healthlaw reference

- September 2004 -

Return To Private Practice Checklist

By Michael A. Cassidy, Esq.

The major health systems and health plans (health systems) are reconsidering the idea of acquiring and maintaining physician practices.  Now that some of the initial multi-year contracts are expiring, many physicians are returning to private practice, either voluntarily or involuntarily.  This transaction must be examined both from the viewpoint of terminating the existing relationship with the hospital/employer and establishing a new practice entity.  The following is a checklist of items to be considered.

Termination of Existing Relationship

EMPLOYMENT CONTRACT

You should have an employment contract with the health system defining your compensation rights, applicable restrictive covenants and non-solicitation/confidentiality agreements, and termination rights and obligations.  A thorough review of this, and any other agreements, should precede any termination decisions because some or all of these rights could be dependent upon the nature and timing of the termination.

RESTRICTIVE COVENANTS

Restrictive covenants in your existing agreement will restrict your negotiating leverage.  The health system will probably request some type of ongoing restrictive covenant, depending upon both existing agreements and the financial and political reasons for the separation.

COMPENSATION AND BENEFITS

Salary — Compensation is typically structured as guaranteed base and potential incentives or bonuses.  The time and method of termination could affect the incentives/bonuses.

Severance — Any premature termination should include discussions about severance payments relating to the value of the forfeited compensation.

Accounts Receivable — The health systems typically owns and will retain the accounts receivable, unless you have agreed otherwise

Malpractice Insurance — You must assure that there are no gaps in coverage between the “old practice” and the “new practice.”  Many health systems have captive insurance programs which are separate from the employer.  You cannot rely upon one entity’s assurance that the insurance entity is protecting you. You should obtain separate proof of coverage, just like a commercial insurer’s insurance policy declaration, if these are separate entities.

Occurrence: Provides coverage if the counterclaim “occurred” while the policy was in force, regardless of the time of the claim.

Claims Made Tail: Provides coverage only if the claim “occurred” and was “made” or filed while the policy is in force; requires “tail” so policy will remain in force for later claims.

Other Insurance — Investigate the transferability, or portability of insurance policies providing personal benefits, especially if you or your staff have pre-existing conditions or are otherwise uninsurable. These include:

•  Health

•  Disability

•  Life Insurance

Retirement Plans — Several aspects of retirement plans should be reviewed, i.e. eligibility for contributions for the current period, vesting, and rollover opportunities.

RELEASE OF EMPLOYMENT RELATIONSHIP

Most separation agreements will contain mutual releases and may extend restrictive covenants and other confidentiality and non-competition provisions.

ACQUISITION OF PRACTICE ASSETS

You must acquire, or perhaps reacquire, the practice assets, inventory, practice office sites, etc.

Office Leases —Is your practice location important?  The existing documents should have contemplated “return to private practice” scenarios, especially if physician-owned office real estate was involved.  Leases should have existing linked termination provisions, or should be assigned to and assumed by the new practice.

Equipment — Equipment must be valued, by appraisal or mutual agreement, and reacquired or otherwise replaced.  Review equipment leases; they may not be assignable.

Computer and Billing Systems — Assuring no break in billing and cash flow is crucial especially if the accounts receivable remains with the health systems and/or there is no severance. 

Phone System and Phone Numbers — New phone systems may be necessary. 

This requires advance planning.  Practice separations in which physicians establish multiple separate practices may require an answering service or message with instructions about how to reach the new offices of the various physicians.

Medical Records — The medical records will usually be owned by the health system.  They may be treated as valuable assets and sold for additional consideration or merely delivered according to patient preference.  Establishing patient preference may require a mass mailing, and will surely require a lot of explanation.  Plan for adequate staff and phone lines.  Confidentiality should not be an issue, either because of patient consent or the HIPAA exception for “treatment, payment and operations.”

Corporate Name — Assuming the same or a similar corporate name will require the health system’s consent and participation.  You should evaluate the name and seriously consider a name that includes your name.

Inventory — Drugs and medical supplies should be inventoried, valued and acquired.  If you cannot agree on a purchase price, you could take them on consignment.  However, this is an opportunity to generate some incremental income. 

