eAlerts

Knowing and Managing Our Risks

“Endoscopy” is a word loaded with implications in our community. Providing anesthesia for this basic GI procedure is a major portion of many practices’ professional services. For some anesthesia groups, the volume of endoscopy cases is even growing. Over the past decade, we have all heard numerous warnings about the viability of this line of business because it appears to health insurers that sedation for routine screening lower GI endoscopies does not invariably require the involvement of an anesthesiologist. Some of the largest private health plans have adopted and revised medical necessity policies restricting the availability of anesthesia for endoscopies. Medicare carriers in 19 states have Local Coverage Determinations in place, defining the patient conditions for which they will pay for anesthesia for endoscopies. More than a few practices have already adjusted to a smaller caseload.

Many successful groups have justifiable concerns about the future of their endoscopy services. The lead article in this issue of the Communiqué, Scoping out Endoscopy, addresses those concerns and places them in the context of analyzing total, combined practice profitability. As ABC senior staff members Jody Locke and Hal Nelson conclude, “anesthesia for GI endoscopy has been and continues to be a viable income source for anesthesia groups. The key to success is understanding your payer policies, indicating underlying conditions and co-morbidities, and using advanced beneficiary notices so that you can balance bill the patient, when appropriate.” Equally important is the authors’ point that we must analyze each anesthesia line of business independently, not limiting our financial study either to overall profitability or to any one dominant procedure.

Another issue that warrants your attention is common to all employers and employees, not just to anesthesia practices. The rules defining independent contractor status have been tightening up. John Mulligan, Esq. describes recent enforcement developments at both the federal and state level in his article Risks and Issues in Treating Anesthesia Group Professional Staff as Independent Contractors. He recommends unequivocally that groups that characterize individuals who regularly work for them as independent contractors review the status of each “independent contractor” so as to minimize potential devastation in their qualified retirement plans and other assets.

If you do find that some individuals’ classification is questionable, you will also want to take note of the companion piece written by Mr. Mulligan with ABC’s Jill Thompson, Practical Considerations in Converting Personnel from Independent Contractor Status to Employee Status.

The risks discussed in the independent contractor articles are among the many business risks that Mark Weiss, Esq. recommends treating strategically in Managing for Success Requires Managing Risk.

Some risks simply cannot be avoided. Susan Firestone, Administrator at NYU Langione Medical Center and a member of the MGMA Anesthesia Administration Assembly (AAA) Executive Board is very forthright about the uncomfortable situation of patients whose managed care plan turns out not to cover the anesthesia care they have received (Managed Care Participation – Yes or No?) Ms. Firestone suggests placing notices regarding anesthesia coverage in the surgeons’ and hospitals’ preoperative patient information packages, but she also notes the limitations of this effort. Counseling patients who call on how to approach their managed care plans requires time and patients, but according to Ms. Firestone, many patients have reported their success to her.

Rounding up the current collection of articles is a summary of the Family Medical Leave Act by ABC staff member Stephanie Zvolenski. This discussion simply lays out the statutory requirements with which certain anesthesia groups must comply, demonstrating in one more context that preparing for common events such as emergency leave requests is the way to minimize risk.



The upside of risk is opportunity. Many management books advise searching for new opportunities whenever there is an adverse event, and we agree with that idea. Over the last several years ABC has sought out solutions for some of the challenges that anesthesia practices face and is pleased to have brought our clients the Quantum Clinical Navigation System™, the F1RSTAnesthesia Record (FAR) digital pen for completing anesthesia records and most recently the ePreop electronic preoperative record system. As we urge you to do, we will continue to identify practice needs and do our best to meet them through topnotch products and services—we are all in this together.

With best wishes,

Tony Mira
President and CEO
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Risks and Issues in Treating Anesthesesia Group Professional Staff As Independent Contractors
John T. Mulligan, Esq.
McDonald, Hopkins, LLC, Cleveland, OH
While generally anesthesia groups consider their physician and non-physician professional staff as “employees,” some groups treat certain, or even all, of their professional staff as “independent contractors.” What is sometimes forgotten is that this is not simply a matter of choice. It is the nature of the relationship between the group and the individual that determines whether the individual is an “employee” or “independent contractor.”
Practice groups that treat some or all of their personnel as independent contractors typically do so for one or more of the following reasons:
• Certain personnel are considered “PRN” or whose short-term services are obtained from a staffing agency.
