When differences between partners are irreconcilable, break-ups are inevitable. And leaving a practice is a lot like divorcing a spouse - rife with painful emotions and battles over money. Here's how to separate amicably.
When it appears that “irreconcilable differences” are tearing your practice apart, it’s not uncommon to consider “divorcing” your business partner. Such breakups happen every day when physicians leave medical practices in which they had been partners or employees. Many depart voluntarily; others do not. Some physicians take leave of their practice colleagues on good terms; others don’t.
When the breakup is messy - as with marriages - the fallout can take its toll. Issues like custody (ownership of patient records) and property division (splitting practice assets) come into play. You and your former partner’s attorneys end up talking more than you and your erstwhile “spouse.”
Of course, you can always seek counseling if you both are willing to try to save the relationship. Sometimes you can resolve your differences and become more understanding partners. Perhaps you can negotiate a compromise. Or maybe talking out your problems will reveal that your best option is to go your separate ways.
Whether you’re considering leaving your current practice for greener pastures or wishing one of the physicians in your group would hit the road, remember the wise words of practice management consultant Bob Bohlmann: “If things aren’t friendly, there can only be two winners: the consultant and the attorney you’ll have to hire.”
When a partnership hits the rocks
Joining a successful practice and entering a successful marriage can be very similar experiences. Just ask Timothy Boden, who spent 10 years as a clergyman before becoming a practice administrator.
“A successful practice is not just about what goes on in the exam room or the emergency room,” says Boden, who is now the manager of Northwest Mississippi Kidney Center in Greenville. “It’s about sharing the vision of the organization.”
He adds, “I don’t know anyone who has been asked to leave a group because of bad medicine or bad science; it’s always touchy-feely stuff: communications, relationships with employees - all the things that drive docs crazy.”
Among the principal reasons a practice partnership can run into trouble?
Examine your pre-nup
Before either leaving a practice or asking a colleague to leave, be sure to review those ties that bind. The documents you signed upon joining a practice that describe the terms of your employment and partnership can resolve many of your current concerns.
“When people are first joining a practice or forming one, they only see the ‘We’re going to be happy, let’s stay together forever,’ side of it, and they don’t think enough about the day when things might not be so wonderful,” says Joan Roediger, a partner with the Philadelphia-based law firm Obermayer, Rebmann, Maxell & Hippell LLP.
Yet such prenuptial documents can very much come in handy when you are seeking to protect the rights of both the practice and the departing physician.
Employment agreements should describe under which circumstances and in what manner a physician can leave employment. They should list the rights and obligations of both the practice and the departing physician. When a partner leaves, you may also have to consider the shareholder agreement (also called the corporate agreement) he signed. Those documents should explain how the departing physician’s ownership interest in the corporation is to be sold back to the other partners.
Corporate governance documents - available to physician partners - will likely include prearranged agreements regarding income division, the purchase of ownership interest, employment terms, the promissory note for the buy-in, corporate bylaws, and related corporate resolutions. A group organized as a limited liability company (LLC) or limited liability partnership (LLP) may outline all of these terms in a single document called an operating agreement.
If an entire practice is splitting up, these documents contain essential information on determining who gets custody of the office location, patient charts, phone numbers, the practice’s name, its Web site address, e-mail addresses, and other assets.
Explains Roediger: “There really isn’t a standard. It depends on the experience of the attorney who drafted [the documents] and how much the doctors got involved and took time to explore all of the issues.”
Your employment contract should explicitly state how much advance written notice you are obligated to give upon deciding to leave a practice. Failing to give proper notice could put you in breach of contract. There may be damages to pay if the practice decides it needs to hire a locum tenens physician to replace you. You might even find that your deferred compensation arrangement is linked to giving proper notice, which can be as long as one year.
“You see the longer-notice provisions when doctors are eligible to get buyouts or there’s some form of deferred compensation,” Roediger says.
