By Todd A. Rodriguez, Esq.

Preserving the Physician-Patient Relationship

First and foremost, physicians contemplating a split must make provision for the on-going care of the practice’s patients. Failure to do so may give rise to claims of patient abandonment which could result in adverse action against a physician’s license by the Board of Medical Examiners; malpractice liability exposure; and expulsion from, or other disciplinary action by the American Medical Association (AMA) and/or the physician’s state medical society. Pennsylvania’s physician licensure regulations deem it unprofessional conduct for a physician to abandon a patient (either by severing the physician-patient relationship or by leaving a group practice) without notifying them sufficiently in advance to allow the patient to obtain necessary medical care.

In addition, the AMA’s Ethical Opinion E-7.03 provides that patients of a physician leaving a group practice should be notified that the physician is leaving, be informed of the physician’s new address and be offered the opportunity to have their medical records forwarded to the departing physician. While the AMA has no general enforcement authority, it may discipline its own members for failing to abide by its Code of Ethics. Such discipline may include expulsion from membership.

Of course, since patients are the lifeblood of any medical practice, how and when patients are notified of a split-up may be an extremely contentious issue. Once it has been decided that a notice will be sent, the physicians must agree upon the specific language in the notice. Where they will be starting new competing practices, the notice language presents a myriad of issues: Whose new practice contact information will be listed first on the notice? What explanation will be given for the split? Who are patients to contact if they have questions, and how will those questions be answered by practice staff? Since the patient notice would typically be accompanied by a records transfer request, the physicians will also need to iron out how records transfer requests will be processed and who will bear the cost (e.g., staff, copying and mailing costs) of processing those requests.

Even where the physicians agree upon the notice language, there may be issues over which patients will receive the notice. For example, if the split-up entails some physicians remaining in the old practice, those physicians will likely want to limit notice to only those patients of the departing physician(s). A fight typically then ensues over how to define that subset of patients. Depending on how practice records are kept, it may be simple to identify the primary treating physician of a particular patient. However, where physicians within the practice regularly cross cover each other and/or rotate patients, it may be difficult to identify a primary treating physician within the practice. In those instances, practices may have no choice but to send the notice to all active patients of the practice.

Allocating Practice Assets

Once provision has been made for the continuing care of patients, the splitting physicians must deal with what is perhaps the second most contentious issue in practice split-ups: allocation of practice assets. These assets include accounts receivable, cash and equipment. Other related practice-related assets may include real estate jointly owned by the physicians as well as ownership in outside ancillary service ventures such as imaging centers or ambulatory surgery facilities. In some cases, diligent physicians will already have dealt in their corporate agreements (i.e., shareholders’ agreements, employment agreements, joint venture formation documents, etc.) with the allocation of assets in the event of a split. This, however, is the exception rather than the rule.

While most physician shareholder agreements and employment agreements contemplate the departure from the practice of one physician at a time as a result of retirement or employment termination, rarely is a true practice split-up dealt with in those documents. Since practice split-ups are rarely planned far in advance, once notice of the intended split up has been given, it is too late to modify corporate agreements to deal with these issues. Therefore, physicians are often left addressing the split-up issues through intense and costly negotiations while, at the same time, trying to manage the emotions that often accompany practice split-ups.

Unless the physicians elect to dissolve and liquidate the practice’s assets, in which case the proceeds of the liquidation, after payment of practice liabilities, would be divided based on stock ownership, dissolution may not always be the best option. For example, where the physicians will start new practices, it may make most sense for them to purchase the equipment from the practice. Where specific items of equipment are desired by one physician or another within the practice, these items may be valued by an equipment appraiser and be distributed "in-kind" to the physician who desires them in his or her new practice setting. The value of the equipment would then be deducted from the physician’s share of the liquidated corporation’s value or against their stock purchase price entitlement.

Some practices will have dealt in advance with the allocation of accounts receivable and patients by including severance compensation provisions, restrictive covenants and non-solicitation clauses in their corporate employment agreements. However, even when severance compensation arrangements are built into the corporate agreements, if multiple physicians leave at the same time, the severance compensation obligations of the remaining practice may be too great a burden for the practice to bear. In those instances, practices may have no choice but to dissolve as a means of avoiding these obligations. Physicians must, however, be aware that their documents may require that they personally guarantee the corporation’s obligations in the event of dissolution.

In a split-up transaction, the physicians will need to decide how intangible practice attributes, such as the practice name, phone numbers, fax numbers, e-mail addresses, websites and practice logos may be used, if at all, by the physicians post-split up. Since patients and referral sources may simply continue to use the physician who is easiest to contact, these attributes may have significant value – though ascertaining that value may be difficult, if not impossible. Where there is no equitable means of allocating these attributes between the physicians, the fairest approach may simply be to prohibit the use of them by any party following the split up.

Preparing for the Worst

Although the facts and circumstances surrounding if, when and how a group practice may implode are unpredictable, physicians together with practice legal counsel, can take certain steps to prepare for that eventuality, even if they believe it to be unlikely:

·  Adopt an office charting system that identifies each patient’s primary treating physician. This can be done by writing the primary treating physician’s name at the front of the chart or by marking charts with color coded stickers (with the different colors representing the different physicians in the practice).

·  Perform a critical review of existing corporate documents, restrictive covenants, practice values and recordkeeping practices to evaluate how they would apply in the event of a split-up.

·  Consider building split-up provisions into corporate agreements now.

Often it is easier to work out the terms of a future split-up when things are going well, since decisions can be made without the emotion attached to a split-up. Practices may go so far as to develop patient notice language and attach it as an exhibit to the physician employment agreements. While the physicians may agree in the future to change the language of the notice, the predetermined notice serves as a baseline understanding in case the physicians cannot agree on more specific language.

As more and more practices crack under increasing administrative and economic pressures, physicians in group practices, even those where relationships remain harmonious, should evaluate their readiness for a practice split-up. While a group practice may only be as valuable as the sum of its parts, taking steps now to prepare for a split-up may preserve the value of those parts for future use when the practice as a whole is no longer viable. When it comes to practice split-ups, as in medicine, an ounce of prevention may be worth more than a pound of cure.