Legal 123s with ByrdAdatto (Medical Director Agreement – The Fools Gold of Compliance)
Is it ever too early to ask for help? Tune in as we share a story where the client hitting the pause button and asking a quick question changed the future of an arrangement which could have had significant legal and financial impact. In part two Michael and Brad are joined by a special surprise guest as they break down the legal issues packed into the “medical director agreement” our client almost signed.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at email@example.com
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences. Creating simplicity in three, two, one.
Brad: Welcome back to another episode of the Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my cohost Michael Byrd.
Michael: Thanks Brad. As a business and healthcare law firm, a client call is usually a request for help, but sometimes clients don’t recognize they even need help. And instead it’s often too late when they finally make that call. Today’s story is not one of those examples. Rather our client today was about to sign on the dotted line and decided at the last minute to send the agreement to us to bless it before he signed.
Brad: One of those pivotal moments, for sure, Michael. We can so clearly see the disaster that would have occurred in this particular story had he not paused and asked that [00:01:00] question. Do you have any types of those moments in your career?
Michael: Yes. With a caveat, Brad. As we record, I just had a birthday, so I’m going to be really sensitive to age jokes, which you can’t help.
Brad: I cannot help it.
Michael: Okay. Well, we’ll see what we can do there. Just know that if I start crying, it’s your fault.
Brad: That’s fair. I’m all right with that.
Michael: Okay. So I had a moment like this when I was a summer law clerk at a big law firm in Dallas. There’s this one moment where I paused to ask a question that I really believe ended up shaping the early years of my legal career. And kind of at that moment, the practice of law crystallized for me, like all of a sudden I got the bigger picture of what lawyers were trying to do. And it kind of went from the theory of law school, into the real world and it all made sense.
Brad: All right. Well, I’m curious. Tell us how it made sense.
Michael: So after my second year of law school, I had managed to hustle and [00:02:00] leverage every relationship I knew to secure two summer clerkships
Brad: Blackmail. Got it.
Michael: You can’t prove that. The clerkship in the first half of the summer was the only one that had a possibility of turning into a job. The job market was super tight. This was the summer of 1994.
Brad: Did you say the summer of 1944?
Michael: Brad, we just talked about this, pass the Kleenex. Let me finish my story. So there was three of us law clerks that were vying for what we believed to be one position that would be a full-time offer given at the end of the summer. We were all friends, and yet all trying to get this one job. One of the clerks was the son of the firm’s biggest client. And the other was a good friend from my law school. In fact, we even went to undergrad together. So to gain an edge, I showed up on the first day after orientation at 8:00 AM and we were supposed to report at 8:30. I was the second [00:03:00] law clerk there. My buddy from my law school had showed up at 7:30 and we spent a few days trying to outdo each other, and finally just reached a truce where we both would show up at 7:30 every day.
Brad: Yeah. And for those don’t know, compete is one of the core values for ByrdAdatto, and clearly you are already fully engaged in the compete core. So, what was your pivotal moment though? You’re still owe us that part.
Michael: Yes. The compete felt at the time more like survival. We’re trying to get a job. But so during the second week of my clerkship, I was asked to prepare a motion for the partner in charge of recruiting. This was a huge opportunity because number one, it was like getting to actually practice real law and not just do legal research. And it was for basically the guy making the decision on which of the three of us got the job.
Brad: The big guy.
Michael: Yes. And I don’t even remember the specifics of what the motion was about, but in [00:04:00] litigation, a motion is essentially something where you’re asking the judge to make a certain ruling, usually over procedural matters that are going on during the pendency of a lawsuit. And so I went to the firm library.
Brad: So were there books with paper or stone still?
Michael: Yes. This was a different era. I mean, as someone in charge of renting space for a law firm, it’s hard to imagine thinking that you needed to get enough space for these huge libraries to hold all these books, but that’s exactly what it was. You go into the library, you could check books out. And I found a forms book that would help me in trying to get this type of motion put together. And then eventually I found an electronic version that I was able to use as kind of the template for preparing this motion for the partner. I plugged in the names of the parties and basically [00:05:00] I just filled the blanks in Brad. It was about the same qualities if someone went on legal zoom and filled the blanks in themselves. I did not know any different, and was just about to go give this to the recruiting partner.
