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Advising Physicians.

Making Sense of the Complex.

Limitation on Physician-Real Estate Limited Partner to Practice Outside Agreed Area Upheld

In the case of Edwards v. Urosite Partners, the Tennessee Court of Appeals was presented with an interesting fact situation involving a physician and a real estate investment limited partnership.

Dr. Edwards was a partner in a medical group of urologists in the Nashville area. In 2000, Dr. Edwards and twenty-one other physician/shareholders in the medical group formed a limited partnership for the purpose of purchasing, owning, managing, and operating the real and personal property located at the medical group’s primary office location. The limited partnership agreement provided that partnership in the limited partnership was conditioned on continuing employment with the medical group. The language of the agreement was that the limited partnership had the right to purchase a limited partner’s units in the limited partnership “upon the termination of a Limited Partner’s employment agreement with [the medical group] for any reason other than death, disability or retirement from the practice of medicine.”

Dr. Edwards worked at the medical group under an employment agreement through June 2011. Thereafter, he worked as an employee at will through December 2013. In January 2014, he entered into a separation agreement and mutual release with the medical group and the limited partnership that if he practiced outside Hickman or Giles Counties, the limited partnership could exercise its right to redeem his interest in the limited partnership.

In the spring of 2014, Dr. Edwards began providing medical services to veterans in Rutherford and Davidson Counties at the request of the Veterans Administration. In March 2015, the limited partnership notified Dr. Edwards that it was exercising its right to redeem his interest in the limited partnership.

Dr. Edwards filed suit, claiming a breach of contract. He essentially raised three issues: (1) that the limited partnership’s exercise of its right to purchase his interest in the limited partnership forty-five months after his employment agreement with the medical group terminated in June 2011 was too long and not reasonable under the circumstances; (2) that the work that he did for the VA in Rutherford and Davidson Counties was not material because the VA does not compete with the medical group for urology patients; and (3) that allowing the limited partnership to redeem his limited partnership interest due to his practice in Rutherford and Davidson Counties amounts to a restriction on his ability to practice medicine and violates Tennessee public policy.

The Court disagreed with all of the points raised by Dr. Edwards. On the first two points, the Court noted that its responsibility was to enforce the contract as written. Since the separation agreement and mutual release did not set an outside date within which the limited partnership could purchase Dr. Edwards’ limited partnership interest if he practiced medicine outside of Hickman or Giles Counties, the time between the end of Dr. Edwards’ employment agreement and the date of exercise of the limited partnership’s option was not relevant. In addition, it was also irrelevant that the medical group and the VA did not compete for urology patients, since that was not a requirement in the agreement between the parties. Finally, with respect to the third point, the Court said that Dr. Edwards’ was not restricted from practicing medicine wherever he wished by an employer–rather, he could practice medicine in Rutherford and Davidson Counties if he wished to do so, but the cost of that action would be that the limited partnership had the right to purchase his limited partnership interest.

Massive HIPAA Settlement Shows Why Physicians and Other Providers Must Take Patient Privacy Seriously

On February 16, the U.S. Department of Health and Human Services issued a public notice that Memorial Healthcare System had paid HHS $5.5 million to settle potential violations of HIPAA’s Privacy and Security Rules.

Memorial Healthcare System is a nonprofit corporation that operates six hospitals, an urgent care center, a nursing home, and a variety of ancillary health care facilities in South Florida. It is also affiliated with physician offices through an Organized Health Care Arrangement (OHCA).

The protected health information (PHI) of 115,143 individuals had been impermissibly accessed by employees of Memorial Healthcare System and impermissibly disclosed to affiliated physician office staff. This information consisted of the affected individuals’ names, dates of birth, and social security numbers. The login credentials of a former employee of an affiliated physician’s office had been used to access the ePHI maintained by Memorial Healthcare System on a daily basis without detection from April 2011 to April 2012, affecting 80,000 individuals. Although it had workforce access policies and procedures in place, Memorial Healthcare System failed to implement procedures with respect to reviewing, modifying and/or terminating users’ right of access, as required by the HIPAA Rules. Further, Memorial Healthcare System failed to regularly review records of information system activity on applications that maintain electronic protected health information by workforce users and users at affiliated physician practices, despite having identified this risk on several risk analyses conducted by Memorial Healthcare System from 2007 to 2012.

The Acting Director of the HHS Office for Civil Rights noted that “organizations must implement audit controls and review audit logs regularly. As this case shows, a lack of access controls and regular review of audit logs helps hackers or malevolent insiders to cover their electronic tracks, making it difficult for covered entities and business associates to not only recover from breaches, but to prevent them before they happen.”

Physicians and Ambulatory Surgery Centers – Passive or Nonpassive?

It is quite common that a physician chooses to acquire an ownership interest in an ambulatory surgery center. I have been involved in a number of transactions involving just this sort of thing.

The reasons that doctors buy in to ambulatory surgery centers are varied. But a common thread running through these business decisions by physicians is that they need to have a more convenient place to provide surgical care on an outpatient basis to their patients. In many cases, the surgery cannot be performed in the doctor’s office–for example, if the surgery requires general anesthesia. Or there may be state regulatory issues that make it difficult or impossible for the surgery to be performed in the doctor’s office. Of course, surgeries can clearly be performed in a hospital setting, but a doctor may want to provide his or her patients with a more cost effective and convenient location for surgery.

As is the case with any business transaction, it is very important for a physician and his or her tax advisors to carefully consider the tax implications of any buy in transaction involving the acquisition by the physician of an ownership interest in an ambulatory surgery center.

One of the key tax issues that arises when a physician purchases an investment interest in an ambulatory surgery center is whether or not to group the physician’s activities at the ASC with the physician’s activities in his or her private medical practice. This issue and how it is handled by the physician and his tax advisors can have a real and significant tax impact for the doctor.

The grouping decision relates to whether the doctor’s ownership  interest in the ambulatory surgery center is treated for tax purposes by the physician as a passive activity or as a non-passive activity.

If the physician treats the ASC activities as passive activities, then the passive income flowing from the surgery center to the doctor can be offset by the doctor’s passive losses. If on the other hand, the doctor’s ownership in the ASC is grouped with the doctor’s private medical practice for tax purposes and treated as a non-passive activity, then the income flowing from the ASC cannot be offset by the doctor’s passive losses. Passive losses could be something like losses arising from the doctor’s ownership of a rental condo.

It may be that a doctor wishes to group his or her ASC ownership activity with his or her medical practice in order to be allowed to deduct business expenses associated with the ASC. Or it may be that the doctor wishes to treat his or her ASC ownership activity as a passive activity so that the doctor’s passive losses from other activities (such as the ownership of a rental condo) can be used to offset the income arising from the ASC ownership.

Two fairly recent items from the tax world are helpful in this area. The first is a Technical Advice Memo from the IRS, which was issued in August of last year (TAM 201634022). You can read this TAM at this link.

The other item is a U.S. Tax Court case (Hardy v. Commissioner), which was published yesterday. You can read this opinion at this link.



Dan Smith of DPS Legal Counsel will host a free webinar on Health Law issues in late October or early November. To view the webinar, please request the webinar password by commenting on this post. Also, inlcude in your comment any questions you would like to see discussed in the webinar.

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