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The past decade has seen significant growth in the number of attorneys specializing in the representation of physicians, dentists, chiropractors and other noninstitutional health-care providers. But representing these physicians is far different from representing other small business owners. While most physicians are intelligent over-achievers dedicated to their profession, normally they do not analyze business issues like business people. Additionally, the dynamics of a physician group are unique. Normally, one physician will assume the lead in management, while the other physicians focus on practicing medicine. Most physicians in the private practice of medicine tend to follow a similar career path. This path generally begins with association or employment with a practice, followed by ownership, and, hopefully, ending with retirement. Although this process appears to be simple, many issues arise in each phase that can trigger the need for the physician to retain an attorney. EMPLOYMENT CONTRACTS Although employment agreements vary in complexity, certain general topics comprise the substance of such agreements. Attorneys representing physicians should look for the following items to be incorporated into any physician-employment agreement. Duties and responsibilities. It is important to understand exactly what will be expected from an employed physician. All of the following should be delineated: the work schedule, including night and weekend call; the requirement for staff privileges at certain hospitals or facilities; the location of the physician’s employment; and specific responsibilities regarding supervision of nurses, clerical staff and other physicians. Under all circumstances, a physician’s duties should be consistent with and commensurate with the position as a physician. Compensation. Compensation of employed physicians varies widely, depending on the area of specialty, years of practice and geographic region. The employment agreement should specify both the amount and timing of compensation. Many employment agreements contain either a base compensation or formula compensation based on productivity measures. They may also provide for bonuses on the occurrence of certain events. It is important to ensure that these events are attainable. Compensation formulas are sometimes very complicated and, in practice, may not work. Physician-clients must be able to properly analyze the total compensation being offered. An example of the formula, using expected numbers, should be set forth in the agreement to avoid any confusion as to future interpretation. Benefits and perquisites. A significant portion of a compensation package includes the perquisites or fringe benefits that are granted to the employed physician. By structuring certain perks and fringe benefits separately from compensation, the employed physician may be able to save a significant amount of money in taxes, since these benefits are generally not taxable if paid by the employer. Key benefits include: continuing medical education reimbursement; payments for periodicals and subscriptions; beeper; car or cellular telephone; automobile allowance; and health, life, disability and malpractice insurance. Other benefits can include reimbursement of moving expenses, retirement plans, vacation and disability/sick/maternity leave. The attorney should ascertain what benefits are important to his or her physician-client, suggest benefits that may be of interest to the client and review the agreement to see if those benefits are included. If a benefit is not included, ask opposing counsel why. In many cases, employers may include that benefit without reducing the employed physician’s compensation. Ownership opportunities. In assessing the merits of an employment offer, physicians generally consider the long-term relationship that will develop while associating with a specific practice. It is in the employed physician’s best interest to work out (in advance) the terms and conditions of any ownership opportunities in the practice. This includes not only when the doctor becomes eligible for partnership, but also the economic ramifications associated with becoming an owner, including any buy-in amounts, compensation and buy-out obligations. The structure of a buy-in has unique tax consequences and physicians should consult with their tax advisers about tax issues. Many employers are reluctant to guarantee future ownership opportunities. The physician-client’s interests can be protected by adding a paragraph setting forth the terms of ownership and the fact that these terms are only the current, nonbinding intentions of the parties. Over the course of employment, a relationship usually develops between the employed physician and the employer and, more often than not, such nonbinding ownership intentions are honored. It is also advantageous to build-in a review process where, periodically, the employer advises the employed physician whether or not he or she is on the partnership track. Term and termination. The employment agreement should have a defined commencement and expiration date. Whether a long- or short-term is desirable is dependent on the client’s particular circumstances. Many agreements provide for an evergreen clause, which is a provision allowing the contract to continually renew from year to year. This type of clause is advantageous from the employed physician’s perspective. However, if an evergreen clause is inserted, the compensation section should provide for periodic increases or review of compensation. In the absence of a specific provision in the agreement, employment is generally at will and can be terminated by either party without notice for any reason. In representing the employed physician, it is preferable to limit termination for specific causes. The definition of “cause” is normally hotly negotiated and should be carefully reviewed to ensure that the client understands each of the reasons for termination for cause. A notice provision and the ability to cure any alleged default, breach or cause in a reasonable period of time should be included. Post-termination restrictive covenants. Employers generally incorporate a post termination restrictive covenant in their employment agreements. These covenants generally include both noncompetition and nonsolicitation elements that are designed to prevent the employed physician from competing with the employer in a particular geographic area for a specific period of time and from soliciting patients, referral sources and employees of the former employer. Whatever the form, to be legally enforceable, restrictive covenants must be reasonable in scope and duration, must not be injurious to the public at large and should not prohibit the employed physician from pursuing activities not engaged in by the employer. These