CONTRACTING: PHYSICIAN PRACTICE MANAGEMENT

CONTRACTING: PHYSICIAN PRACTICE MANAGEMENT I. TYPE OF CONTRACT Howard T. Wall, III Esq. This paper addresses the form of Physician Practice Management Agreement that is often used in a variety of integrated healthcare delivery arrangements (the Practice Management Agreement or PMA ). II. PURPOSE OF CONTRACT The Practice Management Agreement that will be discussed in more detail in this paper is the fundamental document in at least two very popular integrated delivery models. The first model is the management service organization ( MSO ), which is often provider sponsored. A typical MSO is established by a hospital system, a group of independent physicians, a health plan, or other organized healthcare delivery system which desires to increase its affiliation with physicians in a model that is less integrated than a foundation or full employment arrangement. The Practice Management Agreement usually comes on the heels of an acquisition of an individual physician's practice or of a physician group ( Medical Group ) by the organization that sponsors the MSO. The Practice Management Agreement will set forth the economic arrangement between the parties after the acquisition as well as define the responsibilities of each party in the relationship. In a typical MSO the objective is to promote the overall well being of the health system or health plan with which the physician will be affiliated through the MSO, rather than the profitability of the practice management arrangement itself. The other common setting for a Practice Management Agreement is an individual physician or Medical Group that contracts with an independent physician practice management ( PPM ) company in a transaction that is independent of a larger health system. The PPM, in most cases, establishes a wholly-owned subsidiary that functions much like a provider-affiliated MSO. The subsidiary acquires the assets of the physician practice and then enters into a Practice Management Agreement. Unlike the system-affiliated MSO, however, the PPM is looking to the practice management arrangement itself to produce economic benefit to the PPM. Consequently, the economics of the management agreement are much more significant since the PPM will not receive incidental benefits such as revenues from network participation agreements with third party payors or referrals to other healthcare businesses operated by the health system. III. OUTLINE OF CONTRACT PROVISIONS The following is an overview or checklist of important provisions that should be included in most Practice Management Agreements. Obviously, the character of the Practice Management Agreement will be different depending upon the entity with which the physician or Medical Group is contracting. The following checklist should, therefore, be modified to reflect the nature of the underlying business transaction being pursued by the parties. Checklist of Key Contract Provisions

A. Definitions: 1. Adjustments 2. Advisory Council 3. Affiliate 4. Agreement 5. Budget 6. Clinic 7. Clinic Expense 8. Confidential Information 9. Effective Date 10. GAAP 11. Gross Revenue 12. Manager 13. Manager Expense 14. Medical Group 15. Medical Services 16. Net Revenue 17. Net Operating Revenue 18. Non-Clinic Expenses 19. Physician 20. Physician Compensation 21. Practice Account 22. Practice Expense B. Appointment and authority of Manager: 1. Appointment 2. Relationship of Parties 3. Patient Referrals 4. Internal Management of Medical Group 5. Formation and Operation of the Advisory Council 6. Duties and Responsibilities of the Advisory Council C. Responsibilities of Manager: 1. Management Services 2. Facilities 3. Medical Supplies 4. Support Services 5. Quality Assurance, Risk Management, and Utilization Review 6. Licenses and Permits 7. Personnel

8. Contract Negotiations 9. Billing and Collection 10. Fiscal Matters 11. Reports and Records 12. Recruitment of Physicians 13. Confidential and Proprietary Information 14. Manager's Insurance 15. No Warranty 16. Non-competition Covenant from Manager 17. Managed Care D. Responsibilities of Medical Group: 1. Organization and Operation 2. Employment Agreement 3. Professional Standards 4. Medical Services 5. Exclusive Authority of the Medical Group 6. Peer Review and Quality Assurance 7. Insurance 8. Employment of Technical Personnel 9. Name, Trademark 10. Sublease 11. Pension and Fringe Benefit Plans 12. Payment of Non-Clinic Expenses 13. Continuing Medical Education E. Financial Arrangement: 1. Definitions 2. Management Fee 3. Incentive Fee 4. Factoring of Accounts Receivable 5. Security Interest F. Confidentiality and Non-Competition: 1. Medical Group Non-Competition 2. Non-Disclosure 3. Liquidated Damages 4. Right to Injunctive Relief 5. Reasonableness of Restrictions 6. Severability G. Term and Termination:

1. Initial and Renewal Term 2. Termination 3. Termination By Medical Group 4. Effects of Termination 5. Asset Repurchase Obligation 6. Asset Repurchase Option 7. Closing of Repurchase 8. Stock Repurchase Option H. Miscellaneous: 1. Medical Records 2. Insurance 3. Medical Group Indemnification 4. Manager Indemnification 5. Changes in Reimbursement 6. Status of Contractor 7. Notices 8. Governing Law 9. Assignment 10. Arbitration 11. Waiver of Breach 12. Enforcement 13. Gender and Number 14. Additional Assurances 15. Consents, Approvals, and Exercise of Discretion 16. Force Majeure 17. Severability 18. Divisions and Headings 19. Amendments and Agreement Execution 20. Entire Agreement IV. SAMPLE CONTRACT PROVISIONS WITH ANALYSIS The remainder of this paper will address significant provisions of the PMA. Unlike certain other agreements within the health care field, such as Managed Care Participating Provider Agreements, there is not an industry model contract. Although many of the agreements used by MSOs, PPMs and other entities have similarities, it is impossible to identify a set of standard provisions that can be found in all agreements. The sample language contained herein does not come from a single contract, but is taken from a number of different agreements. A. Definitions. The definition section is in most cases the most important section of the PMA. Because the calculation of the management fee is often quite complicated, the key

