This document discusses various considerations related to physician employment contracts and practice mergers and acquisitions. It begins with an overview of general issues and then discusses specific topics like employment agreements between physicians and group practices or hospitals, compensation models, practice buy-ins, and mergers. Key parties in these arrangements are identified, as well as the typical professionals that comprise a consulting team. Factors around different alignment models and trends driving consolidation are also summarized.

1.  D A V I D C R A N F O R D , C P A
P R I N C I P A L
D E C O S I M O
 S H A N N O N F A R R , C P A · A B V · C F F
D I R E C T O R O F H E A LT H C A R E
V A L U AT I O N
D E C O S I M O

2. OVERVIEW
 General Considerations
 Basic Issues In Employment Contracts
 Physician Practice Buy-in Considerations
 Compensation Within Group Practices
 Selling A Physician Practice
 Physician Practice Mergers
 Physician-Hospital Integration And Affiliation
Models

4. THE PARTIES
 The Practice itself
 A physician being recruited/admitted to the
Practice
 An individual physician owner
 The Hospital
 Another Practice interested in merging

5. THE TEAM
 Practice Administrator
 Attorney
 Accountant/CPA
 Practice Management Consultants
 Third-party Valuation Professionals
HEALTHCARE EXPERTISE REQUIRED

6. WHICH ALIGNMENT MODEL IS RIGHT FOR ME ?
 Values And Goals Of Each Party
 Economics Of The Deal
 Facts And Circumstances; Terminology
 Alignment Process

8. EMPLOYMENT: GROUP PRACTICE VS. HOSPITAL
 Current Trends and Drivers
 Who May Employ a Physician?—Corporate
Practice of Medicine Doctrine
 Physician Compensation by Hospitals
 Hospital Employment
Advantages/Disadvantages
 Group Practice Employment/Ownership
Advantages/Disadvantages
 Elements of an Employment Agreement

9. GROUP PRACTICE VS. HOSPITAL EMPLOYMENT
Current trends
 Increasing employment by hospitals or other
hospital-physician alignment models
 Increasing consolidation into larger groups
Drivers
 Healthcare reform
 Bundled payment initiatives, Continuity of care initiatives,
Accountable Care Organization (ACO) models, Quality
measures
 Negotiating power
 Increasing IT investment / compliance measures
 Complexity of management

10. CORPORATE PRACTICE OF MEDICINE DOCTRINE
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.
 Varies by state

11. PHYSICIAN COMPENSATION BY HOSPITALS
Physician
Base Pay
(Salary and/or
Production)
Other
Arrangements
On-call
Coverage
Medical
Directorships
Commonly seen base models
 Salary
 wRVU-based arrangements (pay for
production)
Commonly seen add-ons
 Medical directorships
 On-call coverage arrangements
 Clinical co-management arrangements
 In university/teaching hospitals:
teaching component
Entire arrangement must meet
regulatory requirements; independent
FMV determination may be warranted

12. HOSPITAL EMPLOYMENT
Increasing regulatory and
compliance burdens
handled by the hospital
Hospital negotiates
managed care contracts,
and handles billing and
collection
Risk of future
reimbursement cuts may
transfer to the hospital
Hospital may fund EMR
initiatives
If aspects of compensation are
based on practice financial
results:
- Financial results no longer
transparent
- Two very different business
models
Hospitals traditionally do a
poor job of collecting small
patient balances
Less autonomy

13. GROUP PRACTICE
Independence; more control
over patient treatment
More control over financial
results: the practice or its
medical billing provider
handles billing and
collection
More control: facilities /
work schedule
Difficulty in recruiting new
physicians
Shrinking profits
High IT/management costs
Concern about impact of
bundled payments initiatives
Lack of leverage with payers

14. EMPLOYMENT AGREEMENT - LEGAL
 Parties
 Whereas Clause
 Term
 Physician Services
Provided
 Day-to-Day
Operations
 Initial and Continuing
Qualification Terms
 Compensation /
Compensation Model
 Benefits
 Restrictive
Covenants
 Representations &
Warranties
 Termination Items
 Post Termination
Items
 Ownership
Opportunity
 Miscellaneous
Provisions

15. ELEMENTS OF AN EMPLOYMENT AGREEMENT
Parties
• Employer
• Employee
Whereas
Clause
• Tells the story
• Not mandatory
• Not legally part
of EA unless
incorporated by
reference
• Should state the
consideration
for parties
entering into EA
Term
• Start date
• Conditions
precedent—
receipt of state
licensure, board
certification,
hospital
privileges, etc.
• Termination date
• Renewal terms—
automatic
(evergreen),
notice
requirements, etc.

