Neil Caesar, J.D.
MANAGED CARE January 1997. ©1997 Stezzi Communications

Neil Caesar, J.D.

The new rules of managed care require many physician groups to reassess their internal group practice structures. The dangers of ignoring this assessment may be greatest when a group is considering merging with other physicians or being acquired by a health system, an HMO, a management services organization or a physician practice management company.

Today's flood of practice acquisitions and realignments is unprecedented. While outright acquisitions may not continue at their recent torrid pace, some significant realignment of medical practices is happening in most markets. If a medical group's shareholders' agreement and bylaws were written more than a few years ago, chances are that the corporate documents do not adequately deal with the issues of acquisition, merger or integration with other providers. Who makes decisions about these sorts of opportunities? Who can veto a sale? Must approval be unanimous? How would any profits from the acquisition be allocated? Let's explore this situation in more detail.

The prices offered for medical practices continue to soar to stratospheric levels in many markets. (Some of these lofty prices may not withstand scrutiny under the anti-kickback and Stark laws, but that is a topic for another column.) Such numbers may well make groups receptive to acquisition or buyout. Even in the event of a merger between two groups, the groups' values may be disparate enough for some of the physicians to receive profit distribution as part of the deal.

However, within the medical group there may be some members who will listen to a sales pitch about a potential opportunity but remain unmoved. Sometimes their reluctance is focused on the specific opportunity, and sometimes they are unreceptive to any sort of change.

Majority or unanimity?

A medical group must first decide whether "extraordinary decisions" like this can be decided by majority vote of the group's shareholders or partners, or whether a larger number must agree for the action to be taken. (This is called a "super majority" in corporate law.) Some groups require unanimity for such decisions, even though that may mean that good opportunities are passed over because of some disagreement. Other groups are content to require a two-thirds or three-fourths majority for these decisions to carry.

Do not leave the question of how such major decisions should be made until it's time to make one. If there is disagreement about whether to sell or merge a medical practice, having the decision-making procedure set out clearly in writing can help defuse any tension that may exist among the physician co-owners. Otherwise, the majority physicians may come to resent the one or two holdouts who threaten the new opportunity. Conversely, the dissenters may find themselves inappropriately burdened with guilt for being out of step with the majority preference. When a clear decision-making procedure is in place, the prevailing physicians can at least point out that "we all decided that we wanted this sort of decision to go through this procedure, because this procedure reflects our group personality and philosophy. You certainly may be disappointed by the decision, but it was not unfair."

Problems occur because most medical group shareholders' agreements contemplate changes in co-ownership only in the context of internal growth. Groups often decide that unanimous agreement is required when it's time to promote an associate to co-ownership status or to buy back the stock of a departing physician. But a decision to sell out or merge with other providers can be just as serious, potentially causing group members to reveal a fundamental rift in goals and philosophy. If a medical group whose physicians mostly preferred to accept a buyout offer instead finds itself forced to maintain the status quo because of one or two holdouts, lingering resentments may become a wedge that destroys the group. An up-to-date shareholders' agreement may even distinguish among various kinds of major decisions. Thus, co-ownership issues and acquisition-merger-divestment issues could have different requirements for approval.

There is no right or wrong answer to this problem. Some groups may conclude that a buyout decision is even more important than promoting an associate physician to co-ownership status, and therefore that one or two dissenting physicians should be allowed to veto a proposed sale or merger. Just be sure that you consider the ramifications carefully. Obtain consensus among your physicians, and then include the new rules in your shareholders' agreement — before you need to make the major decision.

It is also important that the shareholders' agreement address fair treatment for the dissenting co-owners. May they leave the practice if they disapprove of the acquisition? Will the practice waive any non-competition provisions? Be careful here. If you allow departing physicians to take part of the practice's patient base, this may reduce the sale value of the practice, and may even place the entire transaction in jeopardy.

Another problem exists when the buyout provisions in the shareholders' agreement set a value for the stock far below the "per share" value that will be paid as part of a practice acquisition or merger. If a dissenting shareholder wishes to withdraw from the practice because of the adverse vote, are his shares considered to have the original formula value or the acquisition value? Many states have "dissenters' rights" or "minority shareholders' rights" statutes that obligate majority shareholders to treat minority owners fairly. Typically, these state rules simply require that minority shareholders be treated on a consistent basis with the majority. But such laws will not answer clearly the question of whether a withdrawing minority physician-shareholder should be entitled to a buyout at the higher value.

The only clear solution is to specify precisely what should happen in the event of a withdrawal. For many groups, the answer will be to keep the old, presumably lower formula in place for any withdrawals. After an acquisition, the physicians will typically be bound for an employment term, with some kind of restrictive covenant in the event of their departure, or in the event of their departure before a certain amount of time has passed. Thus, a dissenting doctor who wished to wait until after the acquisition before withdrawing (to obtain the higher stock valuation from the sale) would be stuck by the terms of the sale agreement and/or subsequent employment agreement regarding non-competition.

Neil B. Caesar is president of The Health Law Center (Neil B. Caesar Law Associates, PA), a national health law/consulting practice in Greenville, S.C.

Managed Care’s Top Ten Articles of 2016

There’s a lot more going on in health care than mergers (Aetna-Humana, Anthem-Cigna) creating huge players. Hundreds of insurers operate in 50 different states. Self-insured employers, ACA public exchanges, Medicare Advantage, and Medicaid managed care plans crowd an increasingly complex market.

Major health care players are determined to make health information exchanges (HIEs) work. The push toward value-based payment alone almost guarantees that HIEs will be tweaked, poked, prodded, and overhauled until they deliver on their promise. The goal: straight talk from and among tech systems.

They bring a different mindset. They’re willing to work in teams and focus on the sort of evidence-based medicine that can guide health care’s transformation into a system based on value. One question: How well will this new generation of data-driven MDs deal with patients?

The surge of new MS treatments have been for the relapsing-remitting form of the disease. There’s hope for sufferers of a different form of MS. By homing in on CD20-positive B cells, ocrelizumab is able to knock them out and other aberrant B cells circulating in the bloodstream.

A flood of tests have insurers ramping up prior authorization and utilization review. Information overload is a problem. As doctors struggle to keep up, health plans need to get ahead of the development of the technology in order to successfully manage genetic testing appropriately.

Having the data is one thing. Knowing how to use it is another. Applying its computational power to the data, a company called RowdMap puts providers into high-, medium-, and low-value buckets compared with peers in their markets, using specific benchmarks to show why outliers differ from the norm.
Competition among manufacturers, industry consolidation, and capitalization on me-too drugs are cranking up generic and branded drug prices. This increase has compelled PBMs, health plan sponsors, and retail pharmacies to find novel ways to turn a profit, often at the expense of the consumer.
The development of recombinant DNA and other technologies has added a new dimension to care. These medications have revolutionized the treatment of rheumatoid arthritis and many of the other 80 or so autoimmune diseases. But they can be budget busters and have a tricky side effect profile.

Shelley Slade
Vogel, Slade & Goldstein

Hub programs have emerged as a profitable new line of business in the sales and distribution side of the pharmaceutical industry that has got more than its fair share of wheeling and dealing. But they spell trouble if they spark collusion, threaten patients, or waste federal dollars.

More companies are self-insuring—and it’s not just large employers that are striking out on their own. The percentage of employers who fully self-insure increased by 44% in 1999 to 63% in 2015. Self-insurance may give employers more control over benefit packages, and stop-loss protects them against uncapped liability.