Super Groups: Legal Issues Associated
with the Formation of Large
Multi-site Medical Groups
a presentation
for the
Middlesex County Medical Society
at Due Mari Restaurant, New Brunswick, N.J.
by:
Michael F. Schaff, Esq.
WILENTZ, GOLDMAN & SPITZER, P.A.
90 Woodbridge Center Drive
Woodbridge, NJ 07095
732-855-6047
MSchaff@Wilentz.com
October 17, 2012
I. Overview
• Changes in the Health
Care Environment
• Physician Associations
– Are Super Groups the
Answer?
• Traps for the Unwary:
Assessing prospective
Groups
• Questions & Answers
II. Changes in the Health Care
Environment
• Managed Care
–
–
–
–
market penetration
provider panels
reduced fees
consolidation
• Greater Efficiency
forced by Market
–
–
–
–
reduced fees
reduced staff
reduced overhead
greater patient volume
II. Changes in the Health Care
Environment
• Regulatory change &
uncertainty
– Accountable Care
Organizations
– Medicare/Medicaid
will change
– Reimbursement
Changes
III. Physician Associations
OPTIONS
• Employment in private
practice; no ownership
• Employment by hospital
or other entity
• Solo practice
• Group Practice
–
–
–
–
small; 2-5 Drs.
medium; 6-15 Drs.
large; 16- 25 Drs.
Super Groups; 26+ Drs.
III. Physician Associations
Your CURRENT SITUATION
• What do you want?
– personal needs
– financial needs
– career needs
• Current Likes & Dislikes
• Characteristics
– age
– culture
– personality
III. Physician Associations
WHAT ALTERNATIVES EXIST?
•
•
•
•
All’s Fine
Sell Practice & Retire
Sell Practice & Work
Contract Away Administration
– Management Service
Organization (MSO)
– Physician Practice
management Company
(PPMC)
– Join Hospital
• Merge or Combine Practice
– Into existing Super Group?
– Start a new Super Group?
III. Physician Associations
MAJOR CONSIDERATIONS
• Compensation
– How much will you make?
• Group Practice
– Rights & Obligations
– Control?
• Centralized Management
– Benefits
– Costs
IV. Traps for the Unwary:
Assessing Prospective Groups
Why Form or Join a Group Practice?
• Significant Benefits
• Improved Negotiating
• Increased Revenue
Sources – Ancillary
Revenue
• Economies of Scale
• Shared duties & info.
• Coverage
• Practice risks
• Retirement
IV. Traps for the Unwary:
Assessing Prospective Groups
Why Form or Join a Group Practice?
• Significant
Disadvantages
• Reduced Control
– medical
– financial
• Possible change in
compensation structure
• Increased Costs- Higher
Overhead
• Culture “shock”
IV. Traps for the Unwary:
Assessing Prospective Groups
“Culture Shock”
• Different styles
• Demographics
– age
– specialties
– culture/ethnicity
•
•
•
•
Decision Making
Support staff
Office Policies
Integration of Information
Systems
– Practice management systems
– Electronic Health Records
(EHR)
IV. Traps for the Unwary:
Assessing Prospective Groups
Business Issues
• Administrator & Management
• Staff Satisfaction
• Advisors
– legal
– accounting
– consultants
• Quality of Payer Contracts
IV. Traps for the Unwary:
Assessing Prospective Groups
Honeymoon Period
• May ease transition
• Disassociation
planning
• Cost/profit center
accounting
IV. Traps for the Unwary:
Challenges in Combining Groups
Legal Hurdles
•
Anti-trust laws
–
–
–
–
–
limits mergers that reduce competition
limited exemption for health care professional coalitions
Concerns about the use of “pseudo-merger” to engage in illegal
price fixing
Must do an analysis of increased market power vs. benefits of
integration
There is a PULL between integration requirement vs. desire for
independence
•
control (decision making)
•
sharing of profits and losses
•
clinical, operational and marketing integration
IV. Traps for the Unwary:
Challenges in Combining Groups
Legal Hurdles
•
Self-referral law “group practice”
requirements
–
–
–
•
•
centralized billing & management
single taxpayer ID
general sharing of overhead
Pension plan rules require coordination of
plans
Taxability of transaction– be careful; structure
may have significant tax ramifications
IV. Traps for the Unwary:
Assessing Prospective Groups
Level of Integration
• Partially Integrated
Medical Group
“PIMG”
– cost/profit centers
• Fully Integrated
Medical Group
“FIMG”
IV. Traps for the Unwary:
Combination Models
• Top to Bottom Merger is a complete
merger.