Brad: Yeah. At this point, we’d typically ask, so Rob’s not here today, Riley is our engineer maybe she’d add some music where the story is about to go off the rails here.
Michael: It had all the potential, who knows I may not only be sitting here today, had I not at the last minute thought, there’s some young lawyers here, young associates at this firm that have learned what it takes to do successful things like motions. And maybe I’ll go and just have him take a look at it and give me a little feedback before I turn it into the partner. The associate took one look and started telling me what my motion actually needed. And I still to this day can [00:06:00] vividly remember where I was, the name of this young associate, him walking me through it and just really what I started feeling when I realized, oh, wow this all starting to make sense to me. And oh wow, I was about to turn in garbage into this partner. And so I was really excited when I left at just the realization of what needed to be done. And I totally reworked my motion and ended up taking another couple of days. It wasn’t a problem with any deadline. And my motion went from three pages to 15 pages with exhibits attached and ended up getting a ton of props from the hiring partner for this project. And it was a major reason why I ended up getting a job after law school at this firm. Footnote, they ended up giving all three of us job offers.
Brad: Oh, nice. See, pays to [00:07:00] work hard. And so a couple of follow-up questions, number one, how many steak dinners have you bought that associate since then?
Michael: I’ve lost contact with him and he probably has zero recollection of that experience.
Brad: I know we’ll get into this in more details, but that moment in time where you hit that pause button and then the light switch goes off like, oh God, I’m so off on this. I’ve never had an experience, but I’m glad that you could share your experience like that.
Michael: Yes. You know, I’m bringing vulnerability to the Legal 123s with ByrdAdatto.
Brad: All right. Well, let’s get in today’s story about how our client’s decision to hit that pause button and ask a quick email question, changed things in this way, a good way, for him so we don’t have to have any scary music.
Michael: So the story today, Brad, my inbox one day had an email pop up with a statement along the lines from a client of, Hey, I’m about to sign this medical director agreement, but would like you to take a quick look and bless it before I sign it tomorrow [00:08:00] morning. The email stopped me in my tracks to drop everything and open the attachment. For purposes of today’s story, Brad, we will refer to our client as Dr. Gump.
Brad: Why Dr. Gump?
Michael: I just, can’t not go to the old movies, Brad. I pulled from the movie Forrest Gump, where Forrest seem to fortuitously be in the right place at the right time.
Brad: Now Michael, you often make fun of me for all my old movie references, but so far I’m still good with this one. It is one of my favorite old movie references, so I strongly approve the name selection. But for our audience that does not know, this is a movie about a gentlemen named Forrest Gump played by Tom Hanks and he’s slow witted, but a very kindhearted gentlemen from Alabama. And he’s basically in almost every major American story from the early fifties, all the way through the eighties— fighting in Vietnam, meeting the president, playing ping pong against the Chinese, I mean, pretty fun [00:09:00] story. But back to our story on hand, the statement to you by Dr. Gump, it’s a major red flag to hear that I’m about to sign something and we know nothing. And we know that’s a loaded question when we hear the word medical director agreement.
Michael: Yeah. And let me pause real fast and just acknowledge Dr. Gump is not slow with it.
Brad: Okay. And Dr. Gump, if you’re listening, Michael made me say that.
Michael: So yeah we hear the word medical director agreement and it makes me think how in Texas we talk about what it means if someone offers you a Coke, they’re in fact, offering you a soda. You may respond with, to someone saying do you want a Coke, with sure I’ll have a Pepsi.
Brad: Except the part that no true Texan would ask for a Pepsi. But that might not be your point.
Michael: Okay. Brad, this isn’t acting class, but you’re right. [00:10:00] My point is that medical director agreements are very similar to that. So you, if someone says they have a medical director agreement, it can mean a number of different types of healthcare arrangements.
