Practice Sales & Acquisitions
Buying or selling any type of business can be a complex process. However, when that business is a medical practice or healthcare business, there are unique legal and regulatory compliance issues to consider on top of the usual considerations involved in the sale of a business in any other industry. It therefore is important for healthcare providers and businesses to consult and work with a healthcare and business attorney who is familiar and can assist with these unique issues.
Physician medical practices are the front line for doctors and other individual providers to deliver healthcare services to patients in an outpatient setting. For primary care physicians and many specialists, their medical offices serve as the “home base” (sometimes the only base) for delivering their healthcare services. Small medical practices may include only one, two or relatively few physicians in one office, while large medical practices may have ten or more physicians in the medical practice, with multiple locations within a 30-mile radius of their main office.
But whether small or large, some medical practices and healthcare businesses can barely survive (or cannot thrive) financially. And some — particularly in rural areas, where patients with health insurance or the ability to pay for healthcare services are few — cannot survive at all. Even in large metropolitan areas, competition is often stiff and there may be an over-supply of certain specialists, making it difficult to succeed financially. Some medical practices generate large sums, even millions of dollars, in revenue. But many individual physicians and providers struggle and may earn relatively little. Even if a medical practice or healthcare business is financially successful, there may be good reasons (both professional and personal) to sell the practice or business at some point.
With increasing administrative burdens and frequent reimbursement cuts facing physicians and healthcare providers, many decide it is time to sell their practices. And hospital systems, insurers, management companies and private equity funds have increased the volume of physician medical group acquisitions in recent years for numerous reasons.
There are many legal issues to consider before and during the sale or acquisition of a medical practice or healthcare business, including:
- Transaction Form (stock or asset purchase)
- Transaction Structure (whether to retain the practice name, etc. or not)
- Valuation (hard assets, accounts receivable, intangible assets, liabilities, etc.)
- Fair Market Value and Commercial Reasonableness
- Employment and Compensation (whether individual providers will be employed by the acquiring hospital or other acquiring entity or not)
- Regulatory Compliance (including the Stark Law and Anti-Kickback Statute)
One of the first issues to be decided is what is to be sold. The sale of a medical practice or other healthcare business can be structured as an “asset” sale or a “stock” (or other ownership interest) sale. Each type of transaction is different in many ways, and pros and cons for both the buyer and seller vary according to individual circumstances and goals. Which type of sale is more advantageous for the purchaser versus the seller may differ depending on the specific situation. But in any case, exactly what is to be sold or acquired should be carefully explored, discussed and agreed upon at the outset, to avoid unnecessary misunderstandings down the road.
In a stock purchase, the shareholders of a corporation that owns and operates the business sell their stock so that the buyer becomes the owner of the corporation. In an asset purchase, the corporation that owns the business sells to the purchaser all (or perhaps only some particular) business assets, which generally include furniture, fixtures, equipment, the business name and goodwill.
In a stock purchase, the buyer of stock not only acquires the assets of the practice, but also the liabilities (accounts payable, contractual obligations, malpractice liability, etc.). The stock purchase form is often used when, for example, a physician employee seeks to become a full or partial owner. On the other hand, asset purchases are used when the seller wishes to close the practice and keep the accounts receivable, and the purchaser wants to avoid liabilities.
Properly valuing a medical practice is another early and important step of selling the practice. In a medical practice, generally three groups of items have value for acquisition purposes: hard assets (e.g., furniture, medical equipment, medications, computers, etc.); intangible assets (e.g., location, reputation, patient-payer mix, goodwill, etc.); and accounts receivable (uncollected outstanding bills and revenue). Physicians and other healthcare providers need to realistically identify and determine the value of these assets (preferably based upon qualified, independent valuation experts’ appraisals and opinions) when serious consideration of buying or selling begins. We work with qualified, independent financial and practice valuation experts, who can help you determine and document the appropriate value of the practice.
