How to craft contemporary terms for partner-track associate physicians

Negotiation and hiring practices greatly influence the odds of a successful placement.

John B. Pinto

“A verbal contract isn’t worth the paper it’s written on.”

– Samuel Goldwyn

Back in the day, not quite a generation ago, there were fewer ophthalmologist job listings and more job seekers. A newly employed ophthalmologist could expect a desk, a mug of strong coffee and a pat on the tush: “Work hard, behave yourself, and someday you just might make partner — on terms you needn’t worry about now, kid.”

Fast forward to 2011. The current environment is one of fast-rising senior patient demand, retiring surgeons who are themselves boomer age and more abundant job openings, all colliding with the last decade’s drop in residency training slots and a less workaholic, more demanding cohort of new grads.

Available eye surgeons, especially those with talent, professional zeal, and glaucoma or retinal fellowships, are increasingly hot property. Their bargaining power is not yet quite up to the level of free-agent athletes, but these young surgeons are now hiring virtual agents — such work for one side or the other is now fully one-third of my caseload — who are bidding up employment packages and locking in eventual partnership terms in response to a shifting market environment.

General ophthalmologists in a position to drive a hard bargain are now commanding base wages well above $200,000, and selected subspecialists are cresting guarantees of $400,000. Just a decade ago, these figures were $150,000 and $200,000, respectively.

Such contemporary figures can be positively shocking to 60-something doctors who were unlikely to crack a six-figure base salary when they first entered practice. The deals inked today are not only financially generous but also, of necessity, exquisitely detailed as to future ownership terms.

Typical financial, benefits packages

Base compensation during the initial 1- to 4-year (average: 2-year) associate period for full-time general ophthalmologists now has an infrequently seen floor of about $125,000 for applications to big-city practices in over-doctored plum markets to a ceiling of as much as $300,000 in less desirable, often rural locations.

Because refractive surgery volumes have softened in recent years, there is only a small premium over generalist base wages for corneal subspecialists; this is likely to continue. Glaucoma fellows can routinely command base wages in the $250,000+ range, as can oculoplastic subspecialists. Medical retinologists are in the same bandwidth, while surgical retinal provider base wages can stretch to as much as $400,000. Compensation for pediatric fellows is a bit of an anomaly. There is a great paucity of providers, so even if their economic contributions are modest compared to other domains, such doctors can sometimes enjoy a premium starting wage of $200,000+ that is unlinked to their financial production and driven more by filling an unmet community need and rounding out the bench of a comprehensive subspecialty practice.

Neuro-ophthalmologists are so infrequently seen in private practice as to not be amenable to development of an average base wage.

The typical base compensation package is augmented by a bonus. More than half of the time, the bonus is couched simply in terms of a percentage of excess collections. For example, “The associate will be paid 35% of collections in excess of 2.5-times base compensation.” The bonus percentage is typically lower than the profit margin of the practice. Base and bonus terms will commonly counterbalance each other, such that young doctors requiring, or commanding, a high base will get a relatively low bonus and vice versa.

The base and bonus are routinely supplemented with the following benefits:

• Relocation expenses in the range of $10,000
• Personal and family health insurance
• Four or 5 weeks of combined vacation, sick leave and continuing education time
• Reasonable professional society, hospital and related dues
• A $3,500 to $5,000 stipend for continuing education materials and meetings
• Malpractice insurance
• Business cell phone
• Funding to reach out to prospective referral sources

Partnership terms increasingly transparent at the outset

It is typical to spell out, in significant but unpromised detail, what prospective terms in principle are on offer for a candidate. Neither party is commonly bound to these terms, however. If practice fortunes change or the parties are incompatible, an offer of partnership is not extended or we start all over again to develop terms that are more in keeping with current circumstances.

Here is a generalized approach to buy-in candidacy, setup, timing and terms:

1. In only a minority of situations today is the new doctor given a stripped-down employment agreement and told, essentially, “Trust us — when the time for partnership comes, we’ll let you know the details.” In today’s environment, with more open job positions and fewer MD and DO applicants, candidate partners typically receive an outline of prospective nonbinding buy-in terms at the time they first become partner-track associates. Such nonbinding, good-faith terms are generally contained either in the body of the associate’s initial employment agreement, in an addendum to that agreement, or in a separate letter or letter of intent. In addition to describing the buy-in terms, it is typical today to also hold out the anticipated owner compensation methodology, the approach used to buy out retiring partners, and something about practice governance and decision-making procedures. This is either conveyed as an informal narrative or by simply showing young doctors and their advisers copies of the existing agreements for the practice.

2. In a few practices, associates matriculate to ownership after just 1 year or less. Two years is the most common hallmark; 3 years or longer is seen in a minority of settings. Keep in mind that a partner-track doctor is admitted to partnership at the board’s pleasure. It is not uncommon for an associate to be held back, for reasons such as adverse production levels or deportment, and for the partnership opportunity to be delayed or even durably withdrawn, with the doctor remaining a durable associate or leaving the practice. Only a little more than half of the time does the associate “make partner.”

3. In some practices, a minimum productivity threshold is required to become a partner. It is difficult, where the value of the practice is high due to its scale and success, for a young doctor to be able to afford to buy an equal share before reaching $1 million or more in personal collections. Such revenue thresholds, which can be expressed as a finite dollar figure or as a percentage of existing average partner revenue (70% is typical), may mean that a new doctor cannot become a full partner until well past the typical 2- to 3-year pre-partner period.

