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Negotiating Malpractice Insurance in Physician Employment Contracts

Medical Malpractice Insurance is an essential part of any physician’s practice. According to the American College of Physicians, “Medical Malpractice” insurance is a specialized type of professional liability insurance that covers physician liability arising from disputed services that result in a patient’s injury or death. Injuries may present themselves immediately or at some time in the future. Malpractice insurance requirements will vary depending upon several factors including, but, not limited to how long you have been practicing, the size of your practice, specialty, prior claims filed against you, etc. Many providers receive their malpractice insurance  through their hospital employer while independent physicians must purchase their own. You should carefully examine your insurance policy to determine whether your coverage is for “claims-made” or “occurrence”.

 

Claims-Made

A “Claims-Made” policy protects physicians for treatment that was provided from the first day of coverage through the expiration date. Since coverage ends on the expiration date you much always renew your claims-made policy on the expiration date to continue coverage without any gaps. Each year that a claims-made policy is renewed the retroactive date remains the same. The renewed claims-made policy covers claims that are filed during the policy year for incidents that occurred on or after the retroactive date. This allows for previous years to be covered under the current policy. In short, if you continue to renew a claims-made policy the protections in place will continue for any covered incidents that occur between the retroactive date and the expiration date. Any injuries that occurred prior to the retroactive date or after the policy has expired are not covered, which is why continuously maintaining this type of policy is important.

Claims-made policies allow you to increase your policy limits or add new coverage as needed or when new coverages become available. A claims-made policy allows an insured to transfer their coverage from one insurer to another without purchasing tail coverage, which will be discussed below. This only applies if you have an active claims-made policy that is transferable to another insurer that offers prior acts coverage for this claims-made policy. In this instance, the new insurer will rollover the retroactive date from the previous policy into the new policy. The new policy now covers the same period as the old policy since it includes the retroactive date. Unlike occurrence coverage, claims-made limits do not restore each year. The policy limits remain the same as they were when you initially purchased the policy.

 

Tail Coverage

Claims-made policies don’t cover claims made after the expiration of the policy, so you will have to purchase “Tail” coverage to continue coverage. Tail coverage (aka Extended Reporting Endorsement) is very important if you have been covered under a claims-made policy and are changing insurers, switching employers, or retiring. Tail provides malpractice coverage during the transition for injuries that may have occurred in the past. Tail allows the policy holder to have continuous coverage from the policy’s retroactive date to the policy expiration date. Any claims that are filed during that period are protected. To obtain tail coverage you must pay a one-time fee shortly after cancellation of a policy, but it can be as much as 1.5 to 2 times a typical annual malpractice insurance premium. Again, if you are transferring coverage from one insurer to another insurer tail policy coverage may not be necessary if the new insurer applies a retroactive date to your old policy.

 

Occurrence

Most physicians will opt for occurrence coverage where available. Occurrence policies protect you for treatment rendered during the entirety of the policy period, no matter when the claim is reported. An occurrence policy will still defend you against claims even after the policy has expired. This policy offers permanent coverage for incidents that occur during the policy period. Additionally, occurrence limits “restore” each year so that claims paid for incidents arising from one policy year do not deplete limits available to cover claims from other years. Each year that this type of policy is in effect constitutes a distinct set of limits. The amount of coverage in each year of coverage is aggregated annually to increase the limits.

 

Here are a few questions to Ask yourself

(1) What kind of coverage do I have?

(2) What are the policy limits?

(3) Do I have tail coverage?

(4) What type of incidents does my policy protect me from?

(5) Is this policy transferable?

(6) Will the new insurer retroactively date the new policy?

 

Final Reminders

*When negotiating hospital employment, physicians should ask the hospital to pay for the tail coverage or ask the hospital to allow them to continue their current coverage so that tail coverage is not required.

*Many physicians who are employed by hospitals may be required to obtain tail since most hospitals are self insured and won’t provide the incoming physician with prior acts coverage.

*Purchasing tail coverage may not be a choice. Some hospital bylaws require physicians to maintain malpractice coverage even after they are no longer with that hospital in order to protect from any potential future claims that may arise for any treatment that was provided by the insured while on staff.

*Some hospitals will not grant staff privileges to a physician with any gaps in their malpractice coverage.

*You want to make sure that you policy is always in effect and that it covers all potential claims because legal fees and costs can cost you thousands of dollars. These legal costs are in addition to any settlements that would have to be paid to the injured patient, which can range from a few thousand dollars to millions.