definitions are often placed in this section. As a result, the compensation provision can be set forth in one or two short paragraphs, supported by several pages of definitions. For the purposes of this paper, the key definitions to support the management fee are contained in the discussion of Compensation below. B. Relationship of the Parties/Governance. The provisions that set forth the relationship of the parties often give the reader an indication of how the remainder of the agreement will be drafted. In the context of a traditional MSO arrangement, which is still the model utilized in most hospitalsponsored integrated systems, the parties will truly remain independent the manager will only perform specific, delegated functions. In the context of a PPM arrangement, this portion of the agreement reads more like a joint venture agreement that creates a delicate balance of power between the Manager and the Medical Group. Set forth below are provisions addressing the relationship of the parties and the procedures for joint-decision making. 1. Independence of the Parties. a. Sample Contract Language: Manager and Medical Group intend to act and perform as independent contractors, and the provisions hereof are not intended to create any partnership, joint venture, agency or employment relationship between the parties or any subsidiary of the parties. Notwithstanding the authority granted to Manager herein, Manager and Medical Group agree that Medical Group shall retain the authority to direct the medical, professional and ethical aspects of its medical practice. Manager shall have no direction or control of medical acts, decisions or judgments of Manager or any physician. Each party shall be solely responsible for and shall comply with all state and federal laws pertaining to employment taxes, income withholding, unemployment compensation contributions and other employment related statutes applicable to that party, provided that such responsibility shall not affect the characterization of such amounts as Clinic Expenses otherwise applicable. b. Comment: In addition to establishing the independent contractor relationship, the section establishes that the Manager is not in the practice of medicine. While regulatory authorities will no doubt look to the balance of the agreement, as well as the actual operation of the relationship, to verify this statement, this is an important principle that relates to a broad range of issues from corporate practice of medicine concerns, to professional liability, to fraud and abuse. 2. Referral Issues. a. Sample Contract Language : The parties hereby acknowledge and agree that no benefits to Manager hereunder require or are in any way contingent upon, and are not payment for, the admission, recommendation, referral or any other arrangement for the provision of any item or service offered by Manager or any of its affiliates, to any patients of Manager, Manager's employees or agents. b. Comment : The importance of this provision is entirely dependent on the nature of the overall business of the Manager. If the Manager is purely a practice manager and does not provide any health care services, then the risk that the management fee would violate the anti-kickback statute and similar laws is minimal, if not nonexistent. If, on the other hand, the Manager is an affiliate of a hospital, or is in the business of providing ancillary services that can be utilized by physician groups, then the risk of scrutiny under the anti-kickback statute, and, in the case of

designated health services, the Stark law, is significant. 3. Governing Body. a. Sample Contract Language: Formation and Operation of the Advisory Council. Manager and Medical Group shall establish an Advisory Council responsible for development of management and administrative policies for the overall operation of the Clinic. The Advisory Council shall consist of ( ) members. Medical Group shall designate, in its sole discretion and from time to time, ( ) members of the Advisory Council. Manager shall designate, in its sole discretion and from time to time, ( ) members of the Advisory Council. Except as may otherwise be provided, the act of a majority of the members of the Advisory Council shall be the act of the Advisory Council. b. Comment: The Advisory Council, also commonly referred to as a governing board or a joint policy board, will in all probability replace the Medical Group's board of directors or management committee as the decision making body for the Medical Group. In most cases, the Manager and Medical Group appoint an equal number of representatives to the Advisory Council and provide that the chairperson shall rotate between the Manager and Medical Group. These provisions in some cases establish a mechanism for breaking tie votes, but more often than not are silent on a deadlock - meaning a deadlock results in no action. 4. Functions of Governing Body. a. Sample Contract Language: Functions of the Advisory Council. The Advisory Council shall review, evaluate and make recommendations to Manager and Medical Group with respect to the following matters: Annual Budgets. All annual capital and revenue budgets prepared by Manager as set forth in Section shall be subject to review by the Advisory Council, which shall make recommendations to Manager with respect to proposed changes therein. Physician Employment and Recruitment. The Advisory Council shall advise Manager and Medical Group with respect to the type of physicians required for the efficient operation of the Clinic and the content of all physician employment and recruitment contracts to be utilized by Medical Group. Strategic Planning. The Advisory Council shall make recommendations to Manager regarding the development of long-term strategic planning objectives for the Clinic. Capital Expenditures. The Advisory Council shall make recommendations to Manager regarding the priority of major capital expenditures for the Clinic. Capital Improvements and Expansion. Any renovation and expansion plans and capital equipment expenditures with respect to the Clinic shall be reviewed by the Advisory Council and shall be based, in the best business judgment of Manager, upon economic feasibility, physician support, productivity and thencurrent market conditions. Provider and Payor Relationships. The Advisory Council shall review and advise Manager and Medical Group with respect to the establishment or maintenance of relationship with institutional healthcare providers and payors. Ancillary Services. The Advisory Council shall review and make