Brad: Yeah. And I remember this story, it was for a medical spa. That would definitely be a big red flag. We did an entire episode last season called the Preventable Death to Your Practice that highlights these kind of risks. What did you do?
Michael: Well, I dropped everything and opened this medical director agreement and identified several problems in about two minutes.
Brad: Perfect. Okay. Tell us what was one of them?
Michael: Well, the first observation was that it was called a general partnership agreement instead of a medical director agreement and was about seven pages long.
Brad: Red flag.
Michael: The agreement called for a partnership between Dr. Gump and a nurse practitioner owned entity. Let’s call the NP Ms. Jenny.
Brad: I’m refraining to go into full Forrest Gump [00:11:00] “life’s like a box of chocolates” imitation mode. But Jenny is also from the movie Forrest Gump, and is his love interest who was actually played by Robin Wright. Anyway, I would expect to see a document at least titled medical director agreement or even better management service agreement. I definitely would have pumped the brakes seeing partnership agreement.
Michael: Yeah. And another observation was the length of the agreement, seven pages. And we both know what that means.
Brad: Yeah. Ms. Jenny must’ve printed that partnership agreement from that same book that you found your formulation motion back in 1994.
Michael: Fair point.
Brad: Or 1944, whatever it is.
Michael: Too soon, Brad, my birthday was just a couple of days ago. There’s no way it could cover all the details that would need to be covered to make sure everyone was on the same page and for it to be compliant. I mean, the agreement would require even just a dedicated space for the clinical boundaries that needed to be in place between Dr. Gump and Ms. Jenny, not to mention the business side of things.
Brad: Yeah. That kind of reminds me a [00:12:00] little bit of a handshake expose where you would think they would know what’s going on because in that particular episode, it was basically an oral arrangement. In this case it’s a seven page document, but probably didn’t really accomplish what needed to be accomplished. But what else did you observe on the quick two minute review? Well, Ms. Jenny’s entity was an LLC and we were in California, which meant several things.
Brad: Red flag.
Michael: First, Dr. Gump and Ms. Jenny could technically co-own a medical practice in California. So I had not eliminated the possibility of being able to modify the framework to make this work. However Ms. Jenny’s entity being an LLC was the red flag that you just dropped in there because LLCs are not allowed to practice medicine in California. If Ms. Jenny had had a medical corporation, it could have been feasible to work with her model.
Brad: So what else did you see?
Michael: Well, the crazy one was that, going back to what I said at the beginning, that it was [00:13:00] called a general partnership agreement and this actually opened up a host of huge issues.
Brad: Yeah. I wanted to cut you off earlier when you said that, but I wanted to hear a little more facts for our audience. But the vocabulary word of the day that everyone must hear is general partnership, it is a legal term. So this is essentially a contract formed in a partnership between individuals or entities. But the key element here people is in a general partnership, all partners have unlimited personal liability. Unlimited. I hope you understand that.
Michael: That means no limit.
Brad: Exactly, Michael you’re paying attention. You get an extra star today. Meaning a plaintiff could have sued Dr. Gump personally, for a hundred percent of the liability of the partnership. Did he even know what the liabilities of this partnership was?
Michael: Oh, no. I mean, it’s what made it such a huge deal. What we know is that Dr. Gump said casually I’m going to [00:14:00] being asked to be the medical director agreement. And here’s what I’m going to get paid. I’m not being asked to be the medical director to supervise not we’re going to form this general partnership, or I even have any idea what the assets and liabilities of this partnership are. Dr. Gump just thought he was being a nice guy, that he was going to supervise and delegate Ms. Jenny to do her treatments. If he would have signed this general partnership agreement, Brad, he would have been personally liable for the ten-year real estate lease, the $200,000 laser, and all other business liabilities.
Brad: Yeah, that’s a crazy story. There are massive observations here, Michael, and just in a couple minutes of the opening of this, we’ve already kind of hit a few of them. What did you do?