*The claims-made policy is more flexible and more cost effective especially for those who are still in the early years of their practice.

*“Claims-made” to the insurance company after the coverage period ends will not be covered, even if the alleged incident occurred while the policy was in effect. In other words you would personally be on the hook for any damages!

*Occurrence policies are permanent, which means that you don’t have to renew the policy to maintain coverage for any gaps in coverage. You have separate limits each year you were insured so past claims limit your coverage in the years ahead. These types of policies are becoming increasingly difficult to find.

*You should negotiate tail coverage in an employment contract with a new employer.

*Tail Coverage is only necessary when a Claims-Made policy expires and the insured cannot secure “nose” coverage for prior acts from a new insurance carrier.

*Medical Malpractice usually does not cover liability arising from criminal acts or sexual misconduct.

***This blog post does not constitute legal advice and is only intended for educational purposes only. You should consult a licensed attorney in the State of Florida that specializes in healthcare law.***

Business and Legal Considerations for Selling my Physician Practice

Business and Legal Considerations for  Selling my Physician Practice

Physicians may be determine that it is in their best interest to sell their medical practice for various personal and business reasons. A few of the reasons may chose to sell are because: (1) they are retiring; (2) relocating to another city/state; (3) maintaining the practice is too much of a burden/stress; (4) they are physically unable to meet the demands; (5) lower reimbursement rates; or (6) someone simply made them an offer that they couldn’t refuse. Regardless of the reason why a physician may choose to sell their practice there are certain business and legal considerations that they should factor into the decision process.

 

Who is Buying Physician Practices?

 

Florida is one of the few states that allows for a non-physician to own a medical practice, excluding optometry, dentistry or chiropractic practices. Large corporations, private equity firms, hospitals, health systems and ambitious physicians looking to expand their practices are all common buyers in today’s market. Due to healthcare reform the value of physician practices are diminishing in many markets.

 

What is the Value of my Physician Practice?

 

Many business owners, including physicians, have an idea in their head of what they THINK that their business is worth. Often there is an emotional component that is factored into what the physician perceives their practice to be worth.  I encourage my physician clients to be realistic with their expectations. Let’s face it, there’s no guarantee that patients will remain with a practice once their beloved physician departs and purchasers are aware that while there is some benefit to buying an existing practice there is also significant risk. For this reason, many purchasers choose to pay the purchase price over several months after closing and hire the prior owner as an independent contractor during the transition. I advise my clients to meet with a healthcare consultant and bankers who work primarily in the medical and dental industry so that they can determine what the fair market value (“FMV”) of their practice is. A FMV is partly based on the tangible assets of a practice and consist of all furniture, fixtures and equipment owned by the practice such as examination tables, desks, chairs, and medical equipment.

 

There are numerous methods and factors to be considered in determining the value of the physician’s practice when preparing to sell. The value of a physician practice fluctuates based on: (a) payer mix; (b) referral sources; and (c) the presence of ancillary services. If a practice has one or more ancillary services that it provides that can dramatically increase the value and eventual purchase price of your practice due to the increased profit margins.

 

The process includes requirements or rules that must be followed in order to legally sell a practice. All legal and business considerations should be addressed to ensure the selling physician receives the best possible price for the sale of their practice. The selling physician must be careful to avoid any actions that can reduce the value of the practice during the sale.

 

Sellers must be careful not to misrepresent terms and conditions of the physician practice because it is highly likely everything will be discovered during the purchasers exclusive due diligence period. The selling process ends with a negotiated agreement with attorneys covering the asset purchase agreement, revised partnership agreement (if applicable) and employment agreements to name a few. During the closing process all agreements will be signed and executed.

 

How do I Structure the Sale of my Physician Practice?

 

The sale of physician practices can be structured in various ways depending on the facts and circumstances specific to that particular practice (i.e. debts, obligations, leases, etc.) A physician has to choose between selling stock in their practice, assets, or in some cases a combination of both.

 

A physician that sells stock in their practice will pay less taxes on the purchase price. However, purchasers are weary of purchasing stock because they assume responsibility for the practice’s liabilities. The trade off with a stock purchase is that the purchaser retains the physician’s payer contracts, tax ID number resulting in a much smoother and faster transaction.

 

In an asset purchase agreement the physician has to be very specific about what is included in the sale (i.e. art and certain furniture isn’t included). In this strategy, the physician-seller positions the sale as an alternative to a startup practice. The value is not as high, but a small amount of intangible value can be justified for:

 

  • Speed when compared to that of than a startup;
  • Less losses than a startup;
  • a trained workforce already in place, telephone number, website, and historical marketing already in place;
  • Medical Equipment and furniture are present;
  • Stronger Patient base and reputation.