With regard to employment and compensation, a hospital’s purchase of a medical practice often requires that the physicians become employees for some designated period — usually at least one year. There are various ways a hospital’s acquisition of a practice may be structured, depending upon the practice size and medical specialty or specialties involved. The hospital might buy the practice’s assets, with its physicians and staff retained as employees of the practice, and the practice keeps its separate identity. Or, the hospital might buy the practice’s assets and the physicians and staff become hospital employees, with the practice’s identity ceasing. Or, the physicians might become hospital employees but also remain with the practice, which retains a separate existence. Each situation will have tax and other legal implications for both the physicians and the hospital. And healthcare clients should consult a CPA or tax attorney concerning the tax issues involved.
Other factors governing a practice sale that must be considered relate to regulatory compliance. For instance, the transaction must comply with the federal Anti-Kickback Statute, which proscribes direct or indirect compensation for referral of Medicare or Medicaid patients. Similarly, the Stark Law’s prohibition against referrals and billing for Medicare or Medicaid where there is a financial relationship between the referring healthcare provider and the recipient of payment for designated health services, requires analysis of whether payment of the purchase price establishes a financial relationship that might trigger Stark penalties. Regulatory issues also impact how compensation can be legally structured and paid to physicians if they become hospital employees. It is essential that the purchase price, as well as physician compensation, be at fair market value and commercially reasonable to help ensure that the Stark and Anti-Kickback laws are not violated.
Changes in Ownership – Medicare & Other Issues
When a healthcare entity’s ownership changes hands myriad legal and business issues arise. Buyers and sellers involved in purchases or sales that cause changes in ownership of Medicare suppliers or providers need to consider and address various Medicare requirements to ensure that appropriate and timely filings are made to assign or obtain Medicare numbers. They also should plan for how a transaction may affect Medicare payments after closing.
Purchasers must consider and decide whether to enroll as new providers or suppliers or accept assignment of the seller’s Medicare number. Even if a transaction qualifies as merely an information update, rather than an ownership change, parties still must confirm that appropriate ownership updates are timely filed. Failing to properly handle information updates or ownership changes can result in suppliers’ or providers’ billing privileges being deactivated or Medicare numbers being revoked.
For a detailed discussion of Medicare and other issues associated with Changes in Ownership (“CHOW”), including CHOW notification and filing requirements, payment issues associated with a CHOW, and consequences for failing to report a CHOW or update ownership information, please see an article by Ari J. Markenson, Esq. and Tammy Ward Woffenden, Esq., which appeared in the June 2019 (Vol. 31, No. 5) issue of the ABA’s Health Lawyer, and the ABA Health Law Section’s book titled “What is …CHOW?” Here is a PDF link to the article: https://www.winston.com/images/content/1/8/v2/180034/Changes-in-Owndership-Medicare-Rules-and-Other-Issues-AUG2019.pdf.
Assuring a Successful Physician Practice Acquisition or Investment
As physician practices, healthcare entities, private equity and venture capital firms consider physician practice investments and acquisitions, the players need to address the unique nature of physicians and physician practices in order to assure a successful deal. Effective communication is essential. Too often, physician practices view a practice merger or acquisition as an easy way to generate cash, without understanding that the cash comes with a price.
Sometimes a few members of a physician group may believe that each physician will walk away with a substantial amount of cash with no strings attached. Those physicians may even try to convince the rest of the group “not to worry” about the written agreements involved, contending that the agreements are “just words put on paper” by lawyers who do not understand the “real deal.” The “real deal,” as described by such physicians, may include claims that a non-compete clause, for example, is not enforceable, or that there will be “no changes” to the group or the way the group practices medicine, despite the written agreements. Deal makers for buyers may reinforce such falsely reassuring messages by, for instance, soft-pedaling non-compete clauses or proposed changes to the group or the way the group practices in order to reach a deal and purchase the practice.
Legal counsel who try to get the group to focus on the terms of the agreement are often viewed as obstacles to the group’s obtaining the desired cash the sale will generate. But physicians should understand that virtually no buyer will spend large sums of money to purchase a practice and