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Is Coming Together to Form the Larger Same (or Multi) Specialty Medical Practice the Answer?

Many small or solo practitioners have come (or are considering coming) together to form larger same (or multi) specialty groups for the following reasons.  The principle reason is to get a leg up on managed care.  Managed care entities often take advantage of small or solo practitioners in the same geographic area by forcing them to accept lower reimbursements rates.  Small or solo practitioners, who join together in a single group, can effectively negotiate with managed care as a unit and obtain higher reimbursement rates.

This same principle applies to negotiating for lower malpractice insurance and group health, life and disability insurance premiums, as well as other employee benefits.  The larger groups are able to obtain discounts on the premiums they pay, because the insurance carriers are covering a larger population of physician providers or employees, thereby spreading the risk across a larger population, and thereby reducing the cost of coverage per physician or per employee.  These are the same principles Wal-Mart, Costco and other large businesses use when negotiating with vendors.  They use their purchasing power to influence the vendors to lower the costs because of the volume.

Purchasing power has another twist.  Small or solo practitioners, who come together to form a larger group, can use their own numbers and collective net worth to purchase the sophisticated equipment used to generate ancillary revenue.  A new sonogram machine, MRI, PET, CT or linear accelerator can cost hundreds of thousands or millions of dollars.  On their own, physicians cannot afford these items and banks will not lend them the money to purchase the same because the banks feel the risk is too great.  By coming together, physicians can spread the cost over their numbers and either purchase the equipment themselves and/or obtain financing to purchase the same.  Once again, there is safety in numbers and purchasing power eliminates the obstacle.

Of course, the reason physicians want to obtain this equipment is to obtain the ancillary revenues this equipment generates.  Physicians typically can only bill for the professional component or the component of the health care generated only by the physician's efforts (i.e. the consult, the surgical procedure, etc.).  Hospitals, on the other hand, can bill a facility fee and/or fees for the images or tests the equipment generates.  These fees are often much higher than the professional component.  Physician groups, with the purchasing power to obtain this equipment on their own, can bill for both the professional and technical components.

The federal and state antitrust, Medicare fraud and abuse, antikickback and self-referral prohibitions prohibit groups of small or solo practitioners from negotiating with managed care and from sharing ancillary revenues when they are loosely organized in "name only", and not legally organized and operated as a "true" group practice.  As a fully organized and operated group practice, the physicians are no longer competitors, they are on the same team.  The same is true for sharing ancillary revenues, so long as that sharing is done in a legally permissible manner.

The legal entity constituting the group practice can be virtually any form of legal entity including, but not limited to, a corporation, whether a C corporation or S corporation; a limited liability company; a limited liability partnership, etc.  However, the choice of entity analysis is an involved one and should not be taken lightly.  A properly trained corporate attorney with a tax and health care background should be consulted to put this together, as it is not simply a matter of filing articles of incorporation with the Secretary of State.

Next the entity needs an agreement between its shareholders, members or limited liability partners, as well as properly drafted employment agreements: to govern their relationship with each other; to set forth the manner in which they will be compensated and share in ancillary revenues; and to govern the parties obligations in the event the physician shareholders', members' or limited liability partners' employment and relationship with the entity is terminated for reasons including, but not limited to, the physician's death, disability, retirement, or by the entity with or without cause.

Typically, the practice owners also own interests in the building within which the practice is located; as well as other joint ventures or entities such as ambulatory surgical or imaging centers.  Properly drafted shareholder, buy-sell, operating and/or partnership agreements governing these other entities define the physicians’ rights, duties and obligations to each other during their association, and specify whether and how the departing physician is to be bought out in the event that association terminates.

I often hear the following objections to coming together, the first of which is the most common.  "I generate the most ancillary revenues and I should get all of the ancillary revenues I generate one for one".  The permissible rules for sharing ancillary revenues do not permit this and this thought process is short sighted.  Typically, it only takes one conversation to convince this same physician that he can get a 100% of $50,000 worth of ancillary revenues on his own; or he can get 20% of $1,000,000 (depending on the permissible sharing method used) by coming together with other physicians to former a larger group that generates significantly more and different ancillary revenues, than he can on his own.

