Partnership Agreement

Partnering with other physicians can offer several benefits to physicians, including cost-sharing, coverage when one is unavailable, and future planning. However, before entering any partnership arrangement, physicians should evaluate their goals and current situation. If they decide to enter into a partnership, they should ensure that the agreement is appropriate and outlines the terms of the relationship with the other physicians. We know this agreement as a Partnership Agreement, Shareholders’ Agreement, or Operating Agreement, depending on the type of entity through which the physicians provide services. Here are some key concepts that physicians should address before entering into partnership arrangements with others:

MANAGEMENT/VOTING:

When physicians partner with others, decisions regarding the practice will no longer be made solely by an individual physician. It is crucial to determine how such decisions will be made. For example, will a majority vote or a unanimous vote of the physicians will make decisions? If there are more than two physicians in the practice and decisions are made by a majority vote, there is always a chance that a majority of physicians can team up against the minority physicians. Even if ordinary decisions are to be made by a majority vote, the parties can agree that certain decisions will be made by a unanimous vote, including admitting new physicians, dissolving the practice, changing the compensation of the physicians, terminating physicians, entering into litigation regarding the practice, selling the practice, and purchases exceeding a certain amount.

COMPENSATION/BENEFITS/EXPENSES:

Physicians must also agree on compensation and expense reimbursement. With respect to compensation, the physicians need to determine how they will be compensated and how net profits will be divided. It is essential to consider the practice’s cash flow to ensure that it can make such payments and pay administrative costs related to the operation of the practice. Before determining the compensation structure, it is advisable to consult an accountant regarding the practice’s cash flow. Additionally, physicians need to determine what expenses and benefits the practice will pay for, such as CMEs, automobile allowance, cell phone, conferences, books, license and registration fees, disability, health, and life insurance. If the physicians’ expenses would be significantly different, each physician may have a predetermined expense account.

TERMINATION:

Physicians must also be aware of termination provisions in the agreement. If the agreement allows the physician owners of the practice to be terminated without cause upon a majority vote of the other physician owners, physicians should be concerned. The agreement should allow for termination only in limited circumstances, including if the physician loses their license to practice medicine. Additionally, the agreement should outline the specific terms regarding termination/withdrawal, including the amount of notice that must be provided in the event of a physician voluntarily withdrawing from the practice, as well as the practice’s and withdrawing physician’s responsibilities upon withdrawal.

BUY-OUTS:

Physicians must also consider whether there will be a buy-out in the event of termination, including for retirement, death, disability, voluntary, or involuntary withdrawal, as well as whether such buy-out will be deminimis or significant. The buy-out can differ depending on the reason for withdrawal. For instance, the buy-out for death or disability can be the value of the physician’s life insurance or disability policy, while the buy-out for voluntary withdrawal can be the withdrawing physician’s share of the accounts receivable of the practice. The parties should also discuss when such buy-out payments shall commence, as well as how payments will be made and over what duration. It is also important to have a provision in the agreement to protect the practice from having to make several buy-out payments simultaneously, which could place a significant financial strain on the practice. This provision is often in the form of a cap, and payments exceeding such cap are deferred.

MALPRACTICE/TAIL COVERAGE:

Tail Coverage:

Physicians with a “claims made” policy must be aware of the potential need for tail coverage in case the policy is discontinued. Tail coverage can be expensive, so it is important for physicians to ensure that their agreement with the practice indicates that the practice will be responsible for paying for tail coverage upon the physician’s withdrawal.

Buy-In:

When a physician is offered the opportunity to become a partner in an existing practice, it is important to carefully review the terms of the buy-in, including the financial obligations. It is also essential for the physician to research the practice thoroughly to ensure that it is financially stable. Obtaining a valuation of the practice from a certified healthcare appraiser or accountant is recommended.

Conclusion:

Entering into a partnership with other physicians can be exciting, but it is crucial to evaluate the business and legal issues involved. Physicians should seek the guidance of healthcare attorneys and accountants to ensure that the partnership arrangement is appropriate and in their best interests.