How to close a practice
Whether you're turning your practice over to a colleague, selling it, or simply walking away, take the time to do it right.
For most professionals, accepting another job or retiring involves little more than giving notice and enduring a farewell party or two. Not so for physicians. You have to notify patients, colleagues, employees, insurers, hospitals, and medical boards. You must make appropriate referrals, see that patient records remain accessible, collect accounts receivable, and arrange for continued liability coverage. If you're a solo office-based practitioner, you'll need to find a buyer, hire an associate who will eventually take over, affiliate with another practice, or shut down the business.
All this requires several years of planning, according to Jeffrey Smith, co-founder of the Troy, MI-based Exit Management Institute, which advises business owners on how to close up shop.
Long-term planning increases the chance that you'll get maximum value from your practice, says Paul Angotti, a consultant in Monument, CO. "Too many physicians, when they start nearing retirement, wind down their practices. They cut back one day, then another. Eventually they're working only two days a week, accounts receivable are greatly diminished, and the practice has lost much of its value."
Get some return for your practice
Baretta Casey, of Pikeville, KY, had been a solo FP for eight years when she accepted a job at the University of Kentucky College of Medicine in Hazard, KY. "My liability insurance was rising and reimbursement rates were falling," she explains. "My income scarcely covered my overhead." So Casey rented her building to another family physician and handed over her 5,000-patient panel, too. "I didn't sell because I don't think you can put a price on patients," she says.
Walking away from a practice like Casey did, should be a last resort, say consultants. Worse still is shutting down a practice. "It might make sense in some instances involving rural practices that have no buyers or replacement physicians," says Paul Angotti. "But when a practice is discontinued, assetssuch as medical recordsbecome liabilities. Copies must be made available to patients and stored in case of a malpractice suit. The practice, or the physician's estate, will need to pay for storage, a telephone, copying capability, and so forth. I'm currently working with the family of a physician who died in his office. Rather than close down the practice, I'm keeping it operating and have found four potential buyers."
Consultant Michael Wiley of Bay Shore, NY, agrees that simply closing down makes little sense. "If a practice has dwindled to almost nothing," he says, "I'll try to have my client work out of the office of a competitor for the six months prior to retirement and leave the charts with that doctor. Or I'll sell the practice for a pittance$5,000 to $10,000which still beats having to maintain the charts."
Medical practices generally sell for about one-third of gross receipts. That's down from the 50 to 100 percent of gross receipts that departing physicians realized in the past, but in most cases it provides a nice retirement cushion. (For more information on how to value a practice, see "What's your practice worth?" April 11, 2003.)
First things first: Maximize and protect assets
You might be ready to retire. But can you afford to?
"Before you pack it in, it's important to make sure that you won't outlive your money," says Dennis LaPorte, a CPA who works with the Exit Management Institute. "Few things are worse than selling your practice, then discovering that you and your spouse can't live comfortably on the proceeds. An integral part of exit managementone that should be started years before hanging up your stethoscopeinvolves assessing your financial situation, determining what you'll need to realize your post-practice goals, and making prudent investments. We ask clients to envision their perfect post-retirement day, then tell them what they need to do to make that happen."
Take the long view, too, regarding insurance coverage. "As soon as you know when you'll be leaving your practice, contact your liability insurance carrier," says Alan C. Roeder, an attorney in Farmington Hills, MI. If you have occurrence coverage, additional insurance might not be necessary. But if, like most physicians, you have claims-made coverage, you'll need tail insurance in the event a claim is filed after you stop practicing. Your agent or carrier should be able to tell you if you qualify for premium rebates or special post-retirement coverage.
Ease the transition for patients and staffers
"If you'll be retiring, begin looking at potential succession of ownership three years before you're ready to leave," says EMI's Jeff Smith. "The new owner might be your hospital, the physician who covers for you when you're on vacation, or a young doctor who will gradually step into your shoes." If you select the last option, the transition will be more seamless if the new doctor sets up shop in your office as an associate and begins seeing patients a year or two before taking over.
"When looking for someone to purchase your practice, be sure not to tell patients or insurers prematurely that the practice is on the market," says Bridgewater, NJ, attorney Steven I. Kern. "If patients and staff leave, and referral sources dry up, the value of the practice will diminish."
So when do you begin notifying patients? "As a general rule, we suggest doing so a minimum of three months before your departure, so patients have adequate time to find another physician," says attorney Alan Roeder.
All "active" patientsthat is, patients currently undergoing treatment or who have been seen in the office within the past two yearsshould be notified by letter. It should contain the following information:
Your exit date.
The name of the physician taking over the practice, if applicable.
Names of physicians willing to accept new patients, or other sources of referral.
How copies of medical records can be obtained or transferred to another physician.
An authorization form for the patient to sign for the release of medical records.
Where the medical records will be stored after your exit.
For a sample letter you might use when another physician will take over for you, see "Sample exit letter to patients".
"In addition to a letter, exiting physicians may choose to run a notice in a local newspaper. Some states require such an announcement," says Roeder. Check with your medical board.