recommendations to Manager and Medical Group regarding Clinic-provided ancillary services based upon the pricing, access to and quality of such services. Patient Fees: Collection Policies. At least annually, the Advisory Council shall review and advise Manager and Medical Group with respect to the fee schedule for all physicians and ancillary services rendered by the Clinic. Advertising. The Advisory Council shall advise Manager with respect to all advertising and other marketing of services performed at the Clinic, including design and erection of exterior signs. Notwithstanding any contrary provision of the Agreement, it is acknowledged and agreed that recommendations of the Advisory Council are intended for the advice and guidance of Manager and Medical Group and that the Advisory Council does not have the power to bind Manager or Medical Group. Where discretion with respect to any matter is vested in Manager or Medical Group under the terms of this Agreement, Manager or Medical Group, as the case may be, shall have ultimate responsibility for the exercise of such discretion, notwithstanding any recommendation of the Advisory Council. Manager and Medical Group shall, however, take such recommendations of the Advisory Council into account in good faith in the exercise of such discretion. b. Comment : The sample language sets forth a balance of power that is heavily balanced in favor of the Manager. Specifically, language was taken from the agreement for an entity that receives 100% of the net revenues of the Clinic as its management fee and consolidates all of the practice revenues on the books of the PPM. As will be discussed later, in this model, the PPM takes significant additional financial risk and, therefore, is given greater control over the operations of the medical practice. A variation of these provisions would be to make the Advisory Council's decisions binding on the Manager and Medical Group. C. Obligations of Manager. 1. Management Services. a. Sample Contract Language: Performance of Management Functions. Manager shall provide or arrange for the services set forth in this Article to the extent contemplated by the parties hereto, the cost of all of which shall be included in Clinic Expenses. Manager is hereby expressly authorized to perform its services hereunder in whatever manner it deems reasonably appropriate to meet the day-to-day requirements of Clinic operations in accordance with the general standards approved by the Advisory Council, including, without limitation, performance of some of the business office functions at locations other than the Clinic. Medical Group will not act in a manner which would prevent Manager from efficiently managing the day-to-day operations of the Clinic in a business-like manner other than in the making of medical decisions or judgments or otherwise in fulfilling Medical Group's obligations to patients which shall supersede all other obligations of Medical Group to Manager hereunder. b. Comment: This language again supports the relationship of the parties and makes it clear that the Manager's role is primarily one of business office function. We are reminded that the Manager's activities are not to interfere with the physician's duty to provide medical care to patients. 2. Facilities.

a. Sample Contract Language: Facilities. Manager hereby agrees to enter into leases with respect to offices and facilities more fully described in Exhibit hereto and to pay, as a Clinic Expense (without duplication), maintenance and improvements, utility (telephone, electric, gas, water) expenses, normal janitorial services, refuse disposal and all other similar costs, including, but not limited to, related real and personal property lease cost payments and expenses, taxes and insurance. Manager shall consult with Medical Group regarding the conditions, use and needs for the offices, facilities and improvements. Nothing contained herein is intended to require Manager to provide the foregoing services if such services are required to be provided by the landlord under a lease for a specific property. The Advisory Council shall determine any changes to the office and facility locations of the Clinic. b. Comment : This language is used in a model in which the Manager does not actually acquire the physician offices, but simply enters into a lease or sublease of the office space. In other instances, the Manager will acquire the real estate from the physician group itself, in many cases to enhance the purchase price of the practice. A strategic advantage of leaving the physicians on the lease, is that in the event that the practice management relationship is terminated the practice Manager can simply terminate its sublease for the space and leave the physicians on the hook for the lease liability. This is an issue that will need to be discussed very closely with your client. 3. Equipment. a. Sample Contract Language: Equipment, Fixtures, Furniture and Improvements. Manager shall furnish to the Medical Group the medical equipment, office equipment, fixtures, furniture, and improvements listed on Exhibit hereto (the Acquired Equipment ) for the proper and efficient operation of the Clinic and any additional equipment required, as determined by the Advisory Council, for the operation of the Clinic after the Effective Date (the Acquired Equipment and additional equipment acquired by Manager is referred to as the Equipment ). The parties acknowledge and agree that additional Equipment, including any replacement of the Acquired Equipment, shall only be acquired to the extent that such Equipment acquisition is consistent with the annual capital and/or operating budgets for the Medical Group or approved by the Advisory Council. Manager shall use its reasonable best efforts to maintain all Equipment in good repair, condition and working order. The Equipment provided under this Agreement shall at all times be and remain the sole property of Manager. The Medical Group shall not cause or permit the Equipment to become subject to any lien, levy, attachment, encumbrance or charge, or to any judicial process of any kind whatsoever and shall not remove any Equipment from the Clinic. 4. Financial Services. a. Sample Contract Language: Financial Services. Manager shall (i) be responsible for billing and collecting payments for all medical services rendered by the Medical Group to its patients (including negotiations with and collections from insurance companies, HMOs, PPOs, CHAMPUS and other third-party payors), with all such billing and collecting to be done in the name of the Medical Group (ii) manage and, at the Medical Group's request, finance its accounts receivable through the purchase thereof with recourse on terms acceptable to both parties

(iii) administer the Medical Group's payroll (iv) be responsible for and have control of the Medical Group's financial records and bank accounts as set forth in Section (v) prepare and submit to the Medical Group monthly financial reports with respect to the operation of the Clinic (vi) pay the expense of all medical license fees, governmental or professional fees or taxes including so-called licensure or privilege taxes, professional board examination fees, and professional dues (local, state and national) (vii) pay operating expenses and capital expenditures approved by Manager or set forth in the annual operating and capital budgets (viii) pay the compensation and benefits payable to the Physicians in an amount approved by Manager, and all taxes and assessments payable to local, state and Federal governments in connection with the employment of such personnel and (ix) from the Medical Group's funds, pay such other expenses of the Medical Group, as set forth in Section below. b. Comment : This section is at the heart of the Manager's responsibility to the Medical Group. The Manager takes on the business and financial operations of the practice and assumes an affirmative obligation to pay certain expenses since, as will be indicated later, the management fee is based on the accrual method of accounting. The Manager's access to the Medical Group cash is essential to allow it to perform its functions. 5. Capital. a. Sample Contract Language Capital. Manager shall provide the capital necessary to (a) fund the expenditures set forth in the capital budget submitted by Manager, and approved by the Advisory Council, (b) to fund ancillary services approved by Manager and the Advisory Council and (c) to acquire physician practices which acquisitions are approved by Manager and the Advisory Council. Such capital shall be provided at an interest rate equal to the United States ten (10) year treasury note rate plus two percent (2%) per annum, adjusted quarterly, and shall be evidenced by promissory notes setting forth the terms of repayment thereof, as approved by Manager and the Advisory Council. b. Comment : One of the most important benefits that a Manager brings to a Medical Group is access to capital. In this arrangement, the Manager is able to charge interest to the group for any capital utilized in a straight forward way. In most transactions, however, the cost of capital is a heavily negotiated item with some costs of capital absorbed by the Manager and others passed along to the Medical Group and included in the defined term Clinic Expense. 6. Clinic Administrator. a. Sample Contract Language: Administrator. Manager shall hire and appoint a Clinic Administrator to manage and administer all of the day-to-day business functions of the Clinic. Manager shall determine the salary and fringe benefits of the Clinic Administrator. At the direction, supervision and control of Manager, the Clinic Administrator, subject to the terms of this Agreement, shall implement the policies established by the Advisory Council and shall generally perform the duties and have the responsibilities of an administrator. The Clinic Administrator shall be responsible for organizing the agenda for the meetings of the Advisory Council referred to in Article. b. Comment: The Clinic Administrator is typically an employee of the Manager, not the Medical Group. This provision clearly indicates that the Administrator will take