provisions should be specifically discussed at length with a physician-client to ensure that, in the event of termination, the physician can still practice medicine without major limitations. The employment agreement may include a pre-termination restrictive covenant prohibiting the employed physician from moonlighting, which may not be important, but which should be discussed. If you are representing a physician who practices in a state other than New Jersey, you should note that, in some states, a post-termination restrictive covenant is not enforceable. Other issues. Employment agreements also contain provisions dealing with record keeping, compliance with law, dispute resolution, assignability, notice and many other provisions that are not unique to physician employment agreements, and certainly should not be overlooked. OWNERSHIP Most employed physicians strive to become owners of the medical practices for which they work. Similar to being a partner in a law firm, becoming an owner of a medical practice instills maturity and a sense of stewardship in a physician’s career. Depending on the specific medical practice, ownership has many meanings, and may include the ability to assist with or to make decisions and to share in the profits or losses of the practice. Buying in. When a physician is becoming an owner of a practice, a significant number of documents may be used to evidence the buy-in. Although the names of these documents will differ depending on whether the practice is a corporation, a limited liability company, a partnership or a sole proprietorship, and the types of ownership that will be acquired have different names (either stock, partnership interest or limited liability company member interest), they essentially have similar characteristics. These documents can include: (1) a purchase agreement for the ownership; (2) an ownership agreement (corporation � a stockholders’ agreement and bylaws; partnership � a partnership agreement; limited liability company � an operating agreement); (3) new employment agreements commensurate with being an owner; (4) deferred compensation agreements; and (5) other documents depending on the business structure. Of initial importance is the purchase agreement, whereby the physician-employee becomes an owner in the practice. That document should specifically set forth the individual’s ownership percentage, as well as the purchase price and payment terms. Typical representations and warranties may include disclosure: of the assets owned and liabilities owed by the practice; of whether the practice is in good standing, has filed all required tax returns and paid all taxes; that entering into the purchase agreement does not and will not violate any agreements under which the practice may be obligated; that all billing has been done in accordance with law; and that the books, records and tax returns of the practice reflect its business history. Of particular importance will be a representation and warranty of the seller and the practice setting forth all transactions where the existing owners of the practice, and their family and friends, are involved. For example, it is possible that the other owners of the practice (or their families or friends) own the facility where the practice is located and rent space to the practice. In such an instance, the rental value should be based on fair market rent and not an inflated rent whereby the existing owners are funneling practice money into related parties’ pockets. Ownership agreements. Ownership agreements generally deal with two major issues: (1) control and management; and (2) transferability of ownership interests. Depending on the practice size and dynamics, control and management issues have a varying degree of importance. A group practice is managed by its officers, board of directors or managers, depending on the legal structure of the practice. In reality, management titles usually have no real importance and the functions and the responsibilities for each physician owner are often delegated based on ability. The legal significance of these positions, however, is important. Should a dispute arise between owners, the positions assigned to the physician-client could have an impact on what legal rights exist. Typically, a practice will allow each owner to have an equal vote in the management of the practice. However, voting can be based on factors such as seniority, stock ownership, productivity, compensation or other factors the practice deems relevant. It is important to ensure a client understands his or her voting rights, as well as the voting rights of the other owners before the buy-in. In large practices, it is common to have a management committee that is responsible for the day-to-day operations of the practice. The management committee may have the legal authority to make decisions on certain issues without receiving the input or consent of all of the practice’s owners. Documentation should set forth the powers of any management committee, including the ability to negotiate and execute managed care contracts on behalf of the practice; physician hiring and discipline; check signing privileges; determination of compensation; and other major administrative issues. If a physician-client is a minority owner, a list of actions should be set forth that require a supermajority (a percentage above 51 percent, such as 75 percent) or a unanimous vote, including purchasing equipment over an agreed upon dollar amount; hiring or firing physicians; obtaining loans on behalf of the practice; entering into related party transactions; selling all or part of the practice; issuing ownership interests to new or existing owners; amending the practice’s organization documents; or making a capital call (asking owners for more money). Although important, control and management issues too often are not discussed or set forth in ownership documents. In those instances, a majority vote controls. Once signed, these documents usually are put in a drawer and are not looked at again until a problem develops, so it is imperative to negotiate them up front. Employment and compensation. Employment agreements for physician-owners are similar to employment agreements for employed physicians, but do differ in three major areas: (1) compensation and fringe benefits; (2) termination; and (3) disability. As an owner, the physician will have a larger exposure to the profits and losses of the practice. As a result, the physician may be asked to take a base salary that is proportionally lower than total compensation, getting the remaining amount through a bonus. Generally, employment agreements for physician-owners limit termination only for cause, while practices reserve the right to terminate nonowners without cause, although agreements permit termination by the practice without cause by a vote of a