Life Cycle of a Physician Practice


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Decosimo's Shannon Farr and Anderson Busby's Amanda Busby co-presented this PowerPoint at the 2012 Tennessee Bar Association's Health Law Primer on October 3, 2012 in Brentwood, TN.

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Life Cycle of a Physician Practice

  1. 1. ANDERSON BUSBY PLLC | www.andersonbusby.comLIFE CYCLE OF A PHYSICIAN PRACTICETN Bar Association | 2012 Health Law PrimerAmanda M. Busby, J.D./M.B.A. | Founding Member, Anderson Busby PLLCShannon Farr, CPA, ABV, CFF | Business Valuation Manager, Decosimo Advisory ServicesDisclaimer: These materials are designed to provide general information. Although prepared by professionals, these materials should not beutilized as a substitute for professional legal or accounting advice in specific situations. If legal or accounting advice or other expert assistanceis required, please consult with an attorney or certified public accountant.
  2. 2. Initial Practice Arrangement Group Practice Employment vs. Hospital Physician Buy-in to Group Medical Practice New Start-Up (with or without a hospital income guarantee – only applies in certain communities)
  3. 3. Group Practice vs.Hospital Employment
  4. 4. Group Practice vs. HospitalEmployment Who May Employ a Physician?—Corporate Practice of Medicine Doctrine Current Trends and Drivers Compensation within Group Practices Compensation by Hospitals Hospital Employment Advantages/Disadvantages Group Practice Employment/Ownership Advantages/Disadvantages Elements of an Employment Agreement Physician Recruitment Agreements
  5. 5. Corporate Practice of MedicineDoctrine General Rule: Prohibition against unlicensed individuals or entities from providing professional services or employing licensed professionals to provide professional services  Ex. medicine, optometry, dentistry, law, accounting, engineering, etc.  State ex rel. Loser v. National Optical Stores Co., 225 S.W.2d 263 (Tenn.1949)
  6. 6. Corporate Practice of MedicineDoctrine Common Law Guidance  Op. Tenn. Atty. Gen. 88-152 (8/25/88)(anesthesia services)  Op. Tenn. Atty. Gen. 94-009 (1/28/94)(physical exams to employees)  Op. Tenn. Atty. Gen. 94-53 (4/12/94)(nonprofit hospitals & nonprofit public benefit corporations)  Op. Tenn. Atty. Gen. 07-116 (8/2/2007)(ownership of medical practices by non-physician practitioners)
  7. 7. Corporate Practice of MedicineDoctrine Statutory Exceptions  Medical professional corporations (Tenn. Code Ann. § 48-101-610)  Qualified persons  MDs, DOs, MPCs, MPLLCs, MD or DO general partnerships  Optometrists & ophthalmologists  Podiatrists & physicians other than radiologists, pathologists & anesthesiologists (RPAs)  Chiropractors & physicians other than RPAs  Physician assistants (PAs)(not Advanced Practice RNs (APRNs)) & physicians other than RPAs
  8. 8. Corporate Practice of MedicineDoctrine Statutory Exceptions  Medical professional limited liability companies (MPLLCs)(Tenn. Code Ann. § 48-248-401)(Old PLLC Act)  Qualified persons  MDs, DOs, MPCs, MPLLCs, MD or DO general partnerships  Optometrists & ophthalmologists  Podiatrists & physicians other than RPAs  Chiropractors & physicians other than RPAs  PAs (not APRNs) & physicians other than RPAs
  9. 9. Corporate Practice of MedicineDoctrine Statutory Exceptions  MPLLCs (Tenn. Code Ann. § 48-249-1109) (New/Revised PLLC Act)  Qualified persons  MDs, DOs, MPCs, MPLLCs, MD or DO general partnerships  Optometrists & ophthalmologists  Podiatrists & physicians other than RPAs  Chiropractors & physicians other than RPAs  PAs (not APRNs) & physicians other than RPAs  APRNs & physicians other than RPAs
