Closing a Practice

When a provider needs to close their practice, they need to make sure that they address potential liabilities. The AAFP provides a very detailed checklist for closing a practice with steps to take 90 days and 60 days prior to closing (CLICK HERE). The American Osteopathic Association provides bullet points (CLICK HERE). The American College of Physicians has a checklist that is sometimes be found through an Internet search. Providers should make their own list-specific situation. Here are three specific suggestions to consider as well.

Understand Malpractice Exposure

The first thought when closing a practice is that a tail policy needs to be purchased, which is the cleanest way to cover the malpractice exposure. Providers first should consult their policy for a “perma-tail” clause. Such clauses provide a tail policy at no cost after so many years of coverage with the company, (such as five years or ten years). A provider who closes a practice after four-and-half-years in a policy that provides a perma-tail after five years may be incurring an unnecessary cost if they could extend the practice another six months. If a policy offers a perma-tail option, the provider should check with the carrier for the criteria regarding doing volunteer work or administrative positions.

Another option to address malpractice exposure could be to nose-in to another policy at a new position. As this will shift the liability to a new employer, this option needs to be raised at the beginning of employment negotiations. Employers don’t want the additional exposure that nosing-in brings, but they might consider it if it is the difference between a new hire and an open position. Providers should make the sure the conditions of nosing-in, (and, ultimately, tail coverage from that job), are addressed in an agreement. Employers might require that the provider work for them a period of time before they won’t “claw back” the additional cost nosing-in.

Providers should also make sure that they are purchasing a tail policy that covers them for all future claims and not an extended reported endorsement that is for a limited period of time, such as three years. If any claims were made after an extended reported endorsement ended, the provider would not have coverage through the carrier. If a provider intends to purchase a tail policy after they close their practice, they should work through the details with their carrier well in advance of closing.

Understand Financial Obligations

When a provider considers closing a practice, they should review their contracts for termination clauses. Some vendor contracts may be month-to-month, while others may require 60 or 90 day notices in advance of termination. Other contracts may be multi-year contracts, which is more common with leases and provider agreements, but can also include office services and EMRs. Also look for the penalties of early termination, which can include the balance of the payments remaining on the contract. Take these payments into consideration when setting a close date. It may make sense to keep the practice open longer than desired to align with the termination of contracts.

Provider agreements should also be reviewed for any employed or contracted providers. While providers typically may also be owed the remaining balance of payments if the agreement is termed early, they may also have to mitigate these damages by pursuing other employment opportunities. It may therefore be beneficial to approach providers and discuss the future of the practice with them. While their contract may not make it easy for them to terminate the contract prior to the term, allowing them to pursue other opportunities may be advantageous to both parties.

As a provider combs through their obligations in preparation for closing their practice, they should also note the party and guarantor of each contract. Most contracts should be in the name of the practice entity, but check to see if the provider is a guarantor to the contract. If the provider is not a guarantor and the provider intends to dissolve the practice entity, the other party to the contract may not have much hope of collecting any damages from the contract being cancelled. If the provider suspects that this is the case, they should consult with an attorney to confirm that they have no personal exposure.

Be Creative

Once a provider knows their malpractice exposure and financial obligations, they may want to explore options to reduce both of these liabilities. A provider that has several years remaining on a lease with a steep tail policy quote could look for another provider to sublease space with the understanding that the sublessor might grow their practice to take over the lease. The provider looking to exit could transition to part-time as the sublessor used more space, which would reduce the provider’s tail policy, (because tail policies tend to be factored on current premium).

Conclusion

For most providers, closing a practice will require work, but provides an end to practice obligations. Closing a practice without planning can be challenging and lead to headaches that persist long after the practice is closed. Solo providers and small groups may want to operate on a review cycle where contracts and business initiatives are aligned on a two or three year period. As the practice moves through through each cycle, they are actively assessing practice viability and market conditions to continue, sell or close the practice.