Bankruptcy brings out partners' inner shark

March 1, 2007

"Ladies and gentlemen, I am happy to announce that you have all been offered early partnership." "I wasn't supposed to be a partner for three years."

"Ladies and gentlemen, I am happy to announce that you have all been offered early partnership."

"I wasn't supposed to be a partner for three years."

"And me for two years. Twelve new partners in one year. That seems strange. Why?"

"We've had a rash of sudden unexpected retirements."

"I heard they weren't all retirements. Some have gone to other groups."

"Does this have anything to do with the drop in revenues?"

"No, no, no. Revenues always dip between the Thanksgiving and New Year holidays. Just sign the contract."

"Betsy in the MRI office told me there was a process server today."

"Amway salesman."

"And that the last pension contribution wasn't made."

"Computer glitch."

"And that Dr. Borgan hasn't been seen for weeks and a horrible smell is coming from his office."

"Poor personal hygiene. Do want to be a partner or not? Just sign the contract."

Neal Smithers is the owner and president of Crime Scene Cleaners, one of a number of companies popping up in this niche market. While unemployed, he was watching Pulp Fiction, wondering what to do with his life just as John Travolta accidentally blew the head off of the passenger in the backseat of his car. As Harvey Keitel is brought in to clean things up, Neal realized what he wanted to do with his life, but little did he know how messy and repugnant the job would be. He couldn't have imagined the 300-pound man who died and then spent weeks fermenting in his apartment. What could possibly be worse? A Mafioso divorce? The recent midterm elections? No, a radiology bankruptcy.

The most common cause of personal bankruptcy in the U.S. is difficulty with bills from a medical illness. That is a sobering statistic. Do you know what will become the most common cause of bankruptcy of medical groups? Bills introduced by the new Congress.

I don't want to give the impression that I have a problem with the Democrats or Republicans, since I don't. I have a problem with all politicians. The Republicans had control of the White House, Senate, and House of Representatives and could not even accomplish their professed goal of medical liability reform. These fiscal conservatives, who said they were going to decrease government spending, instead drove up healthcare costs with one of the largest new entitlements since Medicare was created, the new Medicare drug benefit. At the same time, they included in the legislation language that actually made it illegal for the government to negotiate drug costs! What sense does that make?

Now the Democrats are drawing up their wish list of reforms, and right at the top is universal healthcare, which is great. Based on their past record, however, they are going to need trillions of dollars to cover this huge expansion and will once again look to us for the necessary cuts. And you thought the Deficit Reduction Act was bad.

I now hear from worried radiologists who own outpatient imaging centers that because of the DRA they may not be able to stay in business. Radiologix's stock was absolutely hammered for the same reason, and this may have precipitated the company's purchase by Primedex Health Systems at a rock bottom price. Over the next decade, groups will be butchered out of business by these changes, and few are prepared for the painful process and messy bloodbath that will need to be cleaned up.

Most businesses fail, 50% in the first year. A radiology group with just one hospital contract can find itself out of business overnight. An imaging center might take longer, but both types of failure happen every month throughout the U.S. Unfortunately, few people, doctors especially, prepare for failure. The people who do prepare for failure are rock stars, movie stars, and the extremely wealthy. They have lawyers who tell them as they are about to get married that most marriages fail and they need to prepare for that day with a prenuptial agreement. (Sir Paul McCartney, what were you thinking? And you a billionaire!)

People are never adequately prepared for a bankruptcy or the overnight loss of a hospital contract. Most bankruptcies sort of sneak up on you. Revenues are down a little this month. It will pick up next month. Next month comes, and things are down more. It must just be the holidays. Things will pick up next month. They don't. In fact, things get worse, but everybody thinks it is temporary. Soon, decisions are being made about who gets paid and who doesn't get paid. Then all of a sudden it snowballs, and now it is too late. You wake up one day, and lawyers are shoving papers in your face telling you to sign and file for bankruptcy.

I have known several radiologists who have gone through this process, and it is a traumatic one. Their personal tragedies offer an excellent learning experience for all of us. Unfortunately, I couldn't bring myself to share their personal details for fear of exposing another radiologist to humiliation, derision, and scorn. Lawyers are a much better target for that, and so I reference Carlyn Kolker's amusing article, "An unquiet death," in the November issue of American Lawyer.

She writes about the ugly bankruptcy of the law firm Coudert Brothers. You would think that 600 lawyers could have adequately prepared for the approaching disaster, rather than face years of bitter litigation over who owes whom what. Since there are many parallels with radiology groups that have gone through the same process, read on and learn.

As revenues started to decline, partners started to jump ship, taking clients and revenue. When a partnership files for bankruptcy, the last remaining partners are on the hook for all the liabilities. The fewer who are left, the more each owes. As the waters started rising about the ankles of the remaining partners, they began to look around. By the time the water was up to their waists, it was every man for himself.

The executive partners in charge looked at what exactly they were on the hook for and started paying down those debts, leaving others to fend for themselves. Some partners started transferring corporate funds to their own personal accounts. Others continued to draw funds even after the group was disbanded, billing to the corporation foot massages ($157), limo rides ($1454), and their children's tuition ($15,840). Douglas Miller transferred $700,000 to his personal bank account and then killed himself in a hotel.

"Neal Smithers, cleanup needed in the presidential suite."

By the end, partners were on the hook for millions in leases, taxes, monies owed to creditors, as well as potential millions from pending lawsuits.

Not all partnerships are created equal. Not all partners treat each other as equals as the ship is sinking. As soon as things start to go south, start asking the hard questions. Where is the money going? What bills are being paid? Who is responsible for making the decisions of whom to pay? What am I personally liable for?

Even better, try to get some of these issues resolved with your partners and lawyers before they happen. Otherwise, you may find yourselves in such a fetid stinking mess that even Neal Smithers and his haz-matted Crime Cleaners won't touch it.

Dr. Trefelner is a radiologist and cofounder of NightShift Radiology. He invites comments by e-mail at ericxray@pacbell.net or fax at 650/728-5099.