Use your practice contract to ease into retirement

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted May 5, 2008.

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As physicians in the baby boomer generation approach their "golden years," they are starting to look for an alternative arrangement that will allow them to make the transition into retirement.

While you might not be ready to hang up your lab coat permanently, you might be interested in working fewer hours and taking less call.

Whatever the road to retirement, it requires more than simply removing your name from the office door. If you are a physician nearing retirement, it is important that you plan, discuss and make contractual agreements that will allow you to accomplish your goals and changing needs.

The structure of your practice will determine your options and the legal documents that govern them.

For example, if you are the sole physician in your practice, you are faced with two options. One, dissolve the practice. Or, two, sell the practice to another physician. If you sell your practice, you will need an attorney to draft an appropriate purchase agreement. This agreement should include a valuation of the practice and describe the rights, responsibilities, and liabilities of the purchasing and selling parties.

If you are practicing under an employment agreement, it should describe the procedure and time frame for retirement. The agreement should provide language similar to the following: "Employee or Practice may terminate this Agreement without cause upon sixty (60) days prior written notice ...." Often, retirement is addressed separately within the terms of the employment agreement.

More complicated is the case in which you are a shareholder of a medical corporation or a member of a limited liability company.

The shareholders' agreement or LLC operating agreement, respectively, should address the rights and responsibilities of a withdrawing shareholder or member.

As a provision of, or as a separate document from, the shareholders' or operating agreements, there should be language regarding the buy-sell terms. In addition, separate from the shareholders' or operating agreements, each physician should have an employment agreement that details terms of employment with provisions similar to those discussed above.

What to include in the buy-sell

A buy-sell agreement provides the terms and conditions for the buying and selling of a withdrawing party's interest in an entity. Buy-sell terms are found either as a provision of another agreement or as a separate document.

Regardless of where the terms are found, many standard buy-sell agreements do not address the special needs of physicians in the later years of practice. The typical buy-sell agreement neither provides the option of working less prior to complete retirement nor the opportunity to develop a semiretirement arrangement with the practice.

I advise my clients to include provisions that address the special needs of retiring physicians so there are no surprises when the physician decides to begin the retirement process.

A provision that I suggest including is one that provides physicians the option to convert to semiretirement status. This enables senior physicians to remain with the practice on terms that meet their changing lifestyles. The specifics of the semiretirement package can be tailored to meet individual needs and goals.

Often, such arrangements include a part-time work schedule, reduced or eliminated weekend or evening call, and/or additional vacation time. These benefits are frequently accompanied by compensation adjustments so the practice's full-time physicians do not feel that they are financing the semiretired physician's new lifestyle.

Alternatively, the arrangement can be structured to maintain the same compensation as was in place before the physician elected semiretirement status, but gradually grant the semiretirement benefits over the retirement period, typically one to three years.

One of the medical practices I recently advised created a semiretirement package that permits its physicians to work a reduced schedule and eliminate weekend call if they have been with the practice for a minimum of six years, are at least 55 years old and plan to retire within two years. In addition, the practice agreed to maintain the physician's current compensation. This package serves the practice by extending the professional life of the physician and serves the physician by satisfying the desire to transition toward retirement.

Although the suggested provision of the buy-sell agreement may appear to benefit only the semiretired physician, the other physicians in the practice benefit as well. If you are granted semiretired status, the practice's other physicians can absorb some of your patient load. This not only helps those physicians build their individual practices, but it also increases the likelihood that those patients will remain with the medical practice after you have left.

In addition, if you are unable to partially retire, you may be leaving the practice sooner than you and the other physicians had expected, creating a gap in managerial expertise, call coverage, positive relationship management with patients, hospitals, and payers, as well as other issues.

For the remaining physicians, providing an agreed-upon semiretirement package for a senior physician sets the precedent for when they are ready to gradually ease into retirement. In order to facilitate a smooth transition from full-time employment to partial retirement, it is important to give yourself and your practice plenty of time to incorporate these changes into the practice's existing structure.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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