CONTINUATION OF STAFF EMPLOYEE RELATIONSHIPS

Practice Administrator — This is a key relationship.  If the administrator or director will not be staying with your practice, i.e. transferring from the heath system, recruit and hire your own administrator well before the termination date to assist with the transition.

Remaining Staff — You must determine which staff will remain with your practice early enough to recruit replacements.

Employee Benefits —

Salaries — Compensation will always be an issue.  Staff may have received a compensation upgrade when joining the health system.  Frequently, in separations, the health system is not interested in retaining the staff.

Rollover of Retirement Plans — Check the terms of the existing plans.  Coordinate with your new plans. Consider IRA rollovers.

Unpaid Vacation — Determine whether the heath system pays for unused vacation.  If not, encourage staff to use it before they lose it.

New Practice Entity

Creating a new practice entity should create the mirror-image of the issues raised regarding termination, i.e. office lease, equipment, medical records, phone system and numbers, employees, malpractice coverage, cell phones, pagers and answering services, and other insurance (workers’ compensation, premises, office contents, general liability).  Contact a commercial insurance broker.

Establishment of New Practice Entity

Although there are many choices, the corporate structure which still provides the greatest assets protection for the shareholders and the most efficient tax operation is the professional corporation, perhaps taxed as an S corporation.  Although Restricted Professional Companies (RPCs) have some benefits the partnership accounting makes it difficult to operate.

Reimbursement Arrangements with Third Party Payers

Advance planning regarding hardware and software will be of little avail without parallel planning regarding “provider numbers.”  New entities with new EIN’s usually require new accounts.  The time frame for approval varies but is usually longest with your most significant accounts, i.e. Medicare, Medicaid and Blue Cross/Shield.

Timing — Each plan will have its own track record on timing to process these requests.  Contact them and plan accordingly.

 

Collection of Accounts Receivable  — Collection of old accounts receivable is a termination issue.  If all or part of the accounts receivable function is retained by the physicians, a collection and accounting process must be established.  Even if the accounts receivable function is not retained, you should assure that the old and new systems do not result in confusion and delay billing and collection of new accounts receivable.

Bank Financing and Cash Flow

If the original entity retains the accounts receivable function, you may want toestablish working capital loans to cover the shortfall for the start-up period.

Billing Arrangements

Self Billing v. Billing Service — Utilize a billing service or employ the staff and acquire the hardware and software to bill internally.  There are several considerations:

The first consideration is cost.  Low-volume practices may not have sufficient revenue to support in-house billing.  Conversely, high-volume practices may pay a considerable   amount for billing services; negotiate the rate.

The second major consideration is expertise.  If your staff will not have the expertise to assure proper billing, a billing service may be necessary or you may just need to retain a consultant to assist.                        

Transfer of Billing and Demographic Information — Establishment of a new billing process almost always presents the issue of whether you purchase the systems and employ the staff to do this in-house or hire a billing service.  You should compare both short-term and long-term costs, evaluate whether you have and can afford the expertise to perform billing correctly, and assess whether you have sufficient time to get your own system up and running, or whether you have an urgent need to contract with an existing service, perhaps to transition back at a later date.

Michael Cassidy is a shareholder in the firm’s Business and Finance Department and Chair of the Health Care Practice Group. For more information on this topic, please contact Mike at 412.594.5515 or via e-mail at mcassidy@tuckerlaw.com.

Revenue Ruling Addresses Joint Ventures

By Michelle L. Kopnski, Esq.

Over the past several years, there has been uncertainty as to the tax treatment of joint ventures formed between tax-exempt health care organizations and for-profit organizations.  Past guidance has focused on “whole hospital joint ventures” in which a joint venture is formed by an exempt hospital and a for-profit organization with the exempt hospital transferring all of its asset and operations to the joint venture.