direction from the Advisory Council and, although the paycheck will come from the Manager, the reporting lines usually go through the Advisory Council. Variations on this provision allow for the Medical Group to approve the appointment of the Clinic Administrator or be permitted to veto any candidates for this position. 7. Other Personnel. a. Sample Contract Language: Personnel. Manager shall provide non-physician professional support (other than Physician Extender Employees and Technical Employees) and administrative personnel, clerical, secretarial, bookkeeping and collection personnel reasonably necessary for the conduct of the Clinic operations. Manager shall determine and cause to be paid the salaries and fringe benefits of supervisions and control of Manager, with those personnel performing patient care services subject to the professional supervision of Medical Group. If the Medical Group is dissatisfied with the services of any person, the Medical Group shall consult with Manager. Manager shall in good faith determine whether the performance of that employee could be brought to acceptable levels through counsel and assistance, or whether such employee should be terminated. All of Manager's obligations regarding staff shall be governed by the overriding principle and goal of providing high quality medical care. Employee assignments shall be made to assure consistent and continued rendering of high quality medical support services and to ensure prompt availability and accessibility of individual physicians and individual members of the medical support personnel. Manager shall maintain established working relationships wherever possible and Manager shall make every effort consistent with sound business practices to honor the specific requests of the Medical Group with regard to the assignment of its employees. Manager shall provide administrative services such as scheduling, personnel policies and payroll administration for Physician Extender Employees and Technical Employees and payroll administration for all other Physician Employees. b. Comment: One of the major functions provided by the Manager is to employ the non-professional personnel. Since the personnel costs make up a large percentage of any physician practices expenses, this is an important responsibility of the Manager. Also, the ability to include employees in corporate pension and fringe benefit plans established by the PPM, provide a significant opportunity for cost savings that generate profits to the Manager. As will be discussed later, because of recent changes in the interpretation of the incident to rules, these provisions may need to be modified to establish a true employee lease when technical employees are employed by the Manager and leased to the Medical Group. 8. Managed Care Contracting. a. Sample Contract Language: Contract Negotiations. Subject to the approval of the Advisory Council, which approval shall not be unreasonably withheld, the Medical Group hereby agrees to permit the Manager to bind the Medical Group to agreements with third party payors under which the Medical Group will provide medical services to plan enrollees of such third party payors, in a manner consistent with this Agreement. The Medical Group hereby appoints the Manager as the Medical Group's agent and attorney-in-fact to execute agreements with payors binding the Medical Group to provide physician services, on terms and conditions typically contained in provider agreements with managed care

organizations, subject to the approval of the Advisory Council, which approval shall not be unreasonably withheld. b. Comment: This language is crucial in establishing the Manager's right to include the Medical Group in managed care contracts. Regardless of whether the Manager is a part of a provider affiliated organization or is an independent PPM company, participation in managed care arrangements is usually a fundamental part of the business objective of the Manager. These provisions range from limited power to negotiate on behalf of the Medical Group to full authority to bind the Medical Group to managed care agreements without prior approval. D. Obligations of Medical Group. 1. Professional Services. a. Sample Contract Language: Professional Services. Medical Group shall provide professional services to patients in compliance at all times with ethical standards, laws and regulations applying to the medical profession. Medical Group shall ensure that each physician associated with Medical Group to provide medical care to patients of Medical Group is licensed by the State of. In the event that any disciplinary actions or medical malpractice actions are initiated against any such physician, Medical Group shall immediately inform the Clinic Administrator of such action and the underlying facts and circumstances. Medical Group shall carry out a program to monitor the quality of medical care practiced at the Clinic. 2. Medical Practice. a. Sample Contract Language: Medical Group shall use, maintain and occupy the Clinic exclusively for the practice of medicine, and shall comply with all applicable local rules, ordinances and all standards of medical care. It is expressly acknowledged by the parties that the medical practice or practices conducted at the Clinic shall be conducted solely by physicians associated with Medical Group through written agreements approved by Manager, whether employment, independent contractor or locum tenens arrangements, and no other physician or medical practitioner shall be permitted to use or occupy the Clinic without the prior written consent of the Manager. The parties agree that nothing contained in this Agreement or resulting from the operation of this Agreement is intended to be construed as the Manager engaging in the practice of medicine under law, and the parties recognize and agree that only Medical Group and its physicians shall be considered as practicing medicine under this Agreement. b. Comment: This provision places the obligation to employ physician personnel on the Medical Group. A very important requirement is that the physician personnel be engaged through written agreements approved by the Manager. This language acknowledges that physicians may not necessarily be employees, but may also be independent contractor or contract physicians. 3. Employment of Physicians, Technical Employees. a. Sample Contract Language: Non-physician Health Care Personnel. All physician assistants, nurse practitioners and other non-physician professionals who provide patient care services shall be employed by or retained by Medical Group and shall be under Medical Group's control, supervision and direction in the performance of