• The group desires to avoid having to make the payroll tax and withholding tax payments that are required in an employer-employee situation, sometimes as a means to maximize (or appear to maximize) the individual’s wages.
• The group desires to avoid having to provide its personnel with retirement plan or other fringe benefits.
• The group desires to try to reduce its potential liability for the acts or omissions of the personnel.
The IRS Viewpoint on Treating of Workforce Personnel As “Independent Contractors.”
The Internal Revenue Service has tended to view the characterization of regular workforce personnel as “independent contractors” as improper attempts to avoid having to pay payroll taxes and take withholding on wages. The IRS has issued numerous rulings and announcements distinguishing an “employee” from an “independent contractor.”
Current guidance on this subject can be found in IRS Publication 15A. A full examination of all of the factors that would be considered by the IRS in determining whether a physician, CRNA or AA is an “employee” of an anesthesia group practice or is an “independent contractor” is beyond the intended scope of this article. However, there are a number of factors that, if present in a particular relationship, would indicate that the individual was an “employee” of the group regardless of how the group may have characterized him or her.
Of these factors, the most significant one is whether a business entity, such as a physician group, has the right to control the performance of services by the individual. The following factors would indicate “control.”
• The business entity can control when and where the work is done.
• The business entity determines and provides the equipment and supplies.
• The business entity determines who is to assist the individual in performing the work.
• The business entity has the right to determine which specific individual is to perform which task, and in what sequence or order the work is to be done.
• The individual is paid on a standard wage rate for weekly, hourly, or other period of time, rather than a flat fee for the job.
• The individual is restricted in his or her ability to achieve a “profit” by, for example, performing the service in a more efficient manner or by subcontracting the work to someone to perform it at a lesser rate.
• The relationship between the individual and the business entity is a long-term one.
• The individual cannot perform other services either on his or her own behalf or for other business entities.
• The entity is subject to an agreement with a third party (e.g., a hospital) that obligates it to exercise control over those individuals who render services for it.
There are situations in which the relationship between a physician and a physician group is such that the individual can properly be considered an independent contractor. Examples of this would include a physician who provides services on a temporary locums basis, or a radiologist who performs teleradiology services for a teleradiology company, but provides those services out of her own home using equipment that she has purchased herself, has her own malpractice insurance, and provides services for multiple teleradiology firms.
In the context of a typical anesthesia group it would be extremely difficult to argue successfully that full-time regular staff are anything other than employees. This would be true even if the physician or other professional had a service contract that stated that he or she was an “independent contractor,” or even if the medical practice contracted with a legal entity such as a corporation or limited liability company for the services of the individual.
Payroll Tax and Withholding Issues
From a tax perspective, the risk in mischaracterizing individuals as independent contractors is that the group can be liable for the payroll taxes (primarily Social Security, Medicare, and federal unemployment) that employers are obligated to pay and for withholding tax obligations.
The response that we have sometimes heard when we have raised concerns about independent contractor characterization is that “we have been doing this for years and it has never been a problem.” While that may well be true, times are changing. Federal and state agencies and officials, in the face of record deficits, are beginning to aggressively pursue businesses that treat “employees” as “independent contractors.” The 2010 federal budget assumes that federal enforcement activities in this area will yield at least $7,000,000,000 of additional revenue over 10 years.
A number of states have begun to step up activity as well. A report issued by the Ohio Attorney General, for example, estimates that Ohio currently has approximately 92,500 misclassified workers who have cost the state up to $35,000,000 a year in unemployment insurance taxes, up to $103,000,000 per year in Workers’ Compensation premiums, and up to $223,000,000 in income tax revenue. A bill pending in the Ohio legislature would create narrow criteria for independent contractor status and provide sweeping new investigation and enforcement mechanisms to combat what is viewed as rampant worker misclassification.
Simply put, any physician group that characterizes its regular personnel as independent contractors should assume that at some point this characterization will be challenged by either state or federal agencies.
Retirement Plan Issues
One of the reasons sometimes given for classifying personnel as “independent contractors,” is so “we do not have to include them in our pension plan.” Sometimes this occurs in a situation in which certain, selected personnel are treated as “employees” who participate in the plan while others are treated as independent contractors who do not. In other situations, everyone is treated as self-employed independent contractors who are free to establish their own personal pension plans, often through wholly-owned legal entities.
The subject of what the Internal Revenue Code and IRS regulations require with regard to the inclusion of personnel in qualified retirement plans could be an article unto itself. Those requirements have evolved over the years often in response to creative efforts by businesses and their advisers to devise means to exclude personnel from participating.
