Affiliating with a Medical Group Practice

A physician spends years learning the subtleties of diagnosing ailments of the body and how to recognize almost imperceptible indicia of particular diseases. But at some point in his or her professional career, the average physician in the United States will confront another, equally daunting diagnostic task: determining whether to join a physician group in private practice. The physician's professional training has likely left this type of diagnosis completely unaddressed. A physician who joins a group practice, however, without examining how its structure and operations will affect his or her participation in the group, is at risk of entering a relationship that could prove, in the long term, both financially and emotionally unhealthy.

A physician spends years learning the subtleties of diagnosing ailments of the body and how to recognize almost imperceptible indicia of particular diseases. But at some point in his or her professional career, the average physician in the United States will confront another, equally daunting diagnostic task: determining whether to join a physician group in private practice. The physician’s professional training has likely left this type of diagnosis completely unaddressed. A physician who joins a group practice, however, without examining how its structure and operations will affect his or her participation in the group, is at risk of entering a relationship that could prove, in the long term, both financially and emotionally unhealthy.

A physician’s first encounter with a new patient typically includes conducting a complete examination of the patient, obtaining the patient’s personal medical history to determine whether there is any sign of current illness or future trouble. A similar encounter is warranted with any group practice which the physician contemplates joining. This article contains some of the questions which should be asked as the physician conducts the initial “examination” of a group practice.

How is the Group Legally Organized?

Usually, a medical group practice is organized as a separate legal entity, most typically one which provides its owners with a limitation of personal liability (although no form of legal-entity organization will protect a professional from potential malpractice liability for activities in which he or she has personally participated). The most common forms of legal organization for medical groups are professional corporations (PCs), limited liability companies (LLCs) and, in some states, limited liability partnerships (LLPs). As a practical matter, the principal operational differences among these entities relate to the availability of “pass through” income tax treatment (that is, whether the income is taxed at the entity level, or is taxed only to the individual owners as if it had been distributed to them). Historically, in a few states, professionals such as physicians have been prohibited from organizing their practices as limited liability entities of any sort, and in those jurisdictions, group practices have been organized as general partnerships in which the owners (partners) have full personal exposure to all liabilities, of any type, of the group.

For simplicity’s sake, this article will generically use the term “group” to refer to the medical group practice, regardless of its form of legal organization, and will generically refer to the equity owners of a group as its “members.”

Is the Physician Joining the Group as a Member, or Solely as an Employee?

Medical group practices often include physicians who are employees of the group, but not equity owners. It is common for a group to require that a newly affiliating physician serve for an initial period as a nonmember employee so as to assess the new physician’s performance in the context of the group and its operations. Employee-physicians who are not members of the group typically are compensated on the basis of a fixed salary, or only limited participation in individual productivity, rather than participation in the profitability of the group as a whole. In addition, nonmember physicians ordinarily do not have any legal rights to vote or participate in the governance of the group. In essence, the rights and duties of a nonmember employee-physician would be determined solely by the terms of his or her employment agreement with the group. As a result, a physician newly affiliating with a medical group practice as a nonmember is well advised to obtain a detailed and carefully considered employment agreement.

WHEN AND UNDER WHAT CIRCUMSTANCES WILL THE PHYSICIAN BE ELIGIBLE TO BECOME A MEMBER OF THE GROUP?

The physician’s employment agreement should explicitly establish whether and when he or she will be eligible to become a member of the group and under what criteria that determination will be made. The decision will ultimately involve subjective assessments of the physician’s professional competence and compatibility with the other members of the group. But the physician should seek a contractual commitment which makes that decision as objective as reasonably possible. Ideally, the physician’s employment agreement would obligate the group to address this issue after a specified period of employment has passed (often two to three years, but possibly a shorter period if the physician has moved to the group with an already-established practice and patient base), and would establish objective benchmarks which the physician must have met to be eligible for consideration as a group member (for example, among others, medical staff admission to specified hospitals, board certification in the group’s medical specialty, or a consistent level of revenue production equal to that of the existing members of the group). The inclusion of significant objective criteria will not eliminate, but will help to minimize, the physician’s risk of a purely subjective negative determination on this issue.

WHAT WILL BE THE COST OF BUYING-IN IF THE PHYSICIAN IS MADE A MEMBER OF THE GROUP?

