Is a contract needed when leaving a practice?

By Vasilios J. Kalogredis, JD

When a physician departs from a Practice (whether of the doctor’s own violation or not), it is often a very emotional time for all involved.

Feelings may include betrayal, disloyalty, anger, disappointment and a sense of failure. The time between the notice of termination and the actual separation can be very trying. If the departee is forced out, he/she may be embarrassed and feel that the termination is a bad reflection on him/her as a doctor and/or individual. That physician might also be worrying about where his/her next paycheck may be coming from. If the doctor is the one who decided to split, the Practice may be concerned above the damages. How will it impact the perception of the Practice by patients, referral sources, personnel, etc? Will revenue truly be lost by the departure? What, if anything, has been done by the departing doctor that will be detrimental to the Practice? What needs to be done to stop, or at least diminish, the bleeding?

Too often, the parties believe that once the notice is given and received that nothing more needs to be done legally and pragmatically. This is particularly true when there are Agreements already in place (such as an Employment Agreement and/or Buy-Sell Agreement in a corporate setting, Partnership Agreement in a Partnership setting, or Operating Agreement in an LLC setting) detailing the parties’ respective entitlements and obligations.

However, my experience has shown me that negotiation and execution of a Separation Agreement is the wisest way to go to avoid unnecessary problems, including potentially expensive and acrimonious litigation. Set forth below are some of the Key Elements of such a Separation Agreement.

The effective date of the separation should be clearly set forth. Exactly what is ending (e.g., employment, co-ownership, Board Membership, officership, Retirement Plan Trusteeship, medical staff privileges, etc.) should be clearly set forth in the documentation. Payment terms should also be clearly set forth (including any necessary Promissory Note documents)

If the departee is a Practice co-owner, a reaffirmation of his/her buyout entitlement (either in dollars or by clearly defined formula) should be in the document.

If there is a related entity (e.g., real estate housing the Practice) and the departee also is to be bought out of it, those details also should be clearly set forth in the Separate Agreement. Matters such as the effective date of the transfer, payment terms, price (in dollars or by clearly defined formula), whether the departee would be removed from any debt guarantees, etc. should be agreed to and documented.

Whether or not there are to be any compensation payments owed post-termination date and/or bonus, fringe benefit and business expense entitlements (and if so, exactly what they are) through or after the termination date, all of that should be clearly in the documents. One should want no misunderstanding as to these items.

The document should clearly set forth when the Practice’s obligation to provide the departing doctor’s fringe benefits and business expenses (including, but not limited to health insurance, life insurance, retirement plan contributions, malpractice insurance, licensure fees, dues, etc.) shall end. One certainly wants to avoid a lapse in coverages.

Except for anything expressly to the contrary in the documents, mutual releases would generally be provided. Sometimes, certain items are excluded from the mutual releases. These might include any pre-termination date liabilities, even if not learned about until later; taxes, interest and penalties covering the pre-termination date period; repayments due to third party payers relating to pre-separation date activity; medical malpractice claims (not otherwise covered by insurance) resulting from the doctor’s negligent, intentional, or willful misconduct; or claims resulting from other negligent, intentional, willful or fraudulent conduct of the departee.

Sometimes the documents make the departing doctor responsible for some of the legal, accounting and similar fees related to his/her separation. Prepaid expenses (for example, dues or malpractice insurance which may have already been paid by the Practice for the full year) benefiting the doctor post-separation may need to be reimbursed to the Practice as well. Treatment of accounts receivable and accounts payable relating to the pre-termination time frame, but which come in later, should be addressed as well. These are items which many groups do not think about until it is too late, much to their chagrin.

The parties generally affirm their respective rights and obligations vis-E0-vis medical records, confidential information, non-competition and non-solicitation provisions, etc. As to medical records, the Practice is generally required to retain them for a period of time. It is not uncommon to allow the departing doctor to have reasonable access to these records for certain purposes (for example, third party payer audit or malpractice case).

It is not uncommon to provide a non-disparagement provision. Each side would agree to refrain from “making, uttering or communicating any disparaging, untrue, or negative statements” to anyone about each other. It is not uncommon for each party to agree not to disclose the terms and conditions of the Separation Agreement to any third party without the express written approval of the other parties.

If there are Practice owned life and disability insurance policies on the departee in place, how they are to be handled should be addressed. For example, will the leaving doctor buy them out from the Practice and retain them, or may the Practice cancel them and retain the benefit of any prepaid premium or cash surrender value?

If a tail premium is due on the departee’s malpractice insurance, the Separation Agreement should ideally set forth who will be responsible to pay for it. In Pennsylvania, I suggest that the Separation Agreement also clearly set forth who will be responsible to repay any MCARE abatements.

Negotiation and execution of a properly prepared Separation Agreement is another example of a document which makes sense in order to avoid unnecessary hassles and potential litigation. I strongly recommend it.

Vasilios J. Kalogredis, J.D., CHBC has advised doctors as a health care attorney on a full time basis since 1974 and is founder and a shareholder of Kalogredis, Sansweet, Dearden and Burke, Ltd. in Wayne, Pa.