April 1998 Bulletin

PPMC merger should have exist strategy

Careful advance consideration can minimize your financial exposure and be less disruptive to your patients if the arrangement unravels and either party wants to call it quits

By Steven M. Harris

Problems associated with joining physician practice management companies (PPMCs) have been well documented (Bulletin April, 1997), but little guidance has been offered physicians contemplating selling their practices to a PPMC. Advice also is scarce when negotiating the "merger" of a mature practice into an alternative medical or business entity that promises expert management services, access to managed care contracts and overall safety in size. Such is the case when private group practices are approached by hospitals or faculty foundations seeking increased provider membership.

Remember, marriage is blissful while divorce is often contentious and costly. Careful advance consideration of the following points will minimize your financial exposure if your marriage to a PPMC begins to unravel and separation appears the only option.

EXIT STRATEGY

Develop an effective exit strategy at the inception of the relationship. Trying to figure out how to break cleanly from a PPMC when the relationship is failing likely will be expensive for you and disruptive to your patients. Memorialize within the purchase or merger agreement the exact exit procedure to be effectuated if either party wants out. Also, note that there may be two distinct levels of dissatisfaction. The practice, as a whole, may wish to terminate the relationship. Alternatively, a physician, or number of physicians less than the entire group practice, may wish to leave the PPMC or foundation model.

In case a single physician or a group of physicians representing less than the entire group practice wishes to leave, the internal agreements among the group must address the departing physicianís equity stake in the practiceóits value and responsibility for redemption. In a foundation model, the physicians may be employed individually by the foundation even though the group may operate clinically much like it did prior to the sale or merger. Care must be taken to determine whether the acquiring entity or the employed physicians themselves (operating as a clinical group) will be responsible for financial obligations owed to a retiring partner.

The management services agreement between a PPMC and group practice defines the legal and operational relationship between the parties during their relationship. All agreements assign medical-related decisions to the physicians while often directing that business issues will be decided by the PPMC. Donít be fooled by this seemingly appropriate division of responsibilities. If the PPMC controls the finances of the practiceóoften through absolute authority over its budgetópatient care will most certainly be affected and perhaps compromised.

Physicians should demand at least equal representation over fiscal issues. If not delineated in advance, control over budgeting decisions may materially affect the manner in which you are allowed to practice medicine.

PENSION PITFALL

Compensation paid to physicians affiliated with PPMCs is often tied to productivity. Personal expenses directly attributed to a provider, such as continuing medical education in excess of a specific budgeted amount and pension contributions, often reduce that physicianís salary and bonus. The PPMC will not necessarily discourage a physician from availing himself to these options. However, amounts allocated by the physician to those benefits will reduce W-2 compensation dollar-for-dollar. Actually, in many cases this option is of genuine benefit to a physician who can elect to charge these benefits as "above the line" expenses and thus avoid paying for the benefit personally with after-tax dollars.

Pension benefits must be considered differently. Amounts contributed to a pension plan on behalf of a physician may be subject to a vesting schedule (specified in the plan) that may not afford the participant full and immediate access to "his" money in the event the group practiceñPPMC relationship terminates.

When participants are in effect using their own compensation, not fresh employer money, vesting provisions other than 100 percent should not be accepted.

If, for instance, a physician left the employ of the PPMC or foundation after two years and the vesting provisions under the plan provided for 20 percent vesting per year of service, the physician would receive $60,000 x 40 percent or $24,000 (subject to market fluctuation) from the plan even though he was "charged" with a $60,000 reduction of compensation over a two-year period. In the event pension contributions are considered charged expenses to a providerís compensation, do not accept anything less than full and immediate vesting of benefits.

Steven M. Harris, a partner at Harris Kessler & Goldstein in Chicago, concentrates on health care law and has counseled physicians, physician networks and health care groups nationally.


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