March 21, 2017
By Debra Phairas, President Practice & Liability Consultants, LLC
The biggest mistake to avoid in bringing in an associate is saying “let’s see how it goes with being an employee and we will figure out the partnership terms in a couple of years.” That is a recipe for disaster! Hence my title, “Friend or Foe.” An open, trusting, fully transparent long term partner Friend relationship is the goal. You do not want to create a Foe or possible competitor when the new associate decides to leave and set up a practice in the same vicinity because the terms were not clearly spelled out, or feelings of distrust arise due to lack of clarity regarding the road to becoming a partner.
These recommendations are based on years of experience with assisting physicians to bring in associates and also trying to repair damage to existing relationships.This includes doctors who sued each other over verbal promises made during the employment period.
1. Make a list and discuss the following: compensation, how/when salary is paid, benefits, hours, days of the week, surgery OR times, locations expected to work at, ability to set schedules, exam room space, physician office space, memberships in national, state and local organizations, cell phone, auto, entertainment perks, working conditions and practice building expectations.
2. Write an employment offer or contract spelling out these terms.
3. When interviewing, look for a confident attitude and willingness to participate in marketing and management capabilities. Discuss the philosophy of the practice, cash/credit for purchases, conservative or progressive and try to discern if the candidate has the same values and philosophy.
4. Decide on who will be responsible for any tail insurance should the associate leave the practice before becoming a partner. This generally follows the rules of supply and demand. If you have many candidates eager to join your practice, you may make the employee responsible for tail insurance.If you have trouble recruiting, you may have to pay the tail. Or, you can decide to split it 50/50. This often is left out of contracts and leads to misunderstandings.
5. Clearly state all accounts receivable, charts, lists and practice trade secrets are the employer's property.The new associate should not have rights to any of these. If the associate does not stay with the practice, the information in the patients’ chart can be obtained through release of information requests, but the actual hard copy chart is the work product of the physician owner of the practice.
6. Find out if restrictive covenants are legal in your state by calling your state medical association.This would allow you to put in the contract the associate cannot leave your practice and set up a competing practice in your draw area. In some states only when a physician becomes a partner are restrictive covenants allowable. If so, they must be reasonable such as the draw area of the practice and a reasonable time frame such as two to three years.
7. Help the associate make a good decision about your opportunity by also discussing lifestyle issues such as real estate, schools, recreation, culture, entertainment, sports and business philosophy as well as medical philosophy.
8. Create an incentive program, which allows the associate to know what is expected of him/her in terms of productivity. Share practice expense information with the person so they have a better understanding of what it takes to run a practice and what gross income is necessary to achieve desired net income.If you have a serious candidate, share financial data you are comfortable with, but make the associate sign a confidentiality agreement. After the associate reaches the incentive threshold, the additional money generated should be given either in bonus or placed in escrow to satisfy the buy-in should partnership be offered. Encourage the associate to do this because it is like a forced savings plan. If the doctor decides not to join the practice and become a partner, then the bonus amount belongs to the associates and should be given in the final paycheck.
9. Whatever overhead ratio the practice currently has needs to be added on to achieve break-even. A 50% operating overhead would double the direct costs in additional overhead. It is only fair to the new associate to exclude the senior partner discretionary expenses such as auto, travel, entertainment, etc.This will provide a break-even point the associate must achieve to pay for him/herself in salary, benefits and contribution to overhead.The employer deserves a return on investment for outlaying money for salary and benefits. The employee could be given 25% of the excess revenue generated beyond break-even and the employer retains 25% for return on investment.The entire bonus can be given to the employee, the entire amount placed in escrow for credit against the buy-in or split in some proportion, for example, if the employee was due 10,000 bonus, $6,000 could be given in bonus and $4,000 credited toward a future buy in and placed in escrow.
Example: $200,000 Salary $ 45,000 Benefits (payroll tax, work comp, dental, health, life, e.g., 25% salary) $245,000 Total Direct MD Costs + $245,000 Overhead Costs at 50% overhead ratio (includes share of fixed costs such as rent and new and incremental variable costs such as medical, office supplies, telephone, dues and subs ) = $590,000 Breakeven Needed in Revenue/Collections
$600,000 Associate MD achieves in Revenue/Collections = $ 10,000 Excess above Break- Even
$ 5,000 or 50% applied to operating overhead
$ 5,000 to Associate for Bonus or Escrow towards Buy- In
Road to Partnership
1. Have the methodology and approximate cost of a buy-in to the practice decided before you begin interviewing so the associate can make a long-term decision about the future opportunities of the practice. Will goodwill or intangible asset value be included and if so, what is the methodology? Give an example of what amount this would be in today’s dollars. It is recommended to assess goodwill or intangible asset value back to the point in time the associate came into the practice. Thereafter, the associate is also building goodwill of his/her own. Will accounts receivable be included in the buy-in? These should be discounted by insurance adjustments and age. How will tangible assets be valued? Book Value or Fair Market Value? Fair Market Value is usually more in line with true value. Items may have been purchased and expensed and are not on the depreciation schedule or if older than 12 years and still in use, book value would place this value at zero. Will a Buy-Out be valued the same way? Will the new associate have a buy-in and buy-out of a senior partner at the same time? How will the associate pay for the buy-in? A lump sum borrowed from the bank or will the senior partner/group allow payment over time taken out of monthly draw, for example 3-6 years? Usually the practice and any ASC buy-ins will be separate entities and should be valued separately, just as real estate would be.
2. Set marketing goals and require the associate to submit a list of activities performed each month to build the practice, for example, visiting referral sources, giving community talks, grand rounds, media interviews, etc. Inform the associate this is a requirement to become a partner. Mentor the new associate and show how to build referral sources and patient confidence to book procedures/surgery.
3. Assign an area of management responsibility prior to partnership offering and assess whether the associate is partnership material by the degree of involvement and ability.
The road to future successful partnerships with an associate can be summed by with the three C’s: Have the Courage to: Communicate, Confront and Compromise.
About the author: Debra Phairas is the President of Practice & Liability Consultants and has over 20 years of healthcare administration and consulting experience.