Tag: Healthcare Law

By: James D. Wall, Esq.

Physicians often myopically rely on starting salary as the sole criterion for deciding which prospective employer has the better offer.  However, draconian provisions in an employment contract can make the newly employed physician long for the “good ole days” when he or she was a resident.  Here are some points a physician should consider before entering into an employment contract.

Termination Clauses

Almost all contracts (regardless of term) allow the employer to terminate the physician “without cause” upon prior written notice, which typically ranges from 60 to 180 days.  “Without cause” means the employer needs no reason (or “cause”) for the termination.  A physician can minimize the adverse impact of this type of termination by requiring the employer to waive the non-compete or pay for physician’s tail coverage (more on these below) if the employer terminates without cause.  Further, while without cause termination provisions are prevalent, they are also almost always reciprocal, thus allowing the physician the right to terminate without cause with the same notice as the employer.

Call

It is important for the physician to understand his or her call obligations at the outset.  The physician should understand how many physicians are in the call pool and whether the physician provides a certain service that will make it difficult for others in physician’s specialty to take call for physician.  If the contract requires active privileges at neighboring hospitals, what do the hospitals’ bylaws require regarding unattached call?  Often, bigger practices are loathe to mention a specific amount of call in the agreement because they have robust and time-tested call policies and need flexibility if someone in the call pool leaves.  Nonetheless, even if an employer is unwilling to address call in its agreement, it is important for the physician to have a full understanding of call.  

Type of Work

It is sometimes difficult to get an employer to put in writing exactly what type of work a physician will be performing.  However, for certain specialists, it is extremely important to find out what type of work he or she will be doing.  This is especially true if the physician must do a certain number of procedures in order to obtain board certification.  

Compensation

A popular method of compensating physicians is to provide a guarantee for one to three years and then pay the physician based on work relative value unit (often abbreviated “wRVU”).  Sometimes, the guarantee is a floor, and the physician gets a bonus if he or she exceeds wRVU expectations.  Payment on wRVUs requires the employer to accept the risks of collection.   A physician may want to use outside resources (like MGMA) to determine if the amount of compensation per wRVU and the minimum number of wRVUs for the year are reasonable.  After the guarantee period expires, a physician may be at risk if he or she is paid more in salary than earned in wRVUs, which could trigger a repayment obligation.

Partnership Potential

Many independent practices are being purchased by hospitals, management service organizations and bigger practices, often resulting in one-time lucrative payouts to the practices’ owners.  If a physician is in an arrangement where he or she has a long partnership track, and the practice is sold the day before he or she becomes a partner, then the physician will receive nothing for his or her sweat equity in the practice.

Non-compete Covenants

Non-compete clauses are unenforceable in some states, and the Federal Trade Commission has recently proposed rules that would make non-competes unenforceable in all states.    Even in states where non-compete covenants are enforceable, physicians can challenge the covenants for being unreasonable or against public policy.  Nonetheless, prior to signing a contract, a physician should assume that the covenant is enforceable as written.   This means it is important to limit the temporal and geographic scope, and to attempt to require the employer to waive the non-compete in certain circumstances, such as the employer’s termination of the physician without cause.     

Cover Your “Tail”

Many employers provide “claims-made” malpractice coverage for their employed physicians.  If the physician’s employment terminates, the physician’s coverage is also terminated.  Generally, if a claim is made during the term of the employee’s employment, there is coverage.  However, if a claim is made after the employee has left the employer, then the former employee would not be covered.

This gap can be insured by the employee’s purchase of what is known in the insurance industry as a “tail.” The tail covers for acts or omissions occurring prior to his or her termination, but for which the claim is made after termination of employment.  The tail could be costly, often twice the amount of the annual premium.  Some bigger health systems have an occurrence policy which obviates the need for tail.  However, if the employer has a claims-made policy, the physician should consider whether to push the cost of the tail to the employer under certain circumstances.  

Conclusion

Often, contracts that look very generous because of starting salary might not be as generous when the physician considers other factors.

Article published in the North Carolina Psychiatric Association March 2024 Newsletter.

By: James D. Wall, Esq.

If you are contemplating a sale of your practice, you should thoughtfully consider the issues raised below. Selling a practice is in some respects like selling a house:  that is, you wouldn’t sell your house without first making sure the house presents well to potential buyers. The same is true for a professional practice.
 

