American College of Physicians: Internal Medicine — Doctors for Adults ®

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Tips to survive when a physician retires

With an aging workforce and tight reimbursements, practices face some tough choices

From the September ACP-ASIM Observer, copyright 2002 by the American College of Physicians-American Society of Internal Medicine.

By Bryan Walpert

John Cordes, MD, used to love the practice of medicine. But declining reimbursements began to force him to see five patients an hour, too many for his comfort. Insurers constantly compared his prescription costs with those of other physicians. And he was growing tired of seeking permission from insurance plans before sending patients for MRIs or other tests.

So in 2000, still healthy at 70 years old and interested in practicing medicine, Dr. Cordes retired from a large multispeciality practice in Milwaukee. "I just plain wasn't enjoying the work," he said.

Medicine faces a slew of such retirements in coming years. Between 1980 and 1999, the number of physicians 65 or older doubled to 141,000—or nearly 18% of all physicians, according to the AMA.

Age, however, is only one factor. A survey conducted by recruiter Merritt, Hawkins & Associates in 2000 found that 38% of physicians as young as 50 planned to retire within three years. In addition, another 10% planned to leave their jobs for nonmedical positions. Like Dr. Cordes, many cited managed care as a reason.

Though the bear market has done much to curtail the retirement plans of some physicians who need to work long enough to rebuild diminished nest eggs, the trend remains.

As a result, group practices must contend with a number of challenges: what to do with the retiring physician's patients, how to construct a reasonable buy-out, whether to recruit someone new and in some cases, how to transfer leadership responsibilities.

Here are some strategies to help your practice survive the retirement of senior members.

Replacement strategy

When faced with retiring physicians, some practices simply postpone the inevitable by allowing the physician to work part time or with reduced call. At Cardiovascular Associates, a 22-physician cardiology practice in Louisville, Ky., physicians can either create job-sharing arrangements or eliminate evening and weekend call (taking a pay reduction to do so) if they are at least 55 years old and plan to retire within two years.

"Extending the professional life of a cardiologist by allowing him or her to work fewer hours serves the needs of the practice and the physician," said Tim Higgins, practice administrator. "It's a win-win situation."

Still, practices must eventually decide whether they need—or can afford to hire—a replacement.

In some cases, a practice can muddle through without one. Durham Physicians, a four-physician family practice in Penndel, Pa., is not sure whether it will replace one of its senior physicians when he retires in July 2003. Earlier this year, he and another senior physician cut back to two days a week.

In response, the group's two younger physicians took up part of the slack by working additional hours. They also hired a full-time nurse practitioner to handle the rest.

"It depends how things go reimbursement-wise," said Enrico DiRienzo, MD, one of the two physicians who have increased their hours. "We might make do with what we have. Reimbursements are not such that you can just bring in new physicians and start them off with big salaries."

Timing the announcement

Getting advance warning from a physician thinking about retiring is critical for a practice—particularly a smaller group—to make a smooth transition. Recruitment can take a year to 18 months, and subspecialists are in particularly short supply because of the emphasis on training primary care physicians in the 1990s.

"Groups need to understand their demographics," said Bruce Johnson, JD, a consultant with MGMA Health Care Consulting Group and an attorney in the health care group of Faegre & Benson in Denver. "If you have three cardiologists, aged 51, 52 and 53, you're going to have people leaving soon. You may need to plan ahead and start recruiting sooner rather than later."

The timing of the retirement announcement is also important. A year's lead time may not be sufficient if notice is given in December, for example, because most residents and fellows planning to enter the job market in July begin looking the previous fall.

One strategy: Give senior physicians an incentive to announce their retirement at the best time for the group. "I have seen agreements where practices give buyout incentives for timing retirement in a way that allows a practice to recruit during recruiting season," said Daniel Bernick, JD, principal with The Health Care Group, a practice management and consulting firm in Plymouth Meeting, Pa. "You only get a full buyout if there is sufficient advance notice to start recruiting in July, August and September for the following July."

Practices also need to create a mechanism for notifying patients. Typically, the practice or physician writes a letter announcing the departure two to three months prior to retirement, telling patients individually who come in during that period and in some cases, running an advertisement in the newspaper, said Sherry Migliore, director of consulting for PMSCO Consulting in Harrisburg, Pa.

Sometimes, other partners or new hires can take on the retiree's patients—but not always. For example, a senior physician at Northwest Medical Specialties, a group of 11 infectious diseases specialists and oncologists in Tacoma, Wash., planned to retire in September 2001. He had significantly more primary care patients than his partners, none of whom had the time to take them on. So the practice asked him to spend the summer before his retirement seeing all of his patients and referring them to other physicians.