  10. 10. Corporate Practice of MedicineDoctrine Statutory Exceptions  Company doctors—Tenn. Code Ann. § 63-6-204(c)  Community mental health centers—Tenn. Code Ann. § 63-6- 204(d)  Federally qualified health centers—Tenn. Code Ann. § 63-6- 204(e)  Hospitals & their affiliates—Tenn. Code Ann. § 63-6-204(f)  Faculty practice plans—Tenn. Code Ann. § 63-6-204(f)(4)(b)(ii)  Renal dialysis facilities—Tenn. Code Ann. § 63-6-204(g)  Nursing homes and their affiliates—Tenn. Code Ann. § 63-6- 204(_) (new subsection effective July 1, 2012)
  11. 11. Group Practice vs. HospitalEmployment Current trends  Increasing employment by hospitals or other hospital- physician alignment models  Increasing consolidation into larger groups Drivers  Healthcare reform  Accountable Care Organization (ACO) models  Continuity of care initiatives  Increasing IT investment / compliance measures  HIPAA / HiTECH
  12. 12. Group Practice vs. Hospital Employment Compensation within Group Physician Practices Commonly seen models – within a spectrum Eat Share & What Share You Kill Alike Potential issues  Sharing/splitting ancillary services collections and expenses  ―Overpaid‖ compensation (production ≠ compensation)  Treatment of hospital medical directorships, expert testimony fees, honorariums, etc.  Sharing or splitting physician assistant collections and expenses
  13. 13. Group Practice vs. Hospital Employment Physician Compensation by Hospitals  Commonly seen base models  Salary Other Arrangements  wRVU-based arrangements (pay for production) On-call  Commonly seen add-ons Medical Coverage  Medical directorships Directorships  On-call coverage arrangements  Clinical co-management arrangements Physician  In university/teaching hospitals: teaching component Base Pay  Entire arrangement must meet (Salary and/or regulatory requirements; independent Production) FMV determination may be warranted
  14. 14. Group Practice vs. Hospital Employment Hospital EmploymentPerceived Perceived Benefits Increasing administrative Negatives burdens (regulatory and If aspects of compensation compliance) on physician are based on practice practices handled by the financial results: hospital - Financial results no Hospital handles billing longer transparent and collection (also a - Two very different con?) business models Risk of future reimbursement rate cuts Less autonomy may transfer to the hospital
  15. 15. Group Practice vs. Hospital Employment Group Practice Employment/OwnershipPerceived Perceived Benefits Negatives Independence; more Difficulty in recruiting new control over patient physicians treatment More control over financial results: the practice or its medical billing provider Shrinking profits handles billing and collection High IT/management costs
  16. 16. Group Practice vs. HospitalEmployment Elements of Employment Agreement Whereas Services to be Parties Term clause provided• Employer • Tells the story • Start date • Duties• Employee • Not mandatory • Conditions • Work schedule precedent— • On-call • Not legally part receipt of state of EA unless coverage licensure, board incorporated certification, • Outside by reference hospital activities • Should state privileges, etc. • Record keeping the • Termination date • Patient & consideration • Renewal terms— practice for parties automatic relationships (evergreen), entering into notice EA requirements, etc.
