Money Checkup Podcast

Kristen Prinz

Episode 19: Contract Review and Buying Into a Medical Group with Kristen Prinz

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Getting a job offer is a wonderful feeling, especially for physicians who are finally completing their training. But don’t be too quick to accept an offer before you understand what’s inside. Review your contract carefully to see how your compensation will be structured, the term of the contract, the details of your non-compete clause, and more. Learn as much as you can about the culture hospital or medical group, too.

If you’re going into private practice, your contract likely includes details of when or how you will be eligible to buy into the medical group as a partner. When that time comes, do your due diligence to make sure you’re getting a fair deal that you fully understand. 

Reviewing your employment contract

Before you even start reviewing the contract a potential employer has offered you, do your due diligence on the practice’s culture. See what patients are saying online about the practice. Find out how the practice structures on-call coverage and vacation assignments. For many physicians, it doesn’t matter how well they’re being compensated if the culture of the hospital or practice is not a fit.

In conversations with your potential coworkers and managers, you’ve likely heard people describe how much employees make on average. But that could mean a lot of different things. If compensation is based on reimbursements from insurers, you may not collect any money for your first six months. If pay is per shift, find out whether night shifts earn more than day shifts or if the rate goes up after a certain number of hours. If pay is determined by relative value units (RVUs, which is essentially pay based on productivity), know what data they’re using to set their rates and make sure those are reviewed on a regular basis. The rates should increase regularly to account for inflation and cost of living adjustments.

Knowing how much you’re likely to earn is useful, but it isn’t enough detail for your financial planner. The number you really need to know is the minimum amount you will earn. See if your contract sets that amount or if your employer guarantees a minimum number of shifts. If not, use all the information you’ve gathered to figure out what your minimum pay might be, and plan from there.

Next, examine your contract for details about the term of the agreement. Many medical practices change compensation structures frequently. Having a contract that locks you in to a certain structure for a set period of time can help protect you. Also, note how many days’ notice you have to give your employer if you wish to leave the job — this can range from 60 to 180 days (but could be more or less) — and ensure they give you a similar amount of notice if they decide to terminate your employment. 

When you take a job, you don’t necessarily think about being fired for cause. But sometimes the definition of “cause” can be very vague. If your contract shies away from defining those causes, try to get more specific details written in. Similarly, courts have been fairly aggressive in enforcing non-competes against physicians in many states (except California, where they are unenforceable unless you are an equity owner). Make sure you understand the terms of any non-compete language included in your contract. You don’t want to find out the hard way if you leave and are unable to practice in the same capacity. 

Be as specific and detailed as you can in your contract review. Your potential employers or coworkers might be honest with you about their experiences, but that’s all they can share — their experiences. If it’s not in writing, it isn’t guaranteed. Review your employee benefits in detail, too.

Remember that all employment contracts are negotiable. In large hospital systems, administrators often issue standard contracts, but the physician still has some leverage — especially if she works in an underserved area or her specialty is highly sought after. 

Buying into a medical group

If you’re going into a career in private practice, there is a good chance that your practice is physician-owned — and that you’ll have the opportunity to buy in, either immediately or after a set period of time. 

When that time comes, many physicians choose to buy into the medical group without asking for details of the practice’s finances. Although it might feel rude to ask people you’ve worked with for years to verify their claims, it’s essential that you have a complete understanding of how the practice’s finances work before you commit to becoming a partner. 

First, ask to see the partnership agreement, operating agreement or bylaws to understand how the practice is administered. Then ask how they arrived at their valuation. There is no single formula for how a medical group arrives at its valuation, but most are a combination of the practice’s assets, accounts receivable, and “goodwill.” Goodwill, which roughly translates to the reputation of the practice, is very subjective. Ask partners to explain how they value goodwill and how much it factors into the valuation of the medical group.  Confirm what they are saying by requesting the financials of the practice, and have someone with this expertise review on your behalf as well. 

Next, understand the logistics of buying in. Sometimes your employer will loan you the money, then deduct payments from your salary for a set period of time. You may have to take out a private loan. Or, your initial distributions may pay for your partnership interest. Either way, it will likely impact your personal cash flow — to the point that you may actually be earning less than you did as an employee for as long as five years. 

What will your compensation structure be as a partner? Ideally, you will collect distributions from the business in addition to your salary. Your partnership may include increased payments to your 401K (maximum of $56,000 for 2019), which may also reduce your take-home pay. 

Importantly, when you’re no longer an employee, the medical group will no longer withhold taxes on your behalf. You’ll have to put money aside to make estimated tax payments on a monthly or quarterly basis. You may lose some or all of your employee benefits as well and have to start paying out of pocket for those.  

Next, make sure you understand the buyout terms. When other partners leave or retire, often all the other partners have to buy them out, so it’s important to know what your obligation will be. Also, if you choose to leave, you’ll want to make sure you’re getting the same value that you’ve put into the group. If you choose to leave, not only is the valuation usually lower, but the payout is often spread out over a number of years at a low interest rate. 

Ask to see all the partners’ partnerships agreements and employment agreements. Founders often have very different agreements than partners who joined the group later. You may find you and the other partners will be paying them a significant amount of money when they retire — and often none of the partners are aware of it. If you’re really in a partnership, everyone should  know what the terms of that partnership are. 

Take time to learn about what kind of input you’ll have in the direction of the business. If the group is an LLC, managers may make the bulk of day-to-day decisions while partners only have an occasional say.

Most pitfalls of buying into a medical group come from a lack of due diligence. If you take a valuation on faith rather than asking for evidence of that value, you may spend more than is necessary. If you don’t ask for your partners’ agreements, you may be surprised when you’re partly on the hook for a large payout to the founder. And make sure you know exactly how you’ll be compensated so you can adjust your day-to-day spending and estimated tax payments accordingly. 

Last of all, but certainly not least: Make sure you like and trust your potential partners. You could be in business with these physicians for the rest of your career. There will probably be weeks when you spend more time with them than you do with your family. Physician burnout is real, and in the end, there’s only so much money that can make up for the feeling that you’re unhappy at work. Prioritize your happiness as well as your financial security.

To learn more about Kristen Prinz’s law practice, visit Follow Kristen Prinz on Twitter @KEPrinz and listen to her podcast, Tales from Around the Water Cooler, wherever you listen to Money Checkup.

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