In May 2004, Revenue Ruling 2004-51 was issued by the U.S. Department of the Treasury and the IRS.  Revenue Ruling 2004-51 addresses the situation of the participation of a tax-exempt organization in a joint venture with a for-profit organization where the activities of the tax-exempt organization in the joint venture represent only an insubstantial or “ancillary” portion of the tax-exempt organization’s total activities.  The IRS examines the ancillary joint venture from the perspective of the effect on the tax-exempt status of the tax-exempt organization and with regard to whether the activities of the tax-exempt organization constitute an unrelated trade or business thereby subjecting the tax-exempt organization to unrelated business income tax.

The IRS last considered the issue of a joint venture between a tax-exempt hospital and a for-profit organization in Revenue Ruling 98-15.  Revenue Ruling 98-15 presented two fact situations.  In the first situation, a tax-exempt corporation which owned and operated an acute care hospital formed a limited liability company with a for-profit organization.  In exchange for ownership interests proportional and equal in value to their respective contributions, the tax-exempt corporation contributed to the limited liability company all of its operating assets, including the hospital, and the for-profit organization contributed certain of its assets.  The governing documents required the limited liability company to operate in a manner that furthered charitable purposes by promoting health for a broad cross section of the community.  Additionally, the governing documents provided that the limited liability company would be managed by a governing board consisting of three individuals selected by the tax-exempt organization and two individuals selected by the for-profit organization, thereby ensuring that the tax-exempt organization would maintain control of the limited liability company.  Participation as an owner of the limited liability company and using any distributions from the limited liability company for its grant making program were the only activities of the tax-exempt organization.

In the second situation presented in Revenue Ruling 98-15, a tax-exempt corporation which owned and operated an acute care hospital formed a limited liability company with a for-profit corporation.  Unlike the first situation presented, however, the governing documents provided that the purpose of the limited liability company would be to operate its health care facilities and other health care-related activities.  The governing documents did not limit the activities of the limited liability company to those activities that furthered a charitable purpose.  Additionally, the management of the limited liability company was to be by a governing board consisting of six individuals, three selected by the tax-exempt corporation and three selected by the for- profit organization.

Revenue Ruling 90-15 held that a tax-exempt organization may form and participate in a joint venture and meet the operational test without jeopardizing its tax-exempt status if participation in the joint venture furthers its charitable purpose and the joint venture arrangement permits the tax-exempt organization to act exclusively in furtherance of its exempt purpose and only incidentally for the benefit of the for-profit organization.  Because the tax-exempt corporation in the first situation retained control of the limited liability company (through majority board representation) and could further its exempt purpose as required by the governing documents, that tax-exempt organization retained its tax-exempt status.  The tax-exempt corporation in the second situation did not retain its tax-exempt status because the tax-exempt corporation did not control the limited liability company and the limited liability company was not required to operate exclusively for an exempt purpose.

Subsequent to the issuance of Revenue Ruling 90-15, two court cases, Redlands Surgical Services v. Commissioner and St. David’s Health Care System v. U.S., considered the whole hospital joint ventures between a tax-exempt health care organization and a for-profit organization.  Both cases focused on the control over the activities of the joint venture that could be exercised by the tax-exempt organization to ensure that the joint venture acted in furtherance of charitable purposes.  In Redlands Surgical, where the tax-exempt organization ceded control to the for profit organization, the court held that the joint venture activities impermissibly served private interests, rather than a charitable purpose, thereby jeopardizing the tax-exempt status.  In St. David, sufficient control of the joint venture by the tax-exempt organization was found to exist so as not to jeopardize the tax-exempt status.

It is into this arena that Revenue Ruling 2004-51 enters.  In Revenue Ruling 2004-51, a tax-exempt university offered summer seminars to enhance the skill level of elementary and secondary school teachers.  To expand the reach of the training seminars, the university formed a joint venture (in the form of a limited liability company) with a for-profit company that specialized in conducting interactive video training programs.  According to the governing documents of the limited liability company, the sole purpose of the entity was to provide the training seminars.  Each member of the limited liability company was permitted to select three members of the governing board, thereby giving each member identical control of the limited liability company.  The university was given the right to determine the curriculum, training materials, instructors and standard of the seminars.  The for-profit company was given the right to select the locations of the seminars and to oversee the “technical” aspects of the seminars.  All other decisions were to be approved by both parties.

