Outs, and Pitfalls to Avoid. Roger Morris, J.D., R.Ph

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1 Physician Contracting Buy Ins/Buy Outs, and Pitfalls to Avoid Roger Morris, J.D., R.Ph

2 Learning Objectives Conduct a comprehensive review of employment contracts for issues related to structuring successful buy-in/buy-out provisions Strategize about advantages and disadvantages to various arrangements with eye towards future entrances and exits from partnership p

provisions Strategize about advantages and disadvantages to various

3 The Basics The Devil is in the Details Practice Group contracts are the foundation of collegial relationships Should be developed with best case and worst case scenarios in mind Have implications across multiple areas Employment law - e.g., g, non-competes Insurance e.g., malpractice, health insurance Corporate governance e.g., PC versus PLLC Tax e.g., proceeds from buy-in process* *I am not a tax attorney. I am a health care lawyer. We specialize, just like you. Please consult a tax attorney or accountant t for specifics on how various scenarios in this presentation will work for you.

, g, non-competes Insurance e.g., malpractice, health insurance Corporate governance e.g., PC versus PLLC Tax e.g., proceeds from buy-in process* *I am not a tax attorney.

4 Buy-Ins the Pre-buy in Phase Not necessary to address in original employment agreement Contract for term of X years. Group may consider partnership at end of term. Should start negotiations at least six months before potential admission to partnership But make expectations for partnership clear in some way Productivity measures consider Stark issues Management Involvement? Community Involvement? Make it possible for new physician to gain experiences to achieve partnership (training, etc.)

Should start negotiations at least six months before potential admission to partnership But make expectations for

5 Buy-Ins: Negotiations Begin Define a Buy-In Structure Will there be a cash outlay? Can discount salary or suggest banks that offer these types of loans Could either be lump sum or paid over time Think about any tax implications (current partners reporting gain on sale; tax burden for new partner)

Can discount salary or suggest banks that offer these types of loans Could

6 Buy-Ins: Negotiations Begin How do you value the practice? Tangible Assets equipment, property, cash, accounts receivable Intangible Assets goodwill (expected future earning power), reputation, location, happy patients Liabilities debts, loans, paid vacation days owed employees OR - Ignore some or all categories entirely and base on accounts receivable

goodwill (expected future earning power), reputation, location, happy patients

7 Buy-Ins: Negotiations Begin New partner might be asked to sign on as guarantor on existing debt or lease But should new partner be indemnified against financial responsibilities arising from tax or billing audits related to past debts/claims and any resulting False Claims liabilities? Will new partner be offered chance to buy into any related partnerships such as real estate partnership that owns practice location or LLC that owns ambulatory surgical center? What happens if physician leaves midway through buy-in payments? py Do they yget money back? How much?

8 Buy-Ins: Negotiations Begin Could separate buy-in for assets from buy-in for accounts receivable and goodwill Tie stock price to tangible assets Structure purchase of ARs and goodwill as percentage reduction in net income over time (avoids battle over value of intangible assets) Cost fluctuates based on profitability of practice Allows new partner to buy-in to intangible assets with pre-tax dollars Example: two partners, eventual 50/50 split NP receives 70% of share in Year 1 (70% of 50%=35%) so 65/35 split NP receives 80% of share in Year 2 (a 60/40 split) NP receives 90% of share in Year 3 (a 55/45 split) NP receives full equality in Year 4

profitability of practice Allows new partner to buy-in to intangible assets with pre-tax dollars Example: two partners, eventual 50/50 split NP receives 70% of

9 Contracting Options How will net income be divided? Equal division of pie - no consideration of productivity, but may promote team approach, doesn t penalize someone who does less lucrative procedures or has a lot of office administrative duties Division based on productivity Usually collections, not charges IF SO, buy-in reductions start from productivity figures, not equal share of net income

penalize someone who does less lucrative procedures or has a lot of office administrative duties

10 Contracting Options How will net income be divided, continued... Combination of equality and productivity 50% of net income divided equally 50% by relative productivity Equal lbase salaries for all partners with bonuses based on relative productivity NOTE: When using productivity-based i d formula, be careful to avoid violating Stark laws!!

relative productivity Equal lbase salaries for all partners with bonuses based on

11 Contracting Options Senior Doctor Right senior doctor keeps name, tangible assets, majority voting rights Operations Decisions? Supermajority for particular votes (adding partner, acquiring a practice) and majority for less important ones (expenditures of less than $10,000). 000) As size of group increases, does the cost of buy-in decrease? Think ahead to Termination so that is addressed in the Buy-In With cause? Without cause? How many votes or should it be unanimous? Will that vary if forcause/without-cause? Define Cause - Consider: activities included, but not limited to... Warning: With exhaustive list, physician may claim termination is not appropriate p

000) As size of group increases, does the cost of buy-in decrease? Think ahead to Termination so that is addressed in the Buy-In With cause? Without cause?

12 Contracting Options FINALLY though h no one wants to think about it, this may happen to you, so... Carefully construct non-competes be aware of restrictions in your home state as states treat them differently Lookback clauses protect against liability claims arising after departure Benefit carry-forwards malpractice/disability premiums that will follow exiting partner

treat them differently Lookback clauses protect against liability claims arising after

13 Buy-Outs Nothing lasts forever: changes may be necessary due to death, disability, or other voluntary/involuntary departure Have a buy/sell agreement in place so any changes of ownership are already mapped out Facilitates t orderly buy-outs Reduces stress, drama Identifies advanced notice requirements Similar themes to Buy Ins to consider Valuation of practice at time of departure Who pays py for tail insurance? Practice overhead obligations may be inversely related to amount of advanced notice Tax implications

drama Identifies advanced notice requirements Similar themes to Buy Ins to consider Valuation of practice at time of departure

14 Buy-Outs Buy-Out Terms it could be... Structured as set percentage of departing doctor s salary and bonus for the 12 months prior to termination Payable over months to not overburden practice Subject to forfeiture or reduction if doctor leaves and competes, does not give sufficient notice, or is terminated for cause And don t forget to address departure of new partner may not be eligible for full share of buy-out provisions if buy-in not complete

Payable over 24 60 months to not overburden practice Subject to forfeiture or reduction if doctor leaves and

15 Questions? Roger Morris, J.D., R.Ph

Income Distribution and Partner Buy-Ins & Buy-Outs August 2010

Income Distribution and Partner Buy-Ins & Buy-Outs August 2010 Introduction... 2 Income Distribution and Compensation Formulas... 2 How to divide the pie... 2 What behaviors should you reward (if any)?...