A Succession Plan for Your Practice

The entire health care industry is in the state of flux and a good number of medical practitioners are toying with an exit strategy. However, they have not crystallized their plans; here are some issues to address.

A good number of medical practitioners are toying with an exit strategy. However, they have not crystallized their plans because they are busy with their daily patient load, implementation of electronic record systems and practice administration. They are aware that their options include:

• Winding down your practice and walking away

• Selling their practice to an outside group (i.e. a hospital)

• Selling practice to their partners

• Joining an Accountable Care Organization or another strategic alliance

The lack of a plan produces unhappy patients, partner dysfunction (no sense of direction), upset employees and family members who are waiting for you to make up your mind. What you really need is to create a specific plan replete with all the necessary details.

Here are some issues to address:

1. Buy-sell agreement

You need to have an updated buy-sell agreement, which outlines the process for incoming younger doctors and exiting older doctors. This agreement also needs to address your financial arrangements with your partners.

2. Malpractice

Practices need to address the question of the malpractice tail for the exiting doctor and the responsibility of such payments.

3. Real estate

Real estate should be addressed by its own buy-sell agreements. The current practice entity needs to have written lease with the real estate entity. One of the biggest problems we have encountered is with the incoming doctors noting variable monthly rental payments.

4. Patients

The issue of non-solicitation of patients base must be addressed with a time limit, taking into consideration the privacy rules and need for a confidentiality clause.

5. Tax issues

Some of the material tax issues that need to be addressed: stock redemption agreement versus a cross-purchase agreement (stepped up basis); allocation of purchase price; and entity structure issues (i.e. remaining a C corporation, electing S corporation, etc.)

6. Talk

As part of the process, the partners need to vocalize their expectations and intentions with referencing to exiting and entering the practice.

7. Succession team

The succession team needs to include the following. A health care CPA with experience in the succession area and who can guide you around the many pitfalls. A competent team must include a health care attorney who is well versed in Federal and State regulatory matters as well as succession planning and knowledgeable with current trends in the industry. A knowledgeable well-seasoned expert insurance and pension administrator in the field of employee benefits are also key participants in the process. A physician within the medical practice must step up and be the designated point person to interact and coordinate with the succession team.

The overall goal is to come to a series of decisions. Often outstanding issues linger or paralyze the process, thereby preventing a plan coming to inclusion. Competing egos can often thwart a well-intentioned group, leaving the doctors exposed.

8. Employment agreements

A good employment agreement can promote ownership succession. Even if you have a succession plan, the prior valuation may no longer be realistic in today’s world. Prior agreements need to be annually reviewed.

9. Nonfinancial issues

Just as important as financial concerns when building a comprehensive, workable succession plan, nonfinancial issues include coverage, hospital privileges, and office versus non-office hours. Also review your ancillary services to see if they are still workable in this new and turbulent environment.

Conclusion

The entire industry is in the state of flux because of insurance company’s reimbursements, passage of the Affordable Care Act, rising cost of malpractice insurance as well as the advent of the new integrated delivery methods and our regulatory environments.

Fully executed agreements ensure the meeting of the minds. Written agreements avoid misunderstandings as misunderstandings are at the core of most litigation matters.

Jonathan Perelman is a partner at Friedman LLP and the New Jersey partner-in-charge of its Physicians Healthcare Group. He provides accounting and tax services to clients in manufacturing, wholesale/distribution and professional services, with a particular emphasis on medical, dental and legal practices. Jonathan can be reached at jperelman@friedmanllp.com or (973) 929-3560.Friedman LLP is also a proud member of the National CPA Health Care Advisors Association (HCAA), a nationwide network of CPA firms devoted to serving the health care industry. Its members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.