Simply calling an individual an “independent contractor” will not guarantee that a court or the Internal Revenue Service might not take the position that the individual is an “employee” who should be eligible to participate in a plan sponsored by the group practice or by the owners of the group practice. If a court or the Internal Revenue Service were to determine that an individual who had been characterized as an “independent contractor” was actually an “employee,” and if the individual otherwise met the test for participating in a qualified retirement plan sponsored by the group by virtue of age, length of service, and hours of service, failure to have included the individual as a participant in the plan could cause the disqualification of the plan and could give rise to a claim by the individual for benefits.
The Internal Revenue Code abounds with concepts such as “affiliated service groups,” “controlled groups,” and “leased employees” all of which must be considered in determining whether a qualified retirement plan has met the participation standards necessary to assure tax qualified status. Of particular significance is the concept of a “leased employee” under which even a true “independent contractor” may be deemed to be an “eligible employee” if he or she renders 1,500 hours or more of service in a year for the group.
An annual exercise for any group that maintains a qualified plan, or by any group physician who considers himself or herself an independent contractor of the group and who maintains his or her own retirement plan, is to apply the provisions of the group’s plan, or his or her plan, and the provisions of the Internal Revenue Code to each employee or independent contractor who provides services to the group. To the extent that an individual is not being treated as a participant in any such plan, the group or the physician should confirm that such non-participation is consistent with both what its own plan provides and with what the Internal Revenue Code requires.
Liability and Insurance Issues
A person or business entity that engages the services of a true independent contractor is generally not responsible for the acts or omissions of the independent contractor. There are some exceptions to this principle. An entity will, however, be liable for the acts or omissions of its employees in the course of employment under the legal doctrine of respondeat superior. It would be difficult for a medical group to make a convincing case that, for example, an anesthesiologist who was regularly performing services for the group, and for whose services the group billed, should be considered anything other than an “employee” for liability purposes.
From the standpoint of professional liability insurance, where professional personnel are treated as “employees,” generally the group will provide insurance coverage under one policy in which both the personnel and the group are named insureds. On an ongoing basis the only complication (at least where the insurance was of a “claims-made” type) involves “tail” coverage after an individual has terminated employment.
Often, independent contractors are expected to provide their own professional liability insurance. While this can eliminate issues involving “tail” coverage in that, for example, a physician can retain the policy even after terminating his or her relationship with the group, other issues exist such as:
1. Does the group as an entity have any ongoing coverage for its liability for the contractor’s acts or omissions?
2. What is the source of coverage for non-physician professional staff, both during and following association with the group?
3. Are the terms of the various liability insurance policies maintained by independent physicians in compliance with the requirements of the group’s service agreements (e.g., with its hospital)?
4. The involvement of a host of insurance companies can create issues under the group’s contract with a hospital or medical facility that may require that any policy be rated at a certain level, or that the policy name the hospital or medical facility as an additional insured or require notice of change or termination. Negotiating issues, such as indemnification obligations, under hospital contracts is a simpler process where there is only one insurance company involved.
5. While independent contractors could be covered under one common policy obtained by the group, this could be viewed by the Internal Revenue Service as evidence that the independent contractors were actually employees, particularly where the cost for the insurance was paid by the group.The existence of appropriate Workers Compensation coverage should be confirmed for each person who is treated as an independent contractor. An “employer-employee” relationship is more conducive to assuring compliance with Workers’ Compensation and Unemployment Compensation legal requirements. Having appropriate Workers’ Compensation coverage in place is extremely important in any situation involving a work related injury. It may be possible for a group to provide Workers’ Compensation coverage for independent contractors, or the independent contractors may provide their own coverage. However, confirming the existence of contractor provided coverage may be difficult. A lack of coverage can present the group with a significant financial loss.
Summary
If your group uses the services of independent contractor personnel, whether they be health care professionals or other personnel, you should reassess your situation. Given the announced scrutiny that independent contractor status is receiving at both the state and federal level, what may have “worked” or been “under the IRS radar” in the past will not likely continue to do so in the future.
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John T. Mulligan is a member of the law firm McDonald Hopkins, LLC, in its Cleveland, Ohio office. McDonald Hopkins has other offices in Chicago, Detroit, Columbus, West Palm Beach, and Dennis, Mass. Mr. Mulligan’s practice focuses on the representation of physicians and physician groups, with a particular focus on the representation of hospital-based groups. He is listed in the “Best Lawyers in America” for health care law. He can be reached at (216) 348-5435 or jmulligan@mcdonaldhopkins.com.