4. The percentage of the core practice a new partner is allowed to buy into varies from one setting to the next. Most commonly, even if not yet on par with the revenue levels of existing partners, a young doctor is furnished an equal share of the practice. Less often, associates are allowed to buy a less-than-equal share, more in keeping with their pro rata revenue production (eg, a doctor generating 15% of revenue in a three-doctor practice buys an initial 15%, not 33.3%, and is allowed to buy more of the practice later if his or her production increases).

5. As for the buy-in valuation methodology, the following generic approach is typical.

• Tangibles — medical and business equipment, furnishings, fixtures, etc. — are valued in one of two ways:

A. Depreciated on a straight-line 10-year basis with a residual 20% value for all items. This approach typically undervalues medical equipment, overvalues everything else, but comes out close to the results of a formal appraisal.

B. Assessed by an appraiser on or off site.

• Goods sold, pharmaceuticals and medical supply inventory (within expiration date) are valued at their invoiced price.
• Accounts receivable are valued in one of two ways:

A. At the recoverable amount for the entire practice based on a consensus of billing staff and the practice accountant, and then rolled into the tangibles price and applied pro rata to the new partner’s share of the total practice.

B. Valued for specific candidate partners, so that they are only buying their own receivables, not a pro rata share of the total practice receivables. This is sensible in the case of young doctors who are still much less productive than their senior partners, and who, under any production-biased, largely eat-what-you-kill formula, are not going to be enjoying earnings flowing from the group overall but from their own lower personal production.

• Cash on hand in any working accounts is added in at face value.
• Goodwill is obviously the most common sticking point. There are several variants seen; these are the most common:

A. In the case of a distressed or geographically remote practice, goodwill is typically discounted to zero or nearly zero. At present, this is the case in about one-quarter of transactions I see.

B. In “average” practices with midrange profitability, market durability and future prospects, located in markets that are neither hard nor easy to recruit to, goodwill pricing is commonly set at an agreed percentage of annual profit available for physician compensation (25% to 100% is typical) or an agreed percentage of revenue (±30% is typical), in either case, averaged over the past 1 or 2 years. The resulting figure is the goodwill of the overall practice, and the new partner pays a pro rata share.

C. In an increasing number of settings, we see the goodwill value component decoupled from the core practice buy-in and a post-transaction charge being assessed against the new partner’s earnings. A common approach is 10% withheld per year for 5 years and distributed to the other partners. In some variants, a descending percentage approach is used (eg, 20% in year 1, 15% in year 2, 10% in year 3 and so on.) This post-transaction approach is, again, favored in settings where there is a revenue disparity between junior and senior partners.

D. In a few exceptional practices that have high profit margins, a highly desirable location, a dominant market share, great contracts and exceptional provenance, a goodwill premium to the B and C approaches above is charged. In recent years, I have never seen this go above 150% of annual profits (50% is a more typical midline value).

• All of the above value components are added up, less an offset for all accounts payable, liens, notes and other liabilities.

6. Payment terms typically have the new partner executing a note carried by the practice’s existing partners at prime plus 1% for anything from 3 years to 10+ years, the duration being adjusted up or down to make payments affordable for the young doctor and his or her family. It is less common, particularly in today’s tough business financing environment, to see third-party bank financing used, unless a cohort of peri-retirement doctors are selling out to the next generation of providers.

7. Turning to the ancillary segments of a practice (buildings, ASCs, optical, equipment leasing corporation, airplane leasing corporation, research divisions, etc.), the general guidance is that one wants the new doctor to eventually own a share of all of these. However, this is bounded by two issues. First, in the case of costly buildings and other business elements, it is often impractical for young doctors to buy in at the outset — they simply do not have the earnings stream to do so. This element of the buy-in is commonly delayed. Second, in the case of highly profitable ASC facilities, it is typical for founding shareholders, who took the original development risk, to want to enjoy a few extra years of outsized dividends. Accordingly, in a majority of settings, we have new practice partners not buying into the ASC component of the enterprise until 1 to 10 years after they become a new practice partner, and in some cases, the founding doctors retain a disproportionately large ownership share for many years past this point, even past their retirement from surgical care. (Note: The latter is a useful tactic in settings where the young doctor is being allowed to buy the practice for a reasonable discount as an incentive to relocate to a less attractive community.)

Relationships, feelings and the big picture still prevail

Of course, it is not just about money. In today’s seller’s market for surgeon talent in most areas (with prominent exceptions in Boston, New York, Chicago, Los Angeles, San Francisco and the like), any well-advised job-seeking doctor is looking at all of the variables beyond financial that determine whether the pending transaction is favorable or not. These variables include:

• Doctor’s and spouse’s fit with your community
• Compatibility with existing doctors and staff
• Level of support expected to build a new practice
• Historic practice successes and failures
• The first-person reports of prior partner-track doctors
• How much of the practice the new doctor will be able to buy
• Whether an ASC will be available for purchase (and how soon)
• Buy-in pricing and affordability in the context of anticipated post-partnership earnings
• Buy-out terms for retiring owners
• The strength and tenure of practice administration
• Anticipated voice and influence in the boardroom

If any one of these closely linked variables are especially negative or they do not all add up to something quite positive, the typical candidate will move on to the next opportunity. And your practice will be left to start all over again with an increasingly frustrating search for talent.

As power in the negotiation process slowly continues to shift to new graduates and mid-career job seekers, your negotiation and hiring practices should be in line with these general guidelines to increase your odds of a successful placement.

• John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. Mr. Pinto is the country’s most published author on ophthalmology management topics. He is the author of John Pinto’s Little Green Book of Ophthalmology; Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement; Cash Flow: The Practical Art of Earning More From Your Ophthalmology Practice; The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees; The Women of Ophthalmology; and his new book, Legal Issues in Ophthalmology: A Review for Surgeons and Administrators. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; website: www.pintoinc.com.