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Do Your Mega Group Documents Include an Operating Agreement?

by admin on October 26, 2010 No comments

                 Physicians are becoming more and more willing to pool their practices together in large group practices in order to (1) negotiate managed care contract rates, (2) develop ancillary service revenue sources, and (3) get some cost savings from economies of scale in such areas as professional liability insurance, EMR and the like.  This is great news for physicians! 

                The dominant format of such a large group, a “mega group” is what has come to be called the “Umbrella LLC” or “Super LLC” model.  Simply put, the model consists of a limited liability company (the “Big LLC”) which owns multiple limited liability companies (“Sub LLCs” or just “Subs”).  Physicians are owners of the Big LLC and are employed by it.  The Sub is comprised of the practice that joined the mega group.  Physicians looking to join a Mega Group have many things to get comfortable with such as:  governance, income sharing and overhead sharing.  Physicians need legal and financial advice to guide them in that process.  That said, what many physicians often miss is an agreement between the Super LLC and the Sub which is designed to protect their autonomy to the maximum extent allowed by applicable law.  This sort of agreement, which we can call an “Operations Agreement,” should be part of every mega group transaction.

                Mega group transaction documents often contain more legal and financial jargon than clear language about operations and what actually happens within the practice that joined the mega group.  An Operation Agreement is designed to address the particulars within the Sub (operational and financial matters) and to ensure the independence of the sub, which “houses” the group that joined the mega group.  For instance, once the mega group takes a management fee to pay for centralized expenses, what do the physicians in the Sub do with the money?  Usually, mega group documents only address the fact that the Sub gets the money. But now what the Sub does with the money (i.e. who gets what).  This is just one example of the many important issues that ought to be addressed in an Operations Agreement, including who gets to make decisions in the Sub, how to handle compensate disabled or retiring physicians, and hiring and firing matters within the Sub. 

                Mega groups present a terrific opportunity for today’s physicians.  That said, they have to make sure the documents address their legal, financial and operational needs.

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