Another objection I hear is, "Our group compensates each other equally, their group compensates each other on productivity, and the other group compensates each other using a hybrid of the two.  Further, our group is lean and mean, our office is nice and efficient and our rent is much lower than the other group.  We cannot bear their higher overhead".  These obstacles can be overcome by cost center accounting whereby the revenues generated, and expenses incurred, by one cost center can be allocated to that cost center.

I once brought together four practices that wanted to come together for all the reasons described above.  The fact pattern was not exactly as follows, but this will do for purposes of illustrating my point: the four practices were located in four different cities; one practice was used to sharing revenues equally, one practice was used dividing revenues based on productivity, one practice used a hybrid model of 50% equal sharing and 50% productivity based, and the fourth practice was a solo practitioner; two of the practices had very high end expensive offices, lots of granite, marble and expensive improvements, the other practices were more modest; one practice had six members to begin with, another five, another two and the last practice was a solo practioner. The members of the larger practices were significantly younger than the members of the smaller practices, but the older practitioners had more mature practices, longstanding community relationships and well established referral patterns.

Each practice had strengths and weaknesses, and they were all tired of being beat up by managed care forcing them to compete against each other.  They came to me to bridge their differences so they could peacefully and successfully coexist and change their prognosis for the future.  We formed an S corporation and prepared a sophisticated shareholders' agreement to govern their relationship with each other.  We set forth decision making parameters that gave every member an equal voice in decision making, but also set forth specific parameters designed to protect the smaller practices from being out voted by the larger blocks on key issues including compensation, termination, etc.

We designed a cost center accounting and compensation arrangement that shared global overhead by number of physicians and allocated revenues and non-global expenses to the cost centers.  The group used their purchasing power to negotiate higher rates and to purchase malpractice and group health, life and disability insurance at a lower cost per man.  They also were able to eliminate duplicate positions across the group thereby further reducing overhead.  Finally, they were able to use their purchasing power to purchase sophisticated and expensive equipment and they began sharing the ancillary revenues therefrom.  They have grown a lot since the beginning.  However, they remain nimble, have little trouble governing themselves and have enjoyed very little physician turnover.

Who knows what lies ahead.  Are ACOs and physician/hospital integration the future?  What about comanagement of patients?  No one knows for sure, but some form of integration and/or comanagement will likely be in the future.  If so,the larger group is likely to have more leverage when it comes time to negotiating integration and comanagement arrangements with area hospitals.

It is the golden rule: He who has the gold makes the rules and patient control is the gold.  Control the number of patients, the care they need and manage their healthcare in a way that discourages duplication and over utilization, while maintaining their health and maximizing the chances they stay out of the system, and you control the flow of the health care dollar.  The country also gets healthier in the meantime and individual suffering can be reduced. 

I represent hundreds of physicians all across Florida; and although many enjoy a nice lifestyle, not one of them ever told me they got into medicine to get rich.  They took an oath and they wanted to help people.  Hospitals, the federal government, and managed care entities cannot treat patients without you; and, although they serve a valuable purpose, they are not the front line of defense and are not the tip of the sword.  Never forget that.  The patient needs his physician now more than ever.  Let us see to it that the patient gets what he needs and you do not go broke delivering it.

© 2018 Baker & Hostetler LLP

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About this Author

David Schick, healthcare law attorney, business lawyer, Baker Donelson law firm
Partner

David Schick’s practice is focused on healthcare law and business and corporate (profit and not-for-profit) law, with an emphasis in mergers and acquisitions, entity formation and dissolution and the preparation of sophisticated business agreements. These agreements include but are not limited to operating, partnership, buy-sell, purchase and sale, joint venture, management, employment, independent contractor and hospital-based and exclusive service agreements, as well as letters of intent, opinion letters and advice memoranda.

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