July 12, 2023
Top Legal Mistakes Dentists Make
By Patrick Stanley
In our practice, we often see the consequences of dentists failing to consult proactively with professionals. We have created a summary of some of the common legal mistakes our attorneys see at every phase in a dentist’s career. This first post looks at the top issues we often see at the start of a dentist’s career.
Legal Mistake No. 1.: Not Reviewing The Associate Contract
Many new doctors begin as an associate in a practice. Although this can be a great way to build experience, many dentists are not prepared to spot potential issues in their associate employment contracts. For example: Will the new contract limit your future employment? If you are paid on production or collections, how is that calculated? Who is responsible for buying malpractice insurance?
In Arizona, many employers include restrictive covenants (non-compete and non-solicitation clauses) in their associate agreements. Non-competes prevent you from working in another practice within a certain radius of the practice for a certain amount of time after you leave. Non-solicitation agreements prevent you from poaching staff and patients from the practice. Restrictive covenants are generally enforceable in Arizona as long as they are reasonably limited in geographic scope and duration.
In addition to restrictive covenants, there are other terms in an employment agreement you should review. If you are offered a position based on a percentage of production or collections, you will want to make sure that there is enough work to keep you busy and maximize your earnings. You will also want to know what adjustments will be made to your production numbers for insurance and patient discounts. Finally, you will want to have a means to verify that your compensation is being accurately paid.
An employment agreement should also cover some less obvious terms like insurance. Many malpractice policies are “claims made,” meaning that the insurance must be in effect at the time a claim is made for there to be coverage. If you leave and the policy expires, you could be exposed to potential liability. In such a case, “tail insurance” can provide coverage, but it can be quite expensive. You want to make sure the associate contract specifies who will be responsible for buying the tail coverage when you leave.
These are three legal mistakes where dentists can get into trouble if they are not careful. Failing to carefully review an associate contract can have long-lasting implications on a dentist’s career. Consider having an experienced healthcare attorney review your contract before you sign it.
Legal Mistake No. 2.: Buying Into A DSO Without Understanding The Ramifications
In addition to associate employment agreements, many dentists increasingly partner with Dental Service Organizations (DSOs) early in their career. This can be a great way for a new doctor to obtain an ownership interest in a practice. Typically, these work by allowing the dentist to buy a minority interest in a partnership. The DSO will handle all of the administrative tasks, like hiring staff. In exchange, the DSO will charge a fee, in addition to receiving the majority of the profit from the practice.
Pros of DSOs
These can be a good fit in the right circumstance. The newer dentist can experience ownership without a lot of the cost and risks of opening or buying a practice. The cost of partnering with a DSO is often much lower than opening your own practice. Additionally, the DSO handles many of the administrative details, such as hiring and firing staff and marketing to potential new patients. The dentist is free to focus on dentistry and patient care.
Cons of DSOs
Despite the attractive nature of DSOs, there are some drawbacks. First, you will not have control over the practice. All of the decisions, other than patient care decisions, typically are made by the DSO. Second, although the initial start-up costs may be less than owning your own practice, the ongoing costs can be significant, as the DSO will take much of the profit, either in management fees or through its majority interest in the practice. Third, if you decide you do not like the DSO, you may be locked into a long-term commitment.
Usually, your interest in a DSO is non-transferrable. This means you may not be able to get out of the ownership contract by selling your interest to another doctor. Also, there may not be much security in ownership. The ownership of the DSO interest is often tied to an employment contract, whereby you are employed by an affiliate of the practice, rather than by the practice itself.
If you quit or are fired, the DSO can force you to sell your interest in the DSO. The “redemption price” you will be paid is often less than you paid to buy the interest. It can also be paid over an extended period, sometimes as long as seven years. So, you could buy into a DSO and, if the relationship doesn’t work out, the DSO can kick you out, and pay you a fraction of your buy-in cost, over a period of several years.
DSOs can be a good fit, in the right circumstances. However, they are not a good fit for everyone, and you should consult with legal counsel before you enter into any DSO relationship to ensure you are aware of the risks and that your interests are protected.
Legal Mistake No. 3: Trying To Wear Too Many Hats
We often see this mistake after a dentist has signed a lease or bought a practice without involving any professional advisors. In addition to running a practice or working as an associate, the dentist also tries to handle every aspect of setting up the new practice. This could include negotiating and signing a new office lease. It could also include conducting due diligence on a practice to purchase, or drafting an employment agreement.
The problem is that, regardless of how great a dentist the person may be, they are not trained or experienced as a real estate broker, or accountant, or attorney. If the dentist does not know what to look for, he or she could have problems down the road. For example, the dentist could be paying over-market rent. The lease also could have hidden costs that the dentist did not know or understand. The practice financials could be hiding red flags. The dentist could be exposed to potential liability or unfair competition from a former employee. Therefore, dentists should build a team of advisors to help them both to start and run a practice.
