In this episode, we share a secondhand account of a surgeon who was forced to sell his practice to an angry patient due to a malpractice lawsuit that exceeded his insurance coverage. Tune in for the positive and negative impacts an owner’s risk tolerance can have on their business’s corporate model. We discuss the angry patients, ways physicians can protect their assets, and reveal if a patient can really own a medical practice as a result of a malpractice lawsuit.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
Intro: [00:00:00] Welcome to Legal one two threes with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to another episode, the Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my co-host Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. Our clients commonly come to us with the latest word on the street that they heard from a friend. This season Brad we will talk about stories with a common legal urban legend and seek to either prove, disprove the legend. This season’s theme is fake or real.
Brad: Yes. And Michael, you know, going off that theme, it is real that you’re older than me, but do you actually know your actual age?
Michael: That’s a weird question, Brad. Of course I do. I’m 29.
Brad: All right. Well, maybe you shouldn’t share with the audience your actual year you’re [00:01:00] born because that might make you have to do some math now.
Michael: And it might reveal my lie, yes.
Brad: Yes. But have you ever had those moments when someone does ask you how old you are and you kind of have to pause for a moment and think about it?
Michael: I for sure do. I’m pretty fortunate in that I was born on a decade year, and so it ends with a zero. So all I have to do is do some very quick math to uh, know what my age is. So it doesn’t happen as often to me as it does to some of my other family members who would be like, I mean, how old am I again?
Brad: And that happens all the time because if you think about it, like for me, I’m like, oh yeah, we all remember, well, at least in New Orleans, we all remember turning 18. And then when you weren’t in New Orleans, we all remember turning 21. And then after, while I was like 30, 35, 40. And so, my kids were once were asking me how old I was, I was like, I don’t know. I’m somewhere between 48 and 49. I can’t remember. And they’re like, oh, okay. And then now once you get past 50, you’re [00:02:00] like, somewhere after 50.
Michael: North 50.
Brad: Yeah. well, Michael, what if I told you that your entire life was a lie and you found out your actual age was different than you thought?
Michael: You mean I found out I wasn’t 29. Oh, wow. That would be sad. Why are you asking me this?
Brad: Well, what if I could tell you I’m going to ask another question real quick. What if I could tell you I could take one to two years off your life and it would be correct?
Michael: Which years would we be taking off?
Brad: Okay. Yeah, I know. Well, keep going with me here. Like, I’ll make a little bit of sense here. Now, very important question. Were you born in South Korea?
Michael: My daughter would love it if I was, because she we’ve documented multiple times is a massive K-pop fan. No, Brad, I was not born in South Korea.
Brad: Okay. Well, in strange but true news. This year, [00:03:00] in South Korea, millions of South Koreans woke up one day and found out they were at least one year younger.
Michael: That sounds like something that would happen in North Korea. Are you creating some sort of metaphor for aesthetic services?
Brad: No, but fair question. For many decades, apparently, South Korea had official government policy was the setting the citizen’s age. And they had this weird system where the day you were born, you were considered one years old. And then the first January of your birth after your birth year, they gave you another year.
Michael: Wait, so I’m going to say this back to you. If you were born in December, you would be age two by February.
Brad: That’s correct. Riley’s not here today, but maybe Cynthia can give you a gold star for participating. So do you have any gold star, Cynthia? She’s saying no, she doesn’t [00:04:00] have any gold stars to give you. But you can imagine this has caused confusion and drama with the welfare eligibility insurance claims and it’s a resource nightmare, basically.
Michael: Okay. I’m still searching for the answer, Brad, of where you’re going with this today. And why are we talking about South Koreans getting younger?
Brad: Well, typically when someone takes something from you, you might not like it, right. But most people would not probably mind if the few of their birthdays were taken away and they find out they’re actually younger than they actually thought they were.
Michael: Yeah. I think generally speaking, that would be celebrated as good news.
Brad: Yeah. So for today’s story, we’re confronted with something of value being taken from you or a person, and most likely it unfortunately doesn’t make you feel younger. And so, this case like a patient taking over your medical practice. So for today’s show, we’re going to address the myth, fake or real, if I get sued from malpractice, the patient could own my practice.
Michael: I did just [00:05:00] have a little thought, shout out to all the South Koreans that thought they’d just turned 21.