or in connection with Medical Services for patients. Medical Group shall be responsible for paying the compensation, and benefits as applicable of all physician assistants and nurse practitioners employed by Medical Group from funds distributed by Manager to Medical Group in accordance with Article hereto, and for withholding as required by any applicable law. b. Comment: The reason that most practice management agreements require the physicians to employ non-physician technical personnel and other professional staff is legal in nature. First, in many instances, it was seen as a way of demonstrating that the Manager was not engaged in the practice of medicine, and should not be liable for professional malpractice. Second, and more important, because of a long standing HCFA interpretation of the Medicare incident to rules, individuals performing those tasks had to be the W-2 employees of the physician. In October of this year in a program memorandum, HCFA clarified its position and stated that a leased employee could satisfy the control test of the incident to rules. It is likely that the PPM industry will respond to this change and will require fewer such employees to be on the physician payroll. 4. Payment of Non-Clinic Expenses. a. Sample Contract Language: Non-Clinic Expense. Medical Group shall be solely responsible for the payment of all costs and expenses incurred in connection with Medical Group's operations that are not Clinic Expenses, including, but not limited to, insurance premiums for policies of malpractice insurance, deductibles under such policies of malpractice insurance, and all costs and expenses incurred with respect to claims under such policies of malpractice insurance, salaries and benefits, workers' compensations, retirement plan contributions, health, disability and life insurance premiums, payroll taxes, cellular phone and automobile expenses incurred by or in connection with the employment of all Physicians, Shareholders and Medical Group Employees. b. Comment: This sets forth the obligation of the physician group to pay certain expenses out of its distribution under the management fee formula to be described later. This provision will vary depending upon the economics of the transaction. This language illustrates one of the primary purposes of this provision, which is to bring about uniformity between the definition of clinic expenses in each practice managed by a particular Manager. For example, if one Medical Group routinely paid for cellular telephone and another group did not prior to the management arrangement, it is easier to leave that obligation with the Medical Group rather than to modify the Manager's systems and include this item in the definition of Clinic Expenses. 5. CME Expenses. a. Sample Contract Language: Professional Dues and Education Expenses. Medical Group shall be solely responsible for all costs and expenses associated with membership in professional associations and continuing professional education. Medical Group shall ensure that each of its Physicians participate in such continuing medical education activities as are necessary for such physicians to remain current in their respective specialties, including, but not limited to, the minimum continuing medical education requirements imposed by applicable laws and policies of applicable specialty boards. 6. Malpractice Insurance.

a. Sample Contract Language. Insurance. The Medical Group shall obtain and maintain, in full force and effect during the term of this Agreement, as a Clinic Expense, comprehensive professional liability insurance coverage, including malpractice insurance coverage, under which the Medical Group shall be named as the insured to protect against any liability incident to the rendering of professional medical services at the Clinic. Such insurance coverage shall be either occurrence coverage or claims made with coverage limits of not less than $1,000,000 per incident and $3,000,000 annual aggregate. Medical Group shall use its best efforts to have Manager named as an additional insured under such coverage. Upon termination of this Agreement, the Medical Group shall continue to name Manager as an additional insured for five (5) additional years, at Manager's expense, if the insurance policy is on a claims made basis. The Medical Group shall furnish certificates, endorsements and copies of all insurance policies to Manager. E. Compensation to Manager. 1. Definitions. a. Sample Contract Language. Ancillary Revenues shall mean all fees or revenues actually recorded each month (net of Adjustments) by or on behalf of Medical Group which are not Physician Services Revenues or Capitation Revenues, including medical director fees, global and technical fees from medical ancillary services, and fees for medical management and utilization, and other operating revenue of Medical Group from health care related investments and any operating revenue from interest, investment, rental or similar payments or income made or payable to Medical Group but excluding (i) rental income on any leases or subleases between Manager and Medical Group (ii) proceeds of insurance policies, (iii) investment income or pension plans and (iv) any investment income on proceeds under the Asset Purchase Agreement. Capitation Revenues shall mean all payments to Medical Group from managed care organizations where payment is made periodically on a per member basis for the partial or total medical care needs of a patient, copayments and all HMO incentive bonuses. Clinic Expenses shall mean all operating and non-operating expenses of Manager incurred in providing the services under the Agreement relating to the operation of the Clinic, including, without limitation: (a) Salaries, benefits, (including contributions under the Manager's Savings and Profit Sharing Plan), severance benefits and other direct costs of (1) all employees of Manager at the Clinic and (2) Technical Employees (but excluding all other Physician Employees) (b) Direct costs of all employees or consultants of Manager or Parent engaged by the Administrator (or, in the event such costs exceed budgeted amounts, engaged by the Advisory Council) to provide services at or in connection with the Clinic for special projects relating to improved clinic performance (c) Obligations of Manager as tenant under leases or subleases provided for herein, including any leases between Parent or an Affiliate of Parent and Manager as tenant, and any obligations of Parent under any guaranty of such obligations of Manager, without duplication (d) Interest expense on indebtedness incurred by Manager to finance or refinance any