If you are an employed physician, required notice is likely to be 90 days in order to quit without cause. But then again, you may be in a rare specialty, or the practice could be in an area in which groups typically have difficulty recruiting new physicians.
“I saw a contract recently that had an 18-month notice, which to me is crazy,” says Roediger. “But the reason from the practice’s perspective is that it could take that long to recruit somebody in their area or specialty.”
Time your departure
If you are truly unhappy at your practice, try to resist the urge to stand up at your next partner meeting and sing, “Take this job and shove it.” Roediger recommends against knee-jerk reactions and says physicians seeking to leave should put thought into the timing of their departure from a practice.
“You may want to quit this summer and be resettled by fall when the kids will be back in school, but if you are due a bonus payout at the end of the year, or the next quarter, try to wait on the move if you can stand it,” she says. “It is the aberration to see physicians walk away happy when they leave before they could have gotten their bonuses.”
But even if you do wait for it, that bonus could be sliced down, Roediger warns. Depending on what’s included - or not included - in your written agreements, the practice may ding you for expenses related to your departure. That could include everything from hiring a locum tenens to replace you to changing signage and printing new stationery. Those expenses can get deducted from your pay or charged to you, and you won’t be around to object or suggest cheaper alternatives. Also take into account that if you are no longer on staff, the practice isn’t going to take in as much revenue for a while, and who knows how diligently it will pursue the accounts receivables (A/R) still owed to you.
“Try to cut things off clean and, hopefully, the lawyer who drafted the agreements made it all very clear that your compensation is through the date you terminate employment,” Roediger says.
Know your restrictions
Your contract also may contain a noncompete agreement aimed at preventing you from setting up or joining another practice within a defined radius of your soon-to-be former practice. Such a restriction could be in force for up to two years. Roediger says post-employment restrictions are usually spelled out in employment or partnership contracts. Sometimes they are stuffed into the shareholders’ agreement or, in the case of an LLC, in operating agreements.
“You, the departing physician, can be at great risk of being sued by your former practice if you open up an office in violation of the post-employment covenants,” Roediger says. And the practice you are joining could be sued, too.
Your employment agreement will spell out whether your practice will try to enforce any noncompetition covenant by injunctive relief - a court prohibition - or liquidated damages, which require you to pay cash to your former partners. It will also list any amounts or calculation methods to determine such liquidated damages, such as a percentage of your former annual salary.
Your soon-to-be former partners may agree to trim the restricted noncompete time period or accept some lower amount of liquidated damages. Or they may choose not to be good sports at all. Just make sure you wrap up these negotiations before you leave, and get everything in writing, Roediger says.
Another restrictive covenant to watch out for is a ban on hiring employees away from the practice for a period of time. Raiding a former employer by taking several employees could bring a civil lawsuit even without such a covenant. Again, negotiate any exceptions to existing covenants and get them in writing before you depart.
“If the noncompetes and nonsolicitation covenants can be negotiated behind closed doors and not be seen as some kind of fight, then it is to everyone’s advantage,” says Deborah Croes, principal and president of Croes/Oliva Consulting Group in Burlington, Mass.
Protect your retirement funds
Don’t let the timing of your departure cause you to miss out on a retirement plan contribution. Some plans require that you stay with a practice for an entire year to receive your employer’s contribution to the plan. Profit-sharing or defined-benefit matching plans, such as 401(k)s, may require you to be there on the last day of the year.
If your defined contribution plan funds are in a pooled account, as opposed to the more popular individual participation plans, then the amount of your retirement fund distribution may be based on the value of your account’s holding on a specific date - not necessarily the day you leave, says Erick Thurner, an emergency medicine physician and certified financial planner in Newport Beach, Calif.
Thurner, whose firm Physician Financial Advisors counsels physician clients, suggests hiring outside help to double-check the plan administrator’s valuations: “Get help from a pension consultant or an actuary before you take a rollover from a defined benefit plan because it’s very complex and it’s not unheard of for an administrator to get the calculation wrong.”