Tip One:  Corporate Hygiene

You should review corporate charter documents to make sure you have conducted your business as originally authorized. Further, you should make sure that your practice is registered with the applicable licensing board. If there have been any internal changes of ownership, those should have been reported to the licensure board. You should also review your practice’s minutes to make sure those comply with state law.
 

Tip Two:  Employment Review

You should review (or have someone review) the employment agreements of all the providers and key employees of the practice. Can the employment agreements be assigned? If a contract is silent on assignability, then it is generally considered to be assignable. Does a “change of control” provision trigger an employee’s right to terminate the agreement. Further, you should review in employees’ contracts any restrictive covenants regarding competition. North Carolina courts have interpreted a transaction to trigger the commencement of the post-employment restrictive term. That is, if the covenant prohibits competition for one year after employment ends, some courts have concluded that the period commences to run as of the date of a transaction pursuant to which the employer is sold. You should also confirm that all of your licensed providers are current with respect to license renewals.
 

Tip Three:  Review of Third-Party Payor Agreements 

Many third-party payor agreements restrict assignment. Thus, it is highly unlikely that provider agreements would be assignable. Upon a transaction, providers often need to be recredentialed, which of course takes time. Some third-party payors require prior written notice to any type of change in ownership.
 

Tip Four:  Evaluate Third-Party Vendor Contracts 

The same type of analysis must be done with respect to third-party vendors. The contracts of primary concern are leases of your office space and equipment. These contracts typically do not allow assignment without permission from the lessor. If permission is required, that needs to be noted prior to sale so that the acquiring entity can continue with respect to office space and significant equipment. Institutional lessors often need quite a bit of time to agree to an assignment.
 

Tip Five:  Financial Information

You will want to meet with your accountant to make sure that you have financial reports up to date and in order for the previous three years. You should be able to explain any unusual peaks or valleys in profits, and any significant balance sheet items. If you received money as a result of the pandemic, you should have documents regarding your application for funds as well as the forgiveness of any loans due.
 

Tip Six:  Consider Type of Sale

You should also consider the ramifications of selling stock or assets. In our state, a medical practice must be owned by physicians (there are certain exceptions with respect to physicians owning practices with other health professionals, such as optometrists, psychologists, and APPs). Nonetheless, an unlicensed third party will not be able to purchase the stock of your practice.
 

A management services organization (referred to as an MSO) can purchase certain assets of your practice, but a licensee must own a medical practice. An MSO makes its money by managing the non-clinical affairs of the practice for a fee. The MSO often embraces a “friendly physician model” wherein the practice continues to be owned by a physician who would be “friendly” to the MSO and enter into a long-term management agreement with the MSO.
 

You need to discuss with your tax advisor the ramifications of an asset sale and a stock sale before you enter into a letter of intent with a prospective purchaser. Purchasers typically like to buy assets because this structure is more likely to extinguish prior claims against the practice. Sellers often favor sales of stock or membership interests because of favorable tax treatment.
 

Tip Seven:  Review Policies

Buyers active in the health care space will want to review significant policies of the practice in their due diligence. In this regard, you should make sure that HIPAA and other policies are up to date and are being followed. It is not uncommon for practices to have very well drafted policies, but very few in the practice know of their existence.
 

Tip Eight:  Fine-Tuning EBITDA

If you have a time horizon that will permit some planning, you will want to use that opportunity to maximize EBITDA. EBITDA is an acronym for “Earnings Before Interest, Taxes, Depreciation and Amortization.” Many transactions will be priced at a multiple of EBITDA. So, for every dollar that is created in EBITDA, purchase price will be increased by the multiple. For example, if the multiple is six times EBITDA, one dollar in EBITDA results in six dollars of purchase price. Typically, purchasers will look at a trailing 12 to 24 month calculation of EBITDA to determine purchase price. While these calculations routinely exclude extraordinary items, there may be opportunities within the practice to save money, thereby increasing purchase price. Also, in a professional practice, salaries of the owners are often normalized using national data, and then the excess is added to EBITDA. So, for example, if a doctor is making $350,000 in his or her own practice, and the national data suggests that earnings should be $280,000, the $70,000 is added back to earnings.
 

Tip Nine:  Be Ready to Commit Post-Sale Employment

The purchase price can be significantly affected by the sellers’ willingness to stay around post-sale as employees of the newly created enterprise. If you are willing to stick around, then that often creates a higher purchase price.
 