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The Family Medical Leave Act
Stephanie J. Zvolenski, MBA
Financial Manager, ABC
As American professionals continue to try to strike an appropriate work/life balance, many physicians and nurse anesthetists are asking the question to their employers or prospective employers, “What is your policy on family leave?”
A federal statute, the Family and Medical Leave Act of 1993 (FMLA) mandates protection for employees who need time off from work due to personal and/or family medical matters. Although the application of this legislation depends upon the number of employees in an organization, all employers are faced with the need to address this issue for their employees. To help you gain a brief understanding, we have included here a general overview of the FMLA as well as some guidance on creating your own organizational policy.
Fundamentals of FMLA:
The FMLA is a federal government mandated leave benefit that employers with more than fifty (50) employees are required to provide. Under the FMLA the employer is required to protect an employee’s position with the employer should the employee need to be away from his or her job for any period of time up to twelve (12) weeks annually (calendar year or any twelve month period) if certified by his or her physician for a medical reason for him/herself or a family member.
Under the FMLA, although the employer is required to maintain the employee’s position while away from work, the employer is not required to pay the employee. It is at the employer’s discretion to develop a policy by which to administer the FMLA benefit for its workforce. The employer can either require an employee to use his or her accumulated paid time off (PTO), or the employer can require the employee to take the time off without pay, or some combination. If the employee is covered by a group and/or individual short-term disability (STD) insurance policy, he or shemay apply for the benefits under that policy in accordance with all rules and provisions of the policy. As stated, the employer has the ability to determine the specifics of the group’s administration of the FMLA benefit, so long as the policy is non-discriminatory and available to all employees.
Groups not required to follow the FMLA:
Even though compliance with the FMLA is only required for employers who employ fifty (50) or more employees, many smaller groups struggle with handling cases where employees need to be away from their jobs for an extended period of time, such as pregnancy leave. In order to protect the employer and the employee, the employer should again decide upon a policy for handling situations where employees need to be away from their jobs for an extended period of time when certified by a physician for a medical need.
Each group will opt to implement the policy that best meets its needs considering both coverage needs and expense management.
Most Common Scenarios:
• Employee is required to use PTO time in order to be paid while off work
• Employee is required to take time off without pay, but may use his or her STD if applicable
• Employee is required to use a percentage (%) of his or her accumulated PTO and take the remainder without pay
• Employee may take a portion of the time off without pay and must then use his or her PTO for any additional time needed
For some anesthesia practices administration of the anesthetics and care of the patient becomes the less stressful part of their day. The administrative responsibilities of managing the group practice can be overwhelming, especially when facing issues of staff management and policies and procedures. It is always advisable to maintain and regularly update your practice’s administrative handbook to address items such as discussed above. Certainly you should be careful to always contact your corporate attorney for guidance for assistance with drafting and managing your administrative handbooks in accordance with all federal and state laws and non-discrimination regulations.
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Stephanie J. Zvolenski, MBA, is a Financial Manager for ABC. Stephanie is responsible for the financial, strategic and operational management of our financial management clients and also serves as an industry consultant and business advisor. Some of her responsibilities in this role include: provider compensation assessment and comparison to market, shareholder/employment agreements, hospital subsidy negotiation/agreements, feasibility studies for new and existing practice opportunities, governance support review and restructuring and design and administration of benefit programs. Stephanie has been with ABC for 4 years and has 15 years of experience in physician practice management including serving as an Administrative Director for a multi-specialty physician practice network within a three hospital system and as a system service line Director. She holds a BA from Washington and Jefferson College and a MBA from Waynesburg University. Stephanie can be reached at 724-952-1361 or at Stephanie.Zvolenski@AnesthesiaLLC.com.
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Practical Considerations In Converting Personnel From Independent Contractor Status To Employee Status
John T. Mulligan, Esq., McDonald, Hopkins, LLC, Cleveland, OH
Jill E. Thompson, CPA, Vice President of Financial/Consulting Services, ABC
Some physician groups, including anesthesia groups, treat certain of their personnel (physicians, CRNAs, office staff) as independent contractors rather than as employees. From an operational standpoint, the primary differences between independent contractors and employees are that independent contractors are paid a gross amount of wages, with no withholdings or payroll taxes being taken or paid on those amounts, and receive no fringe benefits.