  17. 17. Group Practice vs. HospitalEmployment Elements of Employment Agreement (cont.) Compensation Model Compensation Model Compliance with Compliance with Compliance withIncentivize specific Stark Self-Referral Federal Anti- state self-referral behavior Prohibition Kickback Statute legislation• What does • General • General • Disclosure of practice want to prohibition (42 prohibition (42 ownership interests reward? U.S.C. § U.S.C. § 1320a- to patients (Tenn. Code Ann. § 63-6- 1395nn) 7b(b)) 501—63-6-503) • Exceptions (42 • Safe harbors • Ban on referrals to C.F.R. § (42 C.F.R. § self-owned facilities 411.357) 1001.952(i)) unless exception applies (Tenn. Code Ann. § 63-6- 601—63-6-608)
  18. 18. Group Practice vs. HospitalEmployment Elements of Employment Agreement (cont.) Benefits Restrictive covenants• Moving expense reimbursement • Non-Solicitation—patients,• Health insurance, disability employees, referral sources insurance & other employee benefit • Non-Competition—Tenn. Code plans Ann. § 63-1-148• Vacation & sick leave • Resignation of Privileges• Professional meetings • Confidentiality• Expense reimbursement• Malpractice insurance • Occurrence based • Claims-made policy (need for tail-coverage)
  19. 19. Group Practice vs. HospitalEmployment Elements of Employment Agreement (cont.) Representations & warranties of Patient records employed physician Ownership Miscellaneous Termination opportunity provisions
  20. 20. Group Practice vs. Hospital Employment Physician Recruitment Agreements• Parties to recruitment agreement • Initial recruitment assistance• Relocation of physician • Assistance period• Term • Disclosure of information• Physician & group requirements • Charitable purpose of hospital • Licensure • Compliance • Board certification • Assignment • Medicare & TennCare • Applicable law & venue participation • Waiver of breach • Full-time practice • Independent contractor • Active medical staff privileges • Medicare access to books & records• Non-compete provisions • Right to audit• Loan • Binding effect• Forgiveness of loan • Attorneys’ fees• Assignment of accounts receivable • Promissory note
  21. 21. Physician Buy-in to aGroup Medical Practice
  22. 22. Due Diligence• Understand the Practice and what is (or isn’t) driving value • Basic financial information: balance sheets, profit and loss statements, tax returns • Real estate: owned or leased? If leased, physician- owned or commercially-owned? • Ancillary services? • Employee-physicians or midlevel providers? • Many other factors may affect value
  23. 23. Purchase Price and Purchase Agreement • Is the purchase price supported by anticipated future cash flows? • Consider compensation package and purchase price in tandem • What are the obligations of the seller-physician and the buyer-physician? • How does the seller-physician plan to transfer patients to the buyer-physician? • Over what time period?
  24. 24. New Practice Start-up
  25. 25. New Start-Up• Choice of Entity • Sole proprietorship • General partnership • Professional corporation (for-profit) • Professional limited liability company (for-profit)
  26. 26. Entity Type Tax Form Applicable Taxes Special ConsiderationsSole Individual Ordinary federal income tax rates plus self- Not preferred, since otherproprietorship Income Tax employment (SE) taxes structures provide personal Return liability protection from (1040) creditors when properly usedGeneral Return of None apply at the p’ship level; guaranteed Not preferred (see reasonpartnership Partnership payments and any residual p’ship income above) Income taxed at individual rates (ordinary + SE) (1065)Professional Corporation Net income taxed at maximum federal Important to zero out any netcorporation Income Tax corporate rate (currently 35%): lower tax income through(PC) Return bracket rates do not apply to personal compensation to the (1120) service businesses physician-shareholdersPC with S- Income Tax No income taxes apply at the entity level. A loophole exists whereby SCorporation Return for The S Corp pays the employer portion of Corp dividends are notelection an S Corp Social Security and Medicare (FICA) taxes subject to FICA; must pay (1120S) on wages. Wages and any flow-through ―reasonable‖ salary - ―red residual income taxed at individual ordinary flag‖ for IRS scrutiny federal rates.Professional Form 1065 No income taxes at the partnership level; the Currently the most popularlimited liability PLLC pays the employer portion of FICA; choice for new entitiescompany any residual PLLC income flows through and(PLLC) is taxed at individual rates
  27. 27. New Start-Up• Ownership Agreement • Control/decision making • Transferability of ownership • Employment & compensation of owners • Restrictive covenants • Practice cessation• Steps to Form Business • Entity registration • Federal and state name registration• Obtain Tax Identification Numbers • Federal employer identification number (EIN) • State identification or account number
  28. 28. New Start-Up: Insurance Needs • Professional liability (malpractice) • May want to consider coverage of theft, loss, or accidental transmission of a patient’s PHI • General liability and property insurance • Directors & officers coverage • Life & disability insurance • Coverage for Employees • Workers’ compensation • Health/dental/vision insurance • Employment liability
