Physician Strategy News: March '08
Practice Acquisition Basics — Part 2
In "Practice Acquisition Basics — Part 1" (Physician Strategy News®, February 2008), the first three elements of practice acquisition were reviewed: valuation, due diligence, and the compensation plan. The article addressed the importance of due diligence in setting production expectations, determining an appropriate salary range, and anticipating expenses for the practice.
Part 1 also addressed long-term sustainability as the primary focus in the development of the compensation plan. The practice's financial structure will likely not change significantly after acquisition, at least not in the short term. A practice might continue to struggle to maintain a positive bottom line after the hospital assumes control, and it's important to keep that in mind when structuring the agreements.
This article addresses the next steps in the practice acquisition process — development of the term sheet and contract. The term sheet's purpose is to lay out the employment details in clear terms, with the legal contract in mind. If the term sheet is well done, reaching agreement on the contract will be much easier.
Initial elements in the term sheet will be the effective start date for the physician and proposed contract length. Other core elements will include the base salary, types of bonuses and bonus amounts, conversion factor (if an RVU system is utilized), and target level of production. If the physician's compensation will be subject to fluctuation on a yearly or quarterly basis, the method to determine future base salary and bonus must be clearly laid out. Following is a list of all the standard elements recommended for a term sheet.
Term sheet Check list
- Length of contract
- Effective start date of contract
- Number of hours required of a full-time employment
- Reference to medical staff bylaws and call coverage requirements
- Method for calculating base salary during employment period
- Base compensation
- Annual production target (wRVUs)
- Conversion factor used to calculate the physician's salary and bonus
- Method for adjusting compensation for nonperformance
- Method for adjusting conversion factor going forward
- Bonuses to be paid in addition to base salary (signing bonuses)
- Compensation available in addition to base salary (Medical Director fees, etc.)
- Reference to physician benefits
- Reference to malpractice premiums
- Price paid for practice assets
- Expectations for call coverage
Any ambiguous language will create confusion and you want to minimize the opportunity for misunderstanding. Examples of the calculation are helpful in explaining the terms. Guidelines, such as referencing the hospital’s medical staff by laws, should be included in the term sheet to set behavioral expectations.
A number of issues frequently become the focus in the negotiations. Base salary and additional money to cover immediate out-of-pocket expenses, such as loan payoff, equipment lease commitments, etc., will be negotiation points. The approach to procuring malpractice tail coverage, if it is required, will be a point of contention. The term sheet will also include the price paid for the practice’s assets….often an area of dispute.
The compensation system will surely be a point of contention, as well. This will be especially true if the hospital wishes the mechanisms to limit payments. One such limit could be a loss threshold for the physician bonus. This can be used to stop the payment of the physician’s bonus when the practice as a whole is experiencing financial losses over a set amount. A second limit might adjust salary downward if production goals are not met.
A side issue that will arise during term sheet development is the disposition of office staff. That staff might be nervous about their job security, and the physician will want to alleviate those concerns, to the extent possible. The office staff will become hospital employees and it will be important that the impact of the transition be clearly explained to the staff once the physician commits to employment. The transition also presents an opportunity to weed out troublesome office staff that might be detrimental to the office environment going forward.
Once the physician and hospital reach final agreement on the terms included in the term sheet, the terms will be input directly into the legal contract. We recommend that a standard contract format be developed for all physician employment. This will create consistency among physician employment arrangements. Many physicians will attempt to negotiate exclusive benefits during the contract negotiation process, but the hospital will want to be careful not to set a costly precedent. Also, it is important to include non-compete language in the contract to protect the hospital in the future if the relationship sours.
This discussion outlines some of the key elements required to negotiate the final deal.
For questions or a sample term sheet, please contact Matt Fulton at mfulton@healthcarestrategygroup.com or by calling (502) 814-1188.
