The Dental Lawyer | New York State Dental Journal Article : "Practice Ownership in the Age of Big Dental, Big Debt, and Mid-Level Providers"

Follow this link to my article featured in the March 2014 New York State Dental Journal. http://pubs.ez-flip.com/nysdj201403/start.asp.  The article, located on page 16, is entitled "Practice Ownership in the Age of Big Dental, Big Debt, and Mid-Level Providers."  The article  discusses how the perceived evils of the expansion of corporate dentistry, student debt, and the legalization and proliferation of mid-level providers (such as "dental therapists"), may actually increase the number of owner-worked practices, despite fears of those in the dental establishment that these industry developments will conspire against practice owners.

As I mention in the article, ultimately it is the laws that govern mid-level providers and corporate dentistry which will frame exactly how these developments impact the industry.  It could be, however, that laws aimed at governing them, will have unintended consequences. It's not that I believe with all my heart that the owner-worked practice model will be unaffected by the growth of corporate dentistry and the spread of mid-level providers, but I endeavored, in writing this article, to provide an alternate vision to the "doom and gloom" some in the industry feel  as it relates to the changing circumstances of the industry.

The Dental Lawyer | New York's Rules Extending the Malpractice Statute of Limtations

In Linker v. Malpeso ( Linker v. Malpeso, 2013 NY Slip Op 2679 - NY: Appellate Div., 1st Dept. 2013) the First  Department of NY's Appellate Division gave dentists statewide a stark reminder of burdens associated with the continuing treatment exception to the 2 ½ year statute of limitations  on medical and dental malpractice claims.

Typically the 2 ½ year statute of limitations bars malpractice claims against doctors when the tortuous act occurs more than 2 ½ years from the time the claim is interposed.  Generally a claim is interposed by starting a lawsuit.  Thus if a doctor committed malpractice three years ago and a lawsuit was brought today, that doctor would face no liability for his acts, even if there is no question that he committed the act or acts complained of.

There are two widely known exceptions to the 2 ½ year statute of limitations.  The first is where a doctor leaves a foreign object in the plaintiff’s body.  This exception is known, creatively enough, as the “foreign body” exception.  When a foreign object is left in the body, the statute of limitations does not accrue until after the object is discovered by the plaintiff.  This means that if a doctor leaves an inter abdominal retractor inside a patient (a-la Episode 60 of “Seinfeld”, The Junior Mint)  the two and a half year period that the patient has to bring a law suit does not begin  until the foreign object has been discovered.  This is the case even if the object was left in the body three or four years prior to its discovery, provided that the foreign object should not have been reasonably discovered by the plaintiff.

The second exception is the case where the doctor continues to treat the plaintiff after the act of malpractice.  In this case the statute of limitations is “tolled” until after the plaintiff’s last treatment for the same injury or illness.  Goldsmith v. Howmedica, Inc., 67 N.Y.2d 120 (1986).  The public policy reasoning behind this exception is sound.  If a doctor botches a surgery he/she should not be able to avoid liability if that doctor spends the next three years trying to patch or otherwise correct the error.  In many cases the patient will not know something was done incorrectly until after the doctor’s attempt to “fix” the problem has failed.  Both of these exceptions to the normal statute of limitations are nuanced and there are circumstances where either would not apply.  

In Linker v. Malpeso the Continuing Treatment exception was at issue.  In that case, a dentist  placed 20 implants in a full mouth restoration on September 11, 2008. On September 14, 2011, more than 2 ½ years after the implants were placed, the patient brought a malpractice claim relating the the restoration.  The dentist brought a motion for summary judgment claiming that the 2 ½ year statute of limitations barred the claim from being brought.  The court, however, found there was a triable issue of fact as to whether the continuing treatment exception applied and allowed the lawsuit to continue.  In reaching their decision the court found that while the doctor noted that that restoration was complete, he put the patient on a 2 month follow up schedule which apparently continued into 2009.  In subsequent appointments, the doctor treated the patient for gum and and hygiene issues and replaced a crown.  During that time the patientcontinued to complain about paid from the restoration.

It’s important to understand the procedural posture of the case to fully grasp the court’s ruling.  In a motion for summary judgment a party will only prevail if there are no material issues of fact in dispute among the parties.  In the instance where there are no material issues of fact in dispute, the judge can make a ruling on the law alone so there is no need for a trail to proceed.  Where the parties do dispute a material fact or facts, a fact finder (usually a jury, but sometimes a judge) must first determine what facts they believe to be true.  The process whereby the fact finder decides which facts to believe is the trial.  In this case, the court did not decide that the doctor committed malpractice, nor did the court decide that the post restoration treatment constituted “continuing treatment” as to satisfy the statute of limitations exception.  Rather, the court’s decision was to allow a finder of fact to determine if the dentist’s post restoration conduct constituted continuing treatment. If a judge or jury found that doctors treatment did constitute “continuing treatment” a separate trial to determine whether or not the doctor committed malpractice would still be needed.  