 

A transaction involving the value of intangible assets of a practice could trigger violations of various state and federal healthcare laws, including, but, not limited to, the Florida and Federal Anti-kickback Statutes and Stark law. Tangible and intangible assets can all be included in the sale of a physician practice however to avoid anti kickback issues, the final price must not overwhelmingly exceed the FMV of the practice. If the purchase price exceeds the FMV of the physician practice it will be a red flag for regulators. Regulators might interpret the sale to be disguised as an impermissible payment for patient referrals also knows as Patient-Brokering in Florida. You should always consult with a healthcare attorney to conduct an analysis of Stark law and Anti-Kickback Statutes before proceeding with the sale.

 

The sale of a physician practice may include a “competitive auction process”. Smaller physician practices don’t usually go through this auction process, but it is not uncommon for a larger practice with several offices and expensive medical equipment to go up for auction with a minimum reserve that must be met. All parties involved must agree to the terms and a price. A competitive auction includes an invitation of greater than 20 buyers to bid. Buyers in competitive auctions typically have a six-week deadline to submit a letter of intent to purchase at a tentative price pending exclusive due diligence performed by the buyer for 60-120 days.

 

Protecting your Practice

 

Physicians spend a significant amount of money and devote countless hours to building their practice. It’s not always easy to part ways with your practice, but prior to completing the sale you want to make sure that you and your practice are adequately protected. No matter the size of your practice, when you are entertaining offers from potential purchasers a well crafted Non-Disclosure Agreement (“NDA”) should be drafted by a healthcare attorney and signed by those potential purchasers. The NDA ensures that any documents or information that they receive during the negotiation process will be returned, destroyed, and kept confidential or else there will be a lawsuit for resulting damages. Also, the information gathered during the negotiation practice, such as trade secrets can’t then be used to directly compete with you. Once signed the potential purchasers are given access to secure online data rooms, which include financial statements, confidential information memorandum (CIM or pitchbook), and operational statistics.

 

What if you Own the Practice and Real Property?

 

Physicians that also own the practice facility need to prepare for the sale of both their practice and the practice facility. Alternatively, if the physician is interested in keeping the practice facility, he or she can lease the space to the buyer of the practice. In the leasing agreement, the physician may give the buyer and option to purchase the facility in an amount of time specified. If the selling physician wishes to remain employed by the purchasing party, remaining a landlord represents a conflict of interest that needs to be addressed. Therefore, the selling physician should contract for the sale of the practice facility with the buying party or an independent property management business.

 

Conclusion

 

The following is a list of Legal Considerations for sale of physician practice:

  • Beware of Fee Splitting and Kickbacks
  • Structure the Transaction in a legally permissible manner, such that it doesn’t violate any applicable healthcare or business laws.
  • Purchasers must conduct Due Diligence
  • Physicians must protect patient protected health Information (“PHI”)
  • Account for and protect against any Data/Information Breach
  • Resolve any existing contract disputes
  • Determine whether you can assign third party contracts
  • Negotiate the noncompetition clause
  • Negotiate an agreeable indemnification clause
  • Adhere to any termination Provisions
  • Consult a CPA to determine the tax risks
  • Transition the non-physician employees appropriately

 

In addition to these considerations, there are many other factors to consider before deciding to purchase or sell your practice. The sale of a practice can’t be completed over night and could take several months. The purchaser may have to obtain a Healthcare Clinic License and ensure that the transaction doesn’t violate Stark or meets one its exceptions. It’s up to you to determine whether the time is right to sell your practice. No matter the size of your practice you should always consult with an experienced healthcare attorney.

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This post was authored by Jamaal R. Jones, Esquire and Matt Lester of Jones Health Law, P.A. for more information contact us at (305) 877-5054; email us at JRJ@JonesHealthLaw.com, or visit our website at www.JonesHealthLaw.com.

 

It should be noted that I am not your lawyer (unless you have presently retained my services through a retainer agreement). This post is not intended as legal advice, it is purely educational and informational, and no attorney-client relationship shall result after reading it. Please consult your own attorney for legal advice. If you do not have one and would like to retain my legal services please contact me using the information listed above.

 

All of the information and references made to laws, regulations, and advisory opinions were accurate based on the law as it existed at this time, but laws are constantly evolving. Please contact me to be sure that the law which will govern your business is current. Thank you.

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