Disclaimer: As with many client case studies, the names of the people have been changed to protect the attorney client information. However, the facts and laws are real and should be considered accordingly.
In the world of health care and medical practice management, the term “Medical Director Agreement” is often encountered. However, as demonstrated by a recent case, this term can be misleading and may not always represent what it seems. This article explores a case study involving a medical professional, whom we’ll refer to as Dr. Gump, who nearly signed a detrimental agreement without proper legal review. This analysis will delve into the issues identified and offer insights on best practices for navigating such agreements.
The Background
Dr. Gump, a respected physician located in California, sought ByrdAdatto’s legal advice with a seemingly simple request: “Please review this Medical Director Agreement before I sign it tomorrow.” This request prompted an immediate examination, and it was soon discovered that the document was fraught with issues.
Medical Director Agreement vs. General Partnership Agreement
Medical Director Agreements typically establish a contractual relationship between a physician and a medical entity, where the physician provides oversight and guidance for medical services offered by the entity. However, the term “Medical Director Agreement” can be ambiguous and may sometimes encompass a variety of contractual arrangements, some of which may not be in the best interest of the physician.
In Dr. Gump’s case, the “Medical Director Agreement” presented to him was not an actual Medical Director Agreement but rather a general partnership agreement. This distinction is crucial because the legal and financial implications of a general partnership are significantly different from those of a Medical Director Agreement.
The Red Flags
Upon ByrdAdatto’s initial review, several concerning aspects of the document were identified.
Brevity
The agreement, titled “General Partnership Agreement,” was only seven pages long and involved a partnership between Dr. Gump and an entity owned by a nurse practitioner, Ms. Jenny. The brevity of the document for the type of arrangement contemplated was an immediate red flag.
Wrong Agreement
Ms. Jenny had asked Dr. Gump to be a medical director and promised delivery of a Medical Director Agreement. The document Dr. Gump received was a “General Partnership Agreement” rather than a “Medical Director Agreement.” This was a major red flag. The agreement proposed a general partnership which is not a contract regarding supervision of medical services, but is an agreement to be partners.
Additionally, a general partnership involves significant risks, including unlimited liability for all partners. This contrasts with the more controlled liability typically associated with medical director arrangements and was unsuitable for the intended role of Dr. Gump as a supervising physician. In a general partnership, all partners share equal responsibility and liability for the business’s debts and obligations. This means that if the business incurs liabilities or debts, such as a lease or equipment costs, the partners could be held personally responsible. Dr. Gump, if he had signed this agreement, would have faced potential personal liability for the lease, equipment, and any other business debts incurred by the practice. To make matters worse, Dr. Gump would have taken all this risk for a flat monthly fee, rather than a share in profits as is typical in most partnership arrangements.
Unaddressed Details
The general partnership agreement failed to cover the necessary clinical and business details, raising concerns about compliance and clarity. Effective agreements for a medical director typically contain details covering various aspects of the arrangement, including liability, clinical boundaries, financial arrangements, and operational procedures. An incomplete document not sufficiently addressing these critical components leaves parties vulnerable to unforeseen issues. Worse, it raises the risk that expectations are not aligned (because they were not discussed) and unmet expectations are the death nail to many business arrangements.
Legal Compliance
The agreement indicated a partnership with a limited liability company (“LLC”) owned by Ms. Jenny. This raised additional concerns as California limits the types of entities which can practice medicine and who can own such entities. A professional corporation (“PC”) may practice medicine in California and ownership is limited to licensed physicians and allied professionals, including nurse practitioners like Ms. Jenny. However, allied professionals are limited to owning no more than 49% of the PC and their number cannot exceed the number of physician owners. As such an LLC is not authorized to own or be a medical practice in California. Ms. Jenny’s LLC ownership complicated the legal validity of the proposed partnership.
The Solution: The MSO Model
Faced with these significant issues, ByrdAdatto advised Dr. Gump against signing the agreement until further discussions could be held, and the parties could agree to a viable alternative.
Given the problematic nature of the general partnership agreement, ByrdAdatto proposed an alternative arrangement—the Management Services Organization (“MSO”) model. Under this model, the PC (owned by Dr. Gump) and the MSO (owned by Ms. Jenny) enter into a management services agreement (“MSA”). The MSO handles administrative tasks such as billing and staffing, while the PC retains control over clinical decisions. Under the MSO model, this approach aligned with regulatory requirements and reduced Dr. Gump from undue personal liability as it relates to a general partnership model.
Advantages of the MSO Model
A MSO is an entity whose purpose is to provide management, administrative, and support services to other businesses. In the health care context, the MSO is performing these services for health care entities. Legally, an MSO model consists of two entities and a contract. Specifically, the MSO entity and the professional entity are the two distinct legal entities involved, and the model is operationalized through the MSA.
Because an MSO is a non-professional entity, it can be organized as various types of non-professional entities, such as corporations, limited liability companies, or limited partnerships. From a health care regulatory standpoint, ownership can be held by a diverse range of parties, including entrepreneurs, physicians, dentists, non-practitioners, other businesses, individual investors, and private equity firms, allowing for broader business flexibility without violating ownership regulations. The MSO model helps avoid the extensive personal liability associated with general partnerships, as the medical practice and the MSO are distinct entities with separate responsibilities.
To understand the MSO model, consider a typical health care practice, which can be divided into two core operations: clinical and administrative. The MSO model distinguishes these functions by assigning the professional entity to handle clinical operations and patient care, while the management entity oversees administrative tasks and business operations. Legally connected by the MSA, the professional entity contracts with the MSO to provide management, administrative, and support services for a fee. The MSA is crucial as it defines the roles of each party and ensures compliance by aligning the substance of actions with the contract’s terms. It also governs the flow of money, which is essential for compliance with state and federal laws and for aligning the business goals of the parties involved.
By operating under the MSO model, Dr. Gump avoids the extensive personal liability associated with general partnerships. The structure ensures that personal assets are protected from the business risks of the medical practice, as well as from the operational risks managed by the MSO. This liability segregation provides a layer of protection for Dr. Gump and other physicians, reducing their exposure to potential financial losses arising from business operations and administrative functions.
You can read more information on the MSO model in our MSO Field Guide.
Legal Takeaways for Medical Director Agreements
This case underscores the importance of understanding the specific legal terms and structures involved in agreements. The term “General Partnership” carried significant implications, including unlimited personal liability, which was not suitable for Dr. Gump’s situation. Here are a few key takeaways to keep in mind:
- Thorough Review of Agreements: Health care personnel should always have legal counsel review any agreement before signing. This ensures that the agreement aligns with their professional interests and complies with applicable regulations.
- Understanding Legal Terms: Familiarity with legal terms and structures is essential. Understanding the difference between general partnerships, Medical Director Agreements, and MSO models can prevent costly mistakes.
- Due Diligence on Ownership Structures: Physicians should be aware of the regulations governing medical practice ownership in their state. This knowledge helps in evaluating whether proposed agreements are legally sound.
- Seek Professional Advice: Engaging legal and financial experts in the early stages of negotiation can help identify potential issues and develop compliant and advantageous agreements.
Navigate Medical Director Arrangements with ByrdAdatto
At ByrdAdatto, we help medical professionals by providing a thorough review health care business arrangements. Our legal team is dedicated to addressing issues with arrangement, and ensuring the arrangements and corresponding partnership agreements are compliant. If you need assistance navigating complex partnership agreements, we encourage you to contact ByrdAdatto.
