For a growing number of doctors, it's not dollars but split dollars they desire for selling their practices.
Quietly, more doctors are asking for what is called a split-dollar life insurance plan as a form of compensation for the intangible, or goodwill, assets of their practices, whether they're being sold to a hospital or a physician practice management company.
This little-known alternative to receiving cash is being hailed as an effective way to dodge taxes physicians otherwise would incur upon the sale of their practices.
The arrangement often is implemented quietly in part because the IRS has never been wild about split-dollar life insurance, which previously was used most commonly as an executive's salary perk. Some fear an IRS crackdown if too many people sing the plan's praises.
Though no statistics are available on how many physicians get compensated with split-dollar life insurance, those acquiring practice assets say that increasingly it's something doctors are asking for.
And it's no wonder, with stories like that being told by St. Louis-based Applied Innovative Monetary Solutions, one of two major players in brokering split-dollar deals. AIMS cites a doctor in a mid-March acquisition who accepted a split-dollar plan instead of cash for a $3 million goodwill appraisal. In 10 years, that $3 million will become $11.5 million with no taxes due, a deal that must be especially appealing to sellers today because PPM stocks are no longer a hot commodity.
"Others brought (split-dollar life insurance) to our attention," says John Crawford, chief financial officer of Nashville-based PPM PhyCor, which is studying whether to use split-dollar life insurance as part of a compensation plan.
"We're trying to identify the pros and cons (of the structure). I don't know that we've lost anything because we weren't prepared (to offer it), but we need to be as well-informed about potential tools and techniques as possible."
The way split-dollar life insurance works in a physician practice transaction is that upon the closing of a deal, the buyer begins to make payments into an escrow fund, which continue over the next few years until the amount paid equals the intangible value of the practice. The funds are used to pay premiums on a life-insurance policy owned by the seller, premiums that grow on a tax-free basis. The money also is protected in some states, including Florida and Texas, from being used to settle malpractice claims.
While the insurance premium amount is based on the amount of goodwill, or intangible assets, the rest of the payment is divided between stocks and cash.
Each of the selling physicians must apply individually to participate in the plan. And after a certain amount of time -- usually about three or four years -- each can borrow up to 90% of his or her portion of the cash value of the policy on a tax-free basis. The death benefits also are tax-free and can be used to pay off any borrowings from the life-insurance policy. Meanwhile, the policy is invested in a mutual fund, where it presumably is growing in value all the time.
There is a 6% to 8% income tax on premiums paid by the buyer. But according to promotional materials by Dallas-based consultant Value Management Group, there also is a method by which even this small income tax liability may be entirely eliminated.
And because the split-dollar plan is based on services, rather than a corporate asset, there are no corporate tax consequences, according to Value Management.
Value Management has worked with Nashville-based Lifestar Financial, the other major player brokering split-dollar plans.
Though physicians may think they are fooling the IRS by participating in split-dollar life insurance plans, some tax lawyers warn that the seeming benefits of such plans are no more than fools' gold.
"It's very shrewd, but I think it's a little too shrewd," says Stuart Kaplan, a Pittsburgh attorney who has worked with physicians in practice acquisitions.
"I'm concerned it doesn't really work, that it's not in fact tax-free, even though overly shrewd financial advisers nonetheless sell it that way. It's on-the-edge tax planning."
Split-dollar life insurance first came into form in 1955 as a way to provide extra compensation to top executives; many Fortune 500 CEOs have such a plan.
But it wasn't until the early 1990s that it was used in physician practice transactions.
"It was an original idea of mine," says AIMS President Michael Kohn, a tax attorney by training. He says he noticed that split-dollar could be applied to sales in any industry where intangible assets were part of the purchase price, including industries like funeral homes, advertising companies and computer software companies.
Fort Worth, Texas-based multispecialty PPM ProMedCo is the only company in its industry identified by name as using split-dollar life insurance in its physician practice transactions, although others apparently use it, too. Wayne Posey, ProMedCo's president and chief executive officer, would not comment on such transactions, saying he doesn't reveal the structure of his company's deals.
AIMS and Lifestar say last year they brokered transactions representing hundreds of physicians and tens of millions of dollars in premiums; the privately held companies would not divulge specific numbers. Lifestar's founder, Ed Netherland, is a former partner of Kohn's at AIMS; he split with the then five-year-old AIMS in 1997. He would not comment for this article.
"My tax attorney told me that if I want to get the IRS on my butt, I should start talking to people for articles," he said.
The IRS in 1997 ruled that any employee (which presumably would include a physician, an employee of a professional corporation) receiving a split-dollar plan had to pay taxes on any gain in value of the policy beyond premiums paid.
But tax attorneys and others are trying to incorporate changes in their plans that would work around that ruling.
The IRS has not announced that it has any intention of opening an investigation into split-dollar plans in physician practice transactions, although it isn't inconceivable that the agency would investigate a tax avoidance plan it didn't approve of.
Another possible deterrent to an increasing number of split-dollar plans is that, unlike many physicians, not everyone involved in the sale of a group practice is convinced split-dollar plans are a good idea.
For three years, the PM Group, a Battle Creek, Mich.-based physician consultant, has had no luck selling its split-dollar plan to buyers, despite physicians' enthusiasm for it. That may be because the amount of paperwork involved is tremendous, says Gary Grubb, PM Group president.
"The purchasers drive" the use of split-dollar plans, Grubb says. "They're aware of these programs, but it's not an uncomplicated transaction. There are many documents involved that scare people off or put this concept on the back burner."
And even Kohn says that taking a split-dollar life insurance plan over cash is not best for every physician selling out.
"I think physicians as a market represent three groups of sellers," Kohn says. "One is financially unable to maintain the practice and needs every dollar to pay off debts. That's not our customer.
"One-third selling are just fearful of change and are looking for what I could call a safe harbor. They, too, are not candidates for us.
"But some see the opportunity to take a premium price now -- that's our candidate. They're sophisticated, and well-heeled financially."
For 1998, Kohn expects great growth at AIMS despite a sluggish first quarter. He says his sales were slowed by a federal fraud-and-abuse investigation of Columbia/HCA Healthcare Corp., which had used split-dollar life insurance in more than 30 transactions representing 100 physicians; the blowup of the MedPartners-PhyCor merger; and "general uneasiness with what happened to the first generation of acquired physicians at MedPartners." But second- and third-quarter deal-flow is strong, he says.
Apparently, more physicians are deciding they would be foolish to turn this kind of deal down.