A newly admitted member is nearly always required to buy his or her equity ownership interest in the group (whether that is in the form of stock, a partnership interest or other form of membership interest). That interest could be purchased directly from the group itself, or might be purchased pro rata from among the already outstanding equity interests held by the existing members of the group. In either case, the crucial issues for the newly admitted member are the percentage of the total outstanding equity which he or she will own following such purchase, and, of course, how the equity interests are valued. The former issue is important to the new member’s voting rights in the organization, and potentially important to his or her percentage share in the profits of the group (depending on the group’s revenue-sharing arrangements). The latter issue affects how much the new member must pay to be admitted to the group in the first place. The purchase price will ordinarily be a function of the valuation of the total equity of the group and the percentage of that total equity which is represented by the interests to be purchased by the new member.

There are a myriad of potential methods for valuing the equity of a medical group practice. Among the more common formulations are: book value of tangible assets of the group (net of balance sheet liabilities); current fair market value of all assets of the group (net of all liabilities), including accounts receivable; and discounted present value of the group’s net revenue stream. The appropriate valuation method will depend on several factors, including the group’s method of revenue-sharing, the composition of its assets, its particular combination of revenue sources, its historical valuation practices for purposes of member buy-ins, and its practices with respect to member buyouts (for example, whether a member of the group “buys into” and gets “bought out of” the group’s aggregate receivables upon entry into and exit from the group). Specification of an agreed valuation method in the physician’s employment contract can help avoid a surprise as to the buy-in price at the time the membership decision is made.

A similar determination also should be made at the outset as to how the buy-in price is to be paid. In particular, the physician should determine whether the group is willing to allow payment in installments over time or otherwise to internally finance the buy-in. If it is not, the newly admitted member will be required to obtain the necessary funding personally through bank loans or similar sources. A physician should seek the counsel of his or her tax adviser in connection with considering any type of membership “buy-in” structure.

WHAT IS THE REVENUE-SHARING ARRANGEMENT AMONG MEMBERS OF THE GROUP?

There are a variety of possible approaches to revenue-sharing within a medical group practice. The method chosen may be the most important factor in the overall financial impact on a given physician of joining the group. It may also be, on a psychological level, the factor that best reveals the personality of the group. Some common revenue-sharing arrangements are:

  • Equal sharing of all the net revenues of the group on a per capita basis (or, alternatively, according to percentage of equity owned) among all members of the group, regardless of individual productivity;
  • Net revenues (after deduction of all expenses) shared pro rata among the members based on each member’s percentage contribution to productivity (with productivity usually measured in terms of actual collections for physician services billed by each physician);
  • Net revenues shared among the members according to productivity, but with expenses attributable to the particular practice of a given member charged directly to such physician (for example, the compensation cost of such physician’s individual nurse or physician assistant, the cost of equipment and supplies specifically used for such physician’s patients, or the cost of rent and utilities attributable to such physician’s individual office and examining rooms), rather than included in the calculation of net revenues; and
  • Allocation to each physician-member of collections attributable to services specifically rendered by him or her, as well as the expenses of that member’s individual practice, plus an allocable share (often determined on a per capita basis as among all group members) of the group’s general overhead expenses (such as the cost of general administrative personnel, and billings and collections operations).

The group’s approach to revenue sharing can impact not only the amount of compensation which a physician can expect from his or her ongoing work in the group, but also the determination of his or her buy-in price as a member of the group. Most particularly, it can impact whether the newly admitted member is “buying into” the group’s existing portfolio of accounts receivable as of the buy-in date. It is more likely, for example, that a group sharing revenues as a “common pot” will require a new member to buy into a pro rata share of the group’s existing receivables, whereas a group that compensates its members on a “pure individual productivity” basis might view the receivables as “belonging” to the individual physician whose services generated them. Under the latter type of revenue-sharing structure, it is common for the existing receivables to be distributed out to the existing members, in some fashion, prior to admission of a new member, so that he or she does not share in collections from those receivables. Conversely, in the same type of revenue-sharing structure, it is common for a departing member to receive a distribution of the net collections on “his” or “her” receivables following departure from the group.

