"Phase down" or "partial retirement" as referenced in this article means an arrangement in which the senior physician reduces the amount or intensity of work effort as a prelude to full retirement. The reduction in work effort might be a simple decrease in the number of office hours maintained by the senior physician. But it may instead mean extra vacation, a reduction in call responsibilities, or giving up surgery. The exact formulation will depend on the senior physician’s desires and the group’s willingness to accommodate these desires: in a three-doctor ob-gyn practice, for instance, a proposal by the senior doctor to reduce office hours may be acceptable to the others, but a proposal to drop OB call may not.

Typically, a phase down or partial retirement arrangement includes adjustments to the senior physician’s compensation, to reflect the reduced work effort. The group’s existing compensation formula may be able to fairly accommodate the senior physician’s reduction in work effort, such as a 100 percent productivity based formula. But more likely some adjustment will be required, as in groups where substantial monies are divided equally among the partners or paid out in the form of fixed base salaries. Even a 100 percent productivity based compensation formula may not work properly in the partial retirement context; for instance, dropping call in a cardiology or ob-gyn group may be viewed by the group as a benefit to the senior doctor that warrants a more substantial reduction in senior’s compensation than would be generated by a simple productivity compensation formula. Similarly, if the senior physician is giving up profitable surgical work, a pure productivity formula may generate financial consequences that are overly harsh to him or her, even after allowing for the benefits that accrue to the senior physician in terms of relief from the stress of surgery.

Phase down/partial retirement arrangements generally also include provisos regarding voting and buy-out rights. Because the senior physician is nearing the end of his or her career, he or she is often unwilling to make the substantial financial commitments associated with major new initiatives, such as opening a new office or hiring an expensive physician associate. To facilitate group decision-making, the remaining members may elect to accommodate the change in the senior’s investment horizon, by removing the senior physician from the group’s general, profit-based compensation formula; for instance, instead of receiving an equal share of overall profits, the senior physician receives a straight percentage of collections, or flat salary. But as a quid pro quo, the group may also require that senior physician sell back his stock to the group or otherwise give up his vote in group decision-making.

On the buy-out side, the group’s existing policies or buy-sell arrangements may call for a retiring physician to be paid severance or "deferred compensation" monies calculated by reference to past W-2 or K-1 earnings, such as one times the earnings of the retiring physician in the calendar year preceding retirement, or perhaps the average earnings of the retiring doctor in a two or three year period preceding retirement. But this formula may not work properly if the senior physician is "phasing down" and has accepted a reduced compensation package as the price of a more relaxed schedule. While the senior physician and the group agree the senior doctor must accept reduced pay for reduced work effort, they may not intend that the senior doctor’s buy-out or severance rights also be reduced. Yet that will be the result of the group’s standard "one times earnings" payout formula, if it is not adjusted or qualified.

In many instances, the solution to this problem is to "freeze" the senior doctor’s deferred compensation or severance amount based on earnings immediately prior to the phase down. That way, the deferred compensation amount will not be affected by senior doctor’s reduction in work effort and annual compensation. Sometimes this "frozen" amount is subject to adjustment if, during the phase down period, there are changes in the group’s finances or reimbursement by payors. In effect, the group agrees not to penalize the senior physician, in terms of payout rights, for the reduction in work effort, but does not insulate the senior physician against general changes taking place in the marketplace. Thus, for example, the "frozen" amount could be subject to adjustment if during the phase down years the average physician compensation for the group’s specialty, as measured by national or regional statistics, such as reported by the Medical Group Management Association, change by more than five or ten percent.

Alternatively, to protect the group, the deferred compensation can be subject to post-retirement restrictions, such as a proviso that, in no event may the deferred compensation payments to the retired physician in any given 12 month period exceed perhaps four to six percent of the practice’s gross receipts in that year. This assures that the payout is never more than a modest item of overhead in any given payment year.

The group and the senior physician may also need to address the sharing of buy-in monies from a new partner. For instance, assume that in the year prior to the senior doctor’s phase down, the group has hired a new associate, and that associate’s buy-in to the partnership will be occurring just as the senior doctor is phasing down. Should the senior doctor share in the associate’s buy-in? Some groups feel that if the senior doctor is being protected, through changes in the compensation formula, from the risks of future decreases in reimbursement or other adverse developments (e.g., increased malpractice premiums), that the senior physician must give up some of the "upside," in terms of sharing the profits on a new associate or the new associate’s buy-in. However, the senior physician may argue, with credibility, that he should be entitled to share in these monies, if the new associate’s patient volume will be built in large part by transitioning patients from the senior doctor as he or she phases down, or if senior played a major role in recruiting and mentoring the new associate.

If a younger associate is buying into the practice at the same time that the senior doctor is phasing down, this may also present a favorable opportunity for the group to "prepay" the senior doctor’s future buy-out. In this scenario, the proceeds from the younger doctor’s buy-in are devoted to paying down the senior doctor’s buy-out. This relieves the other group members from worries about funding senior doctor’s buyout from their own compensation packages.

The arrangements described above obviously require some thought and effort. They are clearly more complex than a simple "you’re in or you’re out approach" to group practice partnership. This begs the following questions: Is partial retirement a good idea? Is it worth the effort?

From the perspective of both the group and the senior doctor, the answer is often "yes." From the senior’s perspective, partial retirement allows the physician to enjoy the final years of practice, rather than either "burning out" by maintaining a full bore effort, or giving up the professional satisfaction and the income of these final years. For the group, partial retirement enables it to retain a member who may play an important role in management, relationships with referring sources, and/or group morale and preserving intra-group partner relationships. If the group insists on a "you’re in or you’re out" approach, the senior doctor may elect to retire altogether, thereby depriving the group of the senior doctor’s skills as outlined above. Alternatively, if the doctor stays, but is not allowed to cut back, he may become resentful or even bitter towards his or her partners, particularly in light of well-remembered personal sacrifices made by the doctor in the early years of practice, as he or she started and built the group. Depending on the group’s ability to recruit a replacement physician, the senior doctor’s full retirement may also leave the group shorthanded in terms of handling call responsibilities and overall patient workload.

What is the best way, then, of addressing these issues? Much depends on timing. If the desire is to implement something quickly, say within 6-12 months, the best way to get started is for the senior physician to make a proposal addressing all of the above issues (work schedule, duties, compensation, buy-out rights, voting etc.). It is the senior physician who wishes to change the status quo, and therefore it is generally appropriate that he or she do the initial "heavy lifting" in terms of putting together a reasonable proposal. Further, only the senior doctor knows what level of work effort he or she is willing or able to provide, and on what schedule. The group can then decide whether or not it can accommodate the senior doctor’s wishes.

Alternatively, if partial retirement is more than a year away, it makes sense to develop a "partial retirement policy." This policy establishes minimum eligibility requirements before a senior physician will be eligible for partial retirement, such as attaining a certain age (e.g., 55 or 60) and years of service (e.g., 15 or 20 years of service), with a possible exception for health reasons (e.g., physician is physically unable to maintain a full time work effort). There may also be provisos in terms of the group attaining or maintaining a minimum number of physicians, so that the senior physician’s reduction in work effort does not impose too great a burden on the others, such as dropping call in an ob-gyn or cardiology group, and provisos that only one senior physician at a time may elect phase down status (with a priority established in terms of who has "first dibs" to elect phase down status.) The policy can also address the voting and buy-out issues outlined above.