16. ELEMENTS OF AN EMPLOYMENT AGREEMENT
Physician Services Provided
Day-to-Day Operations
Duties
 Clinical
 Administrative
 Hospital
 Precepting
Work schedule
 Full-time
 Part-time
 Minimum hours vs. maximum hours
 Night, weekend & holiday on-call rotation
Location of Services

17. • Duly licensed — maintain
good standing for all State
licenses, certifications and/or
accreditations necessary to
practice medicine in specialty
• DEA registration
• CME obligations
• Medical staff membership
& privileges
• Compliance with federal,
state & local statutes,
ordinances, rules &
regulations
• Fully eligible to participate
in Medicare, Medicaid
and other governmental
insurance programs
• Compliance with ethical &
professional standards
• Compliance with practice
specific documents
• Billing matters
• Fee schedules
• Assignment of fees
• Medical record keeping
• Accurate billing
requirements
Initial & Continuing Qualification Terms
ELEMENTS OF AN EMPLOYMENT AGREEMENT

18. Guaranteed Minimum Base Salary
Productivity Bonus
 wRVU-based arrangements (pay for production)
 Bonus
Start-up expenses
 Signing bonus
 Moving expense reimbursement
 Student loan repayment
 Board exam cost payment
 Employer Wants - No guaranteed minimum base salary,
collection-based productivity bonus, & no payment of start-
up expenses
 Employee Wants - everything on list
Compensation
ELEMENTS OF AN EMPLOYMENT AGREEMENT

19. CME
Health insurance (medical,
dental, vision)
Disability & life insurance
Retirement plans—401(k),
pension
Malpractice insurance
 Occurrence based
 Claims-made policy
(need for tail-coverage)
Vacation & sick leave (w/ or
w/out rollover)
Holiday Pay
Maternity leave
Expense reimbursements
 Automobile payments, gas
& parking
 Cell phone
 Pager
 Computer/Tablet
 License Fees
 Dues & staff fees
 Professional subscriptions
& journals
 Entertainment/marketing
Benefits
ELEMENTS OF AN EMPLOYMENT AGREEMENT

20. Non-Solicitation—patients, employees,
referral sources
Non-Competition—refer to State law
Confidentiality
 Employer Wants - everything on the list with no time limit
on non-solicitation & confidentiality provisions, maximum
permitted by statute on non-competition provision
 Employee Wants - none of the above, but will usually
agree to non-solicitation provision & try to negotiate non-
competition provision that does not apply if employer
terminates without cause
ELEMENTS OF AN EMPLOYMENT AGREEMENT
Restrictive Covenants

21. ELEMENTS OF AN EMPLOYMENT AGREEMENT
 Qualifications--duly licensed with no restrictions, DEA registration, and Board
certification
 Medical staff membership/clinical privileges never denied, suspended, revoked,
terminated, voluntarily relinquished under threat of disciplinary action, or
restricted
 Provider not excluded from Medicare or Medicaid or other governmental
insurance program
 Not convicted of healthcare violation & no pending or threatened proceedings or
investigations by State Board of Medical Examiners or otherwise
 Never arrested /convicted of crime except routine traffic violation
 No restriction on entering into Employment Agreement
 Malpractice coverage for prior acts & no pending or threatened litigation
 Disclosed all financial relationships with healthcare entities
 Clean provider status with insurance carriers—not removed from panel for cause
Representations & Warranties of Employed Physician
with Continuing Duty to Update Employer

22. ELEMENTS OF AN EMPLOYMENT AGREEMENT
Mutual agreement
Without cause by either side on 90 days notice
Death of physician
Disability—needs to be well defined
Cause—needs to be well defined
 Employer Wants—very broad, immediate with no cure (ex.
failure to perform duties requested, maintain professional &
collegial relationship, failure to document properly)
 Employee Wants—very specific, limited & 30 day cure period
(ex. felony conviction, exclusion from Medicare, Medicaid)
Termination Items

23. Severance/deferred compensation
Patient records & files
Final completion of charts
Ownership of patient records
Right to copies of patient records & charts
(local laws & costs)
Patient notification
Return of employer property (electronics,
medical records, etc.)
ELEMENTS OF AN EMPLOYMENT AGREEMENT
Post Termination Items

25. EMPLOYED PHYSICIAN BUY-IN
Is employee offered ownership opportunity?
When?
Typical to have waiting period of 2-5 years
What are the terms?
Employer Wants — nothing in writing; at most an
open-ended, oral understanding
Employee Wants — firm, written option to become
owner with specific buy-in terms in Employment
Agreement
Ownership Opportunity