Brad: Sorry, you’re
Michael: Not, let’s take this away, Brad.
Brad: All right. Well, Michael, today’s story are main characters of both surgeons, and we’ll just call them Dr. Holmes and Watson.
Michael: Okay. I am assuming Brad, that their full names are Sherlock Holmes and John Watson.
Brad: Do you know them?
Michael: Well, I saw the movie with Robert Downey Jr. and he played Sherlock Holmes, so I learned all about it there. But you know, Brad, just because we’re investigating myths this season does not need mean you need to make the characters named after detectives.
Brad: Fair enough. But what if I told you Dr. Holmes was always analyzing every bit of information that was been put in front of him to the point he would get obsessive over these details?
Michael: I would say I’ve definitely met multiple Dr. Holmes over the years. Yes.
Brad: Well, Dr. Watson was his younger study and had [00:06:00] recently joined Dr. Holmes’s practice, and he was told over the next two to three years that Dr. Watson could become a partner at the practice.
Michael: Can we have a context moment, Brad?
Brad: Sure.
Michael: Okay. So in medical practices, super common for there to be this kind of “partnership track or ownership track” where a physician that joins a practice `will actually be an employee at the beginning for oftentimes a shorter amount of time period, two to three years, and then they’ll have an opportunity to buy in. That’s getting a little jumbled with longer employments that we’re seeing these days with hospital employment, et cetera. But in a traditional private practice setting, that’s a common scenario.
Brad: Yeah, I agree. So, Dr. Holmes aside to attend a CME event in Vegas, that’s for those that don’t know, a Continue Medical Education event in Vegas. And he was there to learn about the latest treatments and trends in the industry.
Michael: Okay. That’s all common.
Brad: [00:07:00] At this conference, Dr. Holmes listened to one talk that terrified him. It was presented by the Mariotti Organization.
Michael: That’s not code for you, is it? You didn’t do this?
Brad: No, it was not my talk.
Michael: Okay. And further context, if I remember from the movie Brad, that professor James Moriarty is Sherlock Holmes’ greatest nemesis. Is that right?
Brad: That’s correct, man. You actually paid attention. You know they wrote books about this before the movie. I don’t know if you did that.
Michael: Oh, really? I was actually trying to cover for you to see how old Sherlock Holmes is because that’s your specialty.
Brad: Yes, that’s true. Well, what happened next was kind of crazy. The Marrioti speaker told the story about a surgeon in California who had a malpractice claim filed by an angry patient. And as the story goes, the surgeon went well, but he still was dealing with this really angry patient.
Michael: Yeah. And so, you know, one of the things that we’ve talked about over the years, Brad, is when you have [00:08:00] an angry person, an angry patient in this current example, you know, what are the things that they do? You know, the first obvious is they come to the practice, hopefully and communicate that to them. But if that’s not enough for them, or they don’t get what they want from them, then they take it elsewhere. And that may be a malpractice lawsuit, it may be a medical board complaint, or they nowadays may go online and express themselves.
Brad: That’s right. Well, right. And so in this story told by the Marrioti organization, the angry patient ended up winning this lawsuit against this California surgeon. And the California surgeon was hit with such devastating amount. He had to pay this angry patient that the amount was so high that it actually surpassed his malpractice insurance caps, which required actually the physician to pay the patient out of his own pocket.
Michael: And so let’s talk a little bit about malpractice cap. So, when you have malpractice insurance, and [00:09:00] most physicians in most states carry malpractice insurance. And if you get sued for malpractice, you have insurance that’s going to cover the cost of your defense and cover you up to a certain point. If the judgment exceeds that, then that means you’re now exposed to having to come out of pocket to pay the rest of the judgment. It’s not actually that common and usually happens in catastrophic scenarios. So, the story you’re telling is not adding up to me right now because I’ve only heard of an angry patient, not a maimed patient. But I’ll pause. This is your story, Brad.
Brad: Well, it’s not my story. It’s the story of the organization the speaker told our California surgeon about this California surgeon and how he had to sell his medical practice to this angry patient to pay off the lawsuit. And now the California surgeon now works for this angry patient who’s not even a doctor, but because the California surgeon didn’t have enough money and didn’t do any asset protection [00:10:00] planning, he now works for this angry patient.
