From Employee to Partner … and Back

Partnerships are a buyer’s market now - with medical practice valuations down due to the recession and anxiety up over the political future of healthcare, practices are feeling forced to sweeten partnership offers.

Should you take the plunge?

Some groups are offering partnership to new associates with as little as six months or a year of experience, and many are lowering the outright buy-in costs, experts say. Typically, owning a practice has meant more long-term job stability and income opportunities as the practice branches into real estate ownership and multiple income streams.

But there’s risk. Values are lower precisely because future revenue streams are in so much doubt. And the current trend seems to be moving away from practice ownership. The shift to more hospitalist and hired-gun positions suggests that many physicians are deciding they don’t want the hassles that come with owning and running a practice, from liability concerns to worrying about supplies.

“People are selling out and becoming employees,” says Carolyn McClanahan, a former ER physician turned financial planner in Jacksonville, Fla. Of her physician clients, she says almost all are now employees.

Recently, she advised a 40-something orthopedist who was part of a group that sold their practice to a hospital to become an employee.

“The older guys realized there was no way they were going to get the money the practice is worth out of the younger guys,” she says. “My client was right in the middle. He will get about $1 million from the sale, but is worried about the loss of autonomy.”

There’s good reason to worry, says Jon Mariano, vice president of Barrington Bank & Trust in Illinois, which has a private banking service for physicians. He notes that relationships between practices and their new hospital owners often go sour after the sale is consummated and the physicians start to come to terms with their new role as employees.

“Everyone is squeezing the bottom line now and there’s a lot of tension in these deals,” Mariano says.

Cultural fit and practice management issues aside, what are the personal financial ramifications of partnership, and what should a doctor look at when evaluating an offer?

While buy-in rates may be lower today because they’re seen as a recruiting tool, you need to consider all the financial aspects of partnership before signing on the dotted line.

Due diligence

Start by requesting the right set of financial documents.

Demanding (or ordering yourself) a fresh business valuation document is overkill in most cases, says Jeffrey Sansweet, a partner with healthcare law firm Kalogredis, Sansweet, Dearden, and Burke in Wayne, Pa.

If this is a partnership opportunity where you are already working as an associate, you don’t need a lengthy third-party description of operations because you should already know that information from working there, he says.

“To me, it’s a waste of money. You just want, in writing, something that says, ‘Here’s the buy-in, and here’s how we came up with it,’” he says.

When helping clients evaluate offers, Sansweet asks for three years of tax returns for the partnership, a current financial statement, accounts receivable, and productivity measures for each physician in the group.

“The practice should be willing to share everything, so be wary if that’s not the case. Typically everything is open to review,” he says.

On the productivity measures, ask for specific numbers on last year’s coded procedures, says Bo Claypool, a consultant with Integro Health Care, LLC. (Also ask for a financial statement that includes the sources of payment - Medicare, private pay, etc. This gives you a better understanding of how revenues will be affected by future trends.)

Compare the deal

Once you have a feel for the income the practice brings in, evaluate the buy-in offer in context with other opportunities common in your specialty.

Are you buying in to a minority share of the practice with limited voting rights? Then negotiate hard for a lower buy-in cost and a quicker ascent to equal power, because if you became a physician employee down the street you’d have similar control over your destiny and a guaranteed salary, Claypool notes.

Is partnership happening too soon? Offers after a year or less as an associate could wreak havoc on your finances, not to mention your career prospects, if things sour.

“Anyone can hide bad habits for a year,” says Claypool, and that goes for both a new associate and existing partners. Get stuck too soon in a binding financial relationship and you could spend money and time trying to extract yourself.

Reed Tinsley, a Houston accountant and consultant, recommends a three-year wait for partnership buy-in. By that time, the amount should be low and manageable for the new partner, because she should already be contributing substantially to the revenues of the practice.

Will you take a pay cut to become partner? While this has been common in the past, Sansweet says it’s becoming routine for new partners to ask for contracts that guarantee they’ll make at least as much as they made as associates.

In some cases, associates are earning more than partners, he says. So what’s the incentive to become a partner?

Job security, for one, because it takes more work to dissolve a partnership than to fire an employee, he says. Also, partnership often leads to participating in real estate ownership and ancillary lines of business - all of which can help replace income down the road in retirement.

“Usually you’re financially better off to go the partnership route, assuming the current owners are reasonable,” Sansweet said.

Just be sure that assumption is proven out in the deal.

Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called “The Journey” that appears in Tribune newspapers across the United States. She can be reached via physicianspractice@cmpmedica.com.

This article originally appeared in the November 2009 issue of Physicians Practice.