Participation in the limited liability company was an insubstantial part of the overall activities of the university.  However, there is no indication as to the actual percentage of the activities of the university which represented such participation.

Revenue Ruling 2004-51 provided that because the limited liability company was treated as a partnership for tax purposes, the activities of the limited liability company would be attributed to the university in order to determine whether the university operated exclusively for tax-exempt purposes, and therefore, continued to qualify for tax-exempt status and, in order to determine if the university was engaged in an unrelated trade or business, and therefore, subject to unrelated business income tax on its distributive share of the income of the limited liability company. 

Revenue Ruling 2004-51 held that because the activities of the university in the limited liability company were an insubstantial part of its overall activities, the tax-exempt status of the university would not be jeopardized because of its participation in the limited liability company.  Additionally, Revenue Ruling 2004-51 held that the activities conducted through the limited liability company constituted a trade or business that was substantially related to the exercise and performance of the exempt purposes of the university, and therefore, the university would not be subject to unrelated business income tax.  Although the university did not have control of the limited liability company through board representation, the control over the “content” of the seminars was considered to be sufficient control by the university to establish that the seminars were substantially related to the exempt purposes of the university.

Revenue Ruling 2004-51 is important to tax-exempt health care organizations because it makes clear that such organizations can participate in “ancillary”, rather than “whole hospital” joint ventures, without jeopardizing their tax-exempt status or becoming subject to unrelated business income tax.  It is important also because it addresses the type of control over the activities of the joint venture that must be available to the health care organization in order to demonstrate that those activities further the tax-exempt purpose of the health care organization. 

Michelle Kopnski is an attorney in the firm’s Health Care Practice Group. For more information on this topic, please contact Michelle at 412.594.5522 or via e-mail at mkopnski@tuckerlaw.com.

IRAs: An Estate Planning Tool

By Charles J. Vater, Esq.

Most people view their individual retirement accounts (IRAs) as a retirement vehicle or tool.  But more and more people, especially physicians and other professionals, are finding that their retirement accounts represent a significant percentage of their overall estates.  For many professionals, their 401(k) plans are being rolled into their IRAs at the time of retirement, and these IRA balances are often times greater than the amounts which will be spent during retirement.  That being the case, IRAs are becoming estate planning accounts which, if planned properly, can extend into several generations and allow beneficiaries to benefit from tax-deferred growth (for traditional IRAs) or tax-free growth (for Roth IRAs).

When an owner of an IRA dies, there are certain basic rules depending upon who the beneficiary is and whether the IRA owner died before or after his/her required beginning date (RBD).  The basic rules are as follows:

• If an IRA has a designated beneficiary who is younger than the IRA owner (i.e. if the beneficiary is an individual or certain qualified trusts), then the IRA balance will be paid out over the beneficiary’s life expectancy based on a single life expectancy table.  This calculation applies whether the IRA owner died before or after his RBD.  If the beneficiary is older than the IRA owner, then the beneficiary may use the owner’s life expectancy to take distributions from the account.

• If an IRA does not have a designated beneficiary (i.e. if the beneficiary is the account owner’s estate, certain nonqualified trusts and charities), and if the IRA owner dies after his/her RBD, then the balance of the IRA must be paid out over the owner’s remaining life expectancy.  If the owner, however, dies before his/her RBD, then the balance of the IRA must be paid out within five years after the owner’s death.

• A spouse is given special treatment as a beneficiary under the IRS’s rules.  A spouse can roll over the IRA account into his/her own IRA or may treat the spouse’s IRA as his/her own and withdraw the account balance over the surviving spouse’s life expectancy.