Michael: Wait? What did you just say? Did you just say that the surgeon works for the patient now because of this judgment?
Brad: Yes.
Michael: Now I’d see why you wanted to make it so clear that this was not your story.
Brad: Well, Dr. Holmes, after seeing this presentation was terrified. ’cause he also was a California surgeon and he didn’t want any of his patients to own his practice. So after the presentation, he immediately signed up with the Mariotti Organization to develop an asset protection plan.
Michael: Which I’m guessing is what they were selling.
Brad: How were you there?
Michael: Seems like that it was very effective marketing/speech that was given. So, let’s talk about asset protection too for a moment, because that is important, right? I mean, the risk that any doctor has that they will get a judgment in excess of their malpractice [00:11:00] insurance is real exposure that you have to think about, especially as you become more and more successful in your career. And so, we’ve talked about this on a prior episode. We talked about utilization of an MSO as a part of an asset protection plant. There’s also personal strategies that go with protecting the personal assets through kind of family limited partnerships, trust, et cetera. So I guess that begs the question, did this new plan help Dr. Holmes?
Brad: Well, in some ways it worked and in other ways it did not.
Michael: Super vague, Brad, can you give me a little more?
Brad: Well, part of the, the, the Marrioti Asset Protection Plan, they started forming tons of entities for Dr. Holmes. These, these entities own property, they owned equipment, some entities, own entities.
Michael: Lots of entities. Well, at least it gets complicated.
Brad: Yes. Well, fast forward two years or so after all [00:12:00] this went down, Dr. Holmes hired our firm, and Dr. Holmes wanted us to help develop a buy-in process for Dr. Watson, obviously, to buy into this medical practice. That’s when we first learned about all these multiple entities with assets in a number of different locations. And we basically started needing to map out the purpose of each entity who owned the entity, determine if this is an entity that Dr. Watson was also going to buy besides the medical practice.
Michael: So I’m a little confused. You said, does Dr. Holmes not own all these entities?
Brad: No. Some of these entities were owned by Dr. Holmes’ wife. One was actually owned by his son. And then some were owned by a family limited partnership.
Michael: Well, this kind of connects a little bit to the general Asset Protection strategy we just mentioned. I mentioned this word and you used the vocabulary word “FLP” or Family Limited Partnership. And a Family Limited [00:13:00] Partnership is a type of entity. It’s usually actually technically with a state called a limited partnership, that is built out in a way to protect the assets of the owners. And so, it’s a personal thing that families will often create to hold their non-risky assets. And so, that in of itself is not that uncommon that a doctor has a family limited partnership.
Brad: Yeah, exactly. Additionally, Dr. Holmes was now uncertain which of these entities he wanted to sell to Dr. Watson and was struggling to determine these next steps. Remember, he’s very analytical and further, Dr. Watson now started getting frustrated because with Dr. Holmes, it was taking him forever to tell him how much it was going to be to buy into his practice and really what was he going to buy into.
Michael: Yeah. I mean, we’ve talked in prior seasons about, you know, kind of joining forces and we talked about the four C’s, and just think about how complicated [00:14:00] that would be for Dr. Watson to not really understand what is he buying and what is he getting for that. And so I would imagine that the valuation process had to be a nightmare with this many entities and trying to figure out what the actual value is of the medical practice.
Brad: Yes, you’re correct. Again, a second star for you, Michael. You know, finally, one of the odd aspects of this deal was Dr. Holmes California medical practice was a professional corporation, which is normal, but he had transferred his individual ownership that he had in the PC to FLP, Family Limited Partnership. So it was actually, he no longer owned it directly.
Michael: Well, if this was a spot, the Red Flag season, you would’ve just gotten dinged there, Brad, because that’s a California law issue on Family Limited Partnership owning that. But before I explain why we have [00:15:00] hit a critical moment in today’s podcast episode, this brings us Brad to the myth busting moment for the story of Dr. Holmes and Dr. Watson. Brad, is it fake or real? If I get sued for malpractice, the patient could own my practice.
Brad: Fake.
Michael: Oh man. I’m so relieved. That was pretty wild. While I’m so glad to hear that. But we need to talk more about why that’s so. So, let’s go into a commercial break and on the other side, talk more about why you gave the answer that you gave, that it’s fake. And I want to hear what happened with Dr. Holmes and Watson.