  29. 29. New Start-Up: Credentialing• Must have a federal EIN and have obtained malpractice insurance to begin process• Many medical billing providers will also assist in credentialing• Medicare provider ID may take up to 60 days• Managed care contracts may take up to 90 days (some commercial insurers may take up to 6 months)• Process includes applying for and obtaining hospital privileges
  30. 30. Electronic Health Records (EHR)Systems • Practice efficiency (?) • Integration with other important systems / functions • Choose carefully • Important for the physician to be directly involved • Packages may be designed for specific specialties • Get references from other users • Plan for substantial installation time and effort • Patient collections may be slower in first months after implementation
  31. 31. Practice Cessation
  32. 32. Practice Cessation• Employment Termination• Sale of a Practice• Physician Owner Disassociation• Group Practice Dissolution & Closure
  33. 33. Employment Termination • Employment agreement terms followed? • Without cause • For cause • Continuing commitments • Restrictive covenants • Loan forgiveness completion if recruitment arrangement • Tail-coverage • Personal guarantees
  34. 34. Sale of a Practice: TaxConsiderations Sales are typically ―asset‖ sales, not ―stock‖ sales The purchase price allocation can have a significant effect on the after-tax cash of the seller: • Long-term capital gains (2012 maximum federal rate = 15%) rates generally apply to value associated with appreciated real estate, and to value attributable to intangible assets (goodwill and other intangibles) • Ordinary income rates apply to value allocated to accounts receivable; depreciation recapture, if fixed assets are valued above the NBV reported for tax purposes (2012 maximum federal rate = 35%) • When a C corporation sells practice assets, a tax issue of distinguishing personal goodwill of the physician vs. business goodwill owned by the entity exists
  35. 35. Sale of a Practice: OtherConsiderations  Physicians need to be familiar with potential limitations on purchase price and subsequent employment arrangements posed by Medicare regulations
  36. 36. Physician OwnerDisassociation• Ownership agreement – are buy-out terms specified? • If so, documents control • If not, • PC & PLLC statutory requirements (Tenn. Code Ann. § 48-101- 613 (MPC)) & (Tenn. Code Ann. § 48-249-1111 (MPLLC)) are the default rule • Fair value appraisal may be necessary if parties cannot agree• Tax considerations • Ownership (of practice and/or real estate) may extend beyond period of employment/service period• Continuing commitments
  37. 37. Group Practice Dissolution &Closure• Closure considerations • Plan for patient continuum of care • Patient notification • Patient records retention • Payer contract termination steps • Notification to hospitals where the physician has privileges • Filing final returns (income tax, payroll tax, etc.) • State department of revenue requirements • Filing entity dissolution documents
  38. 38. Questions and Comments
  39. 39. Amanda Busby, J.D./M.B.A.(865) 249-8011 | abusby@andersonbusby.comAmanda M. Busby is a founding member of the Knoxville law firmof Anderson Busby PLLC. Her primary areas of practice includehealth care, corporate law, and business transactions andlitigation. Ms. Busby counsels physicians, physician groups,pharmacies, and other health care providers on operational,licensing and regulatory matters, including, but not limited to,corporate formation, employment, contracting, mergers andacquisitions, and compliance with Stark and anti-kickbackregulations. Ms. Busby received her J.D./M.B.A. from theUniversity of Tennessee College of Law in 1998 and her B.B.A.,magna cum laude, in Marketing from Lambuth University inJackson, Tennessee in 1993. She is a member of the American,Tennessee, and Knoxville Bar Associations. She serves on theKnoxville Bar Association Board of Governors and on theTennessee Bar Association Health Law Section Executive Council.She is also a member of the American Health Lawyers Associationand its Physician Organizations Practice Group Section. ANDERSON BUSBY PLLC
  40. 40. Shannon Farr, CPA, ABV, CFFBusiness Valuation Manager(800) 782-8382 | shannonfarr@decosimo.comShannon Farr is a valuation manager in Decosimo’sChattanooga office with more than 15 years of accountingexperience. Her practice has focused on business valuationand litigation since 2004. She is accredited in businessvaluation (ABV) and also certified in financial forensics (CFF).Shannon provides valuation services to clients in a widevariety of industries, with a focus on healthcare entities. Herspecialized expertise in this area assists hospital and healthsystem clients in ensuring their acquisitions meet industryregulations surrounding the concepts of fair market value andcommercial reasonableness. Her litigation support experiencehas been used in numerous marital dissolution cases as wellas contract and shareholder disputes involving physicians.Shannon provides expert witness testimony, as well as servingthe court as Special Master.