Saying goodbye to patients can be emotionally wrenching. "I had a lot of crying time with them during the last couple of months," Baretta Casey recalls. She helped ease the transition by arranging for the physician who'd be taking over to keep her staff for one year at the same pay. "That way, some familiar faces remained in the office," she says. It also ensured that staffers wouldn't jump ship while she still needed them.
"It will be impossible to keep your exit quiet once you start notifying outside entities," says Paul Angotti. "For example, insurance carriers will call your receptionist and indicate that they received notice that you're retiring. If this comes as news to the receptionist, it may generate panic. So keep your staff in the loop. Have all the details ready regarding timing, severance policy, benefits, and so forthbut give valued staffers an incentive to stick around."
"Good incentives include cash bonuses or an increase in base salary," says Michael Hawkins, EMI's human capital expert. Or, like Baretta Casey, you can arrange for staffers' continued employment. Michael Wiley notes, "If you give them 60 days' notice but indicate that your colleagues Bob and Jane are looking to hire and you'll set up interviews, then you're taking care of everyone's needs."
Handle practice records very carefully
Patients are legally entitled to a copy of their medical records, but only with a signed authorization, notes Roeder. "Never give a patient or anyone else the original, and only release copies with valid, signed authorizations," he says.
"If a doctor sells his practice, the records usually go with the practice and the sales documents indicate that fact," says Steve Kern. "Legal review is necessary to determine how long the buyer must maintain patient and billing records. For medical records, 10 years from the last date of serviceor from the age of majority if the patient is a minoris a good standard, even if state law provides for a shorter period. Records subject to pending malpractice claims or regulatory investigation should be maintained until such matters are fully resolved."
If you're shutting down your practice rather than handing it over to another physician, it's best to find a colleague in your specialty who'll maintain custody of your records, Kern advises. "Obligations of both partiessuch as how long records must be kept, indemnification provisions, and how patients and the departing physician can access recordsshould be specified in writing. The custodian physician takes on new burdens related to the records, but he'll also benefit since patients often transfer to the practice that holds their records."
Once you've determined record retention requirements, arrange for the shredding of all records that can legally be destroyed. "Maintaining records beyond the necessary date, especially if the storage method isn't physically secure, is a HIPAA privacy time bomb waiting to explode," Kern says. "Enter into a business associate agreement with a reputable record-shredding service."
Your local hospital might have the capacity to safely dispose of charts, says Roeder, who warns against putting old medical records in open trash bins. Retained records must be stored in a safe place and in such a way as to maintain confidentiality. "Records can be copied to microfilm or scanned into read-only CD disks or other permanent storage media that can't be altered," Roeder adds.
Spread the word, and keep the books open
The list of people or entities you'll need to tell about your exit is long. In addition to your employees, patients, associates, hospital, and malpractice carrier, it includes:
The state licensing board.
Any insurer covering the practice, its employees, and its facilities. Review the policies to determine notice requirements and when and how to obtain premium refunds. "Most insurance plans have a 90-day notice of termination provision," says Michael Wiley.
Medicare and Medicaid.
Your affiliated hospitals.
All third-party payers. "The signed contract will contain specifications regarding notice," says Paul Angotti, "but these may have changed since the contract was initiated. Many contracts obligate the practice to provide copies of medical records for every patient in the plan at no cost to the carrier. I always recommend changing such contracts to provide for payment if the carrier wants copies of medical records."
State and local medical societies.
Professional associations in which you hold membership.
The federal Drug Enforcement Administration. "Upon retirement, any controlled substances on hand should be returned, transferred, or discarded in accordance with DEA procedures, and your DEA license should be returned," says Alan Roeder.
If no one is taking over the practice, select a location for mail and phone calls, and arrange to sell the office and medical equipment. "Contact two or three used equipment dealers in your area," says Angotti. "Some may deal only in specialized equipment, but should be able to refer you to someone who handles the devices you're unloading. Unfortunately, you shouldn't expect more than 15 to 20 percent of your purchase price. You'll do better if you can sell big-ticket items to another practice. Consultants might know of a physician who's in the market for a particular piece of equipment, or you can advertise in local newspapers. If an item has, say, a useful life of 10 years and it's five years old, you might realize half of your purchase price."
Usually, the last order of business in discontinuing a medical practice is dealing with accounts receivable. "It takes 12 to 14 months to collect 90 percent of the money owed you," Angotti notes. "You can move the practice's computer into a staff member's home and let her work on it there. Or you can hire a billing service. An alternative is to sell AR to whoever takes over your practice. If, say, you're owed $100,000, you raise the selling price by that amount. The buyer might be amenable because by purchasing your AR he gets cash flow from the first day of operation."
Leaving a medical practice, of course, isn't just a matter of dollars and cents. Surgeon Edward Friedman, of Raymond, ME, who retired in 1997 after suffering injuries in two automobile accidents, stresses that it's a big transition. "There are a lot of emotions that you never anticipated," he says. "You need to take a year to rediscover yourself. If your only interest is medicine, you'll be lost."
Gail Weiss. How to close a practice. Medical Economics Jan. 9, 2004;81:69.