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Brad: Welcome back to the Legal 123s of ByrdAdatto. I’m your host Brad Adatto, my co-host of Michael Byrd. Now Michael, this season, the theme is Fake or Real. And Michael, today we’ve been talking about this Mariotti organization and the impact it had on Dr. Holmes’ practice, and of course, the impact it had on Dr. Watson.
Michael: Yeah. So quick recap. Dr. Holmes has a practice. Dr. Holmes brings Dr. Watson on as an employee at some point along the way. Dr. Holmes is living life going to his medical c m e and goes to hear a speech from the Marrioti Organization. And in that speech, audience, this is not [00:17:00] Brad’s story. This is the story that was heard by Dr. Holmes, that a California surgeon had an angry patient as a result of a procedure that ended up in a lawsuit that ended up in a judgment over the policy limits that ended up making this doctor work for the patient because the patient ended up owning the practice in this “story”. And then Brad, from there, we talked a little bit about that, but you gave the answer that that is fake, that there’s no way that a patient could end up actually owning the doctor’s practice and employing the physician. But before the commercial break, you mentioned some ways that the Marrioti plan had worked and other ways that it did not. So, kind of talk a little bit about some examples that worked.
Brad: Yeah. And we have discussed this other shows you were kind of [00:18:00] referencing this when earlier in the episode about different risk tolerances that people have. And so some people, you know, they’re afraid to step out of the shower in the morning, you know, the people will step out of a perfectly good airplane, and so your risk tolerance is going to drive that fear. And that’s where a good asset protection plan may come in. And depending on how risky you are or risk adverse you are, it’s going to impact potentially your corporate model. For example, medical equipment needing to be transferred or having a new separate entity, that happens, or the entity may be leasing the medical equipment back to the practice. Now, this can add up to a host of other issues when you start moving equipment out of your practice into another entity and you’re leasing back and forth. But again, it can happen that way.
Michael: It’s really easy to go create a new entity and it’s really easy to say, okay, this entity’s going to serve this function and that entity’s going to serve this function. So as you’re using your example, we’re going to create an equipment owned [00:19:00] company, and it’s going to lease the equipment. It’s dangerous to do that without considering the ramifications, as you just alluded to. And if you transfer the equipment out of one, there’s a whole host of issues that can get triggered by that. When you lease equipment back and remember, you own the equipment, all of a sudden you create another entity to lease it to yourself, you might have to start paying sales taxes. That’s probably not what you’re planning to do. There actually can be breach of warranties that can happen on your equipment if you transfer the equipment from one entity that purchased it to another entity. And then, if you borrowed money to purchase the equipment, you could breach your representations and warranties by transferring that without notifying the lender.
Brad: All good points. And you know, alright, strike that. Did I say good points? No, no way. I didn’t mean [00:20:00] that, audience. But for those who wish to limit their liability, it is worth the administrative burden to set up these entities. I mean, you have to go through that process of thinking through it. And you might go further, like on the personal side, you might want to have a strong estate plan, like you have a trust, or as Michael said, a Family Limited Partnership to start protecting personal assets. But there’s a bigger issue, Michael, you noted before we went to break, when we started talking about the flip owning his medical practice in California.
Michael: I mean, there’s the one thing where you create, you don’t think through it and you create these consequences. There’s another thing when you do something that’s flat out not compliant. And so, you know, we’ve talked on other episodes about the corporate practice of medicine. We’ve actually talked about California being a strong corporate practice of medicine State. And one of the rules in California, much like a lot of other States, is that if you are an entity that’s providing medical services, then you [00:21:00] need to be owned by a doctor, or you can be partially owned by an allied health professional, as we’ve talked about before, and a properly owned entity that’s authorized to practice medicine can also end up being an owner. What can’t be an owner is a non-doctor or a Family Limited Partnership. So by creating this asset protection plan and making a Family Limited Partnership, the owner of the practice, this model is now violating the corporate practice of medicine.
Brad: And this is one of the reasons why, I mean, great context too, by the way. This is one of the reasons why I flagged it as false as the patient in this story wasn’t a doctor and therefore in California could not own this medical practice. And in general, Michael, we’re talking about, obviously you brought CPOM into this, but for our audience member, what are some of the other rules or regulations to place that [00:22:00] actually protect physicians just in general with their practice?