In addition to patient service receivables, group practices (especially those in certain medical subspecialties) frequently have significant revenues from other sources and separate sharing arrangements with respect to such other revenues. Many private-practice medical specialists now perform a variety of office-based procedures which entail the use of sophisticated diagnostic or therapeutic equipment, or carry out clinical lab tests on an in-house basis. The charges for such procedures usually entail not only physician-service fees, but also a so-called “technical component” as a cost-recovery for equipment and facilities. It is common for “technical component” revenues to be viewed as related to capital investment, and therefore shared only among the group’s members, often according to ownership percentage (even in groups that generally share revenues on a productivity model). It should be noted that as to “technical component” revenues produced from certain types of procedures covered by Medicare or similar federal reimbursement programs, revenue-sharing according to productivity is inadvisable because it may be interpreted as payment solely for ordering the procedures, a violation of the federal “Stark” and “anti-kickback” laws. A physician newly joining a group should inquire carefully as to how “technical” fees and similar revenues are shared within the group.

DOES THE GROUP HAVE ANY ANCILLARY OPERATIONS TO WHICH THE PHYSICIAN WOULD ALSO WANT TO BE ADMITTED?

Some medical specialty practices also utilize “captive” ancillary operations, organized as separate legal entities, either for financial or regulatory-compliance reasons. For example, the members of a plastic surgery group may conduct their outpatient procedures in an ambulatory surgery center organized as a limited partnership or LLC, separate from the surgery group although having the same equity owners. The revenues of such a separate entity would consist of the “technical component” or “facility fee” charges for the particular procedures conducted using the surgery center’s facilities. The relative percentages of ownership in such an ancillary entity may not necessarily be the same as those within the sponsoring medical group. A physician newly affiliating with a group should inquire about the existence of any such ancillary entities and about his or her eligibility to become an owner therein, as well as valuation, timing and terms of any such buy-in.

WHAT ARE THE GROUP’S ARRANGEMENTS CONCERNING ON-CALL COVERAGE?

One great advantage of a group medical practice is the group members’ ability to share the burden of being “on call” to cover patients during nonbusiness hours, such as nights, weekends and major holidays. Careful inquiry should be made at the outset of a physician’s affiliation with a group, however, to determine the group’s particular call-coverage practices, and the extent to which call-coverage responsibility will fall on the particular physician. Areas of concern might be: (i) whether on-call coverage is shared equally by all physicians in the group, or is allocated so that senior physicians have proportionately less on-call duty than more junior members and physician-employees; (ii) whether the group has more than one on-call rotation among its physicians (for example, a separate rotation for each hospital covered by the group’s practice); (iii) whether the on-call group maintains separate schedules for weeknight, weekend and major holiday call rotations; and (iv) in a multispecialty group, whether the physician only covers call for patients of his or her particular specialty, and if not, what backup arrangements are in place for serious emergencies of patients of the other specialties. It should be determined whether the group’s on-call practices are set out objectively in organizational documents of the group, and whether those practices are subject to material change in ways beyond the control of the average group member or employee-physician.

DOES THE GROUP PROVIDE MEDICAL MALPRACTICE LIABILITY INSURANCE COVERAGE FOR ALL ITS PHYSICIANS?

Typically, the answer to this question is “yes,” but the question is not as straightforward as it initially seems. In addition to the general issue of allocating the premium cost of the group’s malpractice coverage among the group’s physicians, at least two other ancillary issues should be explored. First, particularly in view of the growing crisis in malpractice insurance availability in certain specialties (obstetrics, for example) and in certain states (Georgia being one), there is the question of what happens if the group is unable to obtain coverage for a particular physician (as a result of his or her personal prior claims experience, or the general risk level of his or her subspecialty). Can the group expel that physician, or is it obligated to expend extraordinary effort and cost to find malpractice coverage for the physician? In the latter case, who pays the premium costs?

Also, there is the issue of so-called “tail” or “prior acts” coverage. This issue arises in two contexts. First, the group will likely insist, as a condition of employment, that there be “tail coverage” in place as to any medical practice activity in which the physician engaged prior to affiliating with the group. Who pays the cost of such coverage can be a subject of negotiation. Second, the group may also require contractual commitments designed to ensure that “tail coverage” for the physician’s activities while with the group will be in place upon the physician’s retirement or other departure. The group may reserve to itself the right to obtain such coverage on behalf of, and at the expense of, the physician. The physician may wish to consider whether the amount and premium cost of such required coverage are appropriate, as well as whether it is appropriate in all circumstances to charge that cost to the physician (what if, for example, the physician is expelled from the group without cause?).

