August 1998 Bulletin

Plan ahead when selling to PPMC

Get control of earned revenues after termination; beware of restrictive covenants

By Steven M. Harris

Physicians contemplating selling their practice to a physician practice management company (PPMC) should be sure to address the ownership of accounts receivable collected by the PPMC after the parties have terminated their relationship.

Because physician compensation is typically based upon net collections, professional fees received in the normal course of business after a physician leaves the PPMC are attributable to production while employed. The PPMC should be obligated to account for the post employment receipt of such revenue and be required to pay the physician pursuant to the collection formula in effect during employment. Because gross collections attributable to a physician's professional services are typically reduced by expenses associated with such production, it is likely that the amount a physician is entitled to receive after termination will actually be greater than the percentage received during employment. This increase is caused by the employer no longer being obligated to incur expenses operating the physician's practice after termination except for billing and collection expenses associated with the receivables. Finally, be sure to provide a mechanism within the contract that allows a representative of the physician group to review or audit the billing and collection activity of the PPMC.

RESTRICTIVE COVENANTS

PPMCs, faculty foundations and captive professional corporations associated with each often demand that some form of restrictive covenant apply to physicians after termination of the employment relationship. Although the majority of states recognize so-called "covenants not to compete" as a legitimate way for employers to preserve their goodwill in an acquired practice, do not accept the terms of such restrictions as definitive. Courts throughout the country strain to find appropriate rationale to void or reduce the restrictive terms of such provisions in an effort to increase public access to health care providers. This is especially the case when non-traditional providers of health care services, like PPMCs, attempt to enforce restrictive covenants against physicians. PPMCs and similar business entities are facing increasing resistance when attempting to restrict the delivery of medical services despite clear contractual language to the contrary. Each case is fact specific and must be analyzed independently.

GUARANTIES

It is quite common for physicians to be required personally to guaranty obligations of their practice. Such guaranties may include obligations on equipment leases, office leases and bank notes. Part of the attraction of PPMCs is their enhanced creditworthiness, thus eliminating the need for physicians to risk their personal assets in practice-related ventures.

Be careful to identify each and every practice-related personal obligation at the time of sale or merger. Require the PPMC or foundation specifically to assume each. Moreover, recognize that the PPMC's assumption alone will not release you from the underlying debt. It is necessary to secure a specific release from the lender (or lessor) with respect to each personal obligation. Failure to procure such a release may mean that you will face this unwanted exposure in the event the relationship with the PPMC terminates.

FEE SPLITTING

Each state prohibits physicians from paying fees for the referral of patients to anyone other than another physician who shares a legal relationship (e.g., partner, co-shareholder, etc.) with the provider. PPMCs often are paid a specific amount per year for management services provided to a practice. Frequently the financial arrangement between a PPMC and group practice includes a bonus arrangement paid to the PPMC based upon the "net profit" generated by the practice. Such arrangements are under scrutiny in many states.

The Florida Board of Medicine recently held that the terms of a management services agreement between a group practice and PhyMatrix Management Company, Inc., violated a Florida statute prohibiting fee-splitting. The contract terms required the practice pay the PPMC "30 percent of the group practice's net income each year." The Florida Board concluded that the management services agreement which required the practice pay a specified percentage of their net income without regard to the cost of providing services supplied by PhyMatrix and without regard to whether the income is from services performed either by a physician or under a physician's supervision or direction is a split-fee arrangement in violation of Florida law. The PPMC has appealed the decision.

A physician's relationship with a PPMC can be a beneficial and rewarding experience. However, prior to committing a group practice to such a relationship, a thorough review of the legal issues must be performed.


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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