Many medical practices which have treated certain personnel as independent contractors are reassessing this treatment. This reassessment has been prompted by recent announcements by federal and state taxing authorities that they view independent contractor treatment as a device that costs them tax revenues, and that they will be aggressively challenging it on the grounds that many “independent contractors” are actually “employees.” It is the purpose of this article to describe some of the issues involved in converting individuals previously treated as independent contractors to employee status.
1. The Starting Point. The starting point for any practice that treats personnel as independent contractors is to determine whether, in fact, the practice has been improperly treating individuals who were actually “employees” as “independent contractors”. There is nothing necessarily illegal or otherwise improper in treating a particular individual as an independent contractor if, in fact, the nature of the relationship between the practice and the independent contractor can justify that treatment.
To the extent that you have determined that certain personnel should not be treated as independent contractors given the nature of their relationship with your practice, the next step is to determine if there is something you can do to change the nature of the relationship going forward so that you can justify independent contractor treatment. In many cases it may be difficult if not impossible to sufficiently change the nature of the relationship (particularly with respect to the key ingredient which is the control by the practice of the services of the individual) to such a degree that independent contractor status can be justified on a going-forward basis.
Assuming that you have reached the determination that some, if not all, of your independent contractor personnel should be treated as employees, then you face a number of practical issues and questions.
2. When To Make The Conversion. From an administrative perspective, the ideal effective date for the conversion would be January 1. If your practice has a fiscal year which ends on a date other than December 31, you could consider using the first day of your fiscal year as the conversion date. However, making the conversion on a date other than the start of the calendar year will result in the individual receiving both a 1099 and a W-2 for the same year, a fact that may increase the likelihood of scrutiny by taxing authorities.
That being said, the sooner you correct the situation the sooner you will end the period for which you could experience tax-related or other problems, and any date during the year could be used.
3. Be Committed To Seeing The Conversion Process Through. The two primary stumbling blocks that you will likely face in converting independent contractors to employee status are:
1. as discussed further below, it may increase your personnel costs;
2. some of your personnel may be resistant to the change.
You need to be prepared for resistance on the part of at least some of your independent contractors. Be prepared to hear something such as: “My accountant [wife/husband/next door neighbor] told me I qualify as an independent contractor, and I don’t have to do this. She [he] also said it would cost me money.” Some of your independent contractor personnel will have grown accustomed to that status. Some of them may have created their own fringe benefit or retirement plan structure. Some of them may even have formed their own corporations or limited liability companies. They may see a host of tax planning or other advantages in their independent contractor status, most or all of which will be affected, if not eliminated, by becoming employees. They may well have an exaggerated view of the significance of these “advantages.” Some of these “advantages” may exist only because they or their advisors have taken some questionable actions with regard to the recognition of income or expenses.
Because you may well encounter resistance and difficulties in the conversion process you need to be committed up front to seeing the process through with regard to every individual who should be treated as an employee—no exceptions.
4. Assessing The Financial Impact On Your Independent Contractor Personnel And On Your Practice. The most immediate impact on your independent contractors is that no longer will they receive a flat dollar amount as wages. Instead, they will receive some form of time-based rate or salary, with federal, state and local taxes taken out, and with payroll taxes being paid.
Trying to maintain the same out-of-pocket dollar cost for an individual as an employee that you had for that individual as an independent contractor, while at the same time keeping the individual in the same relative economic position, will be difficult.
Simply as an example, assume that you were paying an independent contractor $15,000 a month. Your total out-of-pocket expenditures over the course of a year would be $180,000. Assume for this example that the practice is also providing professional liability insurance. If you view the $180,000 as a maximum “economic package,” once you convert the individual to employee status, those wages will no longer be paid in equal monthly installments of $15,000 but, instead, will be allocated among a variety of items such as:
• Employee and employer half of social security and medicare;
• Withholding taxes;
• Workers compensation and unemployment compensation premiums;
• Health and other benefits;
• CME allowance, dues, etc.;
• Retirement plan contribution;
• Net salary or hourly amount – meaning whatever is left.
Your independent contractors will want to know in advance how this allocation of their wages will impact them, particularly in terms of net “dollars in my pocket.” What makes an assessment difficult is that every individual’s situation will be different. Much of the challenge that you will face will be in educating affected personnel on the true implications of the conversion. That will take time and effort.
You will need to appreciate how the change will affect them. There will need to be advance discussion with your independent contractors with regard to the economic impact of the change. From an employee morale perception, you obviously do not want to be in a situation where at the end of their first month as “employees” they are shocked to receive a pay stub that shows their accustomed $15,000 reduced to a net paycheck of $8,000 or perhaps even less.