By combining certain of the IRS’s rules, it is possible to extend an IRA’s life.  For example, if you have a large IRA balance (which may include a rollover from your 401(k) plan), you are not required to take distributions from the IRA until reaching age 70-1/2.  If you withdraw only your required minimum distributions, then there will likely be a significant balance remaining in the IRA account at the time of your death.  If you name your spouse as your beneficiary, your spouse can then rollover the balance to his/her own IRA and name his/her own beneficiaries (e.g. your children or grandchildren).  Your spouse can then delay distributions of the IRA until he/she reaches 70-1/2.  If the surviving spouse takes only the required minimum distributions, then his/her beneficiaries (your children or grandchildren) will inherit the IRA.  They can then divide the IRA into separate accounts and withdraw the remaining balance of the IRA over their respective life expectancies.  As you can see, following this plan, it is possible to allow an IRA to continue to grow on a tax favored basis for decades, even generations.

This concept can be expanded even further by converting a traditional IRA into a Roth IRA.  Although you will pay income taxes at the time of conversion on  any amounts which would have been taxable when withdrawn, the income taxes can be paid with outside funds rather than with the proceeds of the IRA, allowing your IRA to remain intact.  Once converted, you are not required to take withdrawals from your Roth IRA during your lifetime.  If you name your spouse as beneficiary, then the surviving spouse can roll your Roth IRA into his/her own Roth IRA and not take any withdrawals during his/her lifetime.  When your spouse dies, the named beneficiary must then take distributions from the Roth IRA, but those distributions may be taken over the named beneficiaries’ life expectancies.  Because of the nature of a Roth IRA and the fact that income taxes will have been paid at the time of conversion, all distributions to named beneficiaries would be federal income tax free, provided that the distributions occurred more than five years after the Roth IRA was initially established.

As you can see from the foregoing, if all or a portion of your retirement accounts are not needed for retirement purposes, then there are significant estate planning opportunities for your IRAs. 

Chuck Vater is Co-Chair of the firm’s Business and Finance Department and a member of the firm’s Health Care Practice Group. If you would like to discuss these ideas or any estate planning ideas generally, please contact Chuck at 412-594-5556 or via e-mail at cvater@tuckerlaw.com.

What is Sufficient Notice Under the Family and Medical Leave Act?

By Scott R. Leah, Esq.

In an effort to balance the needs of an employee with the disruptive effect unexpected leave can have on an employer’s business, the Family and Medical Leave Act (FMLA) requires that an employee give his or her employer notice of the existence of a  “serious health condition” and the request for FMLA leave.  The notice provision is critical, if the required notice is not given the employer can deny FMLA leave even where a serious health condition exists. 

There is, unfortunately, no guidance in the FMLA as to what notice is “sufficient,” leaving employers at risk if they improperly deny FMLA leave.  A recent case, Aubuchon v. Knauf Fiberglass, GMBH, 359 F.3d 950 (7th Cir. 2004), dealt with this issue.  In that case, an employee informed his employer that he wanted to be home with his wife during the final few weeks of her pregnancy.  Though an employee isentitled to FMLA leave after the birth of a child, he is not entitled to FMLA prior to the birth unless his wife’s pregnancy qualifies as a serious health condition.  He did not, prior to the leave, give the employer any information as to any serious medical condition, but stated merely that he wanted to be home with her until she gave birth.

The Court held that the notice requirement was not satisfied by merely demanding leave.  Unless the employer already knows of the FMLA authorized grounds for leave, the employee must give the employer reason to believe that he or she is entitled to FMLA leave.  Because pregnancy is not, in and of itself, a serious health condition, the employee did not give his employer sufficient notice of the existence of a serious health condition.

While this decision is helpful to employers where an employee has not  provided sufficient notice of the existence of a serious health condition, it is impor-tant to remember that an employer can be held liable if it improperly denies FMLA leave.  When provided with such vague notice from an employee, who will often lack knowledge of the standards for leave under the FMLA, the employer should request such additional information as is necessary to confirm the employee’s entitlement to FMLA leave.  Such a request is specifically permitted by the FMLA and will protect the employer who has denied FMLA leave due to insufficient notice or proof of a serious medical condition.    

Scott Leah is an attorney in the firm’s Litigation Department and a member of the Health Care Practice Group. For more information on this topic, please contact Scott at 412.594.5551 or sleah@tuckerlaw.com.

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