supermajority vote (usually 75 percent or greater). This is an important distinction, because the applicability of a post-termination restrictive covenant may depend on the reason the employment is terminated. If employment is terminated without cause, the restrictive covenant may not apply. A new physician-owner should review the existing physician-owners’ employment agreements to ensure that they are comparable to the employment agreement being signed. Termination for cause may include termination for: loss of license; regulatory violations; insubordination; criminal activities; damage to reputation of the entity (or moral turpitude); bankruptcy; inability to maintain malpractice insurance at standard rates; low productivity or hours; and the ineffective or incompetent practice of medicine. Practices tend to compensate a physician-owner during disability for a longer period of time than an employed physician, and they allow physician owners a greater period of time to recover prior to terminating their employment. The physician-client should analyze any differences to determine the impact of these changes on disability insurance policies. RETIREMENT OR SALE OF OWNERSHIP INTEREST Upon the occurrence of certain triggering events, a physician’s association with a practice group ceases. These triggering events generally include death, disability, retirement or termination of employment with or without cause. Ownership agreements generally prohibit and restrict transferability of ownership interests. Thus, any attempt at voluntary termination will normally be deemed a breach of contract and an automatic offer to the remaining owners to purchase the offered ownership interests. Valuation of ownership interests. A medical practice valuation has three basic elements: (1) tangible asset valuation; (2) accounts receivable, (generally worth significantly less than their face value because managed care has led to significant discounts from billed amounts); and (3) goodwill value. Depending on the triggering event, different valuation approaches may be applicable. Owners should discuss the value of each owner’s ownership interest, and may wish to annually agree on an “agreed value.” This alleviates any argument about the value of the interest when an owner leaves, but it may create other problems. The most typical problem arises when an agreed value is established and many years pass without any change to it. To combat this, most ownership agreements provide that if the valuation is stale, either party can reject the price and use an alternate valuation formula. This formula could be either a specific formula or an adjustment to the agreed value based on the change in the value of the assets since the date of the last valuation. It might be advantageous from a tax perspective for the practice and the remaining owners to limit the valuation of the ownership interest to the net book value of the practice (the value of the hard assets as set forth above), with the accounts receivable and the goodwill value incorporated in a severance package or a deferred-compensation agreement. Consultation with a tax attorney or accountant is recommended. Payment terms and collateral. In any buy out, the practice and remaining physician-owners would experience undue hardship if they were forced to pay a lump sum to the departing owner. Therefore, most buy-out agreements provide for an extended payout with reasonable interest, over two to 10 years, depending on the triggering event. If insurance funding has been obtained (see below), the insurance proceeds are paid upfront with the remaining amount, if any, payable over a period of 12 to 24 months. Any deferred payment is generally evidenced by a promissory note, which may generally be guaranteed by the practice or the remaining owners and may include provisions concerning interest rate, payment terms and default. Other collateral may include a pledge of the purchased ownership interest and a lien on the practice’s assets. Normally, a reasonable cure period regarding any default is included so that the outstanding principal does not accelerate on default. The goal is to evidence the obligation without appearing to be a bank. Funding buy-outs with insurance. In some cases, to fund a death or disability buy-out, it may be appropriate for the practice and the owners to purchase life or disability buy-out insurance on each owner. Any purchase of life insurance or disability buy-out insurance should be coordinated with the valuation approach chosen. The benefit of purchasing insurance is that the funds will be readily available on the occurrence of a triggering event. Having insurance proceeds available will also ease the burden on any spouse of a deceased owner because funds will be immediately available to pay a significant portion of the purchase price, with no negotiations in price necessary. Many types of insurance exist, so consultation with a reputable insurance agent is recommended. One major issue with respect to insurance is determining who bears the costs of the insurance policy. Whether the practice or the individual owners hold the policy, and who pays the premiums, can have different tax consequences. Again, this issue should be analyzed with the help of a tax expert. Dissolution. Of key importance in any dissolution or breakup are the following three issues: (1) the future use of the office location; (2) the use of the telephone number; and (3) possession of patient charts. In many cases, the most senior owner retains the right to use the office location and telephone number without having to pay for them, because the senior owner is often the founder of the practice. In many cases, however, the telephone can be answered by a phone intercept � a service, like voice mail, that directs callers to either a new phone number for the physician or directly connects the caller to the physician’s office. Phone intercepts help avoid arguments in the future as to whether or not a caller was given the appropriate locale or telephone number of a departed physician. Typically, the patient charts follow the physician. In many instances, the assets of the practice are divided based on their value and the ownership percentages of each owner. It is important to have an accountant who is trusted by the physicians to represent the practice and to coordinate the economics of a dissolution. Each physician may also wish to obtain individual representation by attorneys and accountants to ensure that his or her individual interests are represented. The author is chair of the corporate and healthcare practice groups and shareholder at Wilentz, Goldman & Spitzer of Woodbridge. A version of this article originally appeared in the Sept. 2002 issue of Health Lawyers News , an American Health Lawyers Association publication.

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