President’s Message - August 2017
By Matthew W. Nakon, Esq., President
Summer is slowly winding down, and another school year is upon us. The Tribe is atop the Central Division and poised to make another World Series run. And the Browns, well, they have been undefeated … in the pre-season. We hope you and your families had enjoyable summers and are looking forward to the fall, which is always a great time of the year in Northeast Ohio. This quarter’s Newsletter highlights our Professional Practices and Health Care practice group. From Day One, this Firm has represented physicians, dentists, large and small practice groups, and other health care providers in a variety of capacities and matters, and we continue to do so to this day. We hope you find this edition informative.
I am happy to introduce you to our newest addition to the Firm, Erica Williams. Erica has joined the Firm’s Probate & Estate Planning Department and focuses her practice on estate planning and wealth transfer and preservation. She is experienced in all areas of estate planning, including tax planning, charitable, family and business succession planning, as well as drafting of wills, trust agreements, powers of attorney and associated documents. Erica also represents estates, trusts and guardianships in probate administration.
The Firm is also pleased to announce that six of its attorneys have been recognized for their expertise and selected for inclusion in The Best Lawyers in America© list for 2018. They are Rich Panza, Art Gibbs, Dick Naegele, Tom Pillari, John Polinko and myself. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation and inclusion is considered a singular honor. Please join me in congratulating these fine lawyers on their well-deserved accomplishment.
If there is anything we can do for you, your business, or your family, please do not hesitate to ask.
Follow us on Twitter @WickensHerzer for legal and news information helpful to you and your business.
The Corporate Practice of Health Care in Ohio - August 2017
The trend toward the corporate practice of medicine and dentistry has become impossible to ignore, as more and more health care and dental professionals are deciding to render services through business entities. But while many professionals are familiar with the concept of “corporate practice,” not all are familiar with the regulatory regime around it.
In 2012, the State Medical Board of Ohio provided a definitive statement on the corporate practice of medicine, providing that per the Ohio Revised Code, an Ohio licensed doctor of medicine and surgery, osteopathic medicine and surgery, or podiatric medicine and surgery may provide medical services through a corporation, a limited liability company, or another business entity in Ohio.
Generally, doctors in these specialties may also be employees, rather than owners, of the business entity through which services are rendered, and there is no requirement that the owners of the business be licensed physicians. There are qualifications to this rule, however: professional services rendered through a professional association must be provided by an officer, director, or employee of the association who are themselves licensed to practice such services. Importantly, physicians must exercise independent professional judgment based on the best interest of the patient and within the applicable standards of care. The corporation may not control the professional clinical judgment of the doctor.
Dentists may similarly engage in corporate practice. However, the name of the corporate dental practice must include that dentist’s name – for example, “John Doe, D.D.S., Inc.” Recent developments in dentistry have highlighted the use of dental management companies as an alternative to the dentist-owned practice. In those circumstances, the management company may be owned by a non-dentist, but cannot make or influence clinical decisions with respect to patient care or share in the dental fees for professional services rendered.
Another notable exception, particularly relevant in light of the ongoing opioid addiction crisis, specifies that pain management clinics (as defined in the Ohio Revised Code) must be owned by one or more doctors of medicine and surgery or osteopathic medicine and surgery licensed under Chapter 4731.
An ongoing trend in businesses, including within the health care industry, is the use of independent contractors to provide services instead of through employees. Generally speaking, a professional corporation that hires an independent contractor is not vicariously liable for the negligent acts or omissions of the contractor. This is one of the reasons that a professional corporation may use a written independent contractor agreement with a professional to render services on behalf of that business. A common misconception associated with the execution of an independent contractor agreement, however, is that this contract alone is conclusive of an independent contractor relationship between the parties. Instead, an employer-employee relationship creating vicarious liability may still be found if a court determines that the professional corporation exercised enough control over the manner and means by which that professional (who’s accused of such negligence) performs his or her services.
In evaluating whether an individual is an independent contractor or a misclassified employee, a court will look at several factors including, but not limited to: (1) the source of instrumentalities and tools; (2) the location of the work; (3) the duration of the relationship between the parties; (4) the extent of the purported employer’s discretion over when and how to work; (5) the provision of employee benefits by the purported employer; (6) the tax treatment of the purported employee; and, (7) the method of payment. As with most issues in the law, determination of independent contractor status is typically dependent upon the specific facts of each relationship. Professional corporations and similar business entities that use independent contractor professionals should routinely evaluate these various factors with their legal counsel to prevent findings of misclassification and/or vicarious liability.
Buy-Sell Agreements for Professionals - August 2017
What is a buy-sell agreement? A buy-sell agreement, also sometimes called a share redemption agreement, establishes the terms and conditions upon which a shareholder in a professional corporation will be redeemed at certain future events. In the context of a limited liability company, similar provision regarding the liquidation of a member’s interest will often be found in the company’s operating agreement.
For purposes of this discussion, I will be focusing on the corporate shareholder situation. A buy-sell agreement is among the most important documents a business with more than one owner should have. Why? It allows for an orderly transition of ownership and prevents it from winding up in the wrong hands at a likely critical time for the business. A best practice is to establish a buy-sell arrangement as early as possible in a company’s existence. Quite honestly, it is never too early. As the business evolves and grows, the buy-sell can then be revisited and, if necessary, amended to make sure that the “triggering” events of a sale reflect the current state of affairs amongst shareholders and that the valuation method used for establishing the redemption price will yield the expected result. Triggering events often include death, permanent disability, employment termination, retirement or the election to transfer by an existing shareholder. Common valuation methods are by mutual agreement of the parties, or, failing to arrive at such agreement, the use of a prescribed formula or retention of a valuation expert to conduct a business valuation.
