The biggest mistake to avoid in bringing in an associate is to say, “Let’s see how it goes with being an employee, and we will figure out the partnership terms in a couple of years.”
That is a recipe for disaster. Hence, my title, “Friend or Foe.” An open, trusting, fully transparent, long-term partner/friend relationship is the goal. You do not want to create a foe or possible competitor when the new associate decides to leave and set up a practice in the same vicinity because the terms were not clearly spelled out, or feelings of distrust arise due to lack of clarity regarding the road to becoming a partner.
These recommendations are based on years of experience with assisting physicians to bring in associates, and also with trying to repair damage to existing relationships. This includes physicians who sued one another over verbal promises made during the employment period.
1) Make a list, and discuss the following:
- Compensation and how/when salary is paid;
- Hours and days of the week;
- Surgery OR times;
- Locations expected to do the work, exam room space, and physician office space;
- Ability to set schedules;
- Memberships in national, state, and local organizations;
- Cell phone number;
- Entertainment perks; and,
- Working conditions and practice building expectations.
2) Write an employment offer or contract spelling out these terms.
3) When interviewing, look for a confident attitude, a willingness to work hard, and marketing and management capabilities. Discuss the practice’s philosophy, cash/credit for purchases, conservative or progressive, and try to discern if the candidate has the same values and philosophy.
4) Decide who will be responsible for any tail insurance should the associate leave the practice before becoming a partner. This generally follows the rules of supply and demand. If you have many candidates eager to join your practice, you may make the employee responsible for tail insurance. If you are having trouble recruiting, you may have to pay the tail. Or, you can decide to split it 50/50. This often is left out of contracts and leads to misunderstandings.
5) Clearly state that all accounts receivable, charts, lists, and practice trade secrets are the employer’s property. The new associate should not have rights to any of these. If the associate does not stay with the practice, they can obtain the information in the patients’ charts through release-of-information requests, but the actual hard-copy chart is the work product of the physician owner of the practice.
6) Find out if restrictive covenants are legal in your state by calling your state’s medical association. This will allow you to put in the contract that the associate cannot leave your practice and set up a competing practice in your draw area. In some states, restrictive covenants are allowable only when a physician becomes a partner. If so, they must be reasonable, such as the practice’s draw area and a reasonable time frame (such as 2 to 3 years).
7) Help the associate make a good decision about your opportunity by also discussing lifestyle issues, such as real estate, schools, recreation, culture, entertainment, sports, and business philosophy—as well as medical philosophy.
8) Create an incentive program that allows the associate to know what is expected of them in terms of productivity.
Share practice expense information with the associate so they have a better understanding of what it takes to run a practice and what gross income is necessary to achieve desired net income. If you have a serious candidate, share financial data you are comfortable with, but make the associate sign a confidentiality agreement. After the associate reaches the incentive threshold, either pay the additional money generated as a bonus, or place it in escrow to satisfy the buy-in, should partnership be offered. Encourage the associate to do this, because it is like a forced savings plan. If the physician decides not to join the practice and become a partner, then the bonus amount belongs to the associate and should be paid out in the final paycheck.
9) Add on whatever overhead ratio the practice currently has to achieve break-even. A 50% operating overhead would double the direct costs in additional overhead. It is only fair to the new associate to exclude the senior partner’s discretionary expenses such as auto, travel, and entertainment. This will provide a break-even point that the associate must achieve to pay for themself in salary, benefits, and contribution to overhead.
The employer deserves a return on investment for outlaying money for salary and benefits. The employee could be given 25% of the excess revenue generated beyond break-even, and the employer could retain 25% for return on investment. The entire bonus could be given to the employee, or the entire amount could be placed in escrow for credit against the buy-in or split in some proportion. For example, if the employee was due a $10,000 bonus, $6,000 could be given in bonus and $4,000 could be credited toward a future buy-in and placed in escrow.
$45,000 Benefits (payroll tax, workers’ comp, dental, health, life—eg, 25% of salary)
$225,000 Total direct physician costs
$225,000 Overhead costs at a 50% overhead ratio (includes share of fixed costs, such as rent, and new and incremental variable costs, such as medical, office supplies, telephone, dues, and subs)
$550,000 Break-even needed in revenue/collections
$580,000 Associate achieves in revenue/collections
$30,000 Excess above break-even
$15,000, or 50%, applied to operating overhead
$15,000 to the associate for bonus or escrow toward buy-in
THE ROAD TO PARTNERSHIP
Determine your methodology and approximate cost of a buy-in to the practice before you begin interviewing, so that the associate can make a long-term decision about the practice’s future opportunities. Will goodwill or intangible asset value be included? If so, what is the methodology? Give an example of what amount this would be in today’s dollars. Assess goodwill or intangible asset value back to the point in time the associate came into the practice. Thereafter, the associate is also building goodwill of their own.
Will accounts receivable be included in the buy-in? Discount them by insurance adjustments and age. Will tangible assets be valued by Book Value or by Fair Market Value? Fair Market Value is usually more in line with True Value. Items may have been purchased and expensed, and are not on the depreciation schedule. Or, if they are more than 12 years old and are still in use, they would have zero Book Value.
Will a buyout be valued the same way? Will the new associate have a buy-in and buyout of a senior partner at the same time? How will the associate pay for the buy-in? Via a lump sum borrowed from the bank, or will the senior partner/group allow payment over time taken out of monthly draw—for example, for 3 to 6 years? Usually, the practice and any ambulatory surgery center buy-ins will be separate entities and are valued separately, just as real estate would be.
Set marketing goals, and require the associate to submit a list of activities performed each month to build the practice—for example, visiting referral sources, giving community talks, grand rounds, and media interviews. Tell the associate that this is a requirement to become a partner. Mentor the new associate, and show them how to build referral sources and patient confidence to book procedures/surgery.
Assign an area of management responsibility prior to the partnership offering, and assess whether the associate is partnership material by the degree of involvement and ability.
The road to future successful partnerships with an associate can be summed up by having the courage to communicate, confront, and compromise.
Debra Phairas is president of Practice & Liability Consultants LLC, a medical practice management and consulting firm based in San Francisco. She can be reached at (415) 764-4800 or at www.practiceconsultants.net.