Michael: Well, I actually almost started calling and texting right when I saw the title of the document in the first five seconds. But I went ahead and waited two minutes to get these observations and then I frantically sent him [00:15:00] an email, sent him a text, and called Dr. Gump and implored him not to sign anything until we talked.
Brad: Nothing more fun than practicing law by panic texting your clients and calling them and emailing them. If you’re a client and you see your attorney doing that, just stop what you’re doing because normally we as attorneys don’t panic text you. But Michael, I approve that one. So let’s go to commercial. And on the other side we’ll have some additional discussion on what happened with Dr. Gump and along with this season, I think we can bring a friend of ours on to help talk about some of these implications.
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Brad: Welcome back to Legal 123s with ByrdAdatto, I’m your host Brad Adatto with my cohost Michael Byrd. Michael, this season, the theme is “when should I ask for help?”. So for this second half of the show, we are joined by our friend and colleague Kita McCray. To help us break down today’s story, Micah, please introduce Kita.
Michael: It sounds like you just called me your wife’s name, which there’s probably some counseling that needs to happen. Well, Kita is my office next door neighbor and a colleague at our firm. Kita McCray graduated, her degrees, Brad, are going to make us feel really embarrassed about ourselves by the time we get through it.
Brad: I’m embarrassed about you too.
Michael: Yes, you should be. University of Southern Mississippi BA, University of Southern Mississippi [00:17:00] MPH, University of Mississippi school of law JD, University of Houston Law Center LLM. So we have a master level law degree and the LLM doctorate level for our expertise for today. So Kita, we’re so glad to have you. Some accolades that Kita has received, she has been recognized as a national black lawyer, top 40, under 40. She was a past director of the Jail Alternative Legal Association, and as an awesome person. We’re so glad you’re here.
Kita: Hi, thanks Brad and Michael, it’s a pleasure to join you.
Brad: So Kita, based on all the different schools that you’ve gone to, tell me who your football team is that you cheer for.
Kita: My football team, and if you cut my wrist right now, it would bleed purple and gold for the wonderful LSU tigers.
Brad: I [00:18:00] knew that would be the answer, go tigers. All right, thank you Kita. Now, as we broke down today’s story, the issue really is that we have a seven page partnership agreement that was sent by Ms. Jenny to Dr. Gump. So let’s start with some of the basics. What type of entities are authorized to practice medicine in California Kita?
Kita: So the type of entities that are authorized to practice medicine in California are sole proprietorship, that would be for a physician with a current valid license issued by the medical board of California or the osteopathic medical board of California, a professional medical partnership, but the most common entity type is the professional corporation.
Michael: Okay. And so who is allowed to own a medical practice in California?
Kita: So generally only a physician, or a group of physicians, that have a current valid license can own a medical entity. However, if it’s a [00:19:00] medical corporation, California allows non-physicians to share an ownership so as long as at least 51% is owned by the licensed physician or physicians and the other 49% of the entity may be owned by one or more allied healthcare professionals that are licensed in California, in categories that include nurse practitioners and physician assistants. Unlicensed persons may not have an ownership stake in a professional medical corporation or partnership.
Brad: Well, Michael, what if the unlicensed person really, really wants to own the other 49%, does that make a difference?
Michael: Well, it might because they might just put their head in the sand, like some of our clients and do it anyway.
Brad: But I think Kita made a great point there, you got to be somebody in the industry and for some reason, you and I have heard enough times, they think 49% non-physician is really a key to sit an allied health professional.
Michael: In California.
Brad: In California though. So the general partnership agreement that we’ve talked about [00:20:00] could have worked, I guess in theory, right Kita?
Kita: Yes and no. So it’s true that a general partnership on 51- 49% could have worked from a compliance perspective, but we knew the details of what they were trying to accomplish and Ms. Jenny was to own closer to 85% of the medical practice.
Brad: Mm. That’s probably bad, because that’s math wise and I was never really good at it, but that’s more than 51- 49%, right Michael?