Make certain that you have consulted with your professional advisers before you have discussions with your personnel and before you make promises with respect to financially related adjustments. For example, an individual who wishes to maximize his or her take home pay may request that you exclude them from participation in your qualified retirement plan. This may not be possible under the tax laws that regulate qualified retirement plans. You obviously cannot promise something that is not possible.
Depending on the circumstances, you may find that the only way to make the conversion economically palatable to your personnel is to increase the amount you pay them. If so, you need to decide how much additional cost your practice can handle.
5. Adopting New Service Agreements With The Affected Individuals. If you have had written agreements with independent contractors such as physicians or CRNAs, those agreements should be formally terminated and replaced with written employment contracts that contain language consistent with an employer-employee relationship. If you have not previously had written service agreements with the independent contractors it is recommended that you enter into written employment contracts with each of them (or at least with physicians and CRNAs), clearly identifying them as “employees” subject to your control. If nothing else, these new contracts would support an argument that the nature of the relationship between the practice and the individual has changed.
6. Issues Involving The Practice’s Qualified Retirement Plan. Except, perhaps, under the “leased employee” concept discussed below, the independent contractors have probably not been eligible to participate in any qualified retirement plan that the practice maintains. You should review the practice’s current plan document. How does it address (if at all) participation by independent contractors? Does it deal with the participation rights of individuals who under federal pension laws are considered to be “leased employees?” The practice may find that it has been administering its retirement plan in a manner not consistent with what its own plan document or the Internal Revenue Code provides or requires. Remedying any such problem can be expensive, but it is preferable to risking the tax qualification of the plan.
Of all the issues that surround converting independent contractors to employees, few are as potentially complicated as those involving retirement plan participation. For example:
1. When will the former independent contractors become participants in the plan?
2. Is there any way to exclude them from participation?
3. If the plan has a vesting schedule, must (or should) it give them vesting credit for the years in which they were independent contractors?
4. How much will be contributed to the plan on their behalf, and what impact will this have on the overall cost of maintaining the plan?
One of the risks of treating personnel as independent contractors who are not eligible to participate in the practice’s qualified retirement plan is that if the Internal Revenue Service were successful in demonstrating that they were, in fact, “employees” or “leased employees,” the fact that they were not included in the plan will create tax qualification issues for the plan. To minimize any risk, it would generally be recommended that individuals being converted from independent contractor status to employee status be brought into the plan effective upon their conversion or, in effect, be given credit for eligibility and vesting purposes for all of their years of service as independent contractors.
This may create issues. The independent contractors may have been maintaining their own retirement plans that they would prefer to maintain. They may have been maintaining no retirement plan, and have become accustomed to a higher level of earned income. They may have been content with IRA contributions. There is no way for an “employee” to contribute to his or her own qualified retirement plan based on wages received as your practice’s employee, and qualified plan participants with income above a certain level cannot contribute to IRAs. From the practice’s perspective, including them as retirement plan participants may significantly increase overhead costs unless the plan contribution cost can be offset by a wage reduction.
One way to resolve the problem of increased operating expenses is to exclude the former independent contractor personnel from participating in the plan. There are ways in which persons who are considered highly compensated employees can be excluded from participating in the plan. However, excluding employees from participating in a qualified plan in this manner is something that should be approached with great care. Do not attempt to accomplish this by having them execute “waivers” of participation.
Another approach to control retirement plan costs may be to redesign your plan. For example, many practices have been able to reduce their employer contribution costs by utilizing age weighted plans or by incorporating 401(k) provisions under which a large component of the overall contribution is from the employee and not from the practice.
The starting point for any practice in dealing with this issue would be to meet with your accountant, your attorney, or retirement plan consultant or advisor and consider the options that may exist for cost control while at the same time bringing the former independent contractors into the practice’s qualified plan. A comprehensive retirement plan assessment will take time. The process should begin a number of months in advance of the effective date of any change so as to enable everyone to understand the issues, consider the alternatives, and adopt a course of action.
A practice will need to address the issue of whether an individual who has been improperly treated as an independent contractor could assert legitimate a claim for prior retirement plan benefits of which he or she was deprived. Some of the former independent contractors may say to themselves something like: “If I am now an ‘employee’ but nothing has really changed, wasn’t I really an ‘employee’ all along and don’t I have a claim for past retirement plan benefits?” Such a claim is possible. Dealing with this by making “catch-up” retirement plan contributions may be out of the question for a variety of reasons. Asking former independent contractors to “waive” any claim for past benefits will create issues as well. An effective waiver would need to be supported by “adequate consideration.” An independent contractor would need to be provided information with respect to how much the retirement plan benefits he or should would have received had he or she been treated as a participant in the plan. Trying to obtain a waiver may cause more problems than it would solve.
