Category Archives: Post

By: James D. Wall, Esq.

The North Carolina Medical Board recently proposed a Position Statement on physician employment with hospitals and other large groups.  A Position Statement is not a law or regulation, but rather the Medical Board’s interpretation of existing laws or regulations that govern the practice of physicians, physician assistants and nurse practitioners.  Position Statements give practitioners a road map for compliant and ethical practice.  One would disregard a Position Statement at his or her peril.

What’s the Problem?

While the Board is clear to state that the existence of a Position Statement should not be taken as an indication of the Board’s enforcement policies, it only stands to reason that the Board would have, or anticipates having, some concerns about the “shift from licensees practicing in personally owned practices toward licensees practicing while subject to employment and other contractual relationships with hospitals, group practices and other health systems.”  (Proposed Position Statement 9.1.3., Licensee Employment, p.1).

Know The Structure

The Board expects licensees to know the organizational structure of the employer.  I don’t think this means a physician must memorize the org chart of a multi-billion dollar system.  I believe this advice is more elementary.  Physicians are sometimes employed by start-ups or practices that have  relationships with management service organizations (MSOs), and they often conflate the MSO with the managed practice.  With few exceptions, physicians cannot be employed by a lay corporation to deliver professional services on behalf of that lay corporation.  Physicians may, however, be employed by licensed hospitals and HMOs.  With the increase of MSOs, it is important for physicians to know that the MSOs cannot employ physicians to render professional services.  The licensee’s employment agreement should be with the medical practice, and the remuneration should be paid by the medical practice.  The physician should know the difference between the practice and the MSO, and keep the line between the two clear and in focus.

Employment Agreements Are Real

The employment agreement should be consistent with the employment relationship.  The Board provides in the proposed Position Statement, “Employment Agreements are legal documents. Licensees should seek their own legal counsel before signing them.”  The Position Statement also provides that employment agreements should be negotiated in “good faith” and that both parties should engage legal counsel “experienced in physician employment matters.”  It is obvious that I would mention this, analogous to the barber extolling the virtues of a haircut; but I think it is telling us more.  The takeaway to licensees is “do not tell us you did not know what was in your employment agreement, or that you did not understand it.”  Physicians are forewarned.

Know What is Expected of You

Physicians are required to know the policies and protocols of their employers.  The Board will have little tolerance for a physician’s attempt to defend his or her actions because an employer steered the physician away from doing the right thing.  Further, ancillary to this point is the Board expects physicians to associate with ethical employers.  A physician cannot hide behind an employer when taken to task.  In fact, the Position Statement goes so far to say that you need to “Recognize that your obligation to provide care that conforms to the standards of acceptable and prevailing medical practice, or the ethics of the medical profession, may require you to leave a situation that does not allow you to provide such care.”  This is the “Johnny Paycheck[1] option.”  In short, if your employer is making you do something you believe to be short of acceptable and prevailing standards of medical care, the Board expects you to resign.

A Supervisory Role Doesn’t Insulate You

The Position Statement is specific: if your position removes you from direct patient care “such as a medical director or vice president of medical affairs . . . [such a role] does not remove you from professional ethical obligations.”  The Board provides that “patient welfare must take priority in any situation where the interests of licensees and employers conflict.”

Guidance to Employers Is Plentiful

The proposed Position Statement cites the American Medical Association’s “Principles for Physician Employment” AMA H-22.950 which indicates that employed physicians “should be free to exercise their personal and professional judgment in voting, speaking and advocating on any manner regarding patient care interests, the profession, health care in the community and the independent exercise of medical judgment.  Employed physicians should not be deemed in breach of their employment agreements, nor be retaliated against by their employers, for asserting these interests.”

Further, the Position Statement indicates that while physicians typically assign billings to employers, “employed physicians or their chosen representatives should be prospectively involved if the employer negotiates agreements for them for professional fees, capitation or global billing, or shared savings.  Additionally, employed physicians should be informed about the actual payment amount allocated to the professional fee component of the total payment received by the contractual arrangement.”  Position Statement, p. 5.

Conclusion – Patient Welfare is the Guidepost

The Position Statement is replete with references to patient welfare trumping the relationship between the employed physician and his or her employer.  For example, patients should be notified when a physician departs from the practice, and informed of the physician’s new contact information.  Further, the Position Statement cites the AMA “A physician’s paramount responsibility is to his or her patients.”  The AMA recognizes the inherent conflict of interest with the physician’s duty to his or her patients and the duty of loyalty owed to the physician’s employer.  “This divided loyalty can create conflicts of interest, such as financial incentives to over- or under-treat patients, which employed physicians should strive to recognize and address.”  It is clear, however, that the “employer-made-me-do-it” will not be an acceptable defense.

