Over the next several years, thousands of physicians are expected to stop practicing medicine. Their reasons for retirement are multi-variant, but the inevitable legal and business issues which a physician will confront--and must address before retiring from practice--are significant. Retirement is not as simple as removing the proverbial shingle from the front of the office, turning off the lights and riding off into the sunset or beginning a new career venture. The legal and business issues which a physician must resolve will vary depending upon their practice arrangement: sole shareholder, partner in a practice or employed physician.
As an employed physician, the physician's Employment Contract should include the time frames for termination and any non-competition provisions. This latter provision may be important if the physician is planning to perform ancillary medical activities, e.g., lecturing or intellectual property work, which may be precluded within a certain radius or timeframe in the non-competition provision of the employment contract.
If the physician is a shareholder of, or a partner in, a medical practice, the existing Shareholder's Agreement or Partnership Agreement should address the rights of a withdrawing physician. This agreement is the critical document which will govern the transition of the retiring physician. It should include the stock (or partnership share) valuation formula and buy-out provisions. The buy-out should specify the amount and duration of payments which the retiring physician will receive. Before announcing his/her retirement from that practice, a physician should carefully review his/her agreement and seek to have necessary changes made to ensure the agreement is beneficial, or at least not contrary, to their interests. Once the physician has announced his or her intention to retire, there is little incentive for the other shareholders or partners in the practice to sweeten their colleague's retirement package.
If the physician is in solo practice, the physician has two choices: sell the practice to another physician, or dissolve the practice. If the practice is sold, an Asset Purchase Agreement will need to be drafted. The Asset Purchase Agreement places a value on the practice and needs to describe the respective rights and responsibilities and legal and business liabilities of the selling and purchasing physicians.
Under the federal health care Anti-Kickback Statute, there is a Safe Harbor relating to the sale of a medical practice to another practitioner. There are two standards under this Safe Harbor: (1) the period from the date of the first agreement pertaining to the sale to the completion of the sale is not more than one year; and (2) the practitioner who is selling his or her practice will not be in a position to make referrals to, or otherwise generate business for the purchasing practitioner for which payment may be made in whole or in part under Medicare or a state health care program after one year from the date of the first agreement pertaining to the sale. This Safe Harbor also addresses the sale of a practice to a hospital or other entity, rather than to another practitioner.
Dissolving a medical practice requires a different set of legal considerations. Most states require Articles of Dissolution (or a similarly titled document) to be filed with the appropriate state office. In addition to choosing a date to cease clinical practice responsibilities, the Articles of Dissolution anticipate when the business of the medical practice concludes. These business issues, which are addressed below, include the collection of outstanding accounts receivable, pension and 401(K) considerations, and continuation of health care benefits.
Some states require physicians to notify patients in writing when the physician is leaving a medical practice so patients may have access to their medical records, and the retiring physician can help coordinate his/her patients' continuity of care.
The current policy statement from the AMA's Council on Ethical and Judicial Affairs states that when a physician retires, patients should be notified and urged to find a new physician, and should be informed that upon authorization, records will be sent to the new physician.
A retiring physician should be aware of the statute of limitations in the respective jurisdiction(s) in which they practice and make sure their malpractice insurance will cover them for that period and for the requisite minimum amounts required by that state's law. If the physician is going to rent his/her office space and/or equipment, any such arrangement should comply with the respective rental of office space and equipment Safe Harbors to avoid potential violations of the Anti-Kickback Statute.
In addition to post-retirement business opportunities, a retiring physician must also focus upon the business issues affecting the medical practice with which he/she is associated.
All physicians have accounts receivable. Typically, it takes at least 30 days for a physician's accounts receivable to be converted into cash receipts. As a result of this lag in cash payments, cash will be received after the physician's retirement. It is important to determine how the accounts receivable will be handled after the retirement date. In the case of a solo practitioner, there are two common solutions. The accounts receivable from commercial payers can be sold to an outside agency, which will give the physician an upfront cash payout. Otherwise, the accounts receivable can be transferred to a billing or collection agency which will process the accounts receivable and turn over cash receipts to the retiring physician for a stated time period. This time period should be at least three to six months after the retirement date. The physician should execute a contract with the billing or collection agency.
A physician retiring from a group practice typically receives his/her portion of the accounts receivable based on the buy-out formula in the Partnership or Shareholder's Agreement. There are many different variations on this formula. One method is to take the historical cash receipts divided by the charges (the cash collection percentage) for each payer class and apply these percentages to each applicable accounts receivable payer class. After calculating the expected accounts receivable, the group practice subtracts its average monthly operating expenses and divides by the number of employed physicians to determine a fair estimate for one retiring physician.
Now that it is time for retirement, where will that money come from? For most physicians, it will come from their company sponsored retirement plans. These pension and 401(k) plans can only exist as long as the sponsor, the company, of these plans is in business. If you are a solo practitioner and are closing your business, you will be required to move your retirement funds into a personal individual retirement account (IRA). If you are employed in a group practice, you will most likely be allowed to maintain your funds in the company retirement plans although you will no longer receive a company contribution. You will have the same access to your funds as the active physicians in the group practice. If you participate in post-retirement activities and are offered company sponsored retirement plans, you will be able to rollover your retirement funds to these new plans, without a penalty.
Health insurance coverage is a valuable benefit provided by most employers. The federal government enacted the Consolidated Omnibus Reconciliation Act of 1985 (COBRA) which allows certain individuals the option of continuing their group health insurance under specified conditions. If you are a solo practitioner and have individual health insurance, then retirement should have no impact upon the continuation of your health coverage since it is not linked to the company. If you are insured under a group health insurance plan and the company has less than 20 full and/or part time employees, the company is not required to offer a retiring physician COBRA benefits. Thus, the retiring physician needs to purchase individual health insurance coverage. Sometimes, the group plan will allow the physician to automatically convert his/her group plan coverage to an individual coverage.
If the retiring physician is part of a company with at least 20 employees, then the physician is eligible to continue his/her previous health insurance under the group plan for up to 18 months. The physician is responsible for paying the full cost of the coverage. The continuation of coverage can be stopped for any of the following reasons: the premium for coverage is not paid in a timely fashion, the physician becomes covered under another group health plan, the physician enrolls in Medicare, or the company no longer provides group health coverage to employees.
According to the AMA, of the approximate 778,000 physicians licensed in the United States as of December 31, 1998, almost one-third, 241,000, are over the age of 55. A recent survey by the consulting firm of Merritt, Hawkins & Associates found that close to 80 percent of physicians 50 years old or older are planning to change their pattern of practice in the next one to three years. Of these physicians, 38 percent plan to retire and 10 percent plan to seek employment in a non-clinical setting. Not surprisingly, over half of those physicians surveyed have not made plans to transfer their patients to another physician or group upon retirement and have not entered into a formal succession plan.
The legal and business issues which a physician must address upon retirement are numerous. These issues may take many months to resolve. Careful planning and deliberation will help ensure that a physician's retirement from active practice is smooth and protects the physician's best interests.
Bruce D. Armon, Esq. is a member of the Health Law Department of the mid-Atlantic law firm, Saul, Ewing, Remick & Saul LLP in its Philadelphia office. Stefani R. Graff, CPA, is a financial manager based in Voorhees, NJ, with Per-Se Technologies, a national provider of healthcare business management services, application software and e-Health solutions.