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Clarify Future Equity for New Physicians at Your Medical Practice

Clarify Future Equity for New Physicians at Your Medical Practice

It’s a busy time of year for physician contracts, as residents and fellows consider offers following graduation in July. Among the many issues young physicians need guidance on when joining a physician practice, are questions and concerns pertaining to future partnership:

1. How long will I have to work for the practice before an offer of equity is made?
2. On what basis will I be evaluated for partnership?
3. Will I be offered an equal ownership opportunity?
4. How much will it cost to become an owner?
5. Will I be treated the same as everyone else once I become an owner?

Although the above questions appear simple, most are left unanswered in contracts provided to new physicians. Sometimes this is because the practice has no idea how to structure future ownership. Other times, there is a fear on the part of a practice that providing too much information will bind the practice to bringing in a new partner. This is an unreasonable fear since proper language can both protect the practice and provide the incoming physician with the appropriate information.

I typically recommend to my clients that the following information be provided in associate contracts regarding future equity:

1. Indicate when the physician will be evaluated for partnership and the date the acquisition will actually become effective. Allow time for documents to be negotiated and prepared.

2. Let the associate know the conditions for him or her to become a partner (other than still being employed). These conditions can include specific productivity measures, as well as performance goals. A practice should not wait until it’s time to make a decision about partnership before letting an associate know that he or she has not satisfied the practice’s objectives. Provide regular reviews.

3. Let the associate know if he or she will obtain an equal, or some other amount of ownership interest, in the practice, as well as other entities or ventures in which the practice might be involved.

4. Provide the associate with information about how the purchase price will be computed. If there is a book value formula that will be applied to determine stock value, provide it. If there is a formula used to calculate an accounts receivable buy-in, share this information. There is no harm in having a new associate fully understand how the practice operates, how the buy-in will be structured and what the potential cost might be (based on prior equity acquisitions). Being provided with this data can make the practice a more secure and appealing option to a candidate considering multiple offers.

5. Consider whether or not the acquisition can, at least in part, be structured on a pre-tax basis. When comparing multiple offers, a practice using a more creative, and less expensive, approach for an acquisition will be more attractive. There are some pre-tax, buy-in approaches which can be discussed with legal counsel.

6. Let the associate know whether or not he or she will be treated identically to other owners following the buy-in. Will call, vacation time, and compensation be equal? A simple statement that all physician-owners are treated the same can suffice.

Finally, when I review employment offers with my young physicians, I urge them to consider what will happen if they are not offered partnership. Although this is unusual, it does happen whether it’s a personality conflict, lack of patient volume, or other reasons.

A young physician with significant medical school loans, who purchases a home and relocates his family across the country to start a future with a practice has a lot to lose if partnership is not offered. Unfortunately, when a practice declines to offer partnership, this inevitably results in termination by the physician, which typically leads to obligations to purchase a tail, repay signing or relocation bonuses, comply with a restrictive covenant, and other financial burdens. An experienced health lawyer can try to prevent this result from occurring contractually, but medical practices need to be sensitive to this potentially devastating outcome when drafting and negotiating a contract.

Bringing a new associate into your medical practice requires thoughtful planning. Make sure your relationship with a future partner is established properly by communicating and sharing information from the start.

Find out more about Ericka Adler and our other Practice Notes bloggers.

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