Analysis of asset protection plans for physician practice groups: asset protection planning for physician practice groups is complex because it requires extensive knowledge of taxation, employment benefits, corporate law, and fraudulent conveyance law.

• Author: Wells, Thomas O.

As many physicians understand, medical malpractice awards have risen dramatically, insurance premiums have increased exponentially, and a substantial number of medical malpractice insurers have ceased providing insurance in Florida. Between 1995 and 2001, median jury awards in medical malpractice cases doubled from $500,000 to $1,000,000 for the typical case with the maximum annual claim award reported nationwide increasing from $5.3 to $20.7 million over the same period. (1) In 2002, the average medical liability insurance premium for a doctor in Florida was 55 percent higher than the national average. Florida's average insurance premiums have increased 64 percent since 1996, while nationally the average insurance premiums have increased by 26 percent. (2) Fifty-four of the 66 insurance companies have dropped out of the Florida medical malpractice insurance market. (3) The increase in medical malpractice exposure and premiums, coupled with the reduction in insurers in Florida, have caused many Florida physicians either to drop, or consider dropping, their medial malpractice insurance coverage.

Effective September 15, 2003, Florida enacted legislation to limit the noneconomic liability of physicians and physician practice groups, and to "freeze" medical malpractice liability insurance premiums, subject to regulatory approval. (4) However, this legislation does not limit liability attributable to economic damages, does not reduce medical malpractice liability insurance premiums, and does not create more insurance carriers offering medical liability insurance to Florida physicians. Therefore, the medical liability insurance crisis continues after the passage of the Florida 2003 Medical Reform Act.

The purpose of this article is to review the goals of asset protection for Florida physician practice groups and to analyze the costs and benefits of four popular asset protection plans currently available to physician practice groups. These plans generally all involve the physician practice group borrowing funds against its accounts receivables. Simultaneously with such borrowing, the group either: a) distributes the loan proceeds to its shareholders and allows its share holders to invest the proceeds in asset-protected investments (e.g., annuities, life insurance, homestead property, family limited partnerships, or domestic and/or offshore asset protection trusts) (the "shareholder distribution plan"); b) purchases life insurance policies on each of its physician-shareholders, which policies are then pledged as collateral for a loan to the group, and the group distributes those insurance policies to such shareholders (the "distributed life insurance plan"); c) purchases split-dollar life insurance policies on each of its physician-shareholders (the "split-dollar life insurance plan"); or d) transfers the loan proceeds to a nonqualified deferred compensation plan (a "rabbi trust") that becomes an employee benefit plan subject to ERISA and not subject to the claims of creditors of the group upon some future financial triggering event (the "defensive rabbi trust"). This article will also examine potential fraudulent conveyance liability and corporate "claw-back" liability in connection with this type of planning. Finally, this article will draw some conclusions as to the preferred method of asset protection planning for physician practice groups.

Goals of Asset Protection

Many physician practice groups maintain their books on a cash-basis method of accounting and annually distribute to their shareholders all excess cash either as a dividend distribution or as compensation with a year-end bonus. These groups have very little equity or net worth on their balance sheet for financial accounting purposes. However, with the delay in payment of accounts receivables by insurance companies and health maintenance organizations of up to 180 days, physician practice groups maintain significant accounts receivable balances that may not be reflected on their cash-basis balance sheet. If these receivables are not pledged to a third party via a security agreement, and perfected as a collateralized interest, they represent assets that may be seized by a judgment creditor (e.g., a plaintiff that obtains a medical malpractice liability judgment against the group). The cash flow provided to the group from these receivables is critical to pay staff and physician salaries, lease payments, and other operating expenses. A judgment creditor can materially disrupt cash flow by notifying all account debtors (e.g., insurance companies and HMOs) to make payments on accounts receivable directly to the judgment creditor and not to the group. This disruption to cash flow could prevent the group from paying its operating expenses or cause the group to cease doing business, or to file bankruptcy to prevent this disruption to cash flow. The cash flow produced by these receivables may also fund physician retirement and physician-shareholder stock repurchase plans.

In light of these factors, the goals of asset protection for physician practice groups are to: a) avoid any disruptions to cash flow derived from accounts receivable by the actions of a judgment creditor; b) ensure that the cash generated from these receivables is available to pay retirement income and make stock repurchase payments to retiring physician shareholders; and c) if necessary, fund start-up costs of a new physician practice group if the prior group becomes liable for a significant medical malpractice judgment and has to cease doing business. These goals are typically addressed with the group: 1) valuing its...