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Taking a grown-up approach to growing your business
Too often, hospitalists fail to seek the legal protection they need
by Bonnie Darves



Published in the May 2008 issue of Today's Hospitalist

Andrew Knoll, MD, JD, says he sees plenty of young hospitalists take a more casual approach to what they wear than when he started working as a hospitalist more than a decade ago.

But Dr. Knoll, who is now a health care attorney with the law firm Scolaro, Shulman, Cohen, Fetter & Burstein PC in Syracuse, N.Y., warns that physicians who maintain an equally casual approach to setting up and running a private group can pay a very heavy price.

Too often, Dr. Knoll says, private hospitalist groups fail to “grow up.” While they
“If you’re going to run a business that has an operating budget of $2 million, you ought to act like a $2 million business.”

–Andrew Knoll, MD, JD
Scolaro, Shulman, Cohen, Fetter & Burstein PC

have plenty of clinical acumen, they sometimes fall short when it comes to making sure that their professional infrastructure keeps pace with their business.

“If you’re going to run a business that has an operating budget of $2 million, you ought to act like a $2 million business,” Dr. Knoll says. He recently spoke to Today’s Hospitalist about the perils of not covering your business bases.

When starting a group or expanding into a new facility, what legal and financial areas do hospitalists need to address?
The first thing they have to do is get a good handle on the economics to make sure that the business is viable. There are accountants, practice managers and billing companies that all have a good idea as to what the costs are going to be, what the payer mix is and what the collection rate will be from third-party payers.

They can generate an estimate—referred to as a pro-forma in accounting circles—as to what the group can expect to collect. From there, groups get an idea of the type of subsidy they will need from the hospital.

Do you run into groups that don’t do that front-end leg work, figuring that they’ll have more business than they can handle?
Exactly. But if the hospitalists haven’t assessed the market, they end up losing money before they even start.

That’s why groups need an accountant who is experienced in working with medical practices. I also recommend that they use some type of human resources firm to manage payroll, benefits and employee relations.

They’ll also want experienced legal counsel before they get started to set up the contracts and the business structure, and to prepare certain must-have documents. Those documents cost money, but they’re worth paying for.

What are those legal documents?
The basic documents spell out how the shareholders will divide the money and what happens in a dispute when someone new wants to buy in—or an original shareholder wants to sell out.

As far as business structure, the important issue is ensuring that the group is set up for the hospitalists’ protection so that they’re not personally liable for the business side of the practice. It’s absolutely key that the entity, not the physicians themselves, enter into contracts with hospitals and with vendors.

Groups should also have employee handbooks and all of the protocols that you normally would use to run a business. What is your sick time policy? What is your privacy policy? What is your compliance policy with regard to billing?

Hospitalist groups also need policies on handoffs, both internally and on discharge. This is an area that’s fraught with malpractice risk. Additionally, Medicare and—at least in New York—Medicaid require that billing entities have a written corporate compliance policy.

Then, because the hospitalist group directly interacts with the hospital, it needs to ensure that contracts are compliant with Stark law, the anti-kickback statute, and with not-for-profit law, which the hospital is going to care about. For example, the applicable Stark law provisions prohibit renegotiating the contract during the first year, so you can’t go in and change things after six months if the original terms are not working out.

What should groups do as they grow their business and add new service lines? Can they revisit their financial support from the hospital?
They absolutely need to redo their subsidy. While the Stark and the anti-kickback rules limit renegotiating a contract for the same services within a year, adding new services completely permits a hospital group to open up a new contract for those services.

I would recommend a separate contract for just those new services with an expiration date that is consistent with your master contract. You’d then subsequently roll that separate contract into the master one.

What areas should that separate contract cover?
The same as in the master contract: What exactly are the responsibilities? How will the hospitalist group be paid?

How about new staff? As groups grow, do they fail to account for new personnel?
Your contracts should anticipate growth so that when your business costs increase based on increased numbers, additional staff will be included in the form of an increased stipend.

There’s another issue related to new staff. As groups get bigger, you get a larger number of physicians who all bring their own personalities to the table. Early on, a group of three or four very good friends who know they can work together decide to start a hospitalist group, so there already is a tested relationship. As you start hiring new people, you don’t have that tested relationship and there can be problems.

New personnel also increases the need for hiring ancillary services, billing people and administrators, all of which makes the management of the business more complex. Large groups should consider professional human resource consultants to make sure they’re compliant with employment laws.

What kinds of problems do groups run into if they don’t elect the right business structure or legal protection?
The big one is breach of contract, which can happen in many ways. Here’s a common hypothetical situation: The hospital contracts with the new group to provide hospitalist services for $600,000 a year on a two-year contract. But the group fails to provide the level of promised services, thereby breaching the contract.

Meanwhile, the hospital has to hire locum tenens physicians, which ends up costing the hospital about $1 million to cover the breach instead of the $600,000 that was allotted for hospitalists. That means the hospitalist group is liable for that extra $400,000.

If you’re a legal entity, you bankrupt the entity, which effectively has no money. If you’re not properly structured, the hospitalists could be personally liable, so it’s absolutely essential that the hospitalist group contract with a hospital as an entity with limited liability. And any physician who doesn’t know what “an entity with limited liability” means definitely needs a lawyer!

The other area is contractual arrangements among shareholders that deal with resolving disputes. I have seen disasters where there are no buy-sell agreements in a two-person group where each has a 50-50 vote. Neither party was on speaking terms with the other, neither wanted to sell or buy the other out, and for months, the practice was essentially paralyzed.

Speaking of breach of contract, many groups find that the volume of a new service line quickly outstrips projections. How can groups protect themselves in such cases?
In the contracts that I do, I build in a cap so that when a service exceeds an average of X number for a certain period of time, the parties can renegotiate.

Another potential breach-of-contract disaster can occur when half the hospitalist group decides to leave en masse. This is another occasion when it’s essential to be a legal entity, so a hospitalist’s house won’t be on the line.

Most of these cases don’t reach litigation because the hospital and the group work it out themselves. The key is maintaining a good working relationship with the hospital and having good communications. If half your staff gives you their 90-day notice, don’t wait until the 88th day to tell the hospital.

Bonnie Darves is a freelance writer specializing in health care. She is based in Lake Oswego, Ore.
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