Chris Mann connected with Kurt Ullman at The Rheumatologist to discuss succession planning for physicians and why it is important to have a strategic plan to keep the practice viable.

Physicians are no more likely than other people to want to think about what happens next. The question of who takes over for a doctor due to death, disability or retirement has legal, medical and personal implications and requires planning to ensure the succession goes smoothly.

“Succession planning is like an advance directive for the practice,” says Andrew Swanson, MGMA vice president of Business Development and Consulting in Englewood, Colo. “We have a hard time convincing patients that they need these in place, and it is equally hard to get doctors to face these decisions as it applies to their practice and professional life.”

In addition, doctors can be very busy and don’t feel they have the time. Legal, financial, insurance and other issues are often easier to avoid than work on.

Attorney/Accountant Important Advisors

“No matter the size of your practice, the most important advisors in succession planning are your accountant and your attorney,” says Chris Mann, a partner at the law firm of Dawda, Mann, Mulcahy & Sadler PLC, Bloomfield Hills, Mich. “They do this all the time. The physician, on the other hand, will most likely be facing these questions only once in a lifetime.”

There are some similarities in the issues being faced if the business is operated by a solo practitioner, is a small group (three to six partners) or a larger group. There are also concerns that are size specific.

“It really doesn’t matter if you are a single practitioner or a very large group, advance planning and an orderly transition are important to the continuing operation or disposition of the practice,” says Rai McElroy, CPA, chief financial officer for Arthritis and Rheumatism Associates in the metropolitan D.C. area. “You need a strategic plan to keep the practice viable while decisions are made and implemented in the event of death, disability or retirement. This strategic plan should be designed to maximize the value of the practice by preventing the need for an immediate sale at bargain basement prices.”

2 Main Parts

Planning should focus on two main parts. One is an unexpected transition related to the death or disability of a doctor. The other is the—hopefully—more controlled transfer of the practice because of retirement.

Having a succession plan is important irrespective of the structure of your practice. However, there is much less room for error when a sole practitioner or two- or three-person practice is involved.

“If you are a solo practitioner, an unplanned—or hastily planned—succession can have some horrible effects, not only on the practice, but also on the doctor’s family and their financial situation,” says Mr. Mann. “Should something happen to a large group, it is certainly not a good thing, but the practice can generally withstand that. Succession can be a big issue for two- or three-member practices, but is not as likely to be practice ending.”

Begin Now

The best time to begin succession planning is immediately. Whether in a single- or multi-person practice, the doctor should focus on some things pretty much from the day they start the job: One is to consider who will be taking over the patients in an emergency situation.

“I always encourage solo doctors to reach out to others in the community who might be able to see their patients,” says Mr. Swanson. “Even if you are the only rheumatologist in the area, you [may] be able to make arrangements for the primary care [physician] down the street to cover [for you]. In bigger areas with more rheumatologists, check in with the other specialists in your vicinity, and make reciprocal agreements that are mutually beneficial.”

These interactions may be the basis for selling the practice should an emergency arise. Both solo physicians and smaller group practices could have agreements in place to buy each other out at a set price, if needed. For larger groups, these issues are often addressed in the buy–sell agreements that are put in place in the practice structure agreements between the partners or shareholders.

Whether for an individual, a large group or anything in between, these are decisions that have legal, tax, medical and even personal implications. One is what the practice would be worth if there is a need to transfer.

Distorted Value View

“Physicians have a distorted view of the value of their practice,” says Mr. McElroy. “Location, timing, patient demographics, competition, payer mix and services offered are just some of the factors that can affect market value when trying to sell a practice.”

Your accountant may be able to help you look at comparable practices that have been sold to help you set a price that is realistic. There are also medical practice appraisers available, if needed.

Smaller practices and groups will have a little easier time making emergency plans for physician death or disability. Often, the remaining physicians and/or advanced practice personnel can take over the existing patient panel. If so, agreements should be put in place regarding the distribution of the former partner’s patients, and the money that results, among the remaining physicians.

