Lamb McErlane PC partner Vasilios J. ‘Bill’ Kalogredis recently contributed and was quoted in the April edition of DermWorld, a publication by the American Academy of Dermatology. (AAD)

 Powering Down

DermWorld offers a step-by-step guide for physicians retiring from practice.

Article by Ruth Carol, contributing writer.

Opening your practice didn’t happen overnight and neither will be retiring from it. However, with some thoughtful planning, your retirement can be a seamless transition to the next phase of your life.

Starting to think about retirement at least a year in advance is helpful as there are several legal, financial, and administrative tasks that must be tended to before then, noted Faiza Wasif, MPH, the Academy’s practice management manager. It’s best to consider this transition as early as possible because these matters take time to carry out smoothly without negative legal or financial ramifications.

“It could take anywhere from one year to five years to retire, depending on how well you plan it,” stated Bill J. Kalogredis, JD, an attorney and partner at Lamb McErlane, PC, in West Chester, Pennsylvania.

Fanny Berg, MD, a solo practitioner in private practice for 33 years in Wilmington, Delaware, retired in July 2020. Although it took her approximately four months to complete all the necessary tasks, she had been mulling over her options for a few years.

Finding a buyer

If choosing to retire but not closing the practice, finding a buyer is essential. Reach out to potential buyers, including medical groups and group practices, to see if they are interested in buying the practice. Alert local dermatologists and physician groups as they may know of a dermatologist looking to move to, or expand in, the area. “There may be doctors in the community who want to buy your practice…it could even be a competitor,” Kalogredis said. The sale could go quicker if the physician is already practicing in the area and won’t have to move or obtain a license to practice in the state.

If placing an ad with the state dermatologic or medical society is too public of a move, Kalogredis has made confidential calls on behalf of many physician clients. Health care attorneys have a sense of who is buying dermatology practices both locally and nationally, he said. In general, dermatologists do not need to hire a broker to sell their practice because dermatology is a popular specialty, Kalogredis added.

Earlier on, Dr. Berg had considered selling her practice and then working as an employed physician but never found the right situation. She had discussions with various players and had been in negotiations on and off for close to two years with a dermatology group. After deciding to retire sooner than the end of 2020, largely due to COVID-19, Dr. Berg contacted the dermatology group to find out if it was still interested in buying her practice. “Things came together that time,” she said. Dr. Berg was the sixth physician notifying her malpractice carrier that week about accelerating her retirement because of COVID-19.

Evaluating the practice’s worth

There is no one formula used to evaluate what a dermatology practice is worth, Kalogredis said. He looks at two equations: What would a dermatologist earn if they worked for someone else versus what would an owner, who is taking all the risk, earn? What would the buyer earn over and above?

He recommended speaking with an experienced advisor — a health care attorney, consultant, accountant, or broker — to estimate the value of the practice. “You should get a trusted advisor who understands how dermatology practices work,” Kalogredis said. Interested buyers may do their own appraisal. Evaluating their appraisal could be a starting point for negotiations.

“Dermatology practices have a lot of value,” he said. “You don’t just want to walk away and get nothing.” If planning to retire in a year or two, it is essential to maintain the practice and keep it from decreasing in value, he added. That may mean hiring another dermatologist to keep the patient volume consistent. It is never a good idea to just cut back on hours or let referrals dry up. Deciding to work for a while at the practice could also be a selling point for some buyers, Kalogredis noted.

Dr. Berg consulted with an attorney and her accountant to determine the value of her practice. “Some groups are more interested in how many patients you have, and how many biopsies and surgical procedures you do,” she noted. Having an electronic health record (EHR) system made it easy to track the procedures, charges, and reimbursement, she said. When the groups evaluated her practice, they looked at several years to see that she was maintaining patient volume and her numbers were consistent year to year.

Looking beyond price

Selling a practice is not just about the purchase price. The following are other factors that should be taken into consideration.

