Tough economic times and the unpredictable consequences of health care reform are making a growing number of solo practitioners and small private groups very nervous. I’ve received many inquiries about protective options, such as joining a multispecialty group, or merging two or more small practices into larger entities.
If becoming an employee of a large corporation does not appeal to you, a merger can offer significant advantages in stabilization of income and expenses; but careful planning, and a written agreement, are essential.
If you are considering this option, here are some things to think about:
What is the compensation formula? Will everyone be paid only for what they do individually, or will revenue be shared equally? I favor a combination; productivity is rewarded, but your income doesn’t drop to zero when you take time off.
Who will be in charge, and what percentage vote will be needed to approve important decisions? Typically, the majority rules, but you may wish to create a list of pivotal moves that will require unanimous approval, such as purchasing expensive equipment, borrowing money, or adding new partners.
Will you keep your retirement plans separate, or combine them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You’ll probably need some legal guidance to ensure that assets from existing plans can be transferred into a new plan without tax issues.
Since most private practices are incorporated, there are two basic options for combining them: Corporation A can simply absorb corporation B; the latter ceases to exist, and corporation A, the so-called “surviving entity,” assumes all assets and liabilities of both old corporations. Corporation B shareholders exchange shares of its stock for shares of corporation A, with adjustments for any inequalities in stock value.
The second option is to start a completely new corporation. Both separate entities dissolve and distribute their equipment and charts to their shareholders, who then transfer the assets to the new corporation.
Option 2 is popular, but I am not a fan. It is billed as an opportunity to start fresh, shielding everyone from exposure to malpractice suits and other liabilities. However, the reality is that anyone looking to sue either old corporation will simply sue the new entity as the so-called “successor” corporation, on the grounds that it has assumed responsibility for its predecessors’ liabilities. You also will need new provider numbers, which may impede cash flow for months. Plus, the IRS treats corporate liquidations, even for merger purposes, as sales of assets, and taxes them.
In general, most experts that I’ve talked with favor outright merger of the corporations. This option is tax neutral, and while it may theoretically be less satisfactory liability-wise, you can minimize risk by examining financial and legal records, and by identifying any glaring flaws in charting or coding. Your lawyers can add “hold harmless” clauses to the merger agreement, indemnifying each party against the others’ liabilities. This area in particular is where you need experienced, competent legal advice.
Another common sticking point is known as “equalization.” Ideally, each party brings an equal amount of assets to the table, but in the real world that is rarely the case. One party may contribute more equipment, for example, and the others are often asked to make up the difference (“equalize”) with something else, usually cash.
An alternative is to agree that any inequalities will be compensated at the other end, in the form of buyout value; that is, physicians contributing more assets will receive larger buyouts when they leave or retire than those contributing less.
Non-compete provisions are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buyout penalty. An unhappy partner can leave, and compete, but at the cost of a substantially reduced buyout. This permits competition, but discourages it; and it compensates the remaining partners.
These are only some of the pivotal business and legal issues that must be settled in advance. A little planning and negotiation can prevent a lot of grief, regret, and legal expenses in the future. I’ll mention some other, more complicated merger options in a future column.
Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Skin & Allergy News. Additional columns are available online at edermatologynews.com.