In some specialties and locations, it's becoming increasingly hard to attract new associates to practices wishing to grow or replace physicians who exit. Maybe they should rethink the offer package to be more competitive.

In primary care, the problem is well known: board certified family physicians and general internists have been hard to recruit for years. They are in shortage and there are juicy offers all over America, all promising the market rate, good benefits and a fair amount of security, if not an ownership stake.

And even if a specialty is in over-supply nationally, just try getting a qualified candidate to agree to buy into a practice in a rural area. Even in attractive but saturated metropolitan centers, where practice opportunities should be most valuable, it's very difficult to get someone to join without guaranteeing a salary, subsidizing the start-up and virtually gifting-over the practice at the end of a year.

It makes no sense, but try convincing a youngster of that. They get their advice from their upperclassmen, who tell them it's insane to invest in your own business these days. Why, with health care reform coming and declining reimbursement, the smartest course is to take a salaried job and wait out the short run as things shake out. At least so goes their worldly logic.

Mostly, that logic is just wrong. But they want to be shrewd and they usually regard offers involving ownership with a guarded skepticism bordering on paranoia. They expect to be victimized so they see oppressors everywhere. Who said negotiating with these naifs would be easy?

Working from Anecdotes
To be fair, young doctors are often operating on a few tales of ugly manipulation of unsuspecting junior associates by greedy senior physicians. The story usually involves the new physician working for two, three or more years on the promise that "we'll work out something fair when the time comes." She earns for the practice far in excess of her compensation, only to find out that the offer, if it finally comes at all, it involves paying for accounts receivable she himself has produced and goodwill she feels she's already paid.

Let's End the Double Dip
It's this notion--that earning lots for the employer and then being asked to pay for the practice is somehow unfair--that contains the seed of the compromise. We are increasingly recommending to clients that the practice credit the new doctor with his or her earnings above the compensation package during the first year or two, to be applied to the calculated buy-in price.

For example, if a doctor is paid a total of $225,000 in salary and benefits during the first two years, but he earns $255,000 (when computed the same way as the other owners' compensation), the difference--$30,000--is credited against his buy-in, if ownership is offered and accepted.

End the Bonus, Too
So, the offer of employment will usually contain a base salary and benefit package with the hope of an ownership offer (buy-in or earn-in) some time in the not too distant future. If the base pay package is fair and the excess earnings are applied to the buy-in price as a credit, there is little reason to pay out a productivity bonus to the employed physician during the 'employee' period. In fact, paying a bonus makes it just that much harder for the new doctor to pay for his interest when it is offered.

While there are arguments on both sides, we think that difficult recruit situations deserve a look at this new approach. It candidly acknowledges all the issues up front, early in the hiring process. "We're going to pay you less than you earn. If you quit while you're an employee, we'll keep that difference. But if you are offered partnership and you accept it, we will apply that difference to the fair value of an equal share in the practice. After you buy in, you'll be paid the same way all the owners are." What could be fairer than that?

Lay Out the Whole Deal Up Front
We commonly recommend the job offer letter contain a rough outline of the entire deal, even though there can be no promise that the new doctor will become a partner or shareholder. But, assuming the parties work out, it is reasonable to come to an understanding before everyone invests time and money in the pre-partner phase. Why risk physician turnover if the terms will be impossible later? While the offer letter will lay out lots of details about the terms of employment, it should cover these key points if there is any prospect of a buy-in down the road.

The value of any practice opportunity will have several components. It's useful to list them separately, because they may not all be part of the final negotiated deal. They usually include furniture and equipment, leasehold improvements, supplies and instruments on hand, accounts receivable, cash and other incidental assets, liabilities like loans and accounts payable, and, finally, goodwill.

Most of these items are relatively simple to value fairly. Goodwill and accounts receivable are the big ones and, often, the deal breakers. Accounts receivable are often regarded by the new doctor as "his" by virtue of his having done the work. Of course, the collection of these receivables will be banked into the employer's account if the employee were to resign at any point prior to buying an ownership interest. Only if he were an owner of the practice would 'his' receivables logically go to him if he resigned.

So the logical question becomes, what does the new doctor do to gain access to this asset? Answer: buy it. But since that imposes a cash flow and tax burden on the new doctor, he is usually allowed to 'earn his way in' by taking a reduced paycheck for a period of time. That doesn't mean the practice is off the hook valuing the receivables, though. If it isn't done, neither party knows if the correct 'earn-in' price has been paid. And you can be sure that at least one party will feel victimized.

Goodwill
Generally, the other asset of controversy is goodwill. It is the amount that a willing buyer pays a willing seller above the values of all of the other assets discussed above, both parties being competent and in possession of the relevant facts. Passions run hot on this issue so a case for the existence of goodwill will have to be made.

The best evidence for goodwill: someone actually paid it recently. If Dr. Five actually agreed to pay (by salary reduction, lump sum, or other mechanism) $50,000 to join the group three years ago, Doctor Six can reasonably expect to do likewise unless things have changed markedly. We generally recommend pegging the number at a percentage of one years' collections (common industry practice) and allowing the employee to pass if she thinks the price is too high.

She could then continue to work as an employee for a negotiated salary and benefit package, but that would be well below the earnings she or she would be paid as a partner. Microsoft engineers are fairly paid but they don't get a share of the profits (dividends) until they buy the stock. It's even reasonable to hold the offer open, as an option, indefinitely for the employee to exercise when he or she is comfortable with the price--or never. There's no requirement that all physicians need to own their practices, even in mainstream practices.

Make It or Buy It?
This approach has the effect of reducing the decision to what is referred to in manufacturing as a "make or buy" proposition. If it's cheaper for Boeing to buy 747 toilet seats from a plastics specialist in Taiwan than to set up their own injection molding operation, they contract out the work. Toyota makes its own steering wheels, but Citroen buys them.

Similarly, our junior physician is evaluating the offer to buy-in by comparing it to other opportunities and the cost of 'making' his own practice from scratch. This latter option is becoming increasingly unattractive, though, which should argue for higher goodwill values. Indeed, as practice gets tougher, the value of joining the exclusive club of self-employed physicians, with its attendant perquisites, should be going up, not down.

And, some practices have far better than average potential. We recently worked with a cardiology practice that was negotiating the entrance price of the second physician, in a competitive area of Southern California. The junior will be paying close to a half million dollars to join. A vast number of his contemporaries will roll their eyes skyward wondering how dumb a guy could be to agree to that amount for a half-interest in a practice in the toughest market in America. The management consultant on the case knows from years of experience, and a good understanding of the individuals, that the deal is a good one for both sides.


Jeffrey J. Denning is a principal management consultant with Practice Performance Group, La Jolla, CA. Since entering the field in 1971, Jeff has worked in a consulting capacity throughout the nation with nearly 300 practices representing over 800 physicians, has conducted more than 500 workshops, seminars and speaking engagements in the United States and Australia, and written over thirty feature articles for leading industry publications. Mr. Denning is also editor of UnCommon Sense, a monthly practice management strategy and tactics information service of Practice Performance Publishing, Inc. Jeff can be reached at 848.459.7878 or at www.PPGConsulting.com.