Put Powerful Legal Protections in Place Before You Get Sued

Don’t assume a possible lawsuit will settle within the limits of your malpractice insurance. Put in place legal protections to repel any potential lawsuits.

What can you do to protect yourself, your practice, and your family from the legal risks you must take in your practice?

Lawsuits are normally filed against both the doctor and the practice, and sometimes affiliated entities as well. Many doctors erroneously assume a lawsuit will settle within the limits of their malpractice insurance. This is incorrect. In fact, few plaintiff lawyers are willing to settle for policy limits unless both the doctor and the practice entity are what we call “judgment proof.”

What does it take to be judgment proof?

First, review your internal systems to make sure your billing and other processes are compliant with medical law. Every medical practice should be able to document that it has relied on competent legal counsel or consultants hired through legal counsel under attorney/client privilege to confirm appropriate protocol, billing codes, and procedures. Indeed, a four- to eight-hour visit by a billing consultant not only reduces risk and increases compliance, but it can also enhance profitability and identify new billable services. A great many physicians are amazed to discover how many gaps existed in their billing practices–and how easily such problems can be resolved with the help of a competent consultant.

Also, consider eliminating certain high-risk procedures, patient categories, and problem patients from your practice. Know that 80 percent of your problems will come from 20 percent of your patients. Part of protecting yourself from a lawsuit is considering whether a difficult patient is someone you want to continue treating.

While it’s important to look dispassionately at the feedback from patients who could be sharing a complaint that other patients are too polite to raise, you may need to take action if you’re dealing with those who continually complain. Perhaps they don’t belong in your practice at all.

Organized Assets

If a patient does sue you, and if you are ordered to pay, be sure your assets organized so there’s nothing of value for the plaintiff’s lawyer to take. Remember, even if you’re found primarily not at fault, the cost can still be considerable. In one memorable case, a jury found a doctor only “30 percent negligent,” but the damages were assessed at $3 million–and 30 percent of $3 million is $900,000.

To avoid that nightmare, take these steps to make yourself, your family, and your practice judgment proof:

• Have the medical practice owe debt that is secured by liens filed in the public record, called UCC-1 Financing Statements. This debt should be almost as large as the value of the practice assets, including accounts receivable. If for any reason the practice can’t borrow money, you can personally borrow from a friendly lender (e.g., parents or other family members) and have your medical practice guarantee the debt, pledging its assets as collateral. In the event of a judgment, the friendly creditor can repossess the collateral of the medical practice.
• Have valuable assets such as equipment and real estate held outside of the medical practice in another entity. If your tax advisor tells you this may trigger tax liability, get a second opinion from a corporate-tax expert and ask about something called “New Parent F Reorganization.”
• If you own the building in which your practice operates, you can have it held by a separate LLC or other entity to shield you from liability if someone gets injured on-site. You can also have the owning entity owe a mortgage to the bank or family member and have the medical practice guarantee the mortgage and pledge its assets as collateral such that, if the practice suffers a judgment against it, that will serve as a violation of the loan covenants. The bank will then call in the loan and repossess the practice’s assets, in which case there is nothing left for the plaintiff’s lawyer.
• If you rent the building in which your practice operates, you can set up a twenty-year lease with the landlord company stating that, if the practice goes bankrupt, twenty years of rent is suddenly due, and the landlord has a lien to enforce it.
• Consider separating your practice into different companies. If you have a general practice and an urgent-care location, for instance, these could be distinct companies. Though they will likely need to be owned by a common parent company for Medicare billing purposes, this still creates a legal hurdle.
• Review all partnership and shareholder agreements, buy-sell agreements, life insurance, and disability insurance policies to ensure they are properly situated and inaccessible to creditors.
• Understand and make use of assets that are creditor protected in your state (these vary significantly from state to state). Often, a homestead, assets owned jointly as “tenants by the entireties with a spouse,” annuity contracts, pensions, IRAs, and 529 college savings plans are protected. It is crucial to work with a lawyer who is familiar with the laws in your state.
• Consider holding valuable personal assets in your spouse’s name to protect them from creditors. Also consider a marital agreement in which your spouse pledges to put those assets into joint names, or as otherwise requested, in the event of a divorce.
• Consider employing your children. Since their IRAs are also protected from your creditors, you can employ your kids and pay them up to $5,500 a year. You can then put those wages into IRAs that may be creditor-proof for the entire lifetime of the child.
• Be strategic with how you pay yourself out of your practice. The most protected financial vehicle is a pension. Have a skilled actuary custom design your pension. Consider using a defined benefit plan or a cash balance plan to maximize contributions. Many states also provide for the protection of wages and investments purchased with wages if state-specific rules are met.
• Consider using family limited partnerships, multiple-member LLCs, irrevocable trusts, and other vehicles that will protect assets from creditors.
• Properly structure any inheritances that may be coming your way. If you’re expecting to inherit money from your parents, structure the inheritance so it will be paid into a trust for your benefit and not directly to you to protect it from creditors. You can even serve as the trustee of the trust if it is properly drafted.
• Integrate these items noted with your personal estate and financial planning to ensure that you and your family are fully protected.

As you can easily imagine, these items need to be carefully coordinated with the guidance of a qualified attorney and a certified public accountant. Be wary of advisors who are not attorneys but purport to give legal guidance. Many well-meaning, non-lawyer advisors who offer legal advice have caused significant harm. It happens!

Make sure any attorney you work with specializes in serving medical practices that does high-stakes work. Select a lawyer who is both board certified and has a peer rating of “AV” (the highest rating) in the Martindale-Hubbell legal directories. Your best bet is finding an attorney who has both of these qualifications.

Looking for more advice on legal topics that impact Medical Practices? Register for our free Medical Practice Success toolkit and watch my video “12 Asset Protection Strategies Every Physician Must Know to Reduce Their Personal and Practice Exposure”.