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Ending failed partnerships correctly

By Judith A. Mackarey, Esq.

It’s a perfect Hollywood setting: three well-known plastic surgeons are involved in a nasty public feud which has evolved into lawsuits and countersuits, as well as a board of medicine investigation. But no, this isn’t Jack Wagner’s practice in the popular TV series, Melrose Place. It’s real life. How did this disaster happen? It is the worst-case scenario for a practice split up. And as with the worst possible case, it has become a war zone, replete with allegations of drug abuse, sexual harassment (of both staff members as well as patients), and the personal bankruptcy of two of the physicians. This case is currently pending in California (Hollywood, of course) and is the textbook example of the myriad problems that could arise in a practice break up.

Fortunately, most physician departures from practice settings proceed without difficulty. However, this is not always true, and as the health care environment continues to cause a downturn in financial revenues, practice split-ups will continue to rise. In a tighter financial medical market, a practice group cannot afford to put up with a non-productive partner or associate for an extended period of time, and the personality or other clinical problems that may arise in a group setting are exacerbated. When these things occur, the offending physician may be asked to leave.

The termination of a physician (whether the physician is a partner or an associate) is clearly one of the most difficult things that could happen in a group, even when it is properly handled. However, it also has the most potential to cause untold disruption. The problems could be disastrous, not only from a financial perspective, but could severely damage the reputations of all of the parties involved. It is the professional equivalent to a divorce, and like any other divorce, it could be devastating.

What are the common reasons for terminating a physician? The reasons most often cited are personality related or non-productivity by a partner that has continued unabated for a long period of time. However, the person who is often the last to know that there is a problem is the offending physician. Groups often fail to communicate their dissatisfaction until the problem has reached the point of no return. When the news is finally given to the physician, he is totally surprised. He never knew there was any reason to alter his behavior, since no one had ever complained about his conduct or asked him to change it. Of course, not surprisingly, when the physician is terminated, his reaction is one of outrage, extreme anger and hostility.

Serious problems such as drug or alcohol abuse may cause a group to terminate one of its physicians. Often, the issue is ignored until patient care is affected or until an outside party such as hospital administration pressures the group to take action. This is also true for psychological problems. With an impaired physician, there are also potential medical board reporting requirements that must be considered. When the underlying cause for termination relates to a disability, moreover, special care is needed to avoid a discrimination action. The best course, if possible, is to focus on the conduct rather than the cause of the conduct. The group does not need to explore why the problems are occurring. Everyone in the group may be sure that the physician has a drug problem, but there is often no need to pursue that issue when justifying a decision to terminate. The physician has missed appointments, has not been competent in his clinical activities, has mistreated the staff, or has received complaints from both patients and referral sources. These reasons more than adequately support the termination.

Clinical concerns or malpractice also comprise an area that should be handled with particular care. Often, a group details in writing the various acts of malpractice that the offending physician has performed. This documentation may well support a decision to terminate a physician, but it also can support a subsequent malpractice case against the physician. That is, it may be discoverable in the malpractice litigation. It may also be evidence to support liability on the part of the corporation on the basis of negligent supervision. The plaintiff’s attorney can argue that the corporation knew for some time that the doctor was incompetent, but took no action.

When a medical group is confronted with the termination of a shareholder or partner of the group, there are special issues that need to be considered. In order to terminate a shareholder physician who is also an employee of the group, the group may need to call a formal meeting of the Board of directors, the shareholders of the corporation or the partnership, and a vote must be taken. The physician who is to be terminated will have to be present as well to avoid a challenge to the action taken, and proper prior written notice of the meeting (with the agenda for the special meeting) will have to be given. A review of the corporate documents is needed to determine what needs to be done to accomplish this action. I have seen problems occur if the corporate bylaws require a unanimous vote in order to terminate a shareholder physician. The physician usually will not vote in favor of his own termination, no matter how justified it may seem to everyone else. In this case, the remaining members may have to threaten to resign rather than continue in practice with the problem physician. This of course can be avoided if the corporate documents reflect the manner in which problems with shareholders are to be addressed.

Another issue related to shareholder status is that of the associate physician who is terminated and later claims to have been a shareholder at the time he was terminated. This claim can be made even though the physician employee never formally purchased shares in the professional corporation. Many groups operate in an informal manner, and assurances or promises of partnership are made which, when coupled with compensation packages that are equivalent to those of the partners, can support the argument that the terminated doctor was in fact a shareholder of the practice. In this case, the physician employee claims that he is entitled to a portion of the goodwill and accounts receivable of the corporation.

An associate physician can also claim shareholder status in a situation where the practice is selling to a health system or practice management company, and the physician decides not to join the new entity, but wants a share of the proceeds being paid to the group upon the sale of the corporation. Because of the amounts of money involved, these claims often end up in litigation, and on occasion, associate physicians have prevailed in claims for shareholder status.

Beyond stock repurchase issues, other money matters arise in physician departures. It is advisable to determine in advance what amounts are owed under corporate agreements, when the money is due and whether there are any restrictions on payment or permissible setoffs. Are there any bonuses owed? If so, it must be determined if the bonus is discretionary or an absolute entitlement. This is also the case with accounts receivable post-termination. Depending upon what the employment agreement provides and how the physician is paid, receivables may be owed to the departing physician, whether the physician is a partner or not. Despite the temptation, a practice should not refuse to pay salary or “compensation” to the departing physician because salary payments are covered by wage payment laws. Violation of these state statutes permits the terminated employee to recover up to double the amount wrongfully withheld, and attorneys fees. The availability of a recovery for attorney fees may also make it more attractive for the fired physician employee to litigate other termination claims along with a wage payment claim.

A common problem that occurs with physician departures is the “old” agreement that provides for separation pay with a payout formula that was established many years ago. As often happens, no one had looked at the agreements before a problem arises and the formula is no longer appropriate with declining reimbursements. At this point however, it is too late to revise the documents to reflect the correct separation payment and the higher number must then be paid to the person who deserves it the least. This only serves to make the departure more difficult, because the remaining partners resent having to pay more than should be paid to the departing doctor. It will help avoid this problem if severance payment formulas are reviewed at least annually.

Concerns regarding restrictive covenants and solicitation of patients and referral sources invariably arise when dealing with a departing physician. If this is a particular concern of the group, it may be best to try to work out a separation arrangement that addresses these issues prior to the physician’s departure. The group can provide the departing physician with certain items that may be important for him, in return for assurances that he will not violate any restrictive covenants after he departs.

A recent Pennsylvania case on restrictive covenants must also be considered when terminating a physician. The court refused to enforce a covenant when the employee was terminated “for cause,” finding that the employee could not be considered a competitive threat when the employer didn’t think the employee was worth keeping. Whether you agree with this rationale or not, it may be important to consider when determining why to fire a physician employee. A termination without cause, or upon a certain specified number of days prior notice (with pay), may be appropriate if a restrictive covenant is a concern to the practice.

There are many other issues to be considered when terminating a physician from a group, both legal and operational, such as medical records issues and patient notifications, but these are the major issues that arise. Professional divorce is probably one of the most difficult things a group will encounter, and it can take a toll on the practice if not handled correctly. When possible, however, careful planning and proper documents can save unforeseen issues from occurring and prevent the termination from ending up in litigation.

Judith A. Mackarey, Esq., is a partner with Wade, Goldstein, Landau, Abruzzo, Mackarey & Miller, P.C., a health law firm located in King of Prussia, Pennsylvania.

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