of its obligations hereunder or services provided obligations hereunder or services provided (interest expense will be charged for funds borrowed from outside sources as well as from Manager in the latter case, charges will be computed at a floating rate that is equal to the current blended borrowing rate in effect for actual and available outside borrowings of Parent and such rate will be computed as the sum of interest and related costs divided by the related total of all borrowings) (e) Other expenses incurred by Manager carrying out its obligations under this Agreement in accordance with policies and budgets established by the Advising Council, including, but not limited to, the write-off of any tangible or intangible assets on the balance sheet of Manager or any portion thereof other than service agreement costs in connection with the acquisition under and execution of this Agreement Net Clinic Revenues shall mean the sum of Ancillary Revenues, Physician Services Revenues and Capitation Revenues. Physician Services Revenues shall mean all fees actually recorded each month (net of Adjustments), by or on behalf of Medical Group as a result of professional medical services personally furnished to patients by Physician Employees and other fees or income generated in their capacity as professionals, whether rendered in an inpatient or outpatient setting. 2. Management Fee. a. Sample Contract Language : Medical Group and Manager agree that the compensation set forth in this Article is being paid to Manager in consideration of the substantial commitment made by Manager hereunder and that such fees are fair and reasonable in consideration of the services performed hereunder and the capital being made available by Manager. Manager shall be paid the following service fees: (a) Manager shall be reimbursed the amount of all Clinic Expenses paid by Manager (b) Manager shall be reimbursed any amounts advanced to Medical Group to fund non-clinic Expense obligations of Medical Group (c) During each year of the Agreement, Manager shall receive a fee equal to 15% of an amount equal to (i) Net Clinic Revenue less (ii) Clinic Expenses. 3. Factoring of Accounts Receivable. a. Sample Contract Language: Accounts Receivable. On approximately the tenth business day of each month, Manager shall purchase the accounts receivable of Medical Group arising during the previous month, by payment of cash, or other readily available funds into an account of Medical Group. The consideration for the purchase shall be an amount equal to all fees recorded each month (net of Adjustments). Service fees due to Manager under Article shall be offset against such consideration. Although it is the intention of the parties that Manager purchase and thereby become owner of the accounts receivable of Medical Group, in case such purchase shall be ineffective for any reason, Manager is concurrently herewith entering into a Security Agreement to grant a security interest in the accounts receivable to Manager. In addition, Medical Group shall cooperate with Manager and execute all necessary documents in connection with the pledge of such accounts receivable to Manager. All collections in respect of such accounts receivable shall be deposited in a bank account at a bank designated by Manager. To the extent

Medical Group comes into possession of any payments in respect of such accounts receivable, Medical Group shall direct such payments to Manager for deposit in bank accounts designated by Manager. 4. Security Interest. a. Sample Contract Language: Security Interest. In addition to the rights of Manager to bill for and collect the Medical Group's accounts receivable under Section hereof, to the extent permitted by law, Medical Group assigns and grants title to accounts receivable of Medical Group to Manager, and to the extent such assignment of accounts receivable would violate applicable law, Medical Group hereby grants to the Manager a security interest in all the Medical Group's accounts receivable which may be created during the Term, for medical or other services rendered by the Medical Group (the Collateral ), to secure the payment of all monetary obligations of the Medical Group to the Manager arising under this Agreement. In the event of a default by Medical Group under any provision in this Agreement, the Manager may, with or without terminating this Agreement in accordance with Article below, exercise all rights and remedies afforded a secured party with respect to the Collateral under the Uniform Commercial Code as enacted and in force in the State of. The Medical Group agrees to execute all financing statements or other documents which may be necessary to perfect Manager's security interest hereunder. b. Comment : The compensation provisions in a typical practice management agreement vary dramatically from deal to deal. The first step is to set forth the key definitions that are to be used in the arrangement. The second step is to actually establish the fee, which ranges from 100% of practice revenues in the most extreme cases in which practice managers intend to consolidate all of the practice revenues on the books of the practice management entity, to as little as 5% of collateral revenue in a simple billing and collection arrangement. The variations between these two extremes are as numerous as the players in the industry. The real issue in establishing the base management fee is will this be paid along with the other expenses of the practice before physicians are compensated or will this management fee be paid after practice expenses. The idea of an incentive fee is usually designed to give the Manager a share of the profits after the expenses are paid, the base management fee is paid and the physicians receive their budgeted income. The incentive fee in some cases is tied to the growth of new business such as ancillary services or capitated payments. Since most of the independent PPM companies are on the accrual method of accounting and many have as an objective to go public at the earliest possible date, the management fee is typically based on the accrual method of accounting. Especially in cases in which the Manager purchased accounts receivable, then the real questions is how will the practice generate cash flow in order to pay expenses, salaries and management fees during the start up months of the arrangement. Two common ways of providing funding are working capital arrangements in which the cash is provided by the Manager in exchange for a fee or a pass through of capital costs or an arrangement whereby the practice Manager purchases accounts receivable on a periodic basis to provide the practice with available funding. F. Confidentiality and Non-Competition. 1. Medical Group Non-Competition.