Dentists should consider having a broad network of advisors in place before they own a practice. This could include a real estate broker to negotiate a lease or to purchase a building for an office. This may also include a practice broker to assist with finding a practice to buy and negotiate the terms. A healthcare attorney can prepare and/or review the lease or purchase documents and also prepare employment contracts and other documents. Bankers, financial advisors and CPAs can help with making financial decisions or conducting due diligence.
Legal Mistake No. 4: Jumping Into Partnerships
Often it makes economic sense for dentists to join their practices. Doing so can reduce overhead costs and create economies of scale. However, if not done correctly, the results can be catastrophic. Some of the nastiest and most costly legal battles we see involve partnerships that have gone sour. Often there is long-festering resentment over patient load, productivity and finances that can boil over into the office environment, affecting both staff and patients. In many ways, these disputes are like divorces, where personal feelings can get in the way of economic sense. To carry the divorce analogy further, a properly drafted and executed partnership agreement is like a prenup. It will dictate what will happen to the partnership in the event the dentists go their separate ways.
To complicate matters, if the dentists that make up the partnership did not properly form the partnership, they could suffer some unintended consequences. Under Arizona law, a court can find that a general partnership exists even if you don’t intend to create one. For example, if you share office space and staff with another dentist, you could be in a general partnership with that dentist, even if you didn’t agree to become partners. This can create significant liability because, under A.R.S. § 29-1026, partners in a general partnership can be personally liable for the actions of their partners. For example, if there is not a proper partnership agreement in place, and another dentist in the partnership commits malpractice, you could be personally liable for the malpractice.
Before you join your practice with another doctor, you should discuss and clearly identify how the relationship will work. You should create a separate legal entity and document how the partnership will work. Experienced healthcare lawyers can help with this process to limit your liability and create exit planning in the event the partnership does not work out.
Legal Mistake No. 5: Not Having A Contingency Plan.
Many dentists have a carefully thought-out career plan in mind. Often, dentists buy or start a practice thinking they will work hard and grow it over 20 or 25 years. Then, they can either bring on an associate to handle much of the work or sell the practice and retire. However, life is full of surprises and unexpected circumstances can derail your plan.
For example, although you may intend to work another 20 or more years, your body may have other plans. A study published in the Journal of the American Dental Association noted that dentists are much more susceptible to musculoskeletal disorders than other professions. This is because of the positioning required by dentistry. If these problems become severe enough, you may not be able to continue safely working. However, many dentists either do not have disability insurance or do not have enough disability insurance to replace their income in the event they are unable to continue practicing.
Additionally, divorce can have serious consequences for dentists and their practices. Under Arizona’s community property laws, a dentist’s spouse may be able to claim ownership of part of the practice. A pre-nuptial or post-nuptial agreement can be a way to protect your investment in your practice, if it is handled correctly.
Another equally unpleasant possibility is that you might pass away unexpectedly. You may have life insurance, but do you have enough for your family? Additionally, what will happen to your practice if you are not there to operate it? What will happen to your children if you and your spouse both pass away? How will your survivors be able to access your assets? Will they have to go through an extended probate process? These are all questions that are important to answer before the unexpected happens.
No one can predict the future or avoid every potential calamity in life. However, by working with a group of advisors, including insurance experts, financial advisors, and legal professionals, you can mitigate the consequences of these calamities.
Legal Mistake No. 6: Failing To Plan Your Succession
Even if the unforeseen doesn’t happen, many dentists are still unprepared for leaving dentistry on their own terms. The best way of planning for this really depends on how you want to wind down your career. If you are an associate dentist or an independent contractor in a practice, this can be as easy as consulting with your financial advisor to ensure you are financially ready to retire, and then just choosing an end date. If you own your own practice or are a partner in a practice, though, this can be complicated.
Often, you can’t really just decide to sell your practice one day and be done the next. Many practice buyers will want the seller to stay on, often for months, to help with the transition. If you are selling to a DSO, the buyer may want you to stay on for years as an associate dentist. In fact, many DSO contracts we see often pay only a portion of the total sales price up front. The remainder is paid out in annual installments, but only if the practice hits certain targets. Therefore, if you are selling to a DSO, you might find yourself working longer and harder than ever before after the sale in order to hit those targets.
If you are a partner in a multi-dentist practice, you may have other restrictions. For example, you may have to provide your partners with a right of first refusal. If your partners do not approve of a potential buyer, they also may have veto power over the buyer. If you are in a partnership, you should consult with an attorney who understands dental partnerships to know what your rights are before you tell your partners that you plan to leave.
Planning early and consulting with the right professionals before you decide to retire is often essential. If you do not, you could find that you are stuck practicing longer than you wanted to, or else facing significant monetary penalties.
This post is for informative purposes only and should not be used as a substitute for consultation with a licensed attorney. It provides general information and a general understanding of the law, but does not provide specific legal advice. No attorney-client relationship is created by the posting of this information. If you have specific legal questions after reading this post, you should contact a licensed attorney.