Many physicians in private group practices are alarmed by news of health care reform and other developments affecting their practice finances.  Some physicians have responded by abandoning private practice in favor of hospital employment.  Other physicians still want their autonomy, and are committed to private practice.  But they wonder: are the documents that they signed years ago are still reasonable in light of all that is happening in health care?  Will they remain reasonable if reimbursements go down, or expenses go up, or both?

There is no question that the challenges to physicians in private practice have been coming fast and furious in recent years (higher associate physician salaries, Stark, HIPAA, anti-markup, elimination of consult codes, EHRs, etc.) and show no signs of letting up.  At the same time, it is important to remember that physicians have a wonderful “franchise” in the form of their medical licenses.  The system cannot function without doctors and in many regions and specialties they are scarce.  Further, demand for medical services is only going to grow as the huge baby boom generation ages and medical and pharmaceutical technology advances.

So there is no need for panic.  At the same time, private practice physicians cannot remain complacent.  And part of staying on top of things is making sure that old contractual commitments are still appropriate.  Here are some basic guidelines.

First, the buy-out arrangement must be in writing.  This may seem obvious, but not infrequently we encounter situations where partners have never “gotten around” to signing a buy-sell agreement, or “couldn’t agree on what it should be.”  This is a disaster waiting to happen.  The best example of such a disaster is the death of a partner.  Now the remaining partners must negotiate a reasonable buy-out value with the grieving spouse, who may mistrust them or harbor ill will due to prior inter-doctor conflicts involving the deceased.  Such a spouse may also lack knowledge of the Practice’s finances, or valuation concepts, or both, leading to wildly exaggerated ideas of what the Practice (and the buyout) is or should be worth.

Assuming that the buy-out is in writing, the next step is to make sure it is valued and structured appropriately.  There are three basic values that should be priced:  equipment and supplies (net of debt and other liabilities); accounts receivable; and goodwill/intangibles, including such various items as going concern value, patient loyalty, charts and patient lists, workforce in place, phone numbers, and all systems in place and ready to operate a medical practice.

In a typical, incorporated medical or dental practice, the nominal stock buy-out price in the Shareholders’ Agreement is based on equipment and supplies only (net of debt).  Traditionally, receivables and goodwill are generally not factored into the stock buy-out.  Instead, they are reflected in separate “deferred compensation” or “severance” payments.  This structure has a beneficial tax result, from the perspective of the group: the non-deductible portion of the payment (stock) is kept low, since it reflects the more moderately priced “hard asset” values.  The severance payment delivers the remaining, more substantial values (receivables, goodwill) in a tax-efficient (deductible, pre-tax) manner.

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