Assets included in the sale. The contract should specify what items are included in the purchase price, Kalogredis advised. For example, are the equipment, office furniture, artwork, and personal effects included? Who gets the accounts receivable? Generally, the accounts receivable are not an acquired asset (although every deal is different). What happens to the liabilities and post-sale obligations, such as bank loans; lease agreements on equipment; “yellow pages” and service agreements for equipment, billing, staffing, and janitorial services? If the seller owns the building, does the buyer want to buy the building or lease the space? “All of these aspects need to be sorted out and it requires a lot of due diligence,” he said.

Post-sale transition period. Assisting the buyer through the transition process may help ensure that the practice is in good hands. However, that guidance takes time and effort and should be compensated. Consider offering transitional marketing services for a specified period of time for a fee, as part of the contract, Wasif suggested. This guidance not only serves the patients but increases the value of the sale.

Compensation for employed physicians. For a former owner who chooses to become an employed physician at the new practice, Wasif recommends negotiating a compensation plan based on individual performance rather than the owner’s performance. Should the practice start failing under its new ownership, the employed physician’s finances will be protected.

Non-compete clause. If the buyer wants to include a non-compete clause, Wasif suggests making sure that it is reasonable regarding the size of the geographic area and the duration.

Termination and contingency clauses. If the buyer suddenly cannot secure financing to purchase the practice or the seller is having trouble closing, both situations can either delay the sale or increase the cost of it. A contingency clause states that the contract is valid only if a certain event or action (e.g., securing proper funding) takes place by a certain date, Wasif explained. If the event does not occur, both parties are free to walk away from the deal.

Notifying patients

“As a physician, your primary responsibility is to your patients,” Wasif said. Ideally, patients should receive written notice of when the dermatologist plans to retire or close the practice 90 days in advance. She recommends using multiple means, such as mailing a letter, sending an email blast, posting a notice in the office and on the website, updating the office voicemail, and placing a notice in the local newspaper to ensure patients are informed.

If the practice is closing, the dermatologist should provide the names of local doctors the patients can contact for future care needs, she said. Additionally, patients should be told how they can obtain their medical records or have them transferred to another dermatologist. Once the announcement has been made, the dermatologist should stop taking new patients, Wasif added.

“Sending a notice to every patient you have ever seen can be a financial and clerical burden, but failure to notify patients may result in patient abandonment under your state laws.”

Dr. Berg was required to notify patients three months in advance, per state rules. She sent letters and email blasts, posted signs in her office, and ran an ad in the newspaper for three months. “I did my best to reach all of my patients,” Dr. Berg said. She gave patients the option to pick up their medical charts at the office or have them downloaded on a flash drive she would mail to them for those who didn’t want to remain at the practice. Booked eight weeks out, she stopped seeing patients a month before she retired. The group that purchased her practice sent a mailing to patients introducing themselves and the date they would start seeing patients.

“Sending a notice to every patient you have ever seen can be a financial and clerical burden, but failure to notify patients may result in patient abandonment under your state laws,” Wasif warned. Patient abandonment is a malpractice claim that can cost a dermatologist their medical license. “You would be reported to the National Practitioner Data Bank and it could ruin your ability to get another job down the road and get malpractice insurance,” she said.

Maintaining records

Whether closing a practice or retiring from one, dermatologists are required to retain their patients’ medical records, Wasif said. Typically, adult records must be maintained for at least seven years after the last visit, even if the patient is deceased. Records of minors should be maintained for a corresponding period of time past age 18 or 21 in most states. The Academy recommends that dermatologists check with their legal counsel and malpractice carrier to verify the state’s statute of limitations and record storage and handling requirements, she added.

If closing the practice, a dermatologist may have to pay another physician or local hospital to retain the records, Kalogredis said. No matter who is keeping the records, the dermatologist is obligated to let patients know how to access them, he stressed. That may mean setting up a telephone line to assist patients. The state medical board must be notified of the storage location six months prior to the practice shutting down, Wasif added.