Michael: Yeah, this is important to understand because most practices have some level of asset protection planning without even knowing they have it. So an example there is, you have state laws that naturally give some form of protection from creditors, and some states are stronger than others, but there’s something that’s there. There is malpractice insurance that we’ve talked about, and so that’s a great barrier to getting to your personal assets. If you have insurance that covers certain types of risks, today, of course we’re talking about malpractice. Another thing, your actual creditors can create a barrier. So if you have a practice and you have a line of credit in place and the bank has secured your assets, they’re going to fight to protect those assets as well. And so, you have kind of, in a weird sense, your creditors become your allies if you have someone trying to attack your assets. And then on the business side, there is a place for utilizing entities to protect assets and to kind of separate some of the risk. And we talked about this in that prior episode on MSOs, but you can create multiple entities that are well thought out, that you make sure the assets can get from one place to the other. And most importantly, if you’re a medical practice, you want to make sure that you’re compliant, and you can easily mess compliance up.
Brad: Yeah. And we’ve definitely seen physicians forming a whole bunch of different, separate entities and again, for maybe their equipment or maybe their staff or the dirt, the real estate, and then of course the management company. And often, that MSO is kind of the glue that unites all these different businesses that are interwoven with different relationships. And as you mentioned, we did discuss this in other shows. [00:24:00]
Michael: Yeah, the glue plan, Brad. When we last left this story, it sounded like the deal was getting complicated for Dr. Holmes and Watson. What happened?
Brad: Well, unfortunately in this case, pun intended, it didn’t work. The entities were too splintered and not well mapped out as to how the practice was going to pay for, like what entity was paying for what and how the practice was moving funds to pay for that. As such, it made it really difficult to get a good estimate of the overall value of the practice. It came really difficult for Dr. Watson to understand this model as Dr. Holmes was actually having trouble explaining it. And finally, when Dr. Holmes told Dr. Watson that the medical practice ownership also needed to be updated, when we pointed out that the flip shouldn’t be owning it, that was just too much for Dr. Watson to handle, so he actually decided to leave and actually start his own practice.
Michael: Yeah. And really unfortunate chain of events that occurred because they [00:25:00] made things more confusing and complicated by following this kind of tactics presented by the Marrioti Organization. And that’s something to think about because we hear stuff like this and seminars and speeches. So I’d love to hear just your point of view on the approach by the Moriarty organization about kind of this patient owning the practice scenario.
Brad: Obviously like everything, just got to be very careful that when an organization comes out and does a campaign on pure scaring the pants off you, that someone’s going to own your practice and other things like that, just maybe hit the pause button before you go crazy and hire an organization like that. Because in this particular case and audience members, believe it or not, this story is an actual real story. But this is not the only one that Michael and I have come across on this particular issue, and it does impact. A lot of these organizations are not run by attorneys, they’re run by consultants. [00:26:00] They don’t have the health care background to understand why you can’t do certain things. They don’t have the tax background to understand the tax impact. And so it sounds great on paper that you’re having this huge complicated asset plan put in place, but it’s really messy. And although it seems like you’re doing great, but it creates chaos down the road if you’re trying to grow the practice, sell the practice, or add in this case another partner.
Michael: And I’ll just say too, Brad, I mean, the speeches we’ve seen where they’ve kind of put these canned asset protection strategies in place tend to be a one size fits all approach and they’re not personalized to the risk tolerances, as you’ve talked about with the shower versus plane and or personalized to compliance and the actual business of the business owner.
Brad: All good points. So final thoughts today, Michael,
Michael: Brad, if you’re going to lose [00:27:00] some years off your life, it’s a good thing if you’re a South Korean, because you just all of a sudden got younger. Unless you’re 21, as we talked about, that would not be a good thing.
Brad: Fair.
Michael: But if you lose years of your life because you tried to grow a practice and you made a mess and a young doctor ended up leaving and you have to restart again, that’s not good.
Brad: That’s not good. Well, audience members, that’s all the time we have today. Next Wednesday, we’ll continue the quest to determine if a legal myth is fake or real. We’ll bring back series regular Jay Reyero to address fake or real, my company can be taxed as an LLC. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
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Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal [00:28:00] advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
