PATIENT DEPOSITS/PRE-PAYMENTS AND DUE DILIGENCE
We have had cases where our dentist clients are selling a dental practice/shares and cases where our dentist clients are purchasing a dental practice/shares and the question of patient deposits has become an issue. In each case the selling dentist had collected a substantial amount of deposits from patients for work to be performed by the dentist but not yet performed.
The amount in both cases was significant and was not discovered by the Buyer during due diligence but came to light following the closing. On closing, the deposits should be transferred over to the Buying Dentist to be held in trust in favor of the patient and applied to the patient account when the dental services have been rendered. Unfortunately, some selling dentists have gotten into the habit of spending these patient deposits as they come in and don’t have the money on hand to give to the Buying Dentist after closing. It is important for dentists to ensure that they are not spending these patient deposits except in relation to that specific client’s treatment or they risk having committed professional misconduct. The problem that arises is that the selling dentist has to come up with a way of returning the deposits to the Buying Dentist. The funds are either taken from the vendor’s associate fees, accounts receivable or on a payment plan. The Dentistry Act, 1991 deals with these prepayments as follows:
DENTISTRY ACT, 1991, REGULATION 853/93
Section 4 of the Regulations states in part that “Where a member agrees to provide a course of dental treatment on a fee for service basis and accepts payment in advance of completion of the course of treatment, the member shall,
(a) Provide the patient with full particulars of all payments to be made for the course of treatment;
(b) Ensure that the agreement with the patient specifies the obligations of the member and the patient in the event that the member is unable to complete the course of treatment.”
Section 3 of the Regulation states that an agreement with a patient shall (a) be in writing, (b) be maintained in or available as part of the patient record and (d) specify particulars of all payments to be made under it.
Section 2 of the Regulation sets out acts of professional misconduct and subsection 21 of Section 2 deals with “Failing to comply with section 4 respecting payment in advance for treatment on a fee for service basis.” – in effect the dentist collecting the prepaid deposit and not properly applying it may have committed professional misconduct.
AVOIDING PROBLEMS RELATED TO PATIENT DEPOSIT OR PRE-PAYMENTS
- Share Purchase Agreement : If we know that there are significant pre-payments you should have a representation and warranty from the Seller in the share purchase agreement stating either that there are no prepaid patient deposits and/or if there are prepaid patient deposits setting them out in a schedule to the agreement. Also, we would suggest providing for a credit to the Buyer for any prepaid patient deposits against the Purchase Price.
- Work in Progress – Generally a work in progress clause will be included in the purchase agreement that states that fees for work that has not been completed as of the closing date shall be apportioned between the buyer and seller in a fair and equitable manner. So if the seller did 50% of the work prior to closing the seller will be entitled to 50% of the fees (or deposits). If no work has been done on the patient prior to closing the entire pre-paid deposit would go as a credit to the purchaser to be held on account of the particular patient who paid it.
- Due Diligence : Ensure that you or the person performing due diligence on your behalf searches the patient records and computer for prepaid patient deposits.
SUMMARY
This problem can cause substantial stress both to the Buyer who was unaware of the deposits and now has to deal with the problem when the patient attends to have the work or services completed and has already prepaid and also between the Buyer and the Seller especially if the Seller is to remain at the practice following closing as an associate. If the Seller ensures that his pre-paid deposits are being held properly and not spent (except on the depositing patient) there will not be any issues. This blog post is for informational purposes only and should not be construed as legal advice.