Tax Reform Likely to Cause Short-Term Continuation of Physician Practice Consolidation, As Well as Increased Uncertainty with Respect to Future Physician Practice Structures.

By Alan Sonnenklar, Esq. & Stacey Marder, Esq., Weiss Zarett Brofman Sonnenklar & Levy, P.C.

The Tax Cuts and Jobs Act, the recently enacted tax reform law, contains provisions that, while not widely known, may continue, at least in the short term, the trend towards the consolidation of physician practices into hospital systems which was accelerated after the passage of the Health Care Affordability Act ("Obamacare").  Specifically, the law contains a provision for the repeal of the individual mandate which constituted a major pillar of Obamacare.  In addition, the law may limit the ability of personal service businesses, such as medical practices, accounting practices and law firms, to benefit from the reduction in tax rates that will be provided to many corporations and other businesses.  With tax reform unlikely to strengthen the financial position of most physician practices, and with physicians continuing to view hospital affiliation as a way to mitigate against the increasing financial and administrative burdens associated with operating a medical practice, the consolidation of physician practices into hospital systems and larger group practices is likely to continue, at least for the near term. 

However, with the future viability of Obamacare in doubt as a result of the proposed repeal of the individual mandate, and the industry-wide uncertainty about what new arrangements might be implemented by Congress to reform or replace Obamacare, physicians who enter into arrangements with hospital systems for the consolidation of their practices will need to remain highly cognizant of the business terms applicable to the transaction, and, especially, to the contractual provisions applicable to the unwind of the transaction, and to the ability of the physician to terminate the contract and either transition back to private practice or join with another hospital or health care provider entity.  

When offered a compensation package, the physician needs to perform adequate due diligence with respect to whether the compensation model proposed is satisfactory from a business perspective, and legally appropriate.  Specifically if a, RVU-based compensation model is proposed, the physician should check that the proposed thresholds are accurate and attainable based upon the physician’s track record and industry standards.

It is also crucial that the physician clarify and define operational issues in the transaction documents, including where the physician will be required to perform services, the physician’s schedule and call obligations, as well as the specific equipment, supplies and facilities that will be provided to the physician.  Especially coming from private practice where the physician is in control of the day-to-day operations of the practice, it is imperative that the physician have the resources needed to succeed.

The physician must also be mindful of the termination provisions dictating when a physician can be terminated, when a physician can terminate the agreement, and the notice requirements for termination. 

Furthermore, the terms of any restrictive covenants (i.e., non-compete restrictions) must be evaluated with respect to their legal appropriateness, and to ensure that the physician is not prohibited from practicing at a future desired location.  For example, many transactions involving physician  consolidation within a hospital system contain restrictive covenants precluding physicians from “competing” with the system for a specified length of time. Although New York courts do not generally look favorably upon restrictive covenants, applicable law generally upholds non-compete restrictions provided they are reasonable based upon duration and geographic scope.   

Contractual provisions relating to “non-solicitation” should also be reviewed in order to determine if the physician has the ability to contact prior patients, referral sources and employees.  If this is prohibited, it may be difficult for the physician to transition back to private practice.

In the event that, in entering into a hospital arrangement, a physician assigns his lease and equipment to the hospital, it is also important to consider how and if the lease and equipment can be reassigned to the physician in the event of an unwind.  This can be especially helpful should a physician wish to return to private practice.

In sum, although consolidation may seem like a viable option for many physicians in light of the recently enacted tax reform and uncertainty regarding the future of Obamacare, physicians need to do their due diligence prior to entering into such arrangements in order to ensure that their rights are protected on a going forward basis.