Transitioning From A Solo Practice To A Group Practice

Steven Peltz, CHBC

A Closer Look At The Terms Of The Potential Merger

The partners of the large practice talk to John often and they remain friendly. They tell John if he does become interested in joining their practice, he should let them know and they will put together a term sheet for him to review. It will outline the process to join the group. After talking to his family and office manager and giving it much thought, John decided to request the term sheet.

   The term sheet explained that if John joined the group, the partners would perform the following due diligence on John and his practice.

• Obtain the last three years’ tax returns of the practice
• Send an inquiry to his malpractice company for his history
• Review his staff’s benefits
• Review his year end productivity reports by CPT code and payer
• Get a list of his office furniture and equipment
• Review his office insurance policy, office lease, hours and policies
• Review his practice management system (all partners in the group have the same practice management system and electronic health records (EHR))
• Obtain a listing all his outside related activities or investments
• Review his office payroll (his wife could not stay on as manager)
• Gather other operational data

   John would come in as an equal partner and would pay one-eighth of the start-up costs payable to the new practice. At 18 months, he would have to decide to make a commitment. If he wanted to leave before 18 months, he could take his accounts receivable and go back to his original practice. If he decided to leave after 18 months, he could go back to his original practice but could not take his accounts receivable. John would continue to own his office, furniture and equipment. However, if he wanted to purchase new equipment above a specific threshold, he would need a majority of the partners to approve. That applied to all partners. Since the group’s offices were not too far apart, they tried to send patients to the office that had a specific piece of equipment instead of all purchasing the same equipment. Revenue from those procedures went into a pool.

   The group divided up the pool at the end of the year. They distributed 40 percent of the revenue equally among the partners. They divided the rest of the revenue by how many patients a partner saw in his office.

   John’s office would become a profit center. John would continue to make all the day-to-day decisions for his office. He could fire and hire staff, give bonuses, take vacations, decide on his office hours and continue to refer to those specialists he had a relationship with. All invoices for purchases went to the central business office for payment. That office also billed for all partner’s services. Payroll occurred online for all offices. At the beginning of each month, John would receive a profit and loss statement for his profit center for the previous month. He could not be paid or spend more than his account balance would allow.

   John would have to freeze or terminate his retirement plan, and he and his staff could participate in the group’s 401k plan. His staff would have the same benefits as all other employees and the cost would be debited against his profit center. He could only advertise his office as part of the group. If his office was very busy, he could request that the group hire someone who could work at more than one office. The profit from that employee after paying for the direct expenses goes into the pool described above.

   The group had formulas for what they would pay to a partner or his estate in case of death, disability or retirement.

Weighing The Options And Making A Decision

John, his wife, accountant and I had several meetings over two months and discussed the following issues.

• John was at least 15 years from retirement and knew how difficult it was to recruit and pay for a new associate.
• John has seen his referral base decrease, not by a lot, but decrease nonetheless.
• He is seeing almost 5 percent more patients but his net has decreased.
• His procedural reimbursement has decreased.
• He has not had the time to investigate which EHR is best for him.
• Over the past few years, he has seen other groups form.
• He is not confident his billing staff is accurate but has no time to check.

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