DOES THE GROUP REQUIRE NONCOMPETITION GREEMENTS FROM ITS PHYSICIANS?

Noncompetition agreements typically prohibit a physician from practicing his or her medical specialty in the area served by the group’s offices for a specified time (often, one or two years) following the physician’s departure from the group. Although difficult to enforce in some states, such agreements are commonly required to protect the group against the risk of having nurtured its own competitor. A newly affiliating physician should assess the scope of any proposed noncompetition agreement (both as to the time period and the geographic territory covered), and consider the risk of being excluded from his or her established practice for a substantial period of time in the event his or her affiliation with the group goes sour. This could especially be a concern where the physician’s subspecialty is one that requires proximity and access to a specific hospital or a specific group of referring physicians (for example, if the physician practices in a narrow pediatric subspecialty, and the noncompete territory includes the area’s only children’s hospital).

ARE SPECIAL PRIVILEGES ACCORDED TO PARTICULAR “SENIOR” OR “FOUNDING” MEMBERS OF THE GROUP?

Special provisions in a group’s organizational documents may guarantee decision-making control to the group’s “founders” or its most senior members. In some cases, that control entails veto power with respect to operational decisions, and occasionally, a right to force a dissolution of the group in the event of protracted disagreement as to such matters. A group’s governing documents may also provide that in the event of his or her departure from the group for reasons other than retirement, the “founder” is granted individual ownership as to the group’s name, its principal telephone numbers and its principal office lease, thus giving him or her effective rights to the business continuity of the group’s practice. A newly affiliating physician will also want to inquire as to the existence of any extraordinary payment arrangements for any senior members, such as ongoing management fees or extraordinary retirement benefits (for example, a long-term retirement stipend in addition to the usual member buyout rights).

WHAT IS THE GROUP’S POLICY WITH RESPECT TO DISABILITY?

It can be in the mutual best interest of the group and the physician to agree that the physician’s long-term disability causes termination of his or her employment with, and membership in, the group. But this is in the physician’s interest only if the physician is covered by a sufficient amount of long-term disability insurance to provide adequate replacement income. The physician should determine whether the group maintains an adequate amount of disability insurance covering its physicians (although, both for income tax and portability reasons, this coverage would optimally be structured such that the insurance policies would be individually owned by the covered physicians). The period of inability to work that determines a physician’s “disability” under the group’s organizational documents should be coextensive with the “elimination period” under the applicable disability insurance so that the physician’s right to receive compensation from the group does not terminate prior to the commencement of payments under the disability coverage. Furthermore, the definition of what constitutes disability for purposes of the group’s termination decision should not be materially different from (or at least, not materially broader than) that contained in the applicable disability policy.

WHAT IS THE PHYSICIAN ENTITLED TO RECEIVE UPON WITHDRAWAL FROM THE GROUP?

This is in many ways the other side of the discussion of “buy-in” structure and valuation. Typically, a physician departing from a group practice, whether as a result of voluntary retirement, other voluntary withdrawal, disability, or even expulsion, is treated as entitled to have his equity interest redeemed by the group, often at a valuation determined by the same formula as would be used to determine the price for a contemporaneous “buy-in” purchase of the same equity interest. In addition, in many instances the group’s organizational documents entitle a withdrawing physician to receive post-withdrawal payments representing collections of accounts receivable attributable to his or her patients. The right to receive either of such types of payments may depend on the circumstances of the physician’s withdrawal (for example, whether he or she is retiring, withdrawing to join another practice, or being expelled for cause), as well as his or her post-withdrawal conduct (for example, violation of a noncompetition agreement may terminate the physician’s right to receive such payments). The existence and terms of such entitlements should be confirmed by a physician at the time of initial affiliation with the group.

WHAT ELSE SHOULD BE CONSIDERED?

These questions are not an exhaustive compilation. Every medical group, like every medical patient, is unique, with its own personality, its own quirks, its own healthy habits and its own aches and pains. Like any skilled diagnostician, the physician “taking the history” of his or her prospective medical group will want to watch and listen closely for the subtle symptom indicating trouble beneath the surface, or the anomaly warranting further exploration. But the questions listed in this article should form a good basis for gathering the information needed to reveal the symptoms, good and bad, of the group’s organizational and operational health. And for the physician contemplating private practice, this is likely to be one necessary diagnostic checklist that won’t be found among the old medical school notes.