It is important for a medical group's internal structure and inter-physician documents to be updated to reflect the realities of managed care. Let's examine, for example, the departure of one of the group's physicians. Say that physician is not retiring, but is withdrawing from the group because of disagreement over the practice's direction, or because of deselection and participation problems. In this scenario, the medical group will seek to buy out the departing doctor under terms significantly different from those it might offer a retiring physician.
For example, the medical group certainly does not want the withdrawing physician to practice nearby or to continue any sort of relationship with the medical group's patients (or, perhaps, its physicians). This means that the group will want to have some sort of restrictive covenant in place preventing the withdrawing physician from competing with the group after departure. A restrictive covenant should include a provision forbidding solicitation by the withdrawing doctor of the group's patients or managed care contracts. It is essential that any such agreement be negotiated prior to the physician's departure.
To ensure enforceability, I further recommend that the restrictive covenant be in force for all of the group's physicians, so that there is no argument about selective enforcement or preferential treatment. Some experts say the medical group could elect to permit competition in an amicable departure, even continuing to bill for that physician after the departure. I think this is a dangerous concept, because it suggests that the restrictive covenant is not essential for the group's welfare. If a court believes that a restrictive covenant is intended as "punishment" for a physician's departure, it will be far less likely to enforce the provision. (For further discussion about restrictive covenants, see the Legal Forum columns in Managed Care's October and November issues.) Thus, the significant new dynamics and options imposed by the growing presence of managed care, in a new environment of managed competition, make more important than ever restrictive covenants that bind all of a group's doctors to noncompetition and nonsolicitation promises.
Whose name is on the contract?
Our hypothetical medical group has another problem, too. Previously, its managed care arrangements were between the various managed care organizations and the group's physicians individually. The departing physician was a party to every managed care arrangement the medical group enjoyed. It is much more difficult to suggest that a physician must withdraw from existing managed care arrangements when the contracts are in that physician's own name. Therefore, a progressive medical group will ensure that all of its managed care arrangements are in the name of the group itself rather than its individual physicians. If a group has already negotiated contracts in the names of the individual doctors, it should consider renegotiating the contracts in the group's name.
Physician departures from medical groups raise additional issues because of managed care. An increasing number of managed care arrangements include a significant (15 — 25 percent) "withhold" of reimbursement due the physicians. When the provider panel (the medical group, or all of the primary care physicians within an alliance, or all of the physicians on the managed care organization's panel, or whatever) reaches preset utilization targets (or other criteria demonstrating cost-effective performance), the amounts withheld are remitted to the physicians.
What about withholds?
But how do you value these withheld funds prior to actual distribution? If a physician withdraws from a group and is entitled to some portion of the practice's accounts receivable for work generated prior to his or her departure, does this include future entitlement to the remitted withhold? One strong argument suggests that the physician has no entitlement, because withheld payments typically require that the physicians' panel, in the aggregate, achieve its targets over the course of the entire contract year. If a physician departs prior to that point, there is no entitlement to the withhold for any of the doctors, let alone for the departing physician. If a physician will be entitled to a pro rata distribution of a future withhold payment, this should be clearly spelled out in the inter-physician agreements. (In this case, it would probably be covered by the physician's employment agreement, or by a shareholder agreement among the physicians.)
There is no single correct answer to this sort of question. I personally believe that medical groups should stay away from income entitlements based on future collections, particularly when the money is not "earned" until sometime after the termination date. But many medical groups, including some of my clients, disagree with me on this point. Whatever the medical group decides should be clearly spelled out in its buyout provisions. Sometimes there is a right to the repurchase entitlements in a shareholders' agreement. In other cases these entitlements are built into a "separation pay" package that is part of the physician employment agreement.
One word of warning: Be careful if you decide to allow prorated entitlements to future income. Is the pro rata amount based on the time spent as an employee? Or according to productivity? If it's the latter, should productivity be measured by charges, collections, patient encounters or some other method? These are delicate questions, but it is far easier to address them in advance than it is when a physician is heading for the door.
Finally, don't forget this issue's flip side. A medical group that brings on a new partner (or elevates an associate to co-owner status) must decide whether that new partner is entitled to income from work performed before his or her ascension to co-ownership. If, for example, Dr. Green becomes a co-owner on Sept. 1, and the medical group receives a $100,000 withhold on Jan. 1 for the prior calendar year, Dr. Green probably should receive only two-thirds of the portion of that withhold to which he otherwise would be entitled. Indeed, when a new co-owner joins a group at the same time a physician retires or relocates, it may make sense for the new physician to agree to "purchase" from the departing physician his portion of any withhold that might subsequently be paid to the group for work performed by the group during a period of time that covers both physicians' tenure. In this scenario, you may also want to allocate certain managed care-related expenses against the withheld monies, to the extent that these expenses were incurred during the period of the withhold.
However a medical group answers these questions, one thing is certain. A group can only thrive in the coming years if its internal structure and relationships reflect the ways in which managed care and managed competition affect questions of ownership, compensation and physician departures.
Neil B. Caesar is president of The Health Law Center (Neil B. Caesar Law Associates, PA), a national health law/consulting practice in Greenville, S.C.