Tip Ten:  Tell the Truth

Resist the urge to puff beyond the boundaries of truthfulness. If you try to cover up termites with plywood, the buyer will find the termites in its due diligence, and all trust will be lost.

By: James D. Wall, Esq.

As has been widely reported, the Federal Trade Commission (FTC) recently proposed a new rule that would prohibit employers from imposing noncompetes on their workers. This ban would materially and dramatically affect the healthcare industry, especially in North Carolina, where noncompetes are generally enforceable. Many providers have executed employment agreements that contain restrictions on competition with their employers. Additionally, the FTC estimates that approximately 30 million workers have agreed to a noncompete.

Purposes for the Proposed Rule.

The FTC’s chair, Lina M. Kahn, stated when releasing the proposed rule that the freedom to change jobs “is clear to economic liberty and to a competitive, thriving economy.” The FTC has indicated that the noncompetes prevent workers from switching jobs freely and deprives them of higher wages and better working conditions. Interestingly, the FTC specifically pointed out the burden on “doctors” (among others) in its release announcing the proposed ban. The FTC estimated that banning noncompetes would increase workers’ earnings by nearly $300 billion, save consumers up to $148 billion on health costs each year and double the number of companies in the same industry that would be founded by a former worker. The FTC also estimates that 18% of US workers are covered by noncompetes. Anecdotally, with respect to healthcare workers in this State, it would seem that the number would exceed 90%.  Our office has drafted and reviewed hundreds of provider employment agreements, and well over 90% of those agreements contain restrictions on competition.

In some states, noncompetes are disallowed. In North Carolina, noncompetes are permitted and enforced if they meet certain criteria. They must be in writing, protect a legitimate business interest of the employer, be reasonable as to activity restricted, and not be against public policy. Often, physicians who are contemplating leaving their existing employer are faced with the choice of moving their families, taking temporary locums jobs outside the geographic scope of the noncompete, staying with their existing employer, or hiring an attorney to fight the noncompete. Some physicians find none of these options appealing.

What the Rule Prohibits.

The FTC’s proposed rule would prohibit employers from using noncompete clauses with limited exceptions. That is, employers could not:
 

• enter into or attempt to enter into a noncompete with a worker;
• maintain a noncompete with a worker; or
• represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

The proposed rule would apply to independent contractors as well as employees and would require employers to rescind existing noncompetes and affirmatively inform workers that they are no longer in effect. This, of course, could create chaos in the healthcare industry in our State, where many providers are employed by health systems and large providers who often exact restrictive covenants from their employees. Would physicians bound by restrictive covenants flee their employers? The ban on noncompetes would not extend to other similar types of employer restrictions like nondisclosure agreements.

Statutory Predicate for the Ban.

The FTC cannot pass legislation; only Congress can do that. The FTC, however, can implement existing legislation when Congress has given it rule-making authority. The FTC is relying on Section 5 of the FTC Act, which bans unfair methods of competition. The FTC has pointed out that its current proposed ban is not unprecedented. It has taken action against a Michigan based security guard company and its key executives for using coercive noncompetes with respect to low wage employees. The FTC has also recently ordered two of the largest US glass container manufacturers to stop imposing noncompetes on their workers because they obstruct competition and impede new companies from hiring.

Inevitable Challenges.

As could be expected, organizations that tend to side with the causes of employers have not so subtly hinted that the FTC is overstepping its bounds. The US Chamber of Commerce, for example, has indicated that it plans to take the FTC to court over its proposed rule. The Chamber CEO has stated in a Wall Street Journal op-ed that the Chamber will oppose the proposed regulation “with all tools at our disposal, including litigation.” The Chamber and other groups have indicated that allowing the FTC to vitiate provisions in hundreds of thousands of contracts is effectively diving down a steep, slippery slope that would have no contractual provision off limits to the FTC. These opponents also assert that there is a long history of regulation of noncompetes at the State level. That is, each State legislature decides what is best for its citizens.

What’s Next?

When the FTC proposes a rule, it allows the public to comment on the proposed rule. (If you doubt the impact of noncompetes on the healthcare industry, I would suggest that you spend fifteen minutes reading the public comments, many of which are from providers who feel trapped in jobs they believe they cannot leave). After the comment period expires, the FTC will decide whether to adopt the rule. If it adopts the rule, there will inevitably be litigation, and it is hard to imagine that litigation stopping short of a trip to the US Supreme Court.