Roediger suggests talking to whoever does the practice’s retirement work. “You don’t want the practice making an arbitrary or incorrect decision about what it will contribute to profit-sharing or retirement accounts for a physician who is leaving,” she says.
Watch your tail
Tail coverage is a supplemental endorsement to a physician’s malpractice liability insurance policy. It covers claims for incidents that occured while you were with the practice but which were not filed until after you left. It’s expensive, and it’s necessary.
“In the past couple of years, I’ve seen more litigation spout out of two things: tail insurance and whether the termination was for cause,” Roediger says. And those issues can be linked.
“If you are an employee, not a shareholder, there are a lot of good reasons for the practice to pay for your tail insurance even if you were terminated for cause, but that doesn’t always happen,” says Roediger.
Some practices will agree to pay the full cost of tail coverage if a physician is terminated involuntarily. Roediger agrees with that tactic, because doing otherwise would put the fired physician at a great disadvantage. It also could come back to haunt the practice if the physician stopped paying for the tail insurance.
“I always suggest that if the practice agrees to hold shareholders responsible for tail insurance or any part of it, then that cost should be deducted from the physician’s buyout,” she says.
Understand your obligations
So say you’ve made a firm decision to leave your practice. You’ve thoroughly reviewed your employment and corporate agreements and covenants. The coast seems clear. Or is it? Did you get your name removed from every lease, loan, and contract the practice signed while you were there? That’s everything from the loan they took out to build that new urgent care center to perhaps a cell phone or text messaging service contract.
“When a physician is leaving a practice, he or she should personally look at all of the contracts of the practice to be sure his or her name is not there, and that any liability will absolutely end as of the date the doctor leaves,” Roediger says.
Unfortunately, that’s not always the case.
Banks will usually move quickly to remove a departing physician partner’s name from personal guarantees unless the practice is a poor performer with a bad collections history and/or is over-extended with debt. Sometimes, creditors or leaseholders can be sticky or just plain slow about updating contacts, Roediger warns.
Roediger sees many nasty disputes over financial liability erupt when a physician who was recruited to a practice with hospital funds gets stuck repaying her own recruitment costs. “The ideal when writing these hospital recruitment contracts is to make it very clear that the hospital can only look to the practice for repayment of those moneys, not the physician who leaves,” she says.
Determine and secure your share
As a partner, you are likely entitled to have the other partners buy out your share in the medical practice corporation when you depart. Such buyouts are based on the value of the practice’s hard assets (fixtures, equipment, supplies on hand, real estate, etc.) minus the practice’s liabilities and depreciation, divided by the practice’s number of partners. Often, practices will hire an appraiser to value their equipment to determine buyout costs. Make sure any hard-asset valuation is conducted using the same formula used when you bought into the practice.
When determining your A/R share, a separate, straightforward calculation is required. If all partners had been dividing income and expenses on an equal basis, then the equation to value an individual partner’s share of A/R is easy; the three partners are each entitled to one-third of the practice’s A/R. The departing partner’s one-third of A/R and any goodwill is usually paid as deferred compensation.
However, Boden cautions that A/R in a corporation belongs to the corporation, and not to the individual physicians, especially if they are paid on a basis other than equal share. “Don’t put anything in any agreement that could be construed as giving personal ownership of A/R to the physicians,” he advises. Instead, the departing partner’s share of the corporation’s A/R should be the basis for any payout.
Bob Bohlmann, a consultant with the MGMA Health Care Consulting Group in Englewood, Colo., agrees: “If you don’t get A/R nailed down, that will lead to some real hard feelings,” he says. “Physicians might work for you a couple of years and think they are entitled to a share of A/R when maybe they are forgetting what they still owe for a salary draw arrangement when they started.”
Both Bohlmann and Boden say to make it clear in agreements and negotiations that the practice also owns the patient charts, patient lists, and other patient demographic information. At the same time, information in the charts is the patient’s property in most states. “The doctors own the paper; the patients own the information,” says Roediger. “Patients can transfer the information anywhere they want.”
