For most physicians cascading paperwork, slow reimbursement, increased hours, less respect, rapidly increasing malpractice insurance payments, unrealistic demands, higher expectations by patients, greater stress, and less satisfaction are now facts of life.
Now, more physician practices are for sale than ever before.
Historically, physicians typically had one of two reasons for selling their practices: to retire or to start work in a new area of healthcare. Today, many are looking to sell their practice to a healthcare company and work for that company as a salaried employee.
Many hope and expect to gain the safety and stability of employment with a large company while lessening exposure to the problems now inherent in today's healthcare system. The corporation, by contrast, wants to expand and capture market share. And the larger the company's market share, the stronger position it has to negotiate more favorable deals.
By selling and signing an employment contract with a company, physicians may expect a mutually beneficial situation, but this is not always the case.
Here's an example:
A start-up company with a new medical treatment became a publicly traded corporation. The corporation's top managers were not physicians but instead finance and business people familiar with the ways of Wall Street. To meet the corporation's goals and Wall Street expectations, the corporation used the stock-sale proceeds to buy established physician practices around the country, aggressively marketing itself to physicians. It quickly captured market share, exponentially raised the number of treated patients, and developed substantial revenue streams.
The physicians who sold their practices thought selling would be a win-win situation for the physician and the corporation. As marketed to them, the business aspect of owning a medical practice—the ubiquitous paperwork, employee issues and all the rest of the business side of medical practice so distasteful to physicians—would be handled by the company. The physicians would spend all their work time practicing medicine, using the latest technology. Benefiting from the company's promotions to the public, they would see an increase in their patient base. They would receive a base salary and, most significantly, a percentage of the profits of their practice. They also would participate in any Wall Street windfall: As employees, they would take part in the company's stock plans; indeed, in selling their practices, many chose to take payment in stock. The company, in turn, would gain market share.
For these physicians, everything proceeded as planned during the first year of operation after the sale. There were, predictably, some adjustments for them inherent to working for a corporation, but the physicians did see their practices expand. Most of the physicians doubled, and some even quadrupled, the number of patients they treated. Everything was great, until. . .
At the end of the first year, the physicians expected a large payment from their practices' increased profits. But the large bonuses never came. In negotiating the sale of the practice and the employee contract, the physicians had not required the company to specify in the contract what expenses the corporation would charge the individual practice and what accounting rules would be followed. So the corporation charged the practices for marketing, accounting, human resources, financing and other services, wiping out the profits of the practice. The corporation recorded the practice's income not on the practice's income statement but instead on the company's. According to the corporation, the individual practices had little or no profit.
In negotiating with the physicians, the corporation knew exactly what it was doing. The contracts specified in precise terms the physicians' responsibilities: non-compete provisions, confidentiality, dispute resolution, and the like. But, while the individual contract did state the corporation's initial responsibilities—mainly making payment on the negotiated purchase price—it phrased the company's other obligations in remarkably vague terms or (astonishingly) did not specify them at all. The company was to make its "best efforts" to accomplish certain things, but the contract left the phrase "best efforts" undefined. The phrase turned out to be quite malleable. The company's other responsibilities were to be determined at a later, unspecified time.
The company's best efforts always turned out to be whatever efforts the company chose to make. When the time arrived to determine the corporation's unspecified other responsibilities, the determination always favored the corporation, to the detriment of the physician.
The company was successful in contract negotiations because it understood what physicians wanted and structured the negotiations to satisfy the physician's needs. Physicians have the same basic wants, desires and goals as anyone else. But they also have three particular traits that the company exploited in the negotiations:
- The physicians' training,
- The physicians' record of success,
- Special frustrations unique to physicians.
The corporation played to these traits. It knew from the outset that what the parties really were negotiating was a short-term purchase price for the physicians' practice. Little else of significant value to the physicians was being negotiated because the company was not actually committing to anything else other than payment of salary.
Caveat venditor. "Let the seller beware."
After the first full year, when the physicians learned that according to the company, their practice showed little or no profit and that the physician would be paid no bonus, many sought legal advice. The legal advice: the physicians had no legal recourse. The non-compete clauses—fair provisions under the contract terms that the doctors thought they were agreeing to, but disastrous under the terms (or lack thereof) of the actual contract—were broad, tight, specific and ironclad.