The lesson for dentists is twofold:

1.  Know the statute of limitations exceptions.

          2.  Make sure you note in your charts when a specific treatment is complete.  If you attempt to correct a defective treatment, you are extending the statute of limitations. If the doctor in this case made absolutely clear that he was not treating the restoration issues, there would be no basis for the legal proceedings to continue, and the statute of limitations would have applied. 

p.s. a third lesson would be to avoid placing 20 implants when an implant supported bridge is a better option (though we don’t really know if it was here)

A link to the appellate division's decision is here Linker v. Malpeso.

The Dental Lawyer | Malpractice: Dupreee v. Giugliano

An interesting malpractice case recently came out of New York's highest court which has some bearing on dentists.  The case was Dupree v. Giugliano, 2012 NY Slip Op 08171 (2012).  In this case  a physician was treating a patient for depression.  Treatment included referring the patient to a mental health professional, directing the patient to perform certain exercises and take warm baths, and the prescribing of anti-depressants.  At some point thereafter, while demonstrating the prescribed  exercises at a local gym the doctor and patient began as sexual relationship which lasted for close to 9 months.  Upon confession the relationship to her husband, the patient’s partner filed for divorce.  The patient then sued the doctor on the grounds of medical malpractice.

Setting aside the ethical considerations, this fact scenario does not scream medical malpractice.  Liability for negligence arises when an individual has a duty to conform to a specific standard of care, there is a breach in that duty of care, that breach actually and proximately causes injury to another party, and that party is, in fact, damaged.  Professional malpractice claims, such as dental malpractice, add the additional element of requiring a lapse of professional judgment or skill. As I’m sure defense counsel argued, this case lacks the final element.  There was seemingly no lapse or professional judgment or skill.  The doctor meeting the patient at a gym and sleeping with her, when he knew her to be depressed and married reeks of a lapse of judgment, but on the surface, I wouldn’t  say that it smells like a lapse of  “professional judgment.”   This is not the case of a doctor prescribing the wrong medicine or pulling the wrong tooth; then again, in real life, malpractice often doesn't look like that.

In deciding this was a case of medical malpractice the court stated that the patient suffered from “eroticized transference, a medical phenomenon in which the patient experience near psychotic attraction to a treating physician, which the patient is powerless to resist” (internal quotations excluded).  The court claimed that it was the doctor’s responsibility to manage this phenomon once he began treating the patient.  Further, the court relying on a history of case law, determined that the challenged conducted merely had to constitute medical treatment or bear a substantial relationship to medical treatment to find medical malpractice.  The court concluded that the prescribing of medication and exercises as well as the  referral to a mental health specialist was sufficiently substantial treatment to justify the medical malpractice.

Regardless of whether or not you “buy” the court’s reasoning, there are several important points to be made here: 1. Doctors shouldn’t be sleeping with their patients, 2. Courts may stretch to find medical malpractice, and 3. A court finding medical malpractice instead of mere negligence means the malpractice carrier will be paying the damages, not the doctor.    

 

The Dental Lawyer | Innovative Tax Strategies for Dental Practices Part 1: Taking a Reasonable Salary

It has been preached by many canons in the industry that a dental practice is a vehicle to bring a dentist from dental school to retirement.  A dental practice, however, can also be made into an incredibly efficient and alluring vehicle of another type.  A tax vehicle.  Here are some strategies every practice should entertain.  Keep in mind that while these are general tips, an accountant or tax attorney is almost always going to be able to provide your particular practice with the most tax efficient strategies for your particular practice.

      Taking a “reasonable salary” – For those practices which are taxed as a corporation taking a reasonable salary and retrieving additional funds as a dividend can allow the owner to save on FICA taxes (Social Security, Medicare), and other items which are “automatically” deducted from someone’s paycheck.  Here’s how it works. 

When an owner pays himself a salary he is required to pay certain federal and state taxes and fees (noted above).  For many of these taxes and fees, the employer actually gets hit twice as it is the employer’s responsibility to match the employee contribution.  For example, if the doctor has an employee who has $20 withheld from her paycheck for FICA taxes it is the employer’s responsibility to match that $20 with an employer contribution in the same amount.  This means that when the owner is being paid as an employee, the owner is actually seeing twice the amount of these taxes and fees being withheld as the owner is responsible for both the employee and employer portion. 

The way to avoid these taxes and fees would simply be to not take a salary at all and simply take one’s entire income as a dividend from the corporation.  The amount taken as a dividend would still be subject to income taxation, generally, at ordinary income tax rates (as is all money you would receive as a salary).  The benefit would be avoiding all of the withholding taxes which are “automatically” deducted from a normal paycheck.  This apparent loophole is known to the IRS, and as a result owners of corporations like dental practices are required to take a reasonable salary.

