The Art of Negotiating for Practice Control
Aug 15, 2011 |
If you’re a physician in a medical practice, being able to speak your mind and having your opinion matter — having some control — can be invaluable.
“If you don’t have control, you have no say,” says Keith Riley, a partner with New Jersey law firm DeCotiis, FitzPatrick & Cole, LLP. “If you’re not able to negotiate some kind of major decision rights in the practice, you’re going to be at the mercy of a group of physicians who have majority.”
So even if a physician owns 5% of the practice, the majority can still do almost whatever it wants. That’s why it’s essential to do some careful reading, and negotiating, before signing your next practice agreement.
Tom Ferkovic, R.Ph., MS, managing director at SS&G Healthcare Services, LLC, explains that the hierarchy of a medical practice can take on many forms. For example, there are practices where all the physicians are equal shareholders in the legal sense, but one physician seems to stand above the rest. According to Ferkovic, that’s the benevolent dictator.
“Everyone looks to that person,” Ferkovic says. “You can sit around for a two-hour meeting of all the practice partners, and then when the benevolent dictator nods, the discussion is done.”
Another form of practice hierarchy is the compensation model, which tends to be based more on productivity. Which physician sees the most patients? Who’s paid more? Those factors determine who is really in control, according to Ferkovic.
Riley says that whenever he represents physicians who are minority stakeholders, he tells them that the most important thing is to have some sort of shareholders’ agreement where they receive approval rights of major decisions. These decisions can include the practice borrowing money, salary increases, profit distribution or acquiring other assets.
“If you don’t have control or some sort of veto or approval rights, you’re going to be giving your money to the physicians in control without having any real say in how the money is used,” Riley says. “You become a passive investor, and you can’t do anything to protect your interest.”
Understand the responsibility
Ferkovic has heard many doctors say that they want to be a partner in a practice. He cautions them and asks, “Do you understand that when you become a partner and there’s no money, you get paid last?” Too many young doctors, he explains, don’t realize that a medical practice is a business like any other business.
“[Being a partner is] a status and a title,” he says. “But it’s also a responsibility.”
As an example, Ferkovic points to something an attorney explained to him a long time ago. When you’re a shareholder in IBM, you get to vote what your wallet says, because you own that stock. But when you’re on the board of IBM and a shareholder, now you have to do what’s best for IBM, not your wallet.
“I remind doctors of that,” Ferkovic says. “They may be in small groups, but when you sit on the board, your role is to do what’s best for the corporation you represent.”
Know the practice
Before buying into a practice, Riley suggests fully understanding the asset you’re investing in. He recommends an appraisal of the practice, or at least gaining access to the practice’s records and financial statements as prepared by independent accountants.
“Physicians should do their due diligence,” Riley says. “Even though they may have been working there for years, they may not have had access to certain information.”
Some questions to a physician will want to find out the answers to are: who knows what kind of litigation is out there? Are there any Medicare issues? How highly leveraged is the practice? When there are profits, are they being distributed to the doctors, or are they reinvested in the business?
“These are things he has to get a handle on — like how the money is being used — before he puts his name to it,” Riley says. “And when they do value the practice, if the physician is only going to get 5 or 10%, he shouldn’t pay full per unit price; he should get a minority discount. If he does not have control, he should pay a lot less than someone who does.”
Lastly, physicians need to decide if they really are interested in the business aspect of the practice, according to Ferkovic.
“They may simply want to be an employed physician and not worry about the ownership headaches,” he says. “Or be the producing partner and not the one who worries about how the practice is run. These are all factors to be considered.”