26. DUE DILIGENCE
Documents, agreements and contracts need to be
reviewed
 Certificate of Incorporation / other formation documents
 Bylaws, operating agreement, shareholder agreements
 Organization minutes
 Tax returns
 Payor agreements / fee schedules
 Hospital agreements
 Leases and subleases
 Employment agreements, consulting, management, other
service agreements (owners and non-owners)
 Other agreements – shared facilities, shared functions,
purchase/supply contracts, licenses

27. 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?
 Ancillary services
 Managed care contracts: access and rates
 Employee-physicians or midlevel providers?
 Many other factors may affect value

28. DUE DILIGENCE
Referral Sources
 Hospital employed
 Concentrated risk of one large group
 Age of referral source

29. DUE DILIGENCE
Understand any related-party transactions or
arrangements: are they at Fair Market Value?
 Real estate
 Equipment
 Employment of relatives
 Loans to / from related parties

30. 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?

31. PHYSICIAN OWNER DISASSOCIATION
Ownership agreement – are buy-out terms
specified?
 If so, documents control
 If not,
 Refer to State statutory requirements, which may provide a
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

33. ShareShare
&
Share
Alike
Eat
What
You Kill
COMPENSATION WITHIN GROUP PHYSICIAN
PRACTICES
Commonly seen models – within a spectrum

34. ELEMENTS OF A COMPENSATION MODEL
Incentivize specific
behavior
- What does practice want to reward?
Compliance with Stark
Self-Referral Prohibition
- General prohibition (42 U.S.C. § 1395nn)
- Exceptions (42 C.F.R. § 411.357)(c)
Compliance with Federal
Anti-Kickback Statute
- General prohibition (42 U.S.C. § 1320a-
7b(b))
- Safe harbors (42 C.F.R. § 1001.952(i))
Compliance with state
self-referral legislation
- Disclosure of ownership interests to patients
- Ban on referrals to self-owned facilities
unless exception applies
***State specific***
Compensation Model

35. COMPENSATION WITHIN GROUP PHYSICIAN
PRACTICES
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

37. UNDERSTANDING THE PRACTICE
The range of services provided by the practice
and whether those services are provided at the
practice or at a hospital
Recent or planned changes in providers
Production considerations – if the entity has
non-physician practitioners (NPPs) understand
how they are tracked
Are there any planned changes with regards to
production?

38. PHYSICIAN PRACTICE VALUATION
SPECIFIC INFORMATION TO REQUEST AND CONSIDER
• Specialties, board certifications, length of
time with practice, years to retirement
The physicians
• Is the practice operating at capacity?
Office/physician
schedule
• In/out of network (access)? Rates?
Managed care
contracts
• Understand the dynamics of historical
physician compensation
Collections/charges
by provider

39. PHYSICIAN PRACTICE VALUATION
SPECIFIC INFORMATION TO REQUEST AND CONSIDER
• Mid-levels? Non-physician,
licensed employees?
Non-physician
employees
• Collections/charges by payerPayor mix
• Privileges, call group, medical
directorships, etc.
Hospital
affiliation

40. PHYSICIAN PRACTICE VALUATION
SPECIFIC INFORMATION TO REQUEST AND CONSIDER
Patients in the practice
• Zip code reports show the area
patients are drawn from
• Referral reports show how new
patients have come into the
practice.
• Other demographics – how long
have patients been with the
practice? How many new/recurring
patients are seen?

41. PHYSICIAN PRACTICE VALUATION
SPECIFIC INFORMATION TO REQUEST AND CONSIDER
CPT/HCPCS code analysis
• “Top 10” codes
• Technical and professional components of
ancillary services

42. PRODUCTION MEASURES
Production Measures Issues to Consider
Office Visits Number of patients seen in an
ambulatory (office) setting
Encounters Can mean ambulatory
Procedures Can mean every CPT submitted or
the number of times a certain case
is performed
Cases Often comprised of multiple CPT
codes or procedures; assistant
surgeon cases may be reflected
RVUs / wRVUs Impact of modifiers, multiple
procedure discounts

43. PHYSICIAN PRACTICE VALUATION DRIVERS
The physician’s specialty(ies)
Possession of state-of-the-art technology and equipment
The range of services provided by the practice and whether
those services are provided at the practice or at a hospital
A staff that is familiar with coding and runs the practice
efficiently
Effective use of mid-level providers

44. PHYSICIAN COMP BENCHMARK COMPENSATION DATA
American Medical
Group Association
(“AMGA”)
Medical Group
Compensation and
Financial Survey
Includes clinical
compensation
Hospital & Healthcare
Compensation
Service (“HHCS”)
Physician Salary &
Benefits Report
Includes clinical and
medical director
compensation
Medical Group
Management
Association
(“MGMA”)
Physician
Compensation and
Production Survey
Includes clinical
compensation
AMGA HHCS MGMA