Notify your patients
Notifying patients that a physician is leaving a practice need not be a traumatic event. The best-case scenario is for the practice and the departing physician to prepare a joint announcement and send it to each of the practice’s patients, or at least the departing physician’s patients. The announcement should be mailed at least 30 days before the physician leaves and could even mention the physician’s new location.
“Give patients the right to decide,” says Roediger. “Give them a little box to check off saying, ‘I want to transfer my charts to Dr. A’s new location,’ or ‘I want to remain with XYZ practice,’ and include a postage-paid envelope and split the mailing costs between the practice and the physician who’s leaving.”
Those letters could also tell patients which provider will take over their care at the practice, suggests Croes. She says some practices post such announcement letters in reception areas. “The letter is part of, for lack of a better phrase, the party line that everybody - the staff and the physicians - need to stick to so the patients, the referring physicians, and the community get the same message,” she explains. “Even if it is not a particularly agreeable situation, you never put the patient in the middle because there’s nothing more disagreeable for a patient than to feel like they - and their care - is caught up in somebody else’s politics.”
Disengaging from a practice partnership can run smoothly, or it can turn into World War III. It all depends on how you approach it, says Manoogian.
“You have to take the emotions out of it because they make it hard to keep focused on the business issues,” he says. “This isn’t the time to resolve things that happened five years ago; just look at the business issues on the table right now.”
Bohlmann agrees that things can get dicey when a partner leaves a practice, even if it’s a long-planned retirement. He too recommends trying to take a business approach and working to defuse the emotional elements. “Why aggravate the world when the world is aggravated already?” he asks. “If your practice gets the reputation of being a bunch of hard-noses whenever anyone leaves, you’ll get a bad reputation in the community and that will hurt your recruiting efforts in the future.”
Manoogian observes that if you haven’t been able to compromise with your practice partners before, don’t expect things to get any better as you negotiate your departure. “You don’t want to go around bad-mouthing each other and venting in the doctors’ lounge,” he says. “Sometimes physicians forget that medical communities are like small towns. If there’s an ugly breakup, it reflects on everyone involved, and it gets talked about.”
Also, consider all your options before leaving for good. Manoogian says he has helped practices split up partnerships and form cooperative-but-separate corporations that maintain the appearance of unity. Those corporations can share real estate, such as a building, a billing office, a reception area, a break room, or just a front door.
“[You can] share what’s up front or a scheduling system, and then in the back hallway I can have my new equipment and electronic medical record, and you can have your paper charts and your daughter can be your medical assistant,” Manoogian suggests.
Be rebound wary
There’s not much use in getting out of one unhappy practice situation only to jump into another that doesn’t work for you either. But many physicians do just that.
Boden says that as he sees new medical practices forming at an increasing rate, he thinks back to the premarital counseling he provided as a clergyman. “People are hooking up with people who shouldn’t have hooked up in the first place,” he says. “Just because your interests appear to be the same and you are in the same specialty and you want to split overhead, doesn’t mean that this is the best partner to get in with.”
To establish a lasting relationship, start by finding partners who share a similar vision of your practice’s mission and how it should get there. Boden says to also make sure you hammer out a partnership agreement that covers all principal issues that could become points of contention - valuation of assets, buy-in/buyout terms and schedules, and so on - in a straightforward manner. “Your buy-sell agreement should be so simple and so clear that you can explain it standing on one foot,” he says.
When you do find someone you want to practice with, talk through these issues and consider getting some outside help to spot any potential problem areas and communication snafus before they can damage your partnership.
Roediger agrees. Setting up or joining a practice is no time to avoid a relatively minor expense to obtain advice. “You should have somebody look at your employment agreement and those other documents before you sign on,” she says. “To spend $100,000-plus on your training and not spend $500 or $1,000 on a contract review seems kind of short-sighted.”
Bob Redling is a freelance writer and former editor of Physicians Practice. He can be reached via email@example.com.
This article originally appeared in the June 2006 issue of Physicians Practice.