Even if the rule is not adopted or is successfully challenged, this exercise has brought noncompetes to the front burner. Both parties have draft bills in Congress addressing noncompetes. If the rule is not passed, one would anticipate other avenues to curtail the use of noncompetes either by congressional action or, with respect to healthcare, some other agency prohibiting noncompetes to participate in government contracting or government programs.

By: James D. Wall, Esq.

As shrinking reimbursement and heightened regulation force doctors to join hospital systems or practices managed by management services organizations (MSOs), some doctors are pushing back. A recent California lawsuit filed by a group of physicians against an MSO may be the canary in the coal mine.

The MSO Model

California, like about three dozen other states including North Carolina, has prohibitions restricting the corporate practice of medicine (CPOM). These states prohibit lay corporations from owning medical practices. There is a popular model that “works around” these prohibitions. MSOs often become affiliated with medical practice through a management services agreement (MSA). The MSA typically provides that the MSO will provide all administrative and non-clinical support needed by the medical practice in exchange for a significant fee. On its face, this has appeal: let the physicians practice medicine and leave the administrative headaches to someone else. In this model, the medical practice is often owned by a “friendly physician,” who is called friendly because of the physician’s ties to the MSO. The MSA will acknowledge that the medical practice has control over all matters clinical. The MSO controls everything else. Since the MSO is not a medical practice, it can be owned by private equity or any other lay investors.

The California Lawsuit

In the California suit (American Academy of Emergency Medicine Physician Group, Inc. v. Envision Healthcare Corporation, et al), a company that provides administrative and business services to physician groups has alleged that an MSO has violated the California restrictions on the corporation practice of medicine. While the corporate practice of medicine is a creature of state law and this suit would affect those in California, one could argue that the MSO model itself is at issue.

In the lawsuit, the plaintiff alleges that the defendant MSO used various entities that “exist only on paper” to undertake functions the law permits only physicians to undertake, such as employing physicians or providing medical coverage for hospitals. It further alleges that the MSO possesses the direct and indirect power to direct or cause the direction of the management and policies of the professional corporations which is contrary to law.

The plaintiff also alleges that MSO uses “friendly physicians” to control hundreds if not thousands of medical groups. Plaintiff also alleges that the MSO installs executives or officers in the professional medical corporations who are bound by side agreements to sell the entities to the MSO if requested for nominal amounts. The plaintiff alleges that the bylaws of these professional entities prevent the removal of the MSO officers as officers or directors of the medical practice. The plaintiff also alleges that the MSO ensures corporate control of the professional entities by requiring the physicians’ owners to execute agreements limiting their authority. These restrictions include a restriction on the issuance of dividends, the creation of additional stock, the selling of the medical group, or the transfer of shares. The plaintiff has alleged that there are other indicia of MSO control including the MSO negotiating third party payor contracts and deciding whether the medical practice can enter into such contracts, the MSO determining fees to be charged patients, the MSO making coding decisions, and the MSO keeping all revenues after physician salaries are paid. Given these indicia of ownership, the plaintiff argues that the MSO is the functional owner of the medical practices.

So What?

Even if the allegations in the Complaint are proven true, one could ask “so what?” That is, if state law requires a professional practice to be owned by licensed professionals, that requirement appears to have been met. Further, if state law does not restrict the types of board members, then a professional corporation can appoint lay directors. The “so what?” equivalent in litigation is a motion to dismiss. In this case, the defendants filed a motion to dismiss, which was denied.

Friends of the Court

What is also interesting in this California case is that two organizations have filed for permission to submit Amicus Curiae briefs (amicus curiae means “friend of the court” and is used when a non-party has a strong interest in the matter and wants to influence the outcome). The American College of Emergency Physicians (ACEP), which states that it is the nation’s largest nonprofit professional association focused on furthering the professional development of emergency physicians, requested and received permission to file a brief in the matter. It argues in support of plaintiff: “ACEP firmly believes that medical decisions must be made by physicians and opposes any practice structure that threatens physician autonomy, the patient-physician relationship, or the ability of the physician to place the needs of patients over profits.” It further asserts that medical practices, not lay companies, should control (i) a patient’s medical records, (ii) hiring and firing of physicians and allied health staff, (iii) decisions regarding coding, and (iv) approving the selection of medical equipment and supplies.

Additionally, the California Medical Association (CMA) requested and received permission to file a brief in the matter. CMA describes itself as having served as “the voice of California’s house of medicine to advocate for the medical professional against intrusions and transgressions…” CMA further states in its motion that “it springs from a fundamental public policy to protect and preserve the independence of physicians’ professional judgment in the care of their patients, free from external forces that can interfere with the physician-patient relationship.” Both advocacy groups have filed briefs supporting the plaintiff.

