Dissolving a Practice — The Governance Framework No One Hopes to Use

Two pediatricians practiced together for 11 years in a rural county where their office was, in every functional sense, the county’s pediatric infrastructure: roughly $1.05 million in annual collections, a panel that ran 58 percent Medicaid, and a partnership agreement nine pages long whose entire governance section read, “decisions shall require mutual consent.” The sentence worked for a decade because the partners agreed about everything that mattered. Then a regional hospital system offered to acquire the practice, one partner wanted to sell and the other did not, and every subsequent vote tied. Fourteen months later, collections had fallen 9 percent, the offer had lapsed, and one partner’s attorney delivered the sentence that reorders every equal owner’s understanding of the situation: absent contractual machinery, the statutory endgame in many states is judicial dissolution—a court-supervised process in which the practice both partners were fighting to keep simply ceases to exist. A number of statutes allow one side to elect a buyout instead. No partner should have to learn which kind of state theirs is from a litigation posture.

That is the default. A dissolution framework is the alternative, and it belongs in the agreement from the first draft, written by people who fully expect never to use it. Financial distress, a governance failure that outlives its remedies, a transaction that collapses after the partners have already told the staff—each of these arrives with patients on the schedule for next Tuesday, and each of them creates obligations that do not care whether the partners are speaking to one another.

Start with authority, because a wind-down run by six equal voices is not run at all. Define what constitutes a dissolution event and what vote authorizes a voluntary one—supermajority or unanimity, stated plainly. Then name who winds the practice down: a liquidating partner or a small committee, with defined authority to sell assets, settle claims, terminate contracts, sign on the practice’s behalf, and retain counsel and an accountant, and with compensation for the work, because winding up a medical practice is a job and it will otherwise fall on whoever cannot say no. Give the role a reporting obligation to the partners and a target timeline.

Then the waterfall, which is the provision that prevents the ugliest arguments. Money leaving a dissolving practice goes out in an order, and the order should be written rather than negotiated at the moment there is not enough of it:

• Secured creditors and the practice’s lenders, on the terms the loan documents already require.
• Trade payables, taxes, and the vendor obligations that survive closing, including the vaccine account.
• Employee obligations: final payroll, any accrued and payable time off, and benefit-plan wind-down.
• The wind-down reserve—the money set aside for tail coverage, record custody, data archiving, final accounting, and known contingencies, funded before anything is distributed.
• Partner loans and advances to the practice.
• Partner capital accounts, then any residual, distributed by ownership percentage.

Two cautions attach to that list. Creditor priority is a matter of state law and the loan documents, not of partner preference, and an agreement’s waterfall operates inside whatever the statutes require rather than above it. And the reserve line is the one practices skip, which is how a single partner ends up personally carrying an obligation that belonged to all of them.

Patients come next, and here the practice’s obligations are external. Most state medical boards set requirements for notifying patients when a practice closes—how much advance notice, what the notice must say, how it must be delivered, and sometimes whether it must be published. Those rules are the floor. The agreement’s job is to require compliance and assign the work: who drafts the notice, who signs it, which patients receive it, and who pays for the mailing. The content itself is fairly stable across jurisdictions—the closing date, how to obtain a copy of the record, where records will be held and for how long, and how to reach the custodian—and continuity of care is the point of all of it. Patient abandonment is a licensure question before it is a partnership question, which is why the notification plan gets reviewed by counsel and checked against the board’s own current guidance rather than against what a neighboring practice did five years ago.

Record custody is the obligation that outlives everything else, and pediatrics makes it longer than most specialties. Name a custodian in the agreement—a successor practice, a remaining partner, or a commercial custodial service—and define the term, the standard of care, the cost allocation, and how patients and former patients request records. Retention periods are set by state law, and the pediatric wrinkle is that limitation periods for care delivered to minors can run into a patient’s adulthood in many states, which means a custody arrangement measured in years may need to be measured in decades. Privacy obligations do not dissolve with the entity either: protected health information in a third party’s hands is a relationship the privacy rules govern, and counsel should paper it as such. Where a partner takes custody personally, say what happens when that partner dies, and name the successor.

Billing records get their own provision, separate from clinical records, because they answer different questions and are needed by different people. Somebody has to collect the receivables after the doors close, respond to payer audits and appeals for as long as the lookback periods run, produce the documentation a government inquiry requests, and file the final returns. Define who holds those records, who is authorized to act for the dissolved entity, and how the cost of doing it is shared. A practice that dissolves without answering this discovers the answer when the first post-closing audit letter arrives addressed to an entity that no longer exists.

Technology is where the surprise lives. Electronic record and billing vendor contracts do not end when a practice does. Archival access—the read-only version that lets a custodian answer a records request three years from now—is typically a separate paid service, data export in a usable format is typically a separate paid project, and both are negotiated from a weak position once the practice has already announced its closing. Address it in the agreement: allocate archiving and migration costs among the partners proportionally to ownership, require the wind-down reserve to fund the first several years of it, and require that the practice’s vendor contracts be reviewed for their termination and data-return terms at the annual audit rather than at the end. And do not let tail coverage go unnamed in the same paragraph. Every partner needs the gap closed on care delivered before the closing, and a dissolution is precisely the moment when nobody’s employer is still there to buy it.

Red flags. No dissolution framework, so the statutory default—court-supervised dissolution—is the practice’s plan. Patient notification improvised late, which converts a wind-down into a licensure matter. No named record custodian, and no funding for the custody. Billing records unassigned, discovered when a payer audit arrives after closing. Archiving costs unaddressed, leaving one partner holding a multi-year data contract for a practice that no longer exists. And a distribution order left to be negotiated at the moment there is the least money and the least goodwill.

The part of a partnership agreement a practice will be most grateful to have written is the part that describes its ending.