Small Practice Expansion

Medical practices, which are typically operated by professional corporation entities, face many of the same issues as nonmedical organizations when they decide to expand their professional personnel. Although medical practices must consider unique factors specific to licensure, third-party payors, and professional regulations, the whims and will of commerce still play a significant role in the decision to add new professional members, because at its heart, a medical practice is a business.

In order to maintain the competitiveness and efficiency of your practice, you may want to consider bringing on a new, perhaps younger doctor. To help preserve the “honeymoon” period of an expanded practice, you should begin by addressing as many practical issues as possible.

COURTSHIP AND EMPLOYMENT
Like most businesses, medical practices reflect a certain personality of their own. Many practitioners wish to “test run” a candidate before bringing him or her on as an equity owner in the corporation. One way to conduct this trial phase with a new doctor is simply to employ him or her. Employment with potential for equity ownership should be reflected in a written agreement, which can either be a single employment agreement that incorporates (and certainly should reference) the possibility of equity acquisition, or two agreements executed simultaneously that spell out all of the terms for both employment and equity participation. Make sure to specifically list any and all terms and conditions in these agreements.

EQUITY PARTICIPATION
If after the evaluation period you and your colleagues decide to hire a physician with the potential to become a shareholder in the practice, the issues related to the equity ownership should be addressed at the inception of the relationship, and the time before employment. The equity participation process begins on a business level, with the price of equity partnership. Some practices do not require a buy-in to the existing organization, and some base compensation on a formula related to productivity, which may also negate the need for a buy-in. In many cases, however, the existing shareholders require that the new physician buy into the practice. This process often involves the doctor's acquisition of shares in the professional corporation, that evidences his or her ownership of the agreed upon percentage of the business.

The buy-in price issue depends on whether the new doctor will be part of the current staff, or if he or she will assume the workload of a physician who is either retiring or scaling back his or her practice. The buy-in price can be determined either by a fixed price or a formula, which may comprise the price in the future, but will vary considerably from practice to practice. If the doctor is retiring, the price or formula may be altered or adjusted depending on how the retiree's patients are treated.

WEIGH YOUR OPTIONS
Once you determine the buy-in price or method, you must consider the terms of the buy-in. The practice may require the new physician to finance the acquisition privately, and this requirement may even rise to a condition precedent to the acquisition, with failure to obtain bank or outside financing barring equity participation. An alternative is to have the professional corporation finance the acquisition over a number of years with the new physician paying a negotiated interest rate on the borrowed amount. Payments under this plan can be automatically deducted from the new physician's compensation and/or bonus, and can be set at certain percentage limitations to allow the physician to live reasonably on his or her compensation. Another option is to automatically apply any bonus or divisible profit to the buy-in amount at the end of the year, either exclusively of or as part of the payment obligation.

Financing the buy-in through either the retiring physician or the professional corporation is often used as a last resort for many reasons. The retiring physician generally wants his or her buy-in to provide greater fruits during retirement. To safeguard this option, an equity acquisition agreement may include a provision that the incoming physician must make a bona fide attempt to obtain financing from at least three banking institutions prior to either the professional corporation or the retiring partner financing the buy-in.

In the next issue of Cataract & Refractive Surgery Today, I will further address the nature of the terms of equity participation, paying special attention to various legal measures that will help to develop a strong and lasting partnership.