Partnership Agreements 101

April 1, 2010

Do you know what’s in your partnership contract? Poorly designed or nonexistent contracts can spell disaster for you and your practice. Here’s how to make sure you’re protected.


Let’s say you’re ready to retire. You’ve invested your time, dedication, and money into the practice, and you want to reap your hard-earned share. But do you know how much it’s worth? Now, imagine it’s the other way around and a partner in your practice is leaving. Say she quits to go solo, or is fired? What if she dies, or becomes disabled? Do you have a plan in place to handle the myriad issues sure to arise?

“If you don’t have an agreement in place, you have a totally unpredictable, uncontrolled situation,” says Daniel Bernick, an attorney and principal of Plymouth Meeting, Pa.-based firm The Health Care Group.

Indeed, it can become a “Wild West show,” he says. Bernick describes a scenario he witnessed where a physician died, and without an agreement in place, the physician’s spouse demanded a higher amount for the practice share and hired a dueling appraiser.

“It can take years to resolve something like that; it’s really terrible,” Bernick says.

Entering into a partnership without legally binding contracts clearly can lead to devastating situations. But entering into poorly designed agreements could be just as ineffective and risky. It leaves you wide open to a dog fight over everything from compensation to debt to patients’ medical records. Before walking down the partnership path - and well before a break up is thrust upon you - here are a few things you should consider about partnership agreements:

Don’t wait. Just like any other difficult decision, Bernick says, it doesn’t get any easier the closer you get to the moment of truth. Work out the details early in the relationship - not when a partner falls ill or quits suddenly. Remember that a new partner’s priorities may differ greatly from a partner a year away from retirement. New employees should also know what to expect out of the partnership track. “Make sure before you join a practice, everything is spelled out for you,” says Kenneth Hertz, a principal with the MGMA Health Care Consulting Group. And the agreement should be revisited frequently to ensure it is current and relevant.

Hire a healthcare attorney. Call on an expert who understands the complexities of these documents, Hertz says, not your brother-in-law who does real estate law. “There are certainly healthcare-related issues that people need to be aware of, and I think an attorney that has that kind of experience can bring that to the table,” he says.

Consider what partnership means to you and your practice. The medical practice landscape has changed in recent years, notes Brian McCartie, vice president of business development for Cejka Search, a St. Louis, Mo.-based healthcare recruiting firm. Younger physicians tend to be calling for more flexible work arrangements. “Partnership can mean a variety of different things,” McCartie says. Partners may share only the overhead, a receptionist, and billing. Or they may choose to pool and split the profits, or only to split profits from ancillary services. Whatever form the partnership takes, put it in writing.

Just like medical practices themselves, partnership agreements can come in various forms. Depending on the practice and the law firm drafting the documents, what the agreement is called can vary among names such as employment agreement, buy-sell or stock purchase agreement, and deferred compensation plan, says Bruce Johnson, a healthcare lawyer and partner with Denver-based Faegre and Benson LLC. But the same concepts tend to be covered in agreements for both PCs (professional corporations) and LLCs (limited liability companies), he says. Here are some notable areas a partnership agreement should cover:

Value. A partnership buy-in agreement will address the value of the practice’s assets, such as furniture and fixtures that can be depreciated based on a schedule over time, and the value of the accounts receivable that can be subtracted from your salary over a period of time, Johnson says. The buy-out agreement, of course, will be a mirror image of this, he says. Addressing the value of your practice will help protect you in the case of a catastrophic event, such as the sudden death of a partner.

Debt. Take a close look at the debt the practice has in the form of real estate and equipment leases, for example, McCartie says. If the partnership dissolves, what is each partner responsible for?

Ancillary services. What is the buy-in for the practice’s ancillary services and what kind of cash do they generate for the practice? Take a long-term look at these ancillary services, as CMS may have some in their crosshairs for reimbursement cuts, says McCartie, which would make the services less appealing to buy into.

Notice. The document should define how far in advance a physician should notify the group before leaving. A 90-day notice period is common, Johnson says, but it can take at least a year and a half to recruit a new doctor, and some practices consider a longer notice requirement.

Patient notification. Consider addressing how patients are notified of the partnership changes. Who writes the letter to the patients and what will it say? Some partnership agreements even define who bears the time and cost burden of notifying the patients, Johnson says. For example, a departing physician may have to pay for the copies of the released medical records. What’s the copy cost? At 35 cents a page, that can really add up, Johnson notes.

Noncompete clause. This part of the agreement is subject to state law, Johnson says, but shouldn’t be overlooked. Do you agree that a physician can leave the group if she’s unhappy and go out on her own across town? The document may outline whether the partner can set up a competing practice after termination and solicit former patients, Bernick says.

Termination scenarios. If a partner leaves the practice under the cloud of embezzlement charges or a loss of license or privileges, the payout will likely be less than for one who is retiring after 30 years of service. “You can tailor it to the circumstances to have an appropriate buy-out,” Bernick says.

Once you have your agreement crafted, you need to have it signed, Johnson says. It may sound obvious, but plenty of practices have spent good money on legal documents, but failed to have them signed and only notice when it comes time for a split. “If you can’t produce a document, [a physician] will say that all those promises you have made aren’t binding,” he says. “Then you are in a world of negotiation.”

Sara Michael is a senior editor for Physicians Practice. She can be reached at sara.michael@cmpmedica.com.

This article originally appeared in the April 2010 issue of Physicians Practice.