However, in other cases, the partners may decide they can’t, or don’t want to, add to their own patient loads. In that case, preplanning for locum tenens or other options is imperative.

Insurance Is an Important Part

In unplanned transitions, insurance should be included. For solo doctors, disability and life insurance could make a big difference in their family’s financial security going forward.

“If an accident or sickness takes away your ability to see patients, that effectively ends the money machine,” says Lawrence B. Keller, CFP, certified financial planner practitioner and founder of Physician Financial Services in Woodbury, N.Y. “Unless you are among the fortunate few who don’t need the money, you need to protect your family by protecting the income that is generated by your ability to work.”

One of the suggestions is an own-occupation disability policy. If due to accident or injury you are unable to perform your duties as a rheumatologist, you would qualify for payments. This type of insurance has the added advantage of allowing you to work in any other profession and make as much money as possible without reducing the disability benefit.

Life insurance is also a consideration for the solo practitioner. Your practice’s insurance broker should be able to suggest policy limits for both kinds.

Work closely with both your insurance broker and your accountant. There are different kinds of coverage with different tax implications.

Both smaller and larger practices may need to structure insurance to benefit the group in addition to the individual. For example, the practice may be the beneficiary of a life or disability insurance policy to provide funds for buying out a physician should the need arise.

In addition, smaller groups may want to consider adding coverage for fixed expenses associated with the practice in the event of an accident, disability or death.

“When there are a small number of doctors generating revenue, they are each going to be responsible for a certain percentage of the practice’s overhead,” says Mr. Keller. “A disability overhead policy covers up to 100% of a doctor’s share of these expenses.”

Succession by Retirement

Succession by retirement presents its own sets of concerns. You have to decide how quickly the exiting physician will leave and whether they want to retire entirely or work part time. The practice has to find, integrate and train a new physician. All of this takes time.

At all sizes of practice, the planning for retirement should begin as early as possible. The first order of business is finding the person who will be taking over the practice or the position in the group.

Initial recruitment can be done various ways. Advertisements can be taken out in journals. Current partners may want to use contacts at medical schools or other practices. Fellowship programs are another source.

The second aspect is making sure the practice and the physician are a good fit from a personal and professional standpoint.

“You should plan on at least a two- to three-year period of working together so the new person knows what is happening with the practice,” says Mr. Keller. “The incumbents will want to know if the replacement physician’s style of medical management is congruent with the values of the practice. Finally, it is important that the patients like [the new physician] going forward. Best case, we need to start serious planning five or even 10 years before retirement.”

Because of the need to assess compatibility, most often the new person will be brought on board as an employee. The first agreement with the practice will likely be an employment contract that outlines pay, practice expectations and length of the contract. It may or may not outline the price formula for the takeover of a solo practice or buying shares in the group.

At some time, the price will have to be negotiated. Whether it is part of the employment contract or comes about later, an agreement will have to be reached.

Negotiating Value

“If you have a group of physicians, you have a pretty good idea of what the practice is worth,” says Mr. Mann. “Generally, at some point, everyone has bought into the group or people have left and paid on their way out.”

This means that there is often a history of what a slice of the practice has been worth in the past. In addition, most larger groups have buyout formulas in place as part of their governing documents.

Solo practices, much as we discussed in the unplanned succession section above, are harder to evaluate. Not only is there less of a paper trail for valuation, it is the physician’s life work and worth much more to them than to someone coming in from the outside. Expectation management is an important part of the accountant’s job.

It’s important to involve your practice’s attorney from the start. They will be involved with drawing up the contracts for employment and/or selling the practice, as well as the rules governing how the partners deal with each other and the practice.

You should also be comfortable with your accountant. There are tax and practice funding requirements that need to be carefully structured to avoid unnecessary tax consequences for the physician, their families and the practice.

Start these discussions right away, and revisit succession plans at least annually.

“If there is one takeaway, it is that it is never too early to start thinking about succession,” says Mr. Mann. “There is always a point where it is too late.”

Read the original article in The Rheumatologist.