Cautionary Tales

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In 29 years of consulting, I have worked with greater than 750 physicians, 150 of whom have hired me more than once to help them make decisions to take them to the next level of success. This article is an accumulation of my clients' experiences.

All the stories are true, some are too amazing to be fiction and I'm not smart enough to make this up.

Some older doctors have been getting away with employment contracts that were counter to the best interests of the employed physicians. Groups are gaining reputations for being unfair to associates and are having trouble finding new ones. Prices for practices were so high, the buyers failed.

Recently I have seen a shift in the mindset of younger physicians who have begun to revolt in great numbers and the word is spreading fast. Many, looking at employment contracts that are unfair or too restrictive, are not signing them. Starting a solo practice is increasingly a better choice.

My practice is filled with faculty physicians leaving academics because their reimbursement is one-tenth that of the physicians they trained. The prestige of the medical center does pay the rent, but not a mortgage. Finding jobs which financially respect their experience is difficult. Many are starting solo practices.

Physicians are not the only ones recognizing problem contracts. The FBI, the Department of Health and Human Services, and the Office of the Inspector General are cracking down on hospitals which have illegal recruiting arrangements.

These attitudes are negatively affecting the good deals that are available. Buying the right practice at the right price could be the best start.

It is a good time to take a look at the past, learn from the mistakes, and carry forward the many good offers that consider each physician's needs and protect the future of each participant.

How do you take the step after training into these uncharted waters and not only survive, but prosper?

Think of your future career as a patient. You are the managing physician, how do you deal with consulting physicians? Who do you call first, how does the information flow between you to determine the best course of treatment? Follow those guidelines for your business decisions. Choose your team of advisors; practice management consultant, attorney, accountant, and listen mainly to them.
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Beware of Free Advice

If you must ask everybody you know what he or she thinks of every step you take and every decision you make, let your professional advisors have the last word. Gather all the free advice from relatives, friends, neighbors and the guy in line at the market, but let the experts who know the whole story and your circumstances be the ones whose advice you heed the most. In medicine, a second opinion is usually good, but you are getting a second opinion from an equally trained colleague. Taking business advice from family and friends is akin to patients heeding medical advice from neighbors and relatives. Folk advice, like folk medicine, can be harmful.

For example, listening to a dentist who rented office space in a commercial building 200 miles away, ten years ago, got one of my clients into trouble when he was attempting to lease space for his practice. It cost him more to have his advisors unravel the mess he created by following that irrelevant opinion than he gained.
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How to Work Well With Advisors

One of my clients always conferred with her attorney and me by phone at the same time. We are in three different states and two time zones. They were expensive hours since she was paying each of us simultaneously. However, there were fewer billable hours. It took less than half the time than it would have for her to consult with each of us separately. Then we would have to talk to each other. Then talk to her. The prospective employer could not tell her one of us had said something contradictory to the other because we all spoke at the same time. We got her everything she wanted in the contract.

On the other hand, I worked with a client who is doing just the opposite. He was too busy to take the time to set up appointments with his advisors, so he e-mailed us various contracts for different jobs, plus plans to build his own office, in bits and pieces. We don't know who suggested the changes and when, which changes were made and when. Our advice was becoming convoluted and counterproductive. We each told him we must have complete documents and the time they were created in order to give him good opinions.

You would not look at lab reports, test results and X-rays out of order to make a medical decision. Don't do it in business.
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Starting a Practice

If you are starting a solo practice, keep it simple. There are many steps to take. Don't complicate it further. Please don't incorporate. It is an expensive way to do business. Forming a corporation when you start out makes getting loans difficult. The corporation has no assets or financial history. Lenders and landlords request a personal guarantee for financing or leasing space, negating the purpose for incorporating in the first place. You can incorporate later to protect your assets, if that is the best course for you.
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Joining a Practice

Contracts are revelatory of people's personalities, history and intentions. One of my clients sent me a proposal hand written by the prospective employer quickly outlining the offer to join his practice. The last page contained this sentence, "You are a lucky boy." Now if there were ever a red flag, this is it. My client is not a boy. He is a highly trained physician, in his mid-thirties, married and a father. Such disrespect is a harbinger of things to come.

It's not the formula, it's the people. Two other practices brought to me lately had the same convoluted income sharing plan (the senior physicians know each other). The income was allocated according to production and the remaining money was divided in a complicated manner; 70% for some partners, 30% for others. It is difficult to understand. In one group, each employed physician was promoted to partner. No one has ever left. The history of the other is quite different. After the first two physicians formed a partnership, no one else ever became a partner. Each new physician left in turn after not receiving a partnership contract. Then, in quick succession, three physicians left within a few months. The pattern had become too apparent.