45. SALE OF A PRACTICE: TAX CONSIDERATIONS
Physician practice 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 (2014 maximum federal rate for
individuals = 20%) 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 (2014
maximum federal rate for individuals = 39.6%)

46. SALE OF A PRACTICE: TAX CONSIDERATIONS
When a C corporation physician practice sells:
 The value of personal goodwill of the
physician potentially could be taxed as a
capital gain (an asset of the individual
physician)
 Other assets and the business goodwill owned
by the entity taxed at corporate rates
Other Considerations:
 Physicians need to be familiar with potential
limitations on purchase price and subsequent
employment arrangements posed by
Medicare regulations

47. 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
 Notify state board
 Notify malpractice carrier

49. THERE’S NO DENYING IT…

50. PHYSICIAN GROUP MERGERS / ROLL-UPS
Operational
Structural
Governance Clinical
Financial
Physical /
Facility

51. MERGER ISSUES TO ADDRESS
Operational
Physician
recruitment
/retention
Staffing,
personnel
Information
technology
Structural
Physician
income
distribution
Ancillary
services
Governance
Name,
marketing,
branding
Board
composition
Clinical
Protocols
Practice
style
Financial
Managed
care
contracting
Debt
financing
Economies
of scale
Physical
Facility
Locations
Real estate
leases

52. SPECTRUM OF INTEGRATION MODELS
Full
Limited
Employment
Professional
Services
Arrangements
Clinical Co-
Management /
Service Line
Management
ACO’s
IPAs
Clinically
Integrated
Network
Call
Coverage
Medical
Directorships
Synthetic
Employment
Arrangements

53. CO-MANAGEMENT MODELS ARE EVOLVING
Traditional co-
management model
Designed around one
hospital-based service line:
- Cardiology
- Orthopedics
- Neurosurgery
Compensation awarded for:
- Defined services (fixed fee)
- Achievement of predetermined
metrics (variable fee)
Next-gen co-
management model
Design is more
complex/integrated
Compensation:
- Management-related activities
(fixed/hourly rate)
- Quality, outcomes and/or
efficiency (at-risk or variable
component)
- Higher percentage of
compensation placed at-risk

54. CLINICALLY INTEGRATED NETWORKS
Purpose:
Improve care
measurably
while
reducing
costs
Not
Medicare-
specific, but
similar to
ACOs
Often
includes a
hospital
partner
Active and
ongoing
clinical
initiatives
Effort among
participating
physicians

55. A FEW THINGS TO REMEMBER
Most integration
relationships will be
formalized with a contract
Numerous laws affect
integrated models
Each integration model has
pros and cons
Process of integration may
be just as important as the
form

56. Disclaimer:
These materials are designed to provide
general information. Although prepared
by professionals, these materials should
not be utilized as a substitute for
professional legal or accounting advice
in specific situations. If legal or
accounting advice or other expert
assistance is required, please consult
with an attorney or certified public
accountant.

57. David Cranford, CPA
Principal
(800) 782-8382 | davidcranford@decosimo.com
David Cranford, a principal in the Decosimo Healthcare
Practice, holds more than 25 years of experience as a senior
executive and financial manager in the healthcare field.
Specializing in physician services and healthcare consulting,
David is dedicated in the areas of physician practice
management, healthcare mergers and acquisition advisory,
and healthcare financial consulting -- including outsourced
accounting, compensation modeling, due diligence and
financial forecasting. He also provides expert witness
testimony as litigation support in healthcare cases involving
contractual disputes. A graduate of the University of
Tennessee at Chattanooga with a degree in Business
Administration, David is a certified public accountant licensed
in Tennessee. He is a member of the National Association of
Public Hospitals.

58. Shannon Farr, CPA·ABV·CFF
Director of Healthcare Valuation
(800) 782-8382 | shannonfarr@decosimo.com
Shannon Farr, Decosimo’s Director of Valuation Services,
devotes her practice to valuations of healthcare entities while
overseeing the Firm’s valuation group. Her practice has
focused on business valuation and litigation support since
2004. Her specialized expertise in healthcare valuation assists
hospital and health system clients in ensuring their acquisitions
meet industry regulations surrounding the concepts of fair
market value and commercial reasonableness. Shannon also
performs fair value for financial reporting valuations to be used
in purchase price allocations and goodwill impairment testing.
Shannon graduated with a Bachelor of Science in Business
Administration degree in accounting from the University of
Tennessee. She is a member of the Tennessee Society of
Certified Public Accountants (TSCPA). She is also accredited
in business valuation (ABV) and certified in financial forensics
(CFF).

59. Elliott Davis + Decosimo
($108M)