Orderly succession: The best way to plan

Ask physicians about their financial goals, and almost all of them will list a comfortable retirement among their top priorities. Many even have a specific age in mind for when they will leave practice, based on the income they're earning and the money they have saved.

Even with that advance notice, however, many groups are still blindsided when a senior partner announces it's time to slow down and begin the trek toward retirement.

Without written policies for how to ratchet down a physician's activity in the practice and how to structure a retirement compensation plan, a harmonious group can quickly morph into a hotbed of political infighting, consultants said. Physicians who have a personal stake in the situation are not likely to agree with other partners' decisions regarding a retirement package, which could lead to a splintered practice and production losses.

Groups that coordinate succession planning before anyone is ready to retire, though, can provide for a smooth transition for both the physician and the practice, consultants said. The doctor will know exactly what to expect and the practice will not have to scramble to decide how to deal with a physician who decides it's time to hang up the lab coat.

"A good transition plan is like a good compensation plan. No one will be completely happy," said Bruce Johnson, a Denver attorney and principal with the Medical Group Management Assn. Health Care Consulting Group. "You want to have, if possible, a consistent set of rules applied uniformly."

You also want to update them regularly so the documents adapt to the changing times. Policies established 15 years ago probably will not be appropriate for a practice that has added partners or changed its call schedule during that period.

Barney Maynard, MD, a urologist in Evansville, Ind., said his group is currently reviewing its practice transition policies. With retirement on the horizon for a few partners, the group wants to ensure the policies are applicable and equitable, he said.

"You should structure the documents in a way so that each physician ... knows how the process works," said Dr. Maynard, a past president of the Indiana State Medical Assn. "It's important that it be written down and formalized. To do it based on a handshake over dinner is courting disaster."

Call schedule and buyout

There are too many important issues to leave to informal talks, consultants said. When you're talking about financial security and quality of life, it's best to come to a written consensus so doctors can know exactly what the playing field is when they start to plan their retirement.

A physician's call schedule and either a buyout or retirement compensation package are the two main elements of a succession plan. Ideally, a physician will announce his or her pending retirement six months or a year in advance, giving the group time to put its succession plan in motion.

Depending on the size of the group and its written policies, the retiring partner may get to cut his or her call schedule or drop it completely. The doctor's income will likely fall as a result, since a reduced call schedule will mean less revenue for the practice.

The group has to be able to pick up the slack for the departing physician, however, which is why foresight is critical to a smooth transition. A small practice won't be able to cover a doctor's call schedule if it isn't given the time to implement a contingency plan, consultants said.

The issue of paying the physician in retirement can be even stickier, especially because practices these days don't carry the same value they once did. While groups in the past could simply allow a young physician to buy out a senior partner, today that stock isn't valued as highly. The goodwill physicians used to cash in on does not play as critical a role in today's practice valuation, consultants said.

Instead, many groups will structure a deferred compensation plan that is tied to the value of what the departing doctor is leaving behind, including accounts receivable, said Patrick Hughes, an attorney with Connell Foley LLP in Roseland, N.J. The group could decide to pay the retiring physician in a lump sum, or it could spread the compensation out over several years, he said.

"Spreading out the payment over time gives the group a safety net, so the practice doesn't get shouldered with the tremendous burden of paying out in one year," Hughes said. "You have to be concerned if two senior partners retire within a year or two of each other. While the formula is agreed to ahead of time, it gives them a way to extend the term of the payment."

The life of the group, of course, is important to the retiring physician as well, because if the remaining partners decide they can't continue without the retiring physicians, they may decide to close the practice, leaving the retiring doctors without a source of compensation.

"There are a lot of issues, and you need to be fair to both sides," Hughes said. "That decision shouldn't be made in a vacuum. You have to coordinate with many other things."

One of those things is holding the physician to his or her word. While some say they want to start slowing down and retire in a year or two, they might not actually reduce their production levels. Meanwhile, the group has accommodated the doctor by altering the call schedule and changing the compensation formula, perhaps based on reduced overhead costs. The physician could actually have a better compensation plan during a slowdown period than under a normal partnership structure, consultants said.

Physicians' individual situations also may cause them to want to negotiate the succession plan to make it fit them better, said Mike Stephenson, administrator for Kansas City Bone & Joint Clinic Inc., which has eight orthopedic surgeons in two locations.

"Even the best-laid plans don't go that smoothly," he said. "Doctors always want to negotiate. It never appears to go the way you want it to."

To limit discussion, consultants suggest being as explicit as possible with succession-plan policies, including how many doctors can have reduced call at one time and how many have to be available to handle the call schedule before another one decides to ease into retirement.

"Typically, there's a founding partner who sort of calls the question," Johnson said. "There are physicians who are patriarchs who say, 'Let's develop a set of rules we all can follow,' but on the other end, there are doctors who say, 'I want to have it a certain way because I deserve it.' Most groups obviously fall somewhere in between."

The role of recruitment

How a group handles an outgoing partner's transition also is a function of how well it can transfer the work load. Large groups typically have the economies of scale to absorb the partner's overhead without adding a new doctor immediately, but smaller groups may need plenty of notice from a retiring physician to begin the recruiting process.

Physicians in most groups also are not evenly spaced across all age groups, making the need for new doctors even more critical at some points. If you have a five-physician group with three doctors older than 60, the two younger physicians may find themselves a little overwhelmed unless they plan ahead.

For example, as Dr. Maynard settled into practice with his current group nearly 25 years ago, retirement was the furthest thing from his mind. It wasn't well-covered territory among his colleagues, either. However, reality hit about seven years ago.

"We were having a weekly director's meeting, where we would talk about how the practice was going, and we saw the senior partner was going to retire, leaving three of us with only 20 months separating us," Dr. Maynard said. "The three of us could pick up the slack, but at some point, when one of us decided to retire, there was no way two or one of us could carry on this practice."

It either was going to become a "shoving match to see who turns out the lights last," Dr. Maynard said, or the group would just dissolve with all three physicians retiring together, ending an ongoing entity since 1952. The remaining partners decided to start recruiting, and the practice is now up to seven physicians.

"Five to seven years from now, when we're retired, they'll be more than ready to bring in somebody new," Dr. Maynard said. "The day I retire, I will encourage the young associates to start recruiting now."

Being in a rural location puts even more pressure on a group to plan ahead, because it takes even longer to recruit. Evansville, Ind., physician, Michael Hoover, MD, said his general surgery group is constantly working on recruiting because of its fairly regular flow of retiring physicians. Four senior partners have retired in the past seven years, and the group has managed to replace them as well as add physicians to keep up with the increased patient load, he said.

The practice, which has 12 physicians, requires its doctors to follow a rigorous clinical and on-call schedule, so it rewards its partners by allowing them to work without call responsibilities, with a commensurate cut in pay, for their last three years, Dr. Hoover said. Surgeons can work full-speed until age 70, but at that point, "you no longer can be a partner in the firm," he said.

Knowing well in advance when physicians will retire, however, does not necessarily make it easier for the group to fill the open spots. Physicians in the practice are "very busy," Dr. Hoover said, including being on call about every fourth night, which isn't a very persuasive selling point when you're trying to recruit younger doctors who care deeply about their quality of life.

"In my opinion, we probably need about 16 physicians," he said. "We have a good practice that allows physicians to build their practice, but it's a constant struggle to get them to consider coming here."