If the practice is sold, the new owner will acquire all the medical records, Wasif explained. The contract will need to document the transfer of the records to the new physician, who will be responsible for complying with all applicable laws for storing, protecting, and releasing the records. It also should state that the seller will have reasonable access to the records if needed for a liability claim or another event.

Arrangements for the transferring of records must be HIPAA compliant, Wasif noted. If being kept in a storage facility, it should have experience managing secured patient information along with HIPAA agreements. Having an EHR system simplifies this process, she added.

Dr. Berg had an EHR system for 10 years, but also had paper charts as a backup. That turned out to be advantageous for the group that bought her practice because it used a different EHR system that was incompatible with hers.

Managing staff

Staff — often the backbone of any well-run practice — should be notified as soon as possible, Wasif noted. Providing the details of the decision and timeline can be done in writing. Another option is to convene a meeting to thank staff in person for their years of service and professional dedication, answer their questions, and address their concerns, she said.

Just make sure the deal is finished before telling staff, Kalogredis suggested. Informing staff 30 days in advance is reasonable and will give them time to find a new job if they choose, he said.

“Don’t forget to make time to address the emotional needs of your staff while working through these legal and financial requirements.”

Even when the practice remains open, changing ownership can be difficult for the staff, Kalogredis added. “Don’t forget to make time to address the emotional needs of your staff while working through these legal and financial requirements,” Wasif advised.

Dr. Berg had been talking about retirement, so it was no surprise when she convened a meeting to tell her staff one month before she notified patients about her plans. Dr. Berg considers herself fortunate to have had little staff turnover throughout the years; one staff member was with her 32 of the 33 years she was in practice. Staff was given the option to interview with the new group or start looking for a new job right away. “They all opted to stay until my last day,” she said. “That made me feel like I had taken good care of the staff.”

Tying up loose office ends

If the new owner is not purchasing all the equipment, consider selling the pieces as a package, Kalogredis said. Don’t expect a lot of money for them because newer models are likely on the market, he said. Talk to peers or advertise in a medical journal. Office furniture can be handled in the same manner. If the equipment is leased, the vendors should be notified as stipulated in the agreement.

Inform all third-party vendors of intent to close/sell the practice and provide a forwarding address if there are payments to fulfill after the closing, Wasif said. Review all policies with third-party vendors to determine appropriate termination schedules.

DermWorld classifieds

Need to sell something? Learn how you can place an ad in DermWorld at www.aad.org/classifieds.

Among the vendors that should be notified are those for the EHR, business-related insurance, office equipment, telephone lines, payroll, janitorial services, and utilities as well as office, pharmaceutical, and medical supplies.

The new group bought most of Dr. Berg’s office equipment and furniture. Anything the group didn’t buy she sold to a local physician group. Dr. Berg sold the remaining lasers, all of which she owned, through a broker. She negotiated her office lease to finish when the new owners took possession. They coordinated the phone lines and utilities for a seamless transfer. “The fact that it was a turnkey setup was very appealing to the group,” she said. After processing tax information for staff in early 2021, Dr. Berg ceased her agreement with the payroll vendor. She also was waiting to hear about a small personal protective equipment loan she received to pay employees when the office had to close in the early days of the COVID-19 pandemic. Fortunately, it was a small loan that the government ended up forgiving.

Tending to legal matters

When physicians retire, they must inform their malpractice insurance carrier and find out if they have tail coverage. Tail insurance extends coverage for a specified amount of time after a policy ends. “If you have a claims-based policy, you will need to purchase tail insurance,” Kalogredis said. “If you have occurrence insurance, you don’t need tail insurance. If you’re with the same insurance company for a number of years, you often have a pre-paid tail.” When Dr. Berg turned 58, her malpractice carrier bought her tail insurance.

