Navigating Financial Straits, Preventing Bankruptcy

How to avoid bankruptcy when key partners go belly up

Mark Estroff, who provides management advice to physicians, has a client whose entire income depends on a single hospital. That's a bankruptcy waiting to happen, he says.

"You have to plan your affairs so that losing a major contract will not ruin you. If this person isn't careful, if he falls from grace with that hospital, he could be out in the cold," says Estroff, a principal with the Atlanta-based accounting and consulting firm Gates, Moore & Company.

Financial experts say this scenario - physicians' practices going bankrupt because of failed relationships with other companies - is becoming increasingly common. The downfall of a number of major insurance carriers and practice-management groups in recent years has put the medical world on notice. "Insurance-company failure is happening more often than it has in the past. We are not yet seeing a large number of physician bankruptcies as a result, but it is something that could start happening," says Darrell Schryver, a principal consultant with the Medical Group Management Association (MGMA), which represents about 200,000 physicians.

When foundations collapse

Judith A. Mackarey saw this scenario unfold when Pennsylvania's Allegheny Health, Education and Research Foundation went under a couple years back. Doctors affiliated with the health system discovered that their rents hadn't been paid in months. Worse still, the health system's collapse meant that those doctors might never see the money Allegheny owed them, explains Mackarey, a principal in the Philadelphia-area law firm of Mackarey and Davidson.

Rather than declare bankruptcy themselves, many of these doctors simply walked away from their Allegheny ties and tried to start up new practices. However, the effect of Allegheny's bankruptcy was essentially the same as if the doctors had gone broke themselves: It left them with no cash, no credit, and a long uphill road to face.

To avoid becoming involved in such a situation, Mackarey says, physicians need to be extraordinarily diligent in their relations with practice management groups and other entities. "Watch very carefully how they are doing financially. If they are not paying you on time, or if an HMO is not paying what it owes you, they may be in breach of your agreement and that may give you an option to terminate. That is when you terminate -  not when the worst has happened, because then it is too late," she says.

Such advice may seem a bitter pill to physicians who are more interested in practicing medicine than in balancing books, but experts agree that the best way to protect yourself is to be in touch with the business end of your practice.

"The healthcare environment is such today that you have to have sound business techniques if you are going to survive," Schryver says. "Many of those I know who have gone bankrupt had absolutely no clue about the business of medicine. For example, they may have signed managed-care contracts that did not cover their costs, simply because they did not know what their costs were."

Even those who refuse to sully their hands with fiscal concerns can take preemptive measures that may save them from the stigma of bankruptcy further down the road. "You don't have to be a CPA, but you have to be interested in your practice, or at least appear interested," Estroff says. "Make the staff put a daily report on your desk. Even if you don't always know what you are looking at, the personnel at least will know that you are paying attention to your practice."

MDs are not immune

Of course, the collapse of an outside entity is not the only thing that will force a physician into bankruptcy. About 1.3 million Americans declare bankruptcy each year, and medical professionals are not immune. Sometimes the cause is simple - one vacation house too many or a spouse run amok with a credit card - or more complicated, such as involvement in a failed investment scheme.

Whatever the cause, however, personal bankruptcy can have a direct and devastating impact on a doctor's practice. "The bankruptcy code is set up to give you some time to put things together and get your life back in order. Sometimes you can't regroup, however, and then the creditors come in and demand the return of your equipment [and] the landlord terminates the lease. These things can happen," says Bonnie Weir, an attorney and senior counsel with the New York-based law firm Kern Augustine Conroy & Schoppmann, which dedicates its practice to the legal needs of physicians.

If a practice is incorporated, its assets may be protected in the case of a personal bankruptcy, but most practices aren't incorporated and such protections are limited. Moreover, Weir says, the typically high income a doctor enjoys can complicate efforts to declare personal bankruptcy. A pricey home or high credit card debt, for example, can rule out the possibility of declaring a Chapter 13 reorganization.

The alternative is a Chapter 7 filing, and it's not a nice one. Chapter 7 pays creditors pennies on the dollar and can do serious harm to one's future credit rating, making it harder to bounce back from bankruptcy in the long run.

The only other option is Chapter 11 -  a form of bankruptcy used mostly by corporations. Individuals can file under this too, "but there are massive reporting requirements," says Weir.

Get help early

The smartest course of action is to avoid the bankruptcy scenario altogether, and the best way to do that is to get help early.

"It can be very difficult for a doctor to admit that he or she has made a mistake that has resulted in financial problems. They don't want to face it early on. As a result, it is difficult to prevent bankruptcy in many cases," says Weir. "As soon as you see that you are in over your head in any way, shape, or form, immediately contact your attorney and try to find a way out," she adds.

"That may mean entering into agreements with people for extended payment plans or paying them some percent on the dollar. If you have just hit a short-term snag, and you can target where you need to protect yourself in order to continue your operations, you [may] avoid going through the bankruptcy at all. If you wait too long to approach your creditors, it will be much more difficult to negotiate with these people," she says.

Estroff concurs, adding that an early start can make all the difference when a practice is in financial straits. In addition to appeasing creditors, a preemptive strike can give a physician greater flexibility at the bank.

Estroff recommends that, as soon as trouble looms for the practice, the doctor should skip a paycheck or take a pay cut to build up the cash reserves. At the same time, he or she must work with the bank to arrange a short-term loan or line of credit that can carry the practice through until cash flow gets sorted out. "Then you are using credit as a tool, rather than as a desperation tactic," he says.

Adam Katz-Stone can be reached via

This article originally appeared in the May/June 2000 issue of Physicians Practice.