Most physicians were even barred from practicing medicine within the geographical area that they lived. And under the equally ironclad confidentiality clause, the doctors could not publicly discuss their situation or, for that matter, anything else of significance about the corporation; if they did, they would be subject to huge fines and penalties.
What had appeared to the physicians as a mutually beneficial situation turned into a nightmare for them. They lost their practices, lost money and took years to recover. They had no legal recourse. And they could not even warn others. The corporation could, and did, continue on with impunity. It used its strategy successfully in numerous instances.
In retrospect, it is clear that the physicians were victims of what, at its essence, is a chasm between the respective norms of two opposing cultures. Medicine is, after all, the ultimate healing art; its essence, its purpose, is altruistic. Business—at least the predominant culture of business—is, well, not. Unlike physicians, the corporation and its top executives, non-physicians all, were involved in the practice of medicine solely to make money; the medical practices, and the very practice of medicine, were just commodities.
Lessons Learned
What could the physicians in this particular saga have done differently to get a better contract? What can other physicians learn from the mistakes these physicians made?
These lessons would have helped those physicians:
1. Retain an attorney or business agent who has genuine expertise in contract law and in contact negotiations of this type. Physicians are all too familiar with the adage that a doctor who treats himself has a fool for a patient. A doctor who negotiates the sale of his or her own practice, especially to a large corporation, has a fool for a patient, or, rather, a business client. Advantageously negotiating the sale of a medical practice is not a matter of intelligence, and it certainly is not a matter of medical knowledge and skill; maybe it should be, but it is not. What matters most is professional experience in such matters. Extensive background in contract law and employment law is a virtual must in negotiating such a contract with a corporation.
In our recounted saga, some of the physicians used their personal attorneys, who were very good at providing legal services to successfully operate the practices but were unfamiliar with such contracts and their potential pitfalls. Some of the lawyers simply succumbed to their client's enthusiasm for supposedly mutually beneficial deal; the lawyers followed the client's instructions to get the deal done. The lawyers were not forceful enough to get the client to step back and analyze the deal pragmatically.
2. Be ready to walk away, even at a late stage of the negotiations. Do not act simply to follow the crowd or because someone or some group has managed to scare you about the short-term or long-term future of the practice of medicine.
3. Determine your business' value. There are several different business methods, ranging from asset-based to future earnings approaches. Recognize that no single approach can be used in isolation. Consider the current market, economic trends, and the purchase price of other similar recently sold practices in your geographical area. And remember that the corporation would not want to buy your practice were it not beneficial to it to acquire it.
4. Be absolutely clear about what you are selling. Consider all the assets of your business, which includes many non-tangible assets such as the practice's location, time in business and patient goodwill. Decide exactly what you are selling.
5. Do not complete the sale unless the contract specifies—with the terms defined reasonably precisely—what you are to receive, long-term as well as short-term. If a long-term benefit cannot be defined, then define how it will be defined in the future. If the conditions under which the company can decide not to provide that benefit or that compensation; and when exactly you will receive each specific benefit or facet of compensation.
6. Have your lawyer investigate the other times the company has been sued by physicians. Remember that although lawsuits against such companies often end in settlement, which, however small the settlement amount, inevitably includes a nondisclosure clause prohibiting public disclosure of the settlement amount. This prohibits the physician from discussing the corporation or the facts pertinent to the lawsuit, the fact that the lawsuit was filed, and the specific allegations contained in the complaint. However, there are public databases that would reveal that these lawsuits were filed.
For a variety of reasons, more and more physicians these days are considering selling their private practices to a medical-care corporation and becoming an employee of the corporation. This could be a sound business strategy, but there are critical presale cautionary steps that the physician should take in order to ensure against certain pitfalls and exponentially increase the likelihood that the final agreement provides the mutually beneficial terms that the physician thinks it provides.
Todd Neely is President of NanoImproved and has over thirty years of business experience as a CEO, management consultant and entrepreneur. He has a deep understanding of business strategy, supply chain, process reengineering and financial management. He can be reached at Todd.Neely@yleen.com.
Marybeth Regan, PhD, is an expert in disease and care management. She has written numerous articles on strategies for care and disease management. She may be reached at Drmarybethregan@aol.com.