If uncertain as to the type of coverage, check with an insurance agent or lawyer before canceling anything, Wasif said. “Tail coverage must be negotiated as soon as possible with your malpractice carrier. The most important factor is to not leave yourself unprotected, even if you are no longer practicing,” she added.

Two to three months prior to retiring, notify all third-party payers, Wasif said. “Determine whether you will have to sign new insurance contracts with them,” she said. If seeing Medicare or Medicaid patients, notify the Centers for Medicare and Medicaid Services (CMS). Send a letter to the state Medicaid and Medicare director as well as the national CMS office.

Retiring physicians must place their National Provider Identifier (NPI) number in inactive status. This is done through the National Plan and Provider Enumeration System. Dr. Berg has chosen not to deactivate her NPI number, which is good through 2022, just yet. Similarly, she is holding on to her medical license, which is active until summer 2022. She may decide to do locum tenens or go back to work for one or two days a week if she gets bored. “I’m not ready to shut the door on that aspect of my life,” she said. “I need more time; it’s only been six months.”

Renewing a medical license after it expires can take several months and require paying lapsed fees. Many physicians maintain their license for a few years and stay current on their board certifications in case they return to practice. “In some states, you have to carry malpractice insurance if you’re going to retain your license,” Kalogredis said. Check with the state licensing board.

The federal Drug Enforcement System (DEA) must also be notified in writing 90 days in advance of retirement, Wasif said. Return any unused DEA forms and prescription pads with a notification letter to the State Bureau of Narcotics and Enforcement. In addition to prescription pads, medications and SHARPS must all be disposed of properly.

Dermatologists should contact referring physicians, affiliated hospitals, and dermatopathology reference labs 90 days before their retirement, she noted. “Make sure that all referred lab work and diagnostic results have been completed, and that you are current with all accounts with these vendors, if applicable,” Wasif added.

Finally, dermatologists should contact the AAD, and any specialty boards and societies of which they are members. When Dr. Berg contacted her state medical society, she was grateful that it provided a checklist of all the things she was required to do for retirement. “It’s a lot to think about and do,” Dr. Berg said. One thing she would have done differently was to be more aggressive 10 years ago about finding associates, so that she could have sold to them, rather than to a different group. “But in the end, it all worked out well for me,” she said, adding, “It’s actually quite nice to be retired. I’m enjoying it immensely.”

Get the guide

The second edition of the Academy’s Valuing, Selling, or Closing a Dermatology Practice Manual features:

• Tips and strategies on maximizing value to increase practice revenue and productivity through an annual fee schedule review and proper coding
• Information on the private equity trend
• A letter of engagement outlining services expected from the valuator
• A sample non-disclosure agreement
• Updated tax information on the Tax Cuts and Jobs Act
• Additional resources to help transition the practice to a new owner

Check out the guide at https://store.aad.org/products/12890.

Using EBITDA to evaluate a practice’s worth

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is one piece of the valuation puzzle. Simply put, EBITDA is a measure of the practice’s fiscal condition and an indicator of its earnings potential. In this case, earnings refer to net earnings after deducting overhead.

Investors often estimate a practice’s value as a multiple of EBITDA, depending on sales, the practice’s financial health, and other factors. This helps them create a picture of future cash flow.

The EBITDA Margin = EBIDTA ÷ Total Revenue

In addition to using EBITDA, it’s important to consider a range of other factors, including:

• Your practice’s efficiency and profitability
• Referral patterns
• Your age and whether you will continue working with the practice for a set period of time
• Your practice’s insurance mix
• Current and future reimbursements
• Economic climate

Filing in

Read about what locum tenens work entails at www.aad.org/dw/monthly/2018/may/filling-in.

Academy resources

The AADA’s Practice Management Center offers information about how to value your practice and what to consider before selling your practice. Learn more at www.aad.org/member/career/epm/sell.

Read the full article in Derm World here.

______________________________________________

Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.