Whether or not the practice owner is taking reasonable salary is somewhat subjective, but the IRS and tax court will look at:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• The use of a formula to determine compensation

(source IRS FS-2008-25, August 2008 Wage Compensation for S Corporation Officers)

The IRS is fairly strict and increasingly aggressive in making sure that individuals don’t dodge taxes by taking dividends instead of salary, so it’s important to play by the rules.  It is however still possible to arrive at a significant tax savings by taking some of the would-be profit of the corporation as a dividend.   Taking the above factors into consideration, the practice owner should set himself a reasonable salary for his location.  The rest should be taken as a dividend.  The amount taken as a dividend will rightfully avoid some taxation which would result if that amount was taken as a salary.

The Dental Lawyer | TSG Spring News Letter

Check out The Snyder Group's Spring 2012 Newsletter

The newsletter discusses:
1. The timing of dental transitions, and specifically that now is a good time.
2. The dangers of using "virtual escrows" as a means to accumulate funds for a partnership buy-in.
3.  Some tips on protecting the value of a practice in the event of death or disability (A subject I can go on for hours about)
4. Some basic questions you should ask to determine if your practice is get prepared to bring on an associate. (of course the best way to know is to put together a valuation with an Associate Feasibility Study).

A final note for today, I can't say enough good things about the people at The Snyder Group.  Tom, Charlie, Donna, Diane, Suzanne, Anita and anyone else who I'm leaving out, are tremendously courteous and extremely talented with regards to dental transitions!  I would highly recommend checking out their newsletters.

The Dental Lawyer | Top Ten Reasons Why Associateships Fail

Check out this video from Dr. Reggie VanderVeen  (a Henry Schein PTT Consultant and all around great guy) via the Michigan Dental Association, discussing the top reasons why Associateships fail.  I think a more appropriate title would be the "Top Ten Reasons Why Associateships Fail to Result in Successful Transitions." That's a little bit of a mouthful, but the point is that other than a few points in there, the video really is relevant to transitions and not the pure employer-employee relationship.

The Dental Lawyer | Entities and Practice Sales: Howard v. United States

In a previous post I mentioned that if there is any intention to sell a practice that said practice should not be taxed as a c-corp (note that when a corporation is formed you have the option, presuming you meet certain requirements, to be taxed as an s-corp or a c-corp).  This suggestion comes as a result of the 9^th Circuit’s decision in Howard v. United States, 448 Fed. Appx. 752; 2011 U.S. App. LEXIS 18092; 108 A.F.T.R.2d (RIA) 5993.  

In Howard, a dentist sold his practice, a professional service corporation taxed as a c-corp (the “Corporation”), to a buyer.  When Corporation was formed owner’s attorney, rather thoroughly, put together an employment agreement with a covenant-not-to-compete along with the incorporating documents.  Dr. Howard entered into the employment agreement with the corporation, which said nothing about the ownership of goodwill.  In the Asset Purchase Agreement, Dr. Howard allocated $549,900 to personal goodwill and $16,000 to the a covenant not to compete with the buyer’s Corporation.  The remaining $47,100 was allocated to tangible assets. 

When the Howards filed their 2002 federal income tax return, they reported $320,358 as a long-term capital gain resulting from the sale of personal goodwill to the buyer.  The IRS, however, had other ideas, and after auditing Dr. Howard’s return, they re-characterized the goodwill as a corporate asset.  The implications of this cannot be understated.  If goodwill is treated as a personal asset, as Dr. Howard intended, the goodwill would be taxed once as a long term capital gain, a rate which is significantly lower than the high ordinary income rates which most dentists pay on their personal tax returns.  By being characterized as a corporate asset, the money allocated to goodwill would be taxed twice, once at the corporate level (that is, the corporation which was solely owned by Dr. Howard had to pay tax on the goodwill) and again when that money was distributed to Dr. Howard, as such a distribution would be treated as a dividend taxable to Dr. Howard personally. As a result, Howard was taxed twice at higher rates as opposed to once at a lower rate. 

The 9^th Circuit relied on Martin Ice Cream Co. v. Comm'r, 110 T.C. 189 at 207-08 (1998), Norwalk v. Comm'r, T.C. Memo 1998-279, 76 T.C.M. (CCH) 208 (1998), Macdonald v. Comm'r, 3 T.C. 720, 727 (1944), to reach the conclusion that when a C-corp has an employment agreement, with a restrictive covenant, entered into by the owner of the corporation, the corporation and not the individual owns personal goodwill.

Industry wide the advice given to avoid this double taxation conundrum is not to sell as a c-corp.  Read narrowly, one should only hit the double taxation problem if there is, (1) a Professional Service Corporation, (2) taxed as an c-corp, (3) where the doctor has an employment agreement with the corporation, and (4) where the employment agreement contains a covenant-not-to-compete. My feeling is, however, that this reading of the case is too narrow, and to avoid the issue dental practices should not be taxed as C-corps (there really are few benefits for most practices to be taxed as a c-corps anyways).

I would also add that I would not be surprised if in the coming years the IRS tries to use this precedent to expand the holding in Howard, to s-corps and partnerships.  As a result the best protection might be for OWNERS not to have employment agreements with their practices in any respect.  Owners, however, should make sure that any associate dentists they employ are bound by an employment agreement for a completely different set of reasons.