The cost of resolving disputes in court are often more than tenfold the cost of reaching agreement on issues that are easily addressed in employment agreements and buy-sell agreements. It is much easier to reach agreement on critical issues before problems arise. Following is a brief discussion of the reasons to document the business relationships among practice group physicians:
Employment Agreements:
Most practice groups have a compensation formula which may or may not be in writing. Often the compensation formula is the only issue the physicians have formalized. Following is a brief description of several other issues that should be addressed in an employment agreement:
Post-Termination Compensation: Most often problems arise when a doctor leaves a group. We have found that doctors who have been paid on a production basis expect to take their accounts receivable with them when they leave. However, without an enforceable agreement the accounts receivable often belong to the group practice. If you leave your group would you expect your compensation to end on the last day you work? Would you expect to receive part or all of your accounts receivable? Would you expect the group to deduct costs of collection or overhead costs from revenue collected after termination? Do you know what the amount of those deductions would be?
An agreement also allows a group to tailor the termination compensation based on the reason a doctor leaves the group. You may want different treatment depending on whether a doctor voluntarily resigns, is forced to resign or leaves due to death or disability.
Grounds for Termination of Employment: Physicians often believe that once they become partners or shareholders they cannot be forced out of a group. This is usually not the case. In many instances a majority of the board of directors or other governing body of a group practice could terminate the service arrangement with one or more of the physicians. This situation is often not what the doctors intend. When we bring this situation to the attention of our physician clients they often opt to require that a partner's or shareholder's employment can only be terminated upon the vote of all or nearly all of the other partners or shareholders (commonly called a super-majority). An employment agreement should also state the conditions under which a physician may leave a group, including the notice that must be given to the group so that the group can replace the physician or adjust its overhead.
Special Governing Provisions: Typically a practice is controlled by a majority vote of its governing body. However, through employment agreements (or other corporate documents) the owners can provide that certain actions require a super-majority vote. Common actions subject to a super-majority vote are the group's admission of new owners, major borrowing, major capital expenditures, opening of new locations, joining a new managed care plan and selling substantial assets.
Excluded Revenue: Do some members of your group earn revenue away from the group? If so, this revenue is an invitation to a future dispute if there is no agreement regarding whether these earnings belong to the group. Groups without agreements can find themselves locked in disputes in which the group tries to go back and recoup the outside earnings of a doctor that is leaving the group.
Restrictive Covenants: Some groups are legitimately served by protecting their primary practice areas from competition by a doctor leaving the group. Others want only to protect referral sources or patient lists. Another available protection is a restriction on hiring staff away from the group. Many options are available. However, without a properly drafted agreement the group is not protected from competitive actions of a doctor who leaves the group.
Uninsured Liabilities: Many groups expect that a doctor suffering a malpractice claim in excess of coverage to reimburse the group for any uninsured loss.
Confidentiality and Records Retention: Without an agreement the practice may be unable to protect itself from a withdrawing doctor disclosing confidential information regarding the practice. Also, by agreement, the practice ensures that it will remain in possession of all patient records. The withdrawing doctor would have the right to examine and copy records as needed for malpractice claims or administrative complaints. Of course, upon receipt of a properly executed patient request for a transfer of the patient's records the group must transfer the records.
Buy-Sell Agreements
Buy-Sell Agreements, also known as Stock Restriction Agreements, can be critical tools in the structuring of a practice. Without such an agreement any owner is free to sell his or her interest to a competitor or any other party (subject to securities laws and professional regulatory laws). This could result in a disgruntled owner selling his or her ownership interest to a group's competitor. The typical Buy-Sell Agreement provides these protections:
- Before an owner can sell his interest he or she must first offer the practice and the other owners the option to purchase the interest;
- If an owner is required to transfer his or her interest (e.g. divorce, creditor action) the owner must offer the practice and the other owners the option to purchase the interest;
- The owner may not pledge the ownership interest as collateral for a loan;
- In the event an owner ceases to be employed by the practice the practice may (or must) purchase the ownership interest;
- In the event of the death or permanent disability of an owner the practice must purchase the owner's ownership interest;
- In the event an owner ceases to be employed by the practice, that owner must repay any debts owed to the practice. In turn, the practice must protect the owner from any loss due to the owner's guarantee of any practice related debt.