7. Other Benefit Plans. The implications with respect to other benefit plans such as health insurance, disability insurance, group term life insurance, cafeteria plans, or medical expense reimbursement plans also need to be considered. The implications of the new federal healthcare reform legislation, the provisions of which are beyond the intended scope of this article, would need to be considered.
Historically, the only such benefit programs common to group medical practices that were affected by legal participation requirements were medical expense reimbursement plans, cafeteria plans, and group term life insurance plans. The questions that will arise in the context of these plans involve whether the practice will need to provide benefits to the individuals being transferred to employee status, and at what level. In the case of some plans, such as medical expense reimbursement plans, there are specific nondiscrimination rules under the Internal Revenue Code.
8. Professional Liability Insurance Considerations. If the practice has been covering independent contractors under its professional liability insurance, converting independent contractors to employee status may not entail complications. If the independent contractors have been maintaining their own insurance, the implications of this transition on their insurance coverage will need to be considered. For example, if they will be transitioned into the practice’s coverage, will that coverage pick up their “prior acts”, or will “tail” coverage be needed on their prior coverage? To the extent that the former independent contractors become covered by the group’s insurance policy, how will “tail” coverage in the event of subsequent termination of employment be handled?
Dealing with these issues will necessitate close coordination with the practice’s insurance agent. It will also necessitate an understanding of exactly what coverage the independent contractors currently have.
Summary
The conversion of independent contractors to employee status is a complicated and time consuming process. If done incorrectly, it can create personnel related problems. As a practice embarks on this process its leadership needs to give itself sufficient time to consider and resolve all the issues which will be presented. The close, coordinated involvement of professional advisors will be critical.
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John T. Mulligan is a member of the law firm McDonald Hopkins, LLC, in its Cleveland, Ohio office. McDonald Hopkins has other offices in Chicago, Detroit, Columbus, West Palm Beach, and Dennis, Mass. Mr. Mulligan’s practice focuses on the representation of physicians and physician groups, with a particular focus on the representation of hospital-based groups. He is listed in the “Best Lawyers in America” for health care law. He can be reached at (216) 348-5435 or jmulligan@mcdonaldhopkins.com.
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Managing For Success Requires Managing Risk
Mark F. Weiss, J.D.
Advisory Law Group Inc., Los Angeles, CA
Opportunity and risk. Risk and opportunity. Janus-like sides of the same coin. Of course, the greater the opportunity, the greater the risk.
In a medical practice sense, anesthesiologists are surrounded by risk and are supremely aware of its existence. On a daily basis, you administer drugs that under other circumstances would be deadly. You’re also cognizant of the risk-reward analysis made by your patients in undergoing surgical procedures, as well as your own need to obtain informed consent from them.
But many anesthesiologists are oblivious, or even averse, to the risk-reward duality in a business sense as it impacts their anesthesia group.
In the group business context, success, that is, opportunity, is associated with the income side of the equation: increasing realized income per unit, increasing the number of well-reimbursed units generated, and increasing the amount of hospital stipend dollars received.
Anesthesia groups are generally less impacted by the risk, or expense, side of the equation. But note the word generally, because it fails to take into account the enormity of the impact on the group of an adverse event – an essential step in risk analysis. It’s a mistake to assume that the probability of an event is the same as its risk: both the probability of an event and the severity of its potential impact must be estimated to properly assess risk.
For example, returning for a moment to the medical practice, as opposed to business, context, even though one might believe that a malpractice claim is a rare occurrence, the enormity of a potential adverse award drives most physicians to carry malpractice insurance.
Business side risk is inherent in any anesthesia group. It exists within the group itself as well as from outside sources. And, it’s a fallacy to believe that business risk can be avoided. It can only be managed.
Let’s look at several examples of anesthesia group business risk and the ways that it can be managed.
EXAMPLE 1. Your Group’s Services Are No Longer Needed
Despite the fact that your group has been providing services pursuant to an exclusive contract with St. Mark’s Community Hospital for years, the hospital’s CEO has been seen giving a guided tour of the facility to the leader of a competing anesthesia group.
The next thing you know, the CEO is mumbling about sending out an RFP instead of simply starting the usual contract renewal negotiations.
You may have believed that the probability of nonrenewal is low, but if the result is the mooting of your group’s existence and the need for each of your group members to find new positions (and possibly sell their homes and find new schools for their children) the “cost” could be extremely high.
What proactive steps has your group taken over the course of years to maximize surgeon support, to provide a level of service that cannot be duplicated, to “burrow” yourselves so deeply within the hospital’s operation that replacing your group would wreak havoc on the core operation of the hospital?
What steps has your group taken to assure that it has an existence beyond simply providing services at St. Mark’s? If the answer is “nothing,” what alternatives do your group’s members have in the event that the contract with St. Mark’s is not renewed?
Note also that these latter steps also apply in two other related risk situations: The risk of St. Mark’s closure and the risk that St. Mark’s imposes a staff model solution in which your group’s physicians are not invited, or do not wish, to participate.
EXAMPLE 2. I Deserve To Be A Partner
Dr. Smith has been providing services through your group for five years as a subcontracted anesthesiologist. He has done all assigned cases, has never caused any trouble, and is regarded as a competent anesthesiologist.
Your group has been in existence for fifteen years. You, and each of you four partners, devote substantial time to administrative duties in addition to full caseloads. Each has invested significant sums in the group in order to get it though past cash flow crises.
Dr. Smith announces that he “deserves” to be a partner and should be admitted without any, or perhaps only a token, buy-in. He either does not understand, or purposefully ignores, the business risk that you and your partners took in forming the group and continue to take in respect of its operation.
On the other hand, the group’s organizational documents do not contain any partnership protection language – to the contrary, Dr. Smith asserts that the language of his subcontract makes him the owner of his own independent practice and claims that “his accounts receivable” are indeed his, and that he will “take them” if he is not made a partner.
How has your group coordinated its organizational documents and its agreements with employed and subcontracted physicians to minimize this risk?
EXAMPLE 3. The Surgery Center Is My Own Deal
Dr. Jones is a shareholder in your group, Orange Leaf Anesthesia, Inc. For the past several years, she’s been scheduled by Orange Leaf to cover a slot at an ASC that generates significant collections for the group.Jones now announces that she is leaving your group and that she will be covering the ASC for her own account.
What steps has your group taken to control or prohibit competition? If covenants not to compete are enforceable in your state, have you utilized them? If they are not, have you implemented non-compete proxy techniques in your group’s agreements to dissuade competition?
EXAMPLE 4. You’ve Mismanaged The Group, So Give Me My $500,000
As the senior partner of your group, you’ve been in charge of its business operations for many years.
Despite the growing Medicaid and Medicare populations in your main facility’s service area you’ve been able to expand the group’s business to other facilities and have advanced the group members’ compensation.
Nonetheless, two of your partners claim you have mismanaged the group – had you managed it “properly,” the group’s profits would have been significantly higher and those profits would have increased partner distributions. They sue.
Your group has obtained malpractice coverage for each of its doctors, has purchased entity coverage from your malpractice carrier in respect of claims against the group itself, and has even purchased general liability coverage insuring the group against third party property damage and bodily injury claims.
But has your group obtained directors and officers (known in the insurance industry as “D&O”) coverage?
D&O insurance protects directors and officers, and in the context of a partnership, its managing members, from liability arising from actions connected to those positions. Different forms of D&O exist to expand coverage beyond the basic level. For example, some D&O policies provide employment practices liability coverage protecting against employment related claims such as wrongful termination and sexual harassment.
And, has your group placed limitations on liability, forum selection provisions and, potentially, arbitration provisions, in its partnership/shareholders agreements and agreements with employed or subcontracted personnel?
In Conclusion
Risk cannot be avoided as it goes hand in hand with opportunity.
Although risk can never be eliminated, it can be managed.
Successfully managing risk requires that you take a proactive approach: Although some elements of risk can be managed after the event, you’re strongly advised to engage in the proper strategizing and implementation far in advance.
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Mark F. Weiss, J.D. is an attorney who specializes in the business and legal issues affecting anesthesia and other physician groups. He holds an appointment as clinical assistant professor of anesthesiology at USC’s Keck School of Medicine and practices nationally with the Advisory Law Group, a firm with offices in Los Angeles and Santa Barbara, California. Mr. Weiss provides complimentary educational materials to our readers at www.advisorylawgroup.com. He can be reached by email at markweiss@advisorylawgroup.com.
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