Closing Your Practice? Don’t Overlook These Legal Issues

This transcript has been edited for clarity. To submit a legal/professional healthcare question for future consideration, write to the editor at legalcorner@medscape.net (include “Ask the Expert” in subject line)Hi, everyone. I’m Ericka Adler, shareholder and leader of the healthcare practice at Roetzel & Andress. Today, I want to talk about how to close a professional practice. Whether you’re selling, retiring, or you’ve simply decided to go out of business, there are certain steps that everyone must consider.Start Planning Before You Close First, if you have the opportunity for some long-term planning, make sure you’re familiar with your obligations to the state, vendors, your landlord, your employees, and any other third parties.Do you owe a certain amount of notice?How much time is left on your lease?Whenever possible, we try to align the timing of your practice closure with those obligations to help limit liability and expense. If not possible, talk with counsel about the steps to take in order to minimize potential issues.What If You’re Selling Your Practice?If it’s an asset sale, there may be an earn-out where there’s still money coming back to the practice. Perhaps you’ve agreed to provide an indemnification, and the practice entity remains responsible for fulfilling that obligation.In both those instances, you want to make sure that you’re keeping the entity alive to satisfy those obligations and continue receiving any remaining payments. In fact, it may even be required by the documents that were signed.Dissolving Your Practice EntitySo, let’s say you’ve now talked to everyone you need to talk to, you’ve sold your entity, and you’re ready to shut it down. What are the next steps?Generally, every state has a process for dissolving a practice entity, so be sure you’re familiar with your state’s requirements. There’s an active dissolution process in which you file articles of dissolution, and there’s also a more passive approach in which you simply don’t file an annual report with the state to indicate you’re still in business. Both approaches ultimately dissolve the entity.Active dissolution: Filing articles of dissolution typically takes effect more quickly. If you change your mind and it’s been more than 60 days, you may need to form a new entity to resume business.Passive dissolution: If you simply stop filing annual reports, the entity will eventually dissolve. Depending on the state, that process may take 6 months or longer.Once those articles are filed or you’re deemed administratively dissolved, you have a right to continue to collect amounts that are due. You can use the court system to file a collection action to get accounts receivable that are owed to you. However, you should no longer be conducting business. For example, if you’re a medical practice, you shouldn’t continue rendering medical services.Notify Patients and Protect Their Records So, what are some other things you need to consider? In most states, there is a process to advise patients. That may be sending out a letter, an email, putting it out through the portal, or posting it on the practice website. Whatever method you choose, make sure that patients receive meaningful notice and that you’re complying with your state’s requirements.Now, one of the first things people are going to want to know is how they can obtain their medical records. In order to comply with both HIPAA and state privacy requirements, that notification should explain how patients can obtain copies of their records.Are they able to contact you directly to get it?Are they being stored by a third-party service that they need to contact?A very common approach is to work with a local hospital or another practice in your area to maintain those records and respond to patient inquiries.Whatever approach you choose, make sure it’s communicated clearly so patients understand how to obtain their records. Many practices, even after they’ve shut down and locked their doors, will still have a notification posted outside of their office.Managing Medical Records After ClosureSo, let’s say you’re working with a local practice or hospital to take custody of your medical records. In that situation, we recommend having a custodian agreement signed. If you’re using a third-party copy or storage service instead, appropriate documentation is also necessary to ensure that the third party will continue to comply with HIPAA and all applicable requirements. That includes properly storing the records and meeting the required timeframes for providing patients with copies of their medical records.Many physicians combine custodian agreements with a recommendation to their patients to go see another physician or practitioner who has taken possession of those records. If you make that recommendation, however, be sure you’re comfortable standing behind it. You can create potential liability if you recommend someone whose care ultimately falls short of the standard your patients expect.Don’t Forget Tail Coverage Another thing to think about when you’re shutting down your practice is your liability post-closing. There are two primary types of malpractice insurance.Most practices either maintain occurrence coverage or claims-made coverage.Occurrence coverage is the type where once you shut down, you don’t need to worry about a tail. You’re covered until the end of time, or at least until the end of the statute of limitations period, for anything that happened while you were practicing when the event occurred.A claims-made policy is different. You need to make sure you have the coverage when the claim is brought against you. A claim can be brought for many years after you decide to close your practice. So, how do you protect yourself? You make sure that you buy what’s called a tail policy.Now, some practices have a tail policy requirement that is separate from the tail for the individual practitioners. So, if you’re a solo doctor, you and your entity might be on the same policy. But if you have more than one practitioner, you likely have a separate policy for your practice.Do you buy a tail policy for yourself and for the practice when you shut down? Some people decide to only buy it for themselves and not for the practice. However, when you do that, there are two important considerations:You’re limiting your coverage. If you have 1 million dollars and your entity has 1 million dollars, that’s 2 million dollars of coverage that you might have available to you. However, if you don’t buy a tail for the practice, then you’re limiting your coverage to only 1 million dollars per claim.If both you and your entity are sued, your carrier might agree to allow the practice to be defended by the same lawyer that’s defending you, but they’re not required to. You might need to pay the cost of defense for the entity separate from your own personal coverage. I usually recommend that we do get a tail policy for the entity in addition to the individual policy, but it can depend on the state you’re in and very much your specialty and your likelihood of getting sued.Reducing Personal Liability After ClosingWhen we talk about getting sued, many people are concerned about their personal liability. What happens when they shut down?Can they still be sued for something that happened while they were running the practice, separate and apart from malpractice?There is always the possibility of personal liability. However, if you’ve observed the corporate formalities of your entity, that risk is generally much lower. You filed your annual reports, held the required meetings, and maintained your meeting minutes. These are the steps that help protect you from personal liability.One thing I do want to warn you about, though, is what happens when you’re shutting down your practice. Let’s say you have $500,000 in the business. If you take that money out and you pay yourself rather than taking care of your creditors, then you could create some personal liability. Always make sure you take care of your creditors and any other obligations that you have: Wages owed to employeesAccrued but unpaid paid time off (PTO)Other outstanding liabilities or debtsBy doing so, you can help minimize your personal risk.Final TakeawayThis is not everything you need to think about, so please make sure you talk with counsel before you shut down your entity. Also, talk to your accountant or your financial advisor about filing a final tax return and addressing any remaining state or federal obligations.Hopefully this has been helpful, and as always, if you have any questions, please feel free to reach out. Thanks so much. The information provided in this video is for educational purposes only and is not intended as, and should not be taken as, legal advice. Viewing this video does not create an attorney-client relationship between you and the presenter or WebMD. You should consult with your own legal counsel for advice regarding your specific situation. Ericka L. Adler, JD, LLM, has practiced in the area of regulatory and transactional healthcare law for more than 25 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. Ericka keeps clients up-to-date on her weekly podcast, Roetzel HealthLaw HotSpot.