a. Sample Contract Language. Medical Group Non-Competition. During the term of this Agreement, neither the Medical Group nor any of its current or future shareholders, key employees or key independent contractors (such shareholders, key employees and key independent contractors are sometimes collectively referred to as the Relevant Parties ) shall: (a) utilize any individual previously working for Manager as its or their employee, consultant, agent or representative (b) directly or indirectly induce or attempt to influence any employee of Manager to terminate its employment with Manager or (c) directly or indirectly, as an investor, director, officer, employee, independent contractor, consultant or in any other capacity, engage in or have any interest in, any medical practice, medical management business or medical facility located within the counties designated on Schedule hereto, except as set forth in such Schedule. Nothing herein or in any other agreement between or among Manager, the Medical Group and/or any of the Relevant Parties shall restrict the Medical Group or any of the Relevant Parties from working after the termination of this Agreement for Manager, any successor or assign thereof any physicians' group to whom Manager or any successor or assign thereto provides management services ( Successor Medical Group ), and the Medical Group agrees not to sue Manager, its successor or assign, any Successor Medical Group and the applicable Relevant Parties in any such event. b. Comment: The Practice Management Agreement typically provides a noncompetition agreement to prohibit the Medical Group from entering into business or from soliciting employees for a specified period of time. Typical arrangements do not usually restrict the practice of medicine. In states with very strict limitations on non-compete agreements, such as Alabama, this level of non-compete may be impossible. 2. Confidentiality. a. Sample Contract Language: Medical Group Non-Disclosure. At no time during or after the termination of this Agreement shall the Medical Group, its employees, independent contractors or its shareholders disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company any material referred to in this Section, or any information regarding the business methods, business policies, procedures, techniques or trade secrets or other knowledge or processes of or developed by, Manager, or any other confidential information relating to or dealing with the business operations or activities of, Manager, made known to the Medical Group, its employees, independent contractors or its shareholders or learned or acquired by the Medical Group, its employees, independent contractors or its shareholders during the term of this Agreement (collectively, Confidential Information ), except as may be expressly authorized by Manager or any successor to it. Immediately upon the termination of this Agreement, the Medical Group and/or the applicable shareholder, employee or independent contractor shall deliver to Manager all documents, computer discs or other forms of recorded information, including all copies thereof, containing Confidential Information. 3. Liquidated Damages.

a. Sample Contract Language: Liquidated Damages. If the equitable relief contemplated by the foregoing paragraph is not available for any reason, or if any court of competent jurisdiction shall refuse to enforce the foregoing paragraph for reasons of public policy or otherwise, the parties agree that Manager shall be entitled to receive liquidated damages from the breaching party in an amount equal to two times the then-current Practice Compensation (as hereinafter defined), or, in the event of a breach by a Physician Shareholder or physician Practice Employee, two times the breaching person's share of the then-current Practice Compensation. The parties acknowledge and agree that such liquidated damages are appropriate because actual damages to Manager would be speculative and difficult to determine at the time of any such breach. b. Comment: In most cases the practice Manager has invested a significant amount of money in purchasing the practice assets. If a number of physicians within the practice leave or if they go into competition with the Medical Group, a Manager can suffer a significant economic loss. Accordingly, it is common to see a liquidated damages provisions in the event of a breach of restrictive covenants. In the above language, the liquidated damages are two times the annual compensation to the physician involved in the breach. G. Term and Termination. 1. Term. a. Sample Contract Language: Term. This Agreement shall commence on the date hereof and shall continue for a forty (40) year period, until. Unless earlier terminated, this Agreement shall be automatically extended for additional terms of five (5) years each unless either party delivers to the other, not less than nine (9) months nor earlier than twelve (12) months, prior to the expiration of the preceding term written notice of such party's intention not to extend the terms of this Agreement. b. Comment: The term of a Practice Management Agreement in a typical PPM arrangement is very long, usually forty or fifty years. In an MSO arrangement, the term may be for a much shorter period of time, but usually not less than ten years. The long term is very important to practice management companies in valuing the intangible portion of the purchase price paid to the practice. 2. Termination By Manager. a. Sample Contract Language: Termination by Manager. Manager shall have the right to terminate this Agreement mediately upon notice to Medical Group upon the occurrence of any default by Medical Group. A default by Medical Group shall be defined as the occurrence of any one or more of the following: (a) The conviction of the Medical Group or any of the Physicians of any crime punishable as a felony under federal or state law unless the Medical Group terminates its relationship with any such Physician who has been convicted within thirty (30) days notice of such conviction (b) Any act or omission on the part of the Medical Group that results in the cancellation of its malpractice insurance and the Medical Group does not obtain new or substitute malpractice insurance consistent with and subject to the limitations of Section above covering the Medical Group and Manager as of the cancellation date of the prior malpractice insurance

(c) If the Medical Group dissolves (d) Any of the representations or warranties of the Medical Group are false or incorrect when made or hereinafter become false or incorrect, the Medical Group fails to cure the same within thirty (30) days after written notice thereof is given by Manager to the Medical Group (provided such default is of a type reasonably capable of being cured within such period) and there is a material adverse effect upon Manager. (e) The Medical Group materially defaults in the performance of any obligation or duty imposed hereunder and fails to cure the same within thirty (30) days (ten (10) days in the event of a breach of an obligation to pay money) after written notice is given by Manager to the Medical Group specifying the default. 3. Termination By Medical Group. a. Sample Contract Language: Termination by the Medical Group. The Medical Group shall have the right to terminate this Agreement immediately upon written notice to Manager upon the occurrence of any default by Manager. A default by Manager shall be defined as the occurrence of any one or more of the following : (a) Manager materially defaults in the performance of any obligation or duty imposed hereunder and fails to cure the same within thirty (30) days (ten (10) days in the event of a breach of an obligation to pay money) after written notice by the Medical Group to Manager specifying the breach or (b) Any of the representations and warranties of Manager are false or incorrect when made or hereinafter become false or incorrect, Manager fails to cure the same within thirty (30) days after written notice thereof is given by the Medical Group to the Manager (provided such default is of a type reasonably capable of being cured within such period) and there is a material adverse effect upon the Medical Group. b. Comment: The Medical Group is typically given very limited opportunities to terminate the Manager. The variation on the above language, however, is a situation in which after a certain period of time, usually one to three years, the Medical Group is given a window in which to terminate the arrangement. With so much competition for acquisitions in this industry, many PPM entities are finding it necessary to give the Medical Group an opportunity to unwind the transaction either at the end of certain periods of time or if certain events, such as an initial public offering of the common stock of the PPM entity, have not occurred. 4. Actions After Termination. a. Sample Contract Language: Actions After Termination. Upon termination of this Agreement for any reason: (a) Manager shall within ninety (90) days deliver the following to the Medical Group or the Medical Group's appointed agent: (i) A final accounting for the Medical Group as of the date of termination (ii) All written data and materials including all patient charts and files, records, contracts and other papers or documents which pertain to the Clinic provided that Manager, at its expense, shall be entitled to retain copies of any and all such material. (b) The Medical Group shall purchase from Manager all assets owned by Manager, as shown on Manager's balance sheet, which are associated with the Clinic,

