Lawyer for Physicians, Medical Corporations and Group Medical Practices

Leaving a medical practice / closing a medical practice

In this suite of articles, I explain the basic corporate, business and contract law issues for medical corporations and group medical practices in California.  I explain things from both sides, that is, the perspectives of both the individual physician and the group practice. The articles in this suite are:

This article gives a very brief overview of how a physician leaves or closes a medical practice.  The physician can’t just walk away – leaving or closing a medical practice is more complex than you think.  In this article I try to give both sides of the story, that is, the perspectives of both the individual physician and the group practice.

Contract Review

Both the physician and the surviving practice should look over their contracts when the physician leaves.  Review managed care contracts, the employment agreement and the shareholders (buy-sell) agreement if you have one.  The latter 2 contracts become important if the physician wants to continue to practice medicine.

Employment Agreement.  Most physician employment agreements require a notice period before termination of employment.  The consequence of failure to give the contracted notice is that the employer / practice might sue the physician for breach of contract.  Usually the practice wants to recover the costs of hiring a temp physician to cover for the departing physician’s absence until the practice replaces him or her.  Further, if the practice must pay deferred compensation, the practice might try to offset its damages against the compensation to be paid.  Lastly, beware any non-competition or non-solicitation clauses in the employment agreement; for more information see Physician employment and independent contractor agreements and also Termination clauses in physician employment and contractor agreements.

Shareholders Buy-Sell Agreement.  If the practice has a shareholders buy-sell agreement, check it for any buy-back of the physician’s shares in the practice.  Medical groups frequently require a mandatory buy-back of shares.  The buy-sell agreement also will provide for the share price, either by an accounting formula or through an arbitration process.  Once again, beware any non-competition or non-solicitation clauses in the buy-sell agreement.  For more information, read Shareholder buy-sell agreements for medical corporations.

Compensation after Termination

When a physician leaves a practice, usually the practice will pay compensation after the termination date.  First, there is salary owed to the date of termination plus accrued vacation pay.  Second, there might be (i) compensation owed for the physician’s share in accounts receivable or collections; (ii) a pro-rated share in year-end bonuses; and (iii) a pro-rated share in the practice’s contributions to the physician’s retirement plan. 

Word #1 to the wise: The latter 2 items (pro-rated share in bonuses and retirement plan contributions) frequently create timing issues, specifically, whether the termination date falls before or after vesting in the particular payment. 

Word #2 to the wise: Consider using an exit / severance agreement (discussed next) to require that the practice give financial data, and permit inspections, that make clear its calculation of post-termination payments.

Exit / Severance Agreement

Exit / severance agreements are useful when a physician leaves a practice to tie up loose ends and prevent misunderstandings, all of which can lead to litigation.  Typical matters for an exit / severance agreement are:

1. The content of any notice that the departing physician and the practice give to patients and referral sources.  Both sides should discuss who is responsible for the mailing, its costs, and the deadline for the mailing.  I talk more below about notices to patients.
2. Mutual access to patient records.
3. Who keeps the patient records.  Retaining patient records is a significant burden.  The CMA recommends a minimum of 10 years for holding patient records.  Consider also any retention periods required by contract, e.g. managed care contracts and malpractice insurance policies.
4. The buy-out of shares in the practice and post-termination payments (all discussed above).
5. Mutual liability releases.
6. The departing physician might buy a malpractice insurance tail.
7. Indemnities in favor of the departing physician for any guarantees that the physician gave for practice debts. 

Word #3 to the wise: Identify and resolve (as best you can) any personal guarantees that the departing physician signed to secure financing given to the practice.  Guarantees are the wild card when leaving a practice.

Notices

A physician who leaves or closes a practice must notify a host of persons of the change in status.

Notice to Patients.  A physician must give notice to patients of his or her leaving or closing a practice, otherwise face a possible claim of patient abandonment.  The notice to patients should be a minimum of 30 days.  The notice should specify the date of departure, the physician’s new contact information if applicable, and who the patients can choose for future medical care.

Medical Records.  Be sure to include in the notice a patient authorization form that states where medical records will be stored.  For example, the notice might have 2 boxes that can be checked – one that keeps records at the practice, and one that transfers the records to the departing physician.  As I discuss above (at exit / severance agreements), it is best that the practice and the departing physician agree in advance to the form of notice and the retention of records.

Notice to Malpractice Carriers.  The insured (whether the practice or the departing physician) should notify its insurance carrier of the change.

Notice to Managed Care Plans and Insurance Networks.  Get this notice out early, at least 60 to 90 days before the change.  Medicare and Medi-Cal have their own forms and procedures for this notice.  If the departing physician will continue to practice, ensure continuity in managed care plans.

Notice to Licensing Boards.  Notify the Medical Board of CA within 30 days of any change in address; use the Board’s “Change of Address Form.”  Also notify the Drug Enforcement Administration (for controlled substances) and any specialty practice groups as necessary.

Notice to Hospitals re Privileges.  First call the hospital administrators and staff, then follow up with a detailed letter that includes future contact information.

Insurance

A tail policy covers malpractice claims for incidents that occurred while the departing physician was still with the practice (even though the claim was filed after the physician left the practice).  Tail coverage is expensive but worth the money.  Someone must pay for the tail policy, be it the practice and/or the physician, and this is why an exit / severance agreement is so useful.  The practice can consider deducting the costs of the tail policy from any deferred compensation or buyout amounts owed to the departing physician.  For more on tail policies, see Termination clauses in physician employment and contractor agreements.

As I mentioned in the introduction, I’ve given you only a brief outline of the topic of leaving or closing a medical practice.  It’s a complex topic, so please get competent legal counsel to help you.

This is the end of my suite of articles on the basic corporate, business and contract law issues for medical corporations and group medical practices in California.  I hope this series has been useful to you.

Call me to schedule a legal consultation: 510-796-9144