There are some hospitals which are supporting senior doctors by recruiting younger physicians with an income guarantee plus the overhead, which effectively puts the younger physician deeply in debt. The senior doctor has no financial responsibility for the younger one and assigns all the HMO and low paying patients to his or her care. What a profit center. One of my clients who worked under this type of contract, found at the end of the year that none of the patients she saw were billed in her name. Since she had no income from the practice, the guarantee became a loan from the hospital.
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Signs of a Fair Contract

There are many good contracts from physicians who respect each other and want to keep the partnership healthy and intact. Generosity, respect and a feeling of fairness throughout the contract reflect a good offer.

A very successful group started with a solo practitioner who brought in a fellow resident who was two years behind him. They flourished. They decided that the group would be limited to four physicians. The buy-in would be very affordable, $60,000. The buy-out was the same amount. The group maintained their success. Their generosity to each other was mirrored in the manner with which they treated their employees, patients and families. When the senior physician died at the age of 52, his widow received his buy-out. Ten years later, the practice was still providing health insurance for her and her children.

One of my clients joined an extremely successful practice. He was the third physician. The senior physician was under 40. The employment contract stated that if my client left, he would receive income from his production for six months after his departure. It is a surgical practice which recognized that his collections would continue for a period of time and felt that he would be entitled to the money. The practice was prosperous and needed his services as represented. He reached and received his bonus the first month of his employment.

I have clients who are a husband and wife team who first hired me when they took a third doctor into their practice. They wanted the compensation, incentive bonus and buy-in to be fair, mostly because the couple are generous and equitable people, but particularly because they are married and wanted to be sure the other physician would stay. They rehired me when they had grown to four and felt it was time to determine the standard for the buy-in and buy-out for the group. There were many ways to structure the formula, some would have been more advantageous to the husband who is the senior physician. But he kept insisting that we lower the price, extend the term for the buy-in and make certain that we considered the fairness to each physician from every aspect. He and his wife had made their money by the work of their own hands and they structured it so each of their partners could do the same. They also decided not to enlarge their suite or construct a building to have more space, because the increased overhead would create a financial burden for the younger physicians.
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Buying a Practice

Older doctors don't always have your best interests at heart. Some make their worst nightmares come true by creating an atmosphere of distrust from the get go. The younger physicians get it and go. I have seen employment agreements that tie you down to committing to buy the practice before you ever work together. This is akin to proposing on the telephone before you go out on the first date.

One deal came across my desk five different times. The sellers were asking so much that no one would buy it. In fact, one of the sellers died during the process.

Another nostrum is that a medical corporation has value beyond the earnings of the physician. Attorneys and accountants say this to make their roles more valuable and to inflate the price of the practice, making it unsalable. One was asking for $2,000,000, though the practice hadn't grossed that amount in years.

The most valuable asset of a medical practice is the physician and he or she is not for sale.

Beware of a practice including leased equipment as fully valued assets. The physician cannot sell what he or she does not own. However, leases can be assumed if the finance company approves of the new owner. Ascertain the buy-out option of the lease. It could be $1.00 at the end or, if fair market value is not a stated buy out, the finance company could charge 25% of the original amount financed.

One of my clients came to me with an offer to buy a practice. I didn't think the selling physician would be too pleased to know he hired me, since I was the consultant for the last person to leave him (Dr. A). The current client (Dr. B) thought that was good, because I knew the history of the practice, and another potential buyer had discussed this deal with me several months before. We agreed that we would not let the seller know I was involved for fear of his withdrawing the offer. Dr. B showed me the financials for the practice. They were fraudulent. Dr. A, who was employed by that practice for four years, did not appear on the reports from the accountant. There was no record of his salary, benefits or even a mention that there had been two physicians in the practice. Dr. B passed on the deal. How could the seller think he could hide a former employee who set up a very successful solo practice less than two miles away?

Stories of bad deals have poisoned the well for buying practices. However, there are fine physicians who want to retire and are willing to pass down their successful practices at fair prices.
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Summary

The future is bright before you. The practice opportunity you want and need can be found. Take your time. Surround yourself with the best minds who are looking out for you. Trust your gut reaction to guide you well.

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General Guidelines

• Although you are younger and less experienced, you probably are trained at a higher level than the older physicians.
• You are both (all) physicians.
• If you feel you are not being respected, you aren't.
• Listen to everyone, but carefully consider the source of information.
• What does the person giving you advice have to gain? commission? annual income?
• How did the person giving you advice learn? doing it once? hearing stories from-
  colleagues?
• How does that experience apply to you? same specialty? same city? same gender? same training? same decade?
• How similar are you to the person giving you advice? age? specialty? ethnicity? gender? training? marital status?
• Manage the decisions for your future as you manage your patients' care.
• Once you choose your course and team of advisors, don't be distracted by anecdotal advice.
• Due diligence is most beneficial. You and your team should investigate information independently.
• Look at the history of the practice.
• Talk to the physicians who left.
• If the price for the practice or buy-in seems too high, it is.
• Trust your gut.
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Red Flags in a Job Offer or Employment Contract

California, 2006...........