In the absence of a properly written buy-sell agreement, the remaining shareholder runs the risk of having the stock pass to a person who does not understand the business or is interested in it. This can lead to unnecessary distraction, dissension and, possibly, even devalue the business. The shareholder being redeemed runs the risk of not receiving the promised value for his or her interest in the business. In short, if you and your business partner do not have a buy-sell agreement currently in place, do yourselves a favor and get one. You will be glad you did.
Dental Practice Valuations - August 2017
Dental and dental specialty practices have substantial goodwill and their values, as compared to other professional practices, are high. The three common methods of valuing dental practices are summation of assets, capitalization of earnings and similar practices. The methodology is the same for a complete or fractional sale and purchase.
Asset Summation. The asset summation method calculates the fair market value of tangible assets consisting of professional dental equipment, office equipment, furniture, technology, dental supplies, dental instruments and goodwill (either personal to the practice owner or the practice entity). And any personal goodwill should be separately appraised! (See William P. Prescott, The current status of personal goodwill, Dental Economics, October 2016; 54,56.
Capitalization of Earnings. Capitalization of earnings is the sum a practice can pay for itself after owner compensation and operating expenses are paid over a measured time not to exceed seven years.
Similar Practices. This generalized method is usually used in destination locations where there is high demand by candidates who are looking for practice opportunities where few exist. Unfortunately, profit level is not considered.
Irrespective of the valuation methodology used, if three criteria are met, the valuation is fair: the purchaser or incoming owner must be paid; the purchaser or incoming owner must repay the lender(s); and within a measured period of time.
For the purchaser, recognize that in a complete purchase and sale, any dental practice broker represents the seller, not the purchaser. Also, the seller is fully paid in cash with few exceptions. For this reason, the purchaser’s CPA should confirm the accuracy of the valuation.
In co-ownership, the associate buy-in will almost always be internally financed as lenders will not lend on a sale and purchase of a fractional interest. If the economics of the associate buy-in are not fair, sooner or later the relationship will fail. Bottom line, be fair, realistic and reasonable.
Lastly, I am pleased to announce that my new book, Joining And Leaving The Dental Practice, Third Edition, will be released in early January, 2018, on my website, www.PrescottDentalLaw.com. Joining And Leaving The Dental Practice lays out in detail the finite practice exit and entry choices. It examines all business, legal and tax aspects of each option that your silent partner, the IRS, considers important. In addition, the three business and tax structures for and three categories of co-ownership are discussed in detail. You learn what can and cannot be done and why. Restructuring faulty ownership arrangements and implementing dispute resolution in order to avoid costly split-ups is also considered which will, hopefully, enable co-owners to work profitably and with minimum stress. Enjoy and I look forward to your questions and comments!
Do You Need a Business Associate Agreement? - August 2017
A professional practice is responsible for protecting the protected health information (“PHI”) of its patients under both the Health Insurance Portability and Accountability Act (“HIPAA”) and the Health Information Technology for Economic and Clinical Health Act (“HITECH”). In the ordinary course of business, a professional practice may utilize non-employee consultants in a variety of functions wherein such consultant may use, create or disclose the practice’s PHI. Some examples are as follows: a third party administrator that assists with claims processing, a CPA firm whose accounting services to a health care provider involve access to PHI, a consultant that performs utilization reviews for a hospital, a health care clearinghouse that translates a claim from a non-standard format into a standard transaction on behalf of a health care provider and forwards the processed transaction to a payer or an independent medical transcriptionist that provides transcription services to a physician. It is imperative in these scenarios that the practice has a signed business associate agreement in place between the practice and the consultant whereby the practice obtains assurances that the consultant will protect the PHI in the same manner as required by the practice itself.
A business associate agreement outlines the requirements of the business associate under both HIPAA and HITECH in an effort to protect a practice from steep HIPAA and HITECH penalties. Amongst other requirements, a business associate agreement must: describe the permitted and required uses of PHI by the business associate; provide that the business associate will not use or further disclose the PHI other than as permitted or required by the contract or as required by law; and require the business associate to use appropriate safeguards to prevent a use or disclosure of the PHI other than as provided for by the contract.
While there are certain exceptions to the business associate agreement requirement discussed herein, these agreements are generally required when patient PHI is handled by an outside party. Professional practices should contact legal counsel when these situations arise to ensure the appropriate documentation is in place.
Solo Group Arrangements In Dentistry - August 2017
Solo group arrangements are a good alternative to co-ownership or partnership because the associate who purchases the first half of the practice is not obligated to purchase the second half. Because the practice owner and the associate, who is now an owner, have separate practices, each owner can sell his or her practice to a third dentist upon retirement or other departure. Separate practices work well because any third dentist is not a co-owner with the other solo group member. In a solo group arrangement, the founding owner sells one-half or an undivided interest in all tangible assets and goodwill attributable to the associate’s developing patient base and can be paid in cash. Thereafter, the founding owner and the new owner, the former associate, operate their respective practices under the terms of an office sharing agreement. Common expenses to both practices are either equally allocated or allocated on the basis of respective productivity. And because solo group arrangements are treated as a sale and purchase of assets, the founding owner receives mainly favorable capital gains and the purchaser can deduct the entire purchase price. This is not the case in co-ownership or partnership.