including any intangible asset, for those assets' net book value, as determined in accordance with GAAP, pursuant to an audit conducted by an accountant chosen by Manager provided, however, that in the event that this Agreement is terminated by Manager pursuant to Section hereof and the decrease or loss with respect to which such termination is effected is primarily caused by events beyond the control of the Medical Group, such assets shall be purchased for those assets' then appraised value (determined in accordance with Schedule hereto). Additionally, the Medical Group shall assume any leases with respect to facilities, Equipment or other property utilized at the Clinic. Furthermore, the Medical Group shall assume any indebtedness of Manager incurred in connection with the provision of services or capital to the Medical Group for the acquisition of assets being purchased by the Medical Group. The purchase price shall be reduced by the amount of any liabilities so assumed. The balance of the purchase price shall be paid at closing in cash. b. Comment: An extremely important part of the termination provisions relate to what happens after termination. In many cases, the language will provide procedures for the Medical Group to repurchase the assets. In some cases, the Medical Group will be given the option to repurchase the assets, in other cases the Medical Group will be forced to purchase the assets. If stock of the PPM entity was issued in exchange for the assets at the time of the original asset sale, it may significantly complicate the steps that occur after termination. H. Miscellaneous. 1. Medical Records. a. Sample Contract Language: Patient Records. The Medical Group will prepare and maintain at the Clinic accurate, complete and timely records on all services rendered to patients at the Clinic. All patient records shall be the property and remain under the control and custody of the Medical Group at all times during and after the term of this Agreement. The records shall be prepared and maintained in compliance with all applicable state and federal laws and regulations. Manager shall have access to the patient records of the Medical Group during the term hereof for the purposes necessary to perform its duties under this Agreement, subject to all applicable laws and regulations governing the confidentiality of such records. b. Comment: The medical record provisions will vary depending upon state law. In some cases, the Manager will be prohibited from owning or controlling the medical records in other cases Manager will be given some ability to control the medical records. 2. Assignment. a. Sample Contract Language: Assignment. Except as may be herein specifically provided to the contrary, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors, and assigns provided, however, that Medical Group may not assign this Agreement without the prior written consent of Manager, which consent may be withheld. Unless the Assignment is to a wholly owned subsidiary of the parent company of Manager, Manager may not assign this Agreement without the prior written consent of Medical Group, which consent may be withheld. The sale,

transfer, pledge, or assignment of any of the equity ownership interests held by any equity owner of Medical Group or Manager or the issuance by Medical Group or Manager of voting equity interests to any other person, or any combination of such transactions within a period of one (1) year, such that the existing equity owners of either Medical Group or Manager, as the case may be, fail to maintain a majority of the voting interests in Medical Group or Manager, shall be deemed an attempted assignment by the party whose equity ownership interests have been transferred or issued, and shall be null and void unless consented to in writing by the other party prior to any such transfer or issuance. Any breach of this provision, whether or not void or voidable, shall constitute a material breach of this Agreement, and in the event of such breach, the non-breaching party may terminate this Agreement upon twenty-four (24) hours notice to the breaching party. b. Comment: The assignment provisions can be very complicated in practice management arrangements, in particular if the PPM is a start up company that anticipates a merger or sale of its assets at some future date. Assignment clauses that prohibit such transactions could devalue the business of the PPM. On the other hand, the Manager must be assured that the Medical Group can not change hands without its prior written approval. 3. Changes in Reimbursement. a. Sample Contract Language: Changes in Reimbursement. If Medicare, Medicaid, Blue Shield or any other third party payor, or any other Federal, state or local laws, rules, regulations or interpretations, at any time during the term of this Agreement, prohibit, restrict or in any way materially and adversely change the method or amount of reimbursement or payment for services rendered by Medical Group pursuant to this Agreement or of the method of compensation for either party provided for in this Agreement, then the parties shall negotiate in good faith to amend this Agreement to provide for payment of compensation in a manner consistent with any such prohibition, restriction or limitation and which takes into account any materially adverse change in reimbursement or payment from such third party payors for such physician services. If the parties cannot reach agreement on such amendment prior to the effective date of such rule, regulation or interpretation, this Agreement shall terminate as of such effective date. b. Comment: This is a provision contained in some practice management agreements to require renegotiation in the event that there are changes in healthcare reimbursement. This is especially important if the practice Manager has assumed obligations to pay salaries and benefits or has assumed risk on practice expenses, yet receives no relief if there are major changes in the physician group income. 4. Arbitration. a. Sample Contract Language: Arbitration. The parties shall use good faith negotiation to resolve any controversy, dispute or disagreement arising out of or relating to this Agreement or the breach of this Agreement through the Advisory Council. Any matter not resolved by negotiation at the Advisory Council Board level or any matter upon which the Advisory Council Board is deadlocked shall be submitted, to binding arbitration in accordance with the rules of the National Health Lawyers Association or other mutually agreeable dispute resolutions service provided however, that the terms and provisions of this Section shall not preclude any party hereto from seeking, or a court of competent jurisdiction from granting, a temporary restraining order, temporary injunction or other equitable

relief for any breach of (i) any non-competition or confidentiality covenant in this Agreement or in any employment agreement with any Physician or (ii) any duty, obligation, covenant, representation or warranty set forth in this Agreement, the breach of which may cause irreparable harm or damage. b. Comment: Most practice management arrangements provide for some method of alternative dispute resolution. The above language is included to recommend the National Health Lawyers Association mediation and arbitration service.