road map in advance for how the situation will be fairly handled.
Having a specific process to resolve disputes can also be helpful to the parties. For example, requiring a certain number of meetings to discuss an issue, specifically identifying a trusted adviser to mediate disagreements, and other similar guidelines can sometimes lead to a surprisingly positive outcome.
Many physicians who are angry with their partners do not do a great job of expressing themselves and will turn to legal counsel before really trying to work things out. As with marriage, communication is key, and any partnership requires effort.
Physicians may enter into practice relationships with the best of intentions, but sometimes things do not go as planned. Having a document where the parties discuss various scenarios in advance and plan for the worst possible outcome protects everyone involved.
Ericka L. Adler has practiced in the area of regulatory and transactional healthcare law for more than 20 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. She also works with providers on a wide variety of compliance issues such as Stark law, Anti-Kickback Statute, and HIPAA. Ericka has been writing for Physicians Practice since 2011.