Canary in the Coal Mine or Anomaly?

This case may signal the next wave of lawsuits by physician advocacy groups against MSOs. What is interesting about this case is that the manner in which many MSOs do business is under attack. That is, the plaintiff complains that the MSO is exercising undue control over professional entities even though the underlying documents may satisfy the mandates of state law. Further, it is eyebrow raising that the plaintiffs in this case did not request monetary damages; they merely requested that the court enjoin the MSO from continuing to act as it had been acting. The trial date is set for early 2024. Because of the lack of a request for monetary damages, and the suit challenges the way of doing business for many MSOs, it would seem the likelihood of settlement would be remote.

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.

By: James D. Wall, Esq.

Generally, the physician’s self-referral law (often referred to as “Stark”) prohibits a physician from referring a patient whose services may be reimbursed by a government payor (e.g., Medicare) for certain “Designated Health Services” (“DHS”) to an entity in which the physician or immediate family member of the physician has a financial relationship, unless an exception applies. “Designated Health Services” is defined to be ancillary goods or services reimbursed by Medicare, and include (i) clinical laboratory services, (ii) physical and occupational therapy services, (iii) radiology and other imaging services, and (iv) durable medical equipment. Stark defines DHS by reference to certain CPT codes, a list of which is published each year and can be found at https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral.

Physician practices that provide DHS implicate the Stark prohibitions because the physicians in the practice order tests, goods or services to be performed or provided by the practice. For example, if a physician orders lab tests to be performed by a laboratory that is owned by the practice, the Stark law is implicated. Same would be true for a cardiologist ordering imaging services to be done in-house, or an orthopedist ordering physical therapy services. In these examples, physicians would be referring tests to an entity (i.e., their practice) in which the physician owns an interest.

Like many regulatory paradigms, the prohibition is broadly defined, but exceptions carve out behavior that the government does not want to prohibit. While a deep dive into each exception is beyond the scope of this article, a prevalent exception for referrals within the same practice is the In-Office Ancillary Services Exception (IOASE). In order to rely on IOASE, a practice must meet the definition of a “group practice” under Stark. IOASE protects the in-office provision of certain DHS that are ancillary to the medical services provided by the physician practice. IOASE requires services to be personally provided by the referring physician, a physician-member of the same group practice as the referring physician, an individual who is supervised by the referring physician, or if the referring physician is a group practice, by another physician in the group practice, provided the supervision complies with all Medicare care payment/coverage rules for the services.

Second, IOASE requires that services be furnished in the same or centralized building. There are three alternative tests for this location requirement, but only one must be met. All three tests require the referring physician to have offices in the building that are open to patients a minimum number of hours per week and the physician must regularly practice medicine and furnish physician services for a minimum number of hours per week in that office. Additionally, IOASE requires the DHS to be billed by the physician group practice performing and supervising the services, or by an entity fully owned by the physician or the physician’s group practice (or by an independent third-party billing company acting as an agent for the group practice).

Compensation Arrangements

Regulations promulgated under Stark prohibit physicians from being paid based on the “volume or value” of their referrals of DHS. This has generally prohibited group practices from paying physicians based upon the specific orders or prescriptions for DHS provided by the group practice. Additionally, Stark regulations allow practices to split profits from DHS either on a share and share-alike basis, or based on the physician’s production excluding DHS compared to the production (excluding DHS) of other participating physicians in the practice.

New Regulations Clarify Physician Compensation

New regulations promulgated effective January 1, 2022 require compensation arrangements to meet certain criteria in order for the practice to enjoy the designation of a “group practice” under Stark.

The requirements for a group practice can be summarized as follows:
 

• Practices should not pay physicians for DHS the physicians order, either by counting the revenues or profits from the referrals in the physician’s production or using the revenues or profits to calculate a productivity bonus.
• A practice may pay a productivity bonus based solely on a physician’s personally performed services (these services are not “referrals” because they are personally performed by the physician).
• A practice can distribute profits from DHS and not be deemed to be paying physicians based on the “volume or value of referrals” by distributing the profits in one of the following manners: (i) per capita; or (ii) based on distributions of the group’s revenues attributed to services that are not DHS and would not be considered DHS if the service had been paid by Medicare even if the service was paid by a private payer.
• A practice may use certain criteria to pay productivity bonuses to ensure that the bonus is not based on the “volume or value of referrals” of DHS: (i) the productivity bonus is based on the physician’s total patient encounters or the RVUs personally performed by the physician; or (ii) the services on which the productivity bonus is based are not DHS and would not be considered DHS if they were payable by Medicare.
• Practices may have an exemption from these rules if revenues derived from DHS constitute less than 5 percent of the group’s total revenues, and the portion of those revenues attributed to each physician in the group constitutes 5 percent or less of his or her total compensation from the group.