Michael: Yeah, the math doesn’t work, Brad.
Brad: Okay, good. Thanks. But the most shocking aspect of this story to me was the idea that in this case, Dr. Gump was going to be a general partner.
Kita: Yeah, in my experience the concerns about general partnerships is by far the personal liability aspect. So as Brad alluded to earlier in the podcast, general partners are personally liable for the business debts and liabilities. So that means the [00:21:00] partner’s personal assets are unprotected and I’ve heard, I don’t have proof of this, that this can also include the kids and the dogs. Each partner is also liable for the debts incurred by the actions of the other partners. And because of this potential personal liability, I’ve noticed that general partnerships seem to be limited in their ability to raise money and attract investors. Finally general partnerships can potentially be shaky because of the risk of dissolution if one partner wants to withdraw from the business or dies. So all in all the overall structure and limited protection of general partnerships are just not worth the risk.
Brad: And you know, Michael, that’s a phenomenal breakdown, but why is it you and I often hear CPAs love general partnerships?
Michael: Well, what we’ll see in some industries, not in medical, and the idea will be to have limited [00:22:00] partners with the general partner, and they’ll have the people that are taking the risk and funding, a certain risk often in real estate deals, will be the GP of the deal. And then you have the investors that are limited partners, but in the context of a medical practice, you don’t see this because of that risk. And it makes it hard for our clients to even red flag it, because they’ve never even heard this term. Dr. Gump saw this and forwarded it, and I’m about to sign it. And he didn’t know what general partnership means. He just thought it was normal legal language for a medical director agreement.
Brad: Right. And your point was perfect. An audience, I didn’t mean really perfect but I’ll say well done, was that people hear limited partnerships all the time. So they think, oh, I’m safe. They don’t understand the difference between a general partner and a limited partner, which [00:23:00] is limited partner means you’re limited versus general partner, which is you have unlimited personal liability. So very good points there. So let’s for our audience that’s still with us, thanks for those who have made it this far, what happened to Dr. Gump?
Kita: So what we did, we ended up setting up an arrangement using the MSO model. So for those who aren’t familiar with the model, the MSO model involves a business relationship between two entities, a medical NLE, generally owned by a physician, in this case Dr. Gump, and a management services organization, or an MSO entity, which can be owned by a non-physician. So the way it works is that the medical entity enters into a management services agreement and agrees that the MSO entity will provide management and administrative services such as billing, collecting, nonmedical staffing and things of that nature in exchange for a management fee, paid by the medical entity. [00:24:00] So in other words, Dr. Gump and his medical entity would have and maintain final authority over all the clinical aspects of the model. While the MSO entity owned by Ms. Jenny would handle the administrative and management aspects of the medical entity on behalf of the medical entity.
Brad: That’s awesome. And that means it works. Michael, what takeaways do you have for our theme again, when should I ask for help?
Michael: Well, you saw the title of the podcast, we’re talking about the idea of fool’s gold and that’s where a medical director agreement fits in healthcare, because it’s a term thrown out there. Like using the analogy to the Coke or for a soda that’s thrown out there, but people are comfortable with it. It’s like, oh yeah, [00:25:00] medical director, that sounds right.
Brad: Everybody signs it Michael.
Michael: Yeah. And so they think they’re good and it just lulls them into this kind of space of, this must be compliant because I hear that term all the time.
Brad: Yeah. That’s a great point, because they hear it so much, they think all medical director agreements are equal and that’s not the case. And for those who are listening, to be clear, as you heard, we were able to build out a model, which we could do a legal arrangement. In this case, we use the MSO model, but there are times in which medical director agreements do make sense if they’re done properly.
Michael: And yeah, I would just add, to go back to the coke analogy, this general partnership agreement was definitely a Pepsi cause it tasted terrible. Join us next Wednesday for MedSpa Widow Maker, where we also will have a special guest joining us.
Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five- star rating and share with [00:26:00] your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney- client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.