How to Shield Your Surgery Center from Lawsuits and Other Threats – Part I
Written by: David B. Mandell, JD, MBA and Jason M. O’Dell, MS, CWM

In attempting to protect an ASC against lawsuits and potential creditor threats, most such centers leave much to be desired.  They may rely too heavily on insurance, have sub-optimal corporate structures in place and even unknowingly miss out on significant tax advantages as well.  In the first part of this two-part article, we will examine the proper use of insurance and discuss corporate structure options. In part two of the article, we will examine techniques to protect the specific assets of the ASC– from accounts receivable to equipment, real estate, and cash flow.

Role of Property & Casualty (P&C) Insurance

When we refer to P&C insurance, we mean insurance coverages such as general business liability policies, E&O or malpractice insurance, and any other liability-type policies at your ASC.

P&C insurance is designed to “indemnify” the insured.   The insurance industry’s definition of “indemnify” is to “make whole” or to restore the status quo.  In other words, if your business suffers a loss and has P&C coverage which covers the loss, you will be returned to in the same financial place you were before the loss (minus any applicable deductibles or co-payments).  As such, P&C coverage covers your legal bills and other loss adjustment expenses, as well as the actual loss up to policy limits.  These other expenses may include the costs of adjusters, estimates, expert testimony, or other associated costs.

P&C insurance coverage is very important given today’s litigious society and the “American Rule” of legal fees which dictates that each side generally pay its legal costs. This is opposed to the rest of the world which follows the “English Rule” where the loser is typically forced to pay the winner’s legal fees – thus making litigation more risky and less attractive).

Four Limitations of P&C Insurance

While some P&C insurance always makes sense as part of the asset protection plan for every ASC, there are significant limitations to this tool.  Let’s examine these limitations individually.

  1. Policy Exclusions: Often we find that clients are completely unaware of the “fine print” P&C exclusions and policy limitations.  Of course, they often become aware of such exclusions after it is too late.
  2. Inadequate policy limits: Even if your insurance policy does cover the center for a particular lawsuit, the policy coverage may be well below what a jury will award. The center must pay any excess above the coverage out of its pocket. Juries do hand out awards in excess of the coverage limits of traditional malpractice, employee harassment, and other common P&C insurances.  If your center were hit by a large judgment, would its policy cover you completely?
  3. Insurance forces you to lose control of the defense: Even if your insurance policy covers against a specific claim, you must consider the consequences of filing a claim. You have lost negotiating power because your insurance company will dictate when the case is settled and how much the case settlement will be.  While this may not matter with a personal injury car accident lawsuit deriving from a car accident, a case against your ASC with its reputation as stake may be another matter. Here you may not want to admit liability and settle, while your insurance company does.On the other hand, if the claim involves your ASC’s reputation, you may want to settle the case out of court and away from the public view. There is no guarantee that your insurer will see things the same way. In these situations, if you rely solely on insurance, you lose all ability to negotiate effectively.
  4. Claims bring ever-higher premiums: An additional consequence of relying solely on insurance to protect you from lawsuits is that once you make claims on the policy, your premiums rise. Given the dismal statistics, your ASC will probably endure a number of lawsuits over your career and your cost of insurance will rise with every claim, even if you are not at fault.

Legal Entity for the Center: Which Should be Used?

One topic that might be of high interest is which type of entity would be best for your business’ protection.  Here, we must consider both “inside” and “outside” claims.

Inside claims are those coming from the ASC itself – i.e., the business is sued for malpractice or by an employee for wrongful termination.  No entity will shield the business from such claims – whether it is a corporation or limited liability company (LLC) – the two most popular legal forms – or a limited partnership, general partnership or sole proprietorship (no legal entity at all).  This is why insurance is important (see above) and multiple entity structures are crucial (see below).

If your concern is about an owner, partner or executive having personal liability for the debts or liabilities or the business (i.e., an owner exposing personal assets to a claim against the business for sexual harassment), then the properly-executed and maintained corporation or LLC are typically the superior legal forms. Of course, a physician or any professional cannot shield himself/herself from personal liability stemming from their own actions or omissions (i.e., malpractice).

Unlike inside claims, “outside claims” arise from outside the business (i.e., someone suing an owner from a personal car accident to try to take that owner’s stock in the ASC).

For this type of protection, the LLC is superior to any corporation — because corporate stock can be taken in such a lawsuit, if successful, but such a plaintiff would not be able to take a membership interest in a properly-structured and maintained LLC.  In fact, we see many businesses and their owners who are unaware that their personal ownership in their incorporated business is completely exposed to a successful lawsuit against them

The good news is that it is typically quite straightforward to protect those interests at a high level, either by converting the corporation into an LLC or transferring the personally-owned stock into a protective entity like a family LLC or a particular type of trust.  Also, it should be noted that professional corporations running a medical practice are often provided a high level of protection by state licensing law (i.e., a non-physician cannot own a medical professional corporation), thereby providing a level of protection for the corporate stock.  This is why, in many states, running a medical practice through a professional corporation is standard practice.

Multiple Entity Structures Are Typically Best

While having the most protective entity for the ASC is wise, even more valuable is to have multiple entities.  You might use one LLC for one location and different LLCs for other locations.  You might use one LLC to run one business unit and a 2nd LLC to operate a 2nd unit.  You might employ one LLC for the ASC and one for real estate. The options are as varied as business operations themselves.

Employing such a multi-entity structure can have a number of advantages:

  1. You enjoy superior asset protection by having each entity employ certain employees and manage separate processes.  In this way, you separate assets, value and even cash flow into separate and distinct “baskets.”  Not all eggs are in one.
  2. By varying how these entities are taxed (as S corporations, C corporations, partnerships, disregarded entities, etc.), you can often maximize the center’s overall tax benefits.
  3. Your business is built for tax flexibility to adjust expenses/profits/income between entities depending on how tax rules change in the future.

Conclusion: Business Protection is Crucial

Given today’s litigious society where successful ASCs are lawsuit targets from competitors, the government, clients, patients and even employees, business protection planning is crucial.  P&C insurance and a superior corporate structure begin with such planning.   In part II of the article, we will expand on business protection to examine techniques to shield the specific assets of the center – from accounts receivable to equipment, real estate, and cash flow.

 

 

David B. Mandell, JD, MBA, is an attorney and author of 11 books, including FOR DOCTORS Only: A Guide to Working Less & Building More,  and Wealth Secrets of the Affluent, published by John Wiley & Sons, Inc., the largest business book publisher in the world.  He is a principal of the financial consulting firm OJM Group (www.ojmgroup.com) which works collaboratively with doctors and healthcare practices, and ASCs nationwide.  Jason M. O’Dell, MS, CWM is a principal of OJM Group as well.  They can be reached at 877-656-4362 or mandell@ojmgroup.com.

Disclosure:  OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio.  OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients.  OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.  For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov.

For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein.  Please read the disclosure statement carefully before you invest or send money.

This article contains general information that is not suitable for everyone.  The information contained herein should not be construed as personalized legal or tax advice.   There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances.  Tax law changes frequently, accordingly information presented herein is subject to change without notice.  You should seek professional tax and legal advice before implementing any strategy discussed herein.

 

abeo

abeo Management Corporation (abeo) serves as a leading source of revenue cycle management and practice management with a specialization in anesthesia. The company leverages its people, processes, and software to serve independent practices, surgery centers, hospitals and healthcare systems with a scope of services that include billing, coding, transcription, practice management, and business consulting.

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