Notably, the oft-used method of carving out government payer business does not work. In order to enjoy the designation of a “group practice” under Stark, the services on which the productivity bonus is based cannot be DHS nor can they be DHS if they were payable under Medicare. Thus, pay plans that may once have been compliant may have fallen out of compliance.

By: Jan Yarborough

Contractual Indemnity clauses have no place in participating provider contracts. This is not news. Managed Care / Health Law continuing legal education presentations, position statements, and blog posts have been warning providers about this issue for decades.

For example, this February 10, 2012 Position Statement of American Academy of Emergency Physicians (“AAEM”):

Indemnification Clause in Emergency Medicine

Emergency physician contracts should not include indemnification or “hold harmless” agreements regarding the hospital or practice site. These agreements unfairly shift risk to emergency physicians and this risk is not generally insurable.

Read Article

Liability Coverage Policies Exclude CONTRACTUAL Indemnity Obligations

The “not generally insurable” phrase in the AAEM’s 2012 position statement reflects the fact that medical malpractice coverage policies expressly exclude coverage for contractual indemnity clauses. In discussions about this exclusion, liability carriers indicated that the exclusion does not apply to indemnity obligations enforced by common law (rather than under a contractual indemnity clause), so long as the coverage applied to the activity.

Not many years ago, managed care payors fully understood this issue facing providers and routinely deleted or allowed edits to the indemnity clause in their participation agreements upon request. Increasingly, however, payors react with horror and disbelief if the provider requests removal of contractual indemnity clauses. This growing reluctance appears to be because payors believe “indemnity” is a synonym for “damages” in a future breach of contract dispute. This belief is uninformed.

Indemnity Does NOT Mean Damages for Breach of Contract

If a party breaches its obligations outlined under a contract, courts assess damages for that breach of contract. This means that if a provider breaches a term in a participating provider contract, the payor may seek monetary or other relief for the damages to the payor resulting from the breach. This rule applies regardless of whether the contract includes an obligation for the provider to indemnify the payor.

Independent Actors Should Remain Responsible for Their Own Actions or Omissions

Participation agreements are neither agency nor employment agreements (and most of these agreements affirmatively so declare). Rather, these agreements require each party to meet its own obligations and responsibilities.

The common law of indemnity generally applies when parties are in unique relationships such as agent and principle, joint venturers, or employer and employee. The common law of indemnity does not apply to arrangements, where independent parties each have their own obligations. Participation agreements do not create the unique relationships where common law of indemnity routinely applies. In fact, those agreements routinely declare the providers to be independent contractors of, and not the agent of, the payor.

Public policy favors not shifting risk from one actor to another in circumstances when each party has its own obligations; each party will thus endure the consequences of failure to correctly perform its obligations. If a participating provider agreement obligates the provider to indemnify the payor, that means the provider essentially insures the payor’s risk for the payor’s own wrongful actions or omissions. Liability policies rightfully exclude contractual indemnity provisions to avoid covering the wrongful actions of a third party the carrier has never met and vetted.

Note, mutual indemnity clauses typically create, without clearly resolving, confusion between which party is actually assuming a given risk. A typical indemnity clause in a participation agreement likely will broadly obligate the provider to indemnity the payor for losses related to the provider’s “actions or omissions.” (Notably, this common language holds the provider responsible for any action or omission without regard to whether or not the action or omission is otherwise wrongful or negligent). Whether or not the contract also requires the payor to indemnify the provider for the payor’s actions or omissions, the provider’s liability coverage policy’s exclusion clause still applies. Furthermore, adding a mutual indemnity clause in these types of agreements – where each party has its own tasks under the contract and neither is agent of the other – leaves many questions as to how to apply the indemnity clause to shift risk between independent contractors.

