Key considerations for physicians joining or forming a group practice

Zachary Doolin: ©PYA

Hospital-employed or private practice? More physicians are reexamining where—and how—they want to build their careers. While many opt for positions within hospitals or health systems, others are drawn to the autonomy and entrepreneurial spirit of private medical group practices. Reasons for creating or joining a private practice may include the desire to maintain or obtain independence, have better control of personal income, and fulfill an entrepreneurial desire.

Regardless of the motivation, significant consideration should be given to the various financial, legal, and operational matters of the private practice. Of the many important aspects to consider, some of the most imperative are the operating agreement, income distribution model, and the buy-in and buy-out process. Building or joining a practice with these considerations as a foundation will ensure a collaborative and sustainable practice for years to come.

John McIntyre: ©PYA

Operating Agreement

A first place to start with any partnership is the operating agreement. An operating agreement provides a blueprint of how the practice will govern itself and ensures transparency for all owners. It is a critical document used to establish the “ground rules” for a practice and details how the practice will function with the high-level roles, responsibilities, and expectations for each owner physician. A practice with established ground rules ensures clarity in decision-making, financial management, and smooth day-to-day operations.

The operating agreement sets the tone for the process through which significant decisions are made, whether by shareholder vote or by delegating to designated leaders. Further, agreements often prevent misunderstandings that could impact the practice’s success by setting a framework for addressing disputes and resolving conflicts in a constructive manner.

Addressing aspects of the operating agreement initially ensures the partners of the practice can confidently focus time on patient care and the growth of the practice, knowing the business has a sound governance structure in place at its foundation.

Income Distribution Model

Once an understanding of the operating agreement is established, the next consideration is often the income distribution model. Income distribution models set the structure for how the shareholders will compensate themselves for their work. Three common models are equal distribution, pro-rata based on productivity, or a hybrid of both. Each of the model types may have multiple variations, considering practice revenues and expenses.

Choosing the best income distribution approach for a practice is influenced by many factors, such as physician specialization, types of revenue, and member contributions to the practice’s growth and management. Depending on the model, members who care for more patients (and thus generate more revenue) or specialize in different areas may receive more compensation. Members who serve in leadership roles that pull them away from patient care might receive a designated share of income for their time.

Importantly, the model should be compliant and fair to each member while also offering incentives for practice growth. Every practice should periodically review its income distribution model to ensure the model is still appropriate for members. Transparency of the income distribution model should be at the forefront of any practice. This transparency ensures practice ownership maintains a productive and collaborative environment while avoiding trust issues that could negatively impact the performance of the business.

Buy-In & Buy-Out Considerations

When new partners join a private medical practice, defining the initial required investment and the anticipated return on investment is crucial. This assessment involves determining the practice's valuation as outlined in the operating agreement.

Payment terms for the buy-in can vary, including lump sum payments at the time of closing, periodic installments, and compensation shifts (i.e., shareholder buy-in redistributions). Clear buy-in terms ensure new partners understand their financial commitments, the value they are receiving, and the risks they are assuming.

The buy-out process is equally important for physicians leaving the practice, whether voluntarily or involuntarily. This process involves valuing the departing physician's interest in the practice and establishing terms of exit. Key considerations include non-solicitation/non-compete terms, patient transitions, and other continued responsibilities such as ongoing legal or regulatory responsibilities. Clear exit terms help prevent conflicts and ensure a smooth transition for both the departing physician and the remaining partners.

Careful planning is vital when joining or creating a group medical practice. Establishing clear buy-in and buy-out terms prevents misunderstandings and conflicts, and a well-drafted operating agreement and transparent processes for income distribution, buy-in, and buy-out are foundational to smooth collaboration. These terms provide a structured approach to managing changes in the partnership, ensuring stability and continuity for the practice. By focusing on these key aspects, a physician can foster a healthy, productive practice environment that benefits both medical professionals and practice patients.

Zachary Doolin is principal at PYA. He advises physician practices and healthcare systems in the areas of fair market value compensation; commercial reasonableness; physician compensation design, development, and strategy; physician/hospital economic alignment models; and value-based compensation. He also assists physician practices and healthcare systems with various strategic, financial, and operational issues.

John McIntyre is a senior staff consultant at PYA. He delivers strategic advisory services across various industries. His expertise supports clients in navigating complex regulatory environments and achieving operational excellence. Through his work at PYA, McIntyre continues to play a vital role in providing clients with insightful solutions and fostering long-term success.