• Division Model is a way to allow existing
groups to retain control over various
existing elements of their practice, such as
staff and billing.
• Leasing Assets vs. Merger or Contributions
– tax issues
IV. Traps for the Unwary:
Division Model
• Operation as a single legal entity with a single
billing number and payroll (referred to as the
“LLC”)
• Several divisions (one for each existing group)
that are not separate legal entities.
• Operational control over each division by
governance at the division level
– each division determining their own method of
division-level governance
– but subject to the LLC final approval
IV. Traps for the Unwary:
Division Model (con’t)
• Billing and collection is done in the name of
the LLC
• Buy/sell terms and obligations at
– Division-level (for Division Assets) and
– Centralized Level (Common Asset Level)
IV. Traps for the Unwary:
Division Model (con’t)
• Cash distributions:
– allocated to divisions based on agreed upon mechanism
• allocation of division-specific costs and revenues to the
division
– concerns STARK LAWS & distribution of DHS Revenue unless
division has >5 members
• allocation of common overhead costs to all divisions based on
agreed upon formula
– per capita vs. per division vs.per owner vs. per FTE vs. revenue
vs.# of staff
– allocation of distributions at the division level
determined by division-level governance
IV. Traps for the Unwary:
Division Model (con’t)
• Joint exposure to liability
– malpractice
– overpayment
– billing fraud, etc..
• Assets may be kept in existing entities owned by members
of a division and leased to the LLC
– lease payments will be allocated to the division (should be a wash
for the Members of the division)
– unwind provision allows for termination of leases during
“honeymoon period” or beyond
– bank loans secured by an exiting group’s guarantees continue to be
secured by those member’s guarantees
IV. Traps for the Unwary:
Payor Contracting
• In general, payor contracts would be at the LLC
level
• While existing contracts with third party payors
must be reviewed in the due diligence process, if
the combination of the groups is accomplished by
creating the LLC as a new entity (and not by
merging the existing entities into the LLC), the
pre-combination contracts should not apply to
services provided through the LLC.
IV. Traps for the Unwary:
Assessing Prospective Groups
Determination of Ownership
• Value of existing
practices
• Adjustments?
• Equal?
• Other?
• Significance of
Ownership
– control, compensation
& equity
IV. Traps for the Unwary:
Assessing Prospective Groups
Allocation of Control
• Centralized Control
– Executive or Management
Committee
• Control at Division Level
for daily items
• Protection for minority
members
• Corporate ethics
• Business decisions
• Medical decisions
IV. Traps for the Unwary:
Assessing Prospective Groups
How is Compensation Determined?
• Cost/income allocation
– division level
– full integration
• Activities & status
– production
– seniority or ownership
– non-medical activities
• Mechanics
– formula
– committee
IV. Traps for the Unwary:
Assessing Prospective Groups
How can Employment be Terminated?
• Voluntary withdrawal
– retirement
– honeymoon period
• Without Cause
• Cause
– loss of license, etc...
• Disability
• Different Standards?
• Appeal Procedure?
IV. Traps for the Unwary:
Assessing Prospective Groups
Post-Termination Payments
• How Determined?
– Business Valuation
– Formula
• How Allocated?
– Ownership Interests
– Teermination/Deferred
Compensation (Tax
issues)
– Restrictive Covenant
• Funding Issues
IV. Traps for the Unwary:
Assessing Prospective Groups
Applicability of Restrictive Covenants
• Area and Duration
• Prohibited activities
• Liquidated Damages
Vs. Injuction
• Trial period affect
IV. Traps for the Unwary:
Assessing Prospective Groups
Agreements with Related & Unrelated
Parties
• Management
• Employment
– Non-medical staff
– Medical staff
•
•
•
•
Billing & collecting
Equipment Leasing
Real Estate
Labs & ancillary
services
IV. Traps for the Unwary:
Assessing Prospective Groups
Agreements with Related & Unrelated
Parties -- Concerns
• Who owns entities?
• Are certain members
benefiting
disproportionately?
• Are non-members
benefiting? Are terms
“arms length”?
• Do transactions
comply with laws &
regulations?
V. QUESTIONS
AND
ANSWERS
Super Groups: Legal Issues Associated
with the Formation of Large
Multi-site Medical Groups
a presentation
for the
Middlesex County Medical Society
at Due Mari Restaurant, New Brunswick, N.J.
by:
Michael F. Schaff, Esq.
WILENTZ, GOLDMAN & SPITZER, P.A.
90 Woodbridge Center Drive
Woodbridge, NJ 07095
732-855-6047
MSchaff@Wilentz.com
October 17, 2012