[1] Johnny Paycheck was a popular country music singer in the 70’s whose biggest hit was “Take This Job and Shove It,” a working man’s anthem at the time written by David Allen Coe.

There has been a resurgence of practice acquisitions of late. If you are an owner in your practice, chances are you are considering selling your practice or soon will be. Other than purchase price, which is the bait on the hook, what else should you consider?

Who’s Your Buyer?

In general, there are three types of buyers. First, there are hospital buyers. With few exceptions, our recent experience has been that hospitals pay practices the fair market value of tangible assets. Often, the “value” is achieved by more lucrative employment agreements as a result of the hospital system’s reimbursement rates that are more favorable than what a private practice might negotiate. There is not a lot of money transferred at closing.

The second types of buyers are other practices. Often, acquirers have built an efficient practice, and believe that they can squeeze inefficiencies out of smaller practices and make them more profitable. These acquirers usually have methods and processes that, when shared, make the acquired practice more profitable and thus more valuable.

These acquirers may have a long range plan of building a bigger practice, which would make them more valuable to the third type of buyer, private equity backed management service organizations, or “MSOs”. While some MSOs are not backed by private equity, we will assume for the purposes of this discussion, that they are. This type of transaction involves the MSO purchasing the non-clinical assets of a practice, including goodwill. The practice owners often sell their ownership in the practice to a physician who may be “friendly” with the MSO. The friendly physician, simultaneous with the closing, causes to enter into a long term management services agreement (MSA) with the MSO. These types of transactions have become popular among practices because, well, adult money changes hands at closing. The MSO receives a return on its investment through the fees paid under the MSA. Often, these fees are paid from the reduced compensation of the providers in the practice. Further, in many of these transactions, owners in the practice are required to “roll-over” purchase price into the MSO as an investment.

What Is Your Timing?

Often, timing can dictate the type of purchaser whom you pursue. We have helped smaller practices whose founder has experienced health issues and must transition his or her practice on a short time frame. Founders often do this to transition loyal employees and to address the nightmarish administrative burden of administering patient charts of a closed practice. In those cases, hospitals or other practices may be a better fit because there is often a prior working relationship between the buyer and seller.

Donating Your Practice

Another exit strategy is for the founding physician to donate his or her practice to a non-profit hospital. With some significant caveats, a physician may be able to deduct as a charitable contribution the appraised value of his or her practice. This allows the physician to meet his or her transition goals with respect to employees and patient charts, while at the same time giving him or her significant tax advantages that may outweigh mere liquidation value of the practice.

What Are Your Goals?

If you have plenty of time to search for a buyer, then your goal is to obtain the most value for your practice. This is not only a function of purchase price, but also depends on the tax treatment of the consideration you receive. For example, if your practice is a C corporation and you sell assets, the corporation will pay tax on the gain resulting from the sale, and the C corporation’s shareholders will pay tax on the dividend they receive as a result of the sale. C corporation dividends are not deductible by the C corporation.  As a result, this phenomenon is often referred to as a “double tax” since the C corporation pays tax on the gain and the shareholders pay tax on the resulting dividend.

The goal should be to structure the transaction so that there is no double tax, that the proceeds received by the owners are taxed at what have been lower capital gains rates, and that the tax on any roll-over equity be deferred until that roll-over equity is liquidated. This is often easier said than done.

Second Bites of the Apple

As a general rule, if practices sell to private equity, they are often valued based on a multiple of “EBITDA,” which is “earnings before interest, taxes, depreciation, and amortization.” Also, as a general rule, larger practices can often command a higher multiple of EBITDA than a comparably run smaller practice. One way to think of this is that one practice with 100 providers would be more valuable than the sum of the value of 50 practices with two providers each. This matters because with practice and MSO acquirers, the selling physicians may be asked to roll-over equity into the new enterprise. The goal of course is that the new enterprise will grow and prosper, and the rolled over equity will create another liquidity event for the physicians.

Not as Easy as It Looks

The complexity of a sale is often dictated by the type of buyer. In a hospital transaction, there is usually an asset purchase agreement and employment agreements for the providers. Since hospitals are exempt from the prohibition on the corporate practice of medicine, they can either directly employ the acquired physician, or own an operating LLC that does so. Further, an acquiring practice can directly employ the acquired physicians. The rub comes when lay companies like MSOs are purchasing non-clinical assets. Because MSOs cannot own medical practices, the transactions involving their relationships with medical practices are often fraught with peril. In short, don’t try this at home.