Physician buy-in agreements

For a physician, a partner buy-in agreement is an admission to the ownership and management of the practice as well as a landmark in a medical career. The agreement determines many of the most important aspects of a physician’s career, including compensation, ownership stake, management responsibilities and the terms under which he or she can leave the practice through retirement or resignation.

However, the agreements do not always get the scrutiny they deserve, according to health care attorneys who have represented practices and physicians in negotiations over the contracts. “A partnership agreement is a crucially important agreement that could be in place for 30 years or more and it should be approached that way,” says health care attorney Jeffrey Sansweet of Wayne, Pennsylvania.

What buy-ins cover

Buy-in agreements are different from the employment contracts physicians sign when joining a practice as an associate. However, employment contracts often stipulate the time of service and other conditions necessary for an associate to be considered for or automatically offered a partnership.

Usually, terms of the buy-in agreement are negotiated separately, after a physician has been with the practice for two to five years. That period allows the associate and partners to evaluate one another and the partners to learn the revenue-generating capacity of the associate. Of course, not all doctors want to become partners, with some preferring to remain employees.

Negotiations usually are not contentious, says Patrick Formato, a health care attorney in Lake Success, New York. “By the time they get to the buy-in, the associates know what the situation is and what the buy-in is,” he says. “And if the practice really values the physician and they want to make it happen, they’re going to make it happen.”

There are exceptions, however. Sansweet says he has seen negotiations drag on for years: “It can get heated when you deal with ego, money and power.”

The amount of negotiating can depend on the practice and how frequently it adds partners. A larger practice that regularly executes agreements probably will work from a template that it is unlikely to alter significantly, Sansweet says. However, a practice that has not added a partner in a long time or that has seen its circumstances change is usually more willing to start from scratch, he says.

Not surprisingly, the attorneys interviewed recommended that physicians hoping to become partners should hire a health care attorney to negotiate on their behalf. “Don’t let the practice’s attorney tell you what to do,” Sansweet says, adding that having lawyers do the negotiating can avoid tension between associate physicians and the partners they hope to join.

Determining the value

Because aspiring partners are buying a share of the practice, determining the value of the practice is key to a fair agreement. There are three common ways to calculate it.

The first is the market method, basing a practice value on recent sales of comparable practices nearby, like the way real estate agents price houses. Healthcare business consultants typically collect practice transactions through annual surveys, broken down by specialty, location and other practice characteristics.

The second is the revenue method bases the value on practice profitability. It is favored by accountants and often used in conjunction with the market method.

The third method is based on practice assets, such as equipment, real estate, valuable inventory and any affiliated businesses, and calculates what it would cost to build the practice from the ground up. Any debt owed by the practice is subtracted from the value.

The practice should open its books to an associate physician during negotiations, including any existing valuations, additional companies owned by the practice, leases, revenue, tax returns, balance sheets, debt and buyout agreements for current partners, Sansweet says, adding, “It’s a red flag if they’re not willing to share everything.”

Practice valuations often include goodwill, the value of a practice over and above the value of its net tangible assets. Such items as patient lists, an ideal location, community reputation and other factors can be included in this.

Buy-ins generally are less expensive than they used to be, Formato says, explaining that as more practices are acquired by hospitals and health care systems, the remaining ones have fallen in value. Typically, when a practice is acquired, the employment and buy-in agreements are voided and replaced by employment agreements with the new owners, he says.

The buy-in payment can be structured in several ways. A lump sum payment is relatively uncommon. More typical is payment through years of deductions from the new partner’s salary or a mix of the two.

The importance of buyouts

Buyouts — the terms under which a partner leaves the practice through retirement, resignation, death, disability or other means — are part of most buy-in agreements and just as important, says Formato. Although these usually are negotiated as part of the buy-ins, many agreements include opportunities to renegotiate when a partner decides to leave or retire.

They usually include the amount of notice a partner must give the practice before leaving, which might be up to 180 days, Sansweet says. And the new partner’s buyout is not the only one that matters.

To truly determine the value of the practice, aspiring partners should also examine the buyout agreements of current partners, particularly if they are nearing retirement age. These agreements detail the terms of how the practice will buy back the ownership shares of departing partners. Depending on the cost, the financial impact can be severe.

Buyouts can sometimes be renegotiated to reduce the cost to the practice, Formato says, adding that in some cases a practice will try to break the agreement to preserve its viability. Buyouts guaranteed by the partners themselves can be harder to change, whereas those guaranteed by the practice can be easier to break, he says.

Other terms to consider

Although the buy-in and buyout terms are most important, buy-in agreements cover other key subjects as well. One of these is power in the management of the practice. A new partner buying a share equal to three current partners should get an equal vote with the other three, Sansweet says. However, it is not unusual for larger practices to have tiered partnerships with senior members retaining more clout.

Buy-in agreements can spell out the new partner’s administrative responsibilities, work and on-call hours, vacation time and more. They also can provide job security by barring partners from expelling someone from their ranks without just cause.

Buyouts also can include noncompete clauses that restrict a departing partner’s freedom to join another practice or establish a new one. However, Sansweet says, these are unenforceable in a growing number of states.