Possible Tools

Commentary and articles consulted in the preparation of this article are unanimous in alerting providers to the unreasonable risk of contractual indemnity clauses. However, the several payors with these clauses in their participation agreements remain unconcerned (or unconvinced). Many payors claim (maybe correctly) that thousands of providers in North Carolina have voiced no objection to the clauses. Thus, if an informed provider requests complete deletion of the clause, the payor may accuse the provider of being an unreasonable, uninformed outlier.

Alternative approaches may be more effective. The provider could request his or her med mal carrier to review and provide a statement to the carrier outlining the unreasonable risk to the provider for contractual indemnity clauses. Alternative language deleting the indemnity clause, while stating that each party is responsible for its own actions or omissions may be accepted by the payor, especially if followed by a provision that states that either party may seek indemnification as available under North Carolina law.

Conclusion

Expenses and liability related to contractual indemnity clauses are expressly excluded in liability insurance policies such as medical malpractice coverage. This means attorneys’ fees and damages must be paid out of the provider’s own assets in the event of a dispute under contractual indemnity clause in a participating provider agreement.

By: James D. Wall, Esq.

How could a physician have any risk in being “friendly”? In this context, “friendly physician” refers to a particular type of arrangement where a physician-owned practice is managed by a management services organization, often referred to as an “MSO.” The term originates from the fact that the “friendly physician” is deemed to be friendly to the objectives of the MSO.

Basic Structure Involving a Friendly Physician

In North Carolina, a medical practice, with few exceptions, must be owned by those who are licensed to practice medicine in North Carolina. Certain businesses such as med spas and urgent care centers often have the need to practice medicine but are managed by entities that are not owned by physicians, and therefore cannot provide medical services. So, for example, if a med spa wants to provide certain injections that would constitute the practice of medicine, it must do so through a person who is licensed to provide the injection. Further, the licensee cannot be employed by the med spa to provide the injection; he or she must be employed by a practice that is licensed to provide the injection.

This conundrum is often addressed by the “friendly physician model” whereby a physician establishes a medical practice that is then managed by an MSO, which has expertise in financial, marketing and other non-clinical aspects of running a medical practice. The basic tenet is to leave to the medical providers the practice of medicine, and allow everything else to be managed by the MSO.

The risk is that MSOs overstep their boundaries and the relationship is viewed as only a “relationship on paper,” where the MSO actually usurps many of the obligations and responsibilities of the physician-owner. Our experience is that when these relationships run awry, the licensing board is much more interested in its licensee (in this case the physician) than it is the MSO. Physicians who may be willing to serve as a friendly physician need to understand certain obligations that may be endemic to being a friendly physician.

Read Everything

When I first started practicing law, I had a mentor who had sage advice on which I have relied over the thirty plus years I have practiced: “read everything.” In this context, it is important for the physician to read all of the documents involved in the relationship, which would include the organizational documents for the physician practice as well as the documents that memorialize the relationship with the MSO (primarily a management services agreement, often referred to as an “MSA”). Given the nature of the relationship and the stakes, it is often advisable for a physician to employ counsel. (Analogous to your barber or hairdresser telling you that you need a haircut, so it is that an article penned by a lawyer suggests that you obtain legal advice).

All Decisions Cannot be Turned Over to the MSO

While the MSO provides certain valuable services to the medical practice (marketing, receivables management, and human resource assistance), certain obligations cannot be turned over carte blanche to the MSO. For example, licensing boards will typically want licensees and not laypersons to counsel other licensees about failures to meet practice norms. Thus, an employee of the MSO should not counsel a physician on how the physician should practice medicine. If the practice relies on advanced practice providers “APPs”, then the collaborating and supervising physicians should also have a line of communication to the physician-owner and if not, to a person licensed to handle communications from licensees. It is important that there is no lay control over clinical decision-making. The issue of who is in control could become murky if there is a non-licensee in the chain of command regarding clinical issues.The physician-owner should either take an active role in counseling providers, or hire another licensee to assist in that endeavor.

Keep the Fees Flat

Further, our medical board has specific rules about fee-splitting, and would prohibit a fee based on a percentage of revenues or profits in this context. Fees to the MSO should be flat and not based upon the volume or value of referrals. Fees may be renegotiated periodically, but again, should not be based on the volume or value of referrals but should be based on the value of the managerial services provided by the MSO.

Take Care of Charts

Physicians have a special relationship with patients and the information that is generated by a patient visit. All physicians have (or at least should have) a working knowledge of the requirements of the Health Insurance Portability and Accountability Act and regulations adopted thereunder (HIPAA). If the MSO has access to the charts for billing or other purposes, the practice should have a HIPAA-compliant business associate agreement with the MSO. Additionally, the ownership of charts should be maintained by the physician practice.

Follow the Agreements

We have seen more than once situations in which the agreements establishing the friendly physician model were compliant, but the parties did not follow the agreements. It is basic. The physician should periodically review the agreements he or she signed to make sure the parties are adhering to their terms.

Act Like an Owner

In short, the friendly physician should act as if he or she owns the medical practice, because he or she does. This would include periodically reviewing financial reports as well as handling any complaints regarding providers (or delegating the handling of such complaints to someone who holds an appropriate license). Ultimately, the licensing board would look to the physician-owner to see if he or she “acted like an owner” in handling these issues.

By: James D. Wall, Esq.

In July, President Biden issued an executive order at least signaling his administration’s disdain for covenants not to compete for physicians (often referred to as “non-competes”). The Executive Order (EO) encourages the Federal Trade Commission to ban or limit non-competes, including in health care. While the EO did not ban non-competes in the health care setting, it is perhaps instructive about the stance the administration may take in the future.

Are Covenants Not to Compete Enforceable Against Physicians?

In some states, covenants not to compete are unenforceable for physicians. In North Carolina, courts continue to enforce covenants not to compete involving physicians, even when doing so forces hundreds of patients to find a replacement physician. Valid covenants must be narrowly tailored to protect the “legitimate business interest” of the employer.

What is a Covenant Not to Compete?

A non-compete restricts a physician from participating in certain job-related activities in a geographic region for a specific period of time, which often extends post-termination of employment.

Issues Regarding Enforceability

While courts in North Carolina enforce non-competes, there are certain restrictions. First, a covenant not to compete must be in writing. Thus, while an agreement of employment can be oral, a covenant not to compete must be in writing.

Second, the covenant must be supported by adequate consideration. Our courts have held that an offer of employment is deemed adequate consideration to support a covenant. Interestingly, our courts have held that mere continued employment is not adequate consideration to support a covenant. For example, if a physician has worked for an employer for several years, and the employer decides that it wants all of its providers to sign covenants not to compete, the employer must provide the employed physician consideration (e.g., a raise or bonus) to support the covenant. If the employer simply says, “sign this or you will be fired” and the physician signs, the covenant would be attacked for lacking supporting consideration. That is, the physician’s continued employment is not adequate consideration to support the covenant.

Third, the restrictions contained in the covenant must be “reasonable” to protect the “legitimate business interest” of the employer. Reasonableness, like beauty, is in the eyes of the beholder, or in this case, the trial judge. Arguments regarding reasonableness usually gravitate to the three restrictions: activity prohibited, geographic scope, and temporal scope. The stakes are high; if any provision is deemed unreasonable by a North Carolina court, the judge is authorized to strike the unreasonable provision, but not re-write it.

Activity Prohibited

Generally, the activity prohibited should be the activity that the physician performs for the employer. Thus, to prohibit a physician from “working for another medical practice” might be too broad, since this would ostensibly prohibit the physician from, say, mopping floors. The “practice of medicine” is tighter, and, the “practice of cardiology” even narrower.

Temporal Restriction

Generally, most of the covenants we draft or review are between six (6) months and twenty-four (24) months post-termination. Again, if a covenant restricts a physician for three years post-termination, and a court finds that only two years is necessary, the court will strike the three year provision, and not rewrite the covenant to two years.

Geographic Restriction

This is often the hardest to evaluate, especially concerning employers that have multiple offices and with physicians who perform some administrative functions for all offices, or who float from office to office providing professional services. A practice probably has a good idea, by the zip codes of its patients, on the territory from which it draws most of its patients. If the restriction goes beyond that territory, it could be struck as unenforceable.

Public Policy Exception

Finally, even if a covenant passes the first three tests (in writing, supported by consideration, and reasonable), it can still be struck as being against public policy. If the court determines that if the covenant were enforced, the public would be deprived of a much-needed service. This is often an argument posited in cases involving sub-specialists.

What’s Next

While the EO has not really changed things in North Carolina, it is instructive that President Biden’s administration is concerned with competition in health care. President Biden has attempted to require vaccines for those working for health care facilities that receive Medicare dollars. It does not stretch the imagination that the administration could similarly direct CMS to prohibit restrictive covenants for those who receive Medicare dollars.