"I think virtually every patient was able to get in to see him so he could tell them in person," said Peter Marsh, MD, an infectious diseases specialist and medical director for the practice's infectious diseases section.

Buyouts

Practices must also decide whether the buyout, which typically is paid out over a year or more, will include "goodwill"—the value of an intangible asset like location or the quality of the personnel that enables a business to earn a greater profit than others that are similar. Goodwill was once popular as a means of compensating a senior physician, particularly the founder, for many years of service.

In some cases, practices have given a year's salary to account for the value a senior physician has built into the practice over the years. In other cases, practices calculate a specific goodwill value—typically 30% of a year's receipts for primary care—and the retiring physician will get a proportional share.

Mr. Bernick said he believes a goodwill payment is important for physicians who founded the practice, set up the systems and software, opened new offices, recruited physicians and built up a patient base. "To not compensate that—to say, 'Thanks for the memories but you're not leaving anything behind but receivables'—shortchanges the doctor who is leaving," he said.

But with reimbursements tightening and costs rising, experts say, future income is less certain—and golden parachutes are more risky. Many groups are moving away from such goodwill arrangements, in some cases scrapping old plans and calculating the buyout based only on the physician's share of the practice's book value and its accounts receivable at the time of departure. This strategy helps reduce the cash-flow hit a practice takes when a physician leaves.

Of course, that will mean getting the agreement of older doctors who stand to lose from the change. But Mr. Johnson said many physicians will take a smaller buyout if they understand the financial impact a large buyout would have on the practice they spent so much time building.

"Senior doctors will sometimes accept less money," Mr. Johnson said. "No one wants to leave anything on the table, but by the same token they want to leave the legacy of a successful practice after they're gone."

Northwest Medical Specialties, for example, wrote an agreement about a decade ago that that would pay retiring doctors a large percentage of a year's income. A few years ago, however, Michael Sullivan, the group's executive director and CEO, realized that the plan no longer made financial sense.

"We couldn't afford to do it any longer because of changes in reimbursement," Mr. Sullivan said. Still, attempting to change such an agreement "could split a group apart."

To avoid such contention, physicians at the group hired a consultant and agreed in advance to accept his recommendations unless they could unanimously reject them. Based on the consultant's suggestions, the group scrapped the old agreement in favor of a payout based on book value and accounts receivable.

The one physician who has since retired from the group didn't like it—he got quite a bit less than he anticipated when he left—but "he said 'I think it's fair.' It was a very rational approach," Mr. Sullivan said.

Succession

Cash is not the only asset retiring physicians take with them. Frequently, retirees have years of managerial experience and may have held the practice together for decades by negotiating contracts, hiring and firing, buying equipment and generally providing the charisma necessary to create consensus.

Advance planning can help ensure that leadership responsibilities are transferred smoothly. Unfortunately, experts say, such planning almost never happens.

"If this person has been the dominant long-time group leader, the other partners who have been there 10 years or more usually aren't capable of taking the new leadership role," said David Scroggins, principal with Clayton L. Scroggins Associates, a practice management consulting firm in Cincinnati. "They're used to somebody else making decisions."

The result can be tumultuous. Mr. Scroggins recalled one cardiology practice with three partners and two employed physicians. The senior doctor had used a dictatorial style for years. When he retired, staff began demanding changes in pay, benefits and hours.

No successor had been trained, and the remaining two partners couldn't maintain a consistent voice, as the old leader had done for so long. Amid disputes and staff turnover, collections suffered. Finally, the two employed physicians resigned.

To avoid such cases, experts suggest that retiring long-time leaders groom a successor, an approach that Cardiovascular Associates is using. Last year, the managing partner began a two-year phase-down to retirement. In the interim, another physician has taken on much of that person's leadership role. Although she now runs executive meetings, for the first year the retiring physician sat in on all of those meetings and assisted her in negotiations with vendors and payers. During the transition year, the two physicians share the salary paid for managing partner duties.

The retiring physician "has been invaluable because of his experience running the group," Mr. Higgins said. "The transition should occur very smoothly as he gradually relinquishes responsibilities and the other physician gains more knowledge."

However practices handle the transition, it is clear more retirements are on their way—not necessarily because physicians want to stop practicing, but because they do not feel they can continue to practice unfettered.

Just consider Dr. Cordes, who took another job working two days a week for an in-house clinic at a large printing company, where he sees only a couple of patients an hour and can order tests like an MRI without opposition.

"I can't imagine myself completely divorced from medicine," Dr. Cordes said. "But now there's absolutely no pressure. It's a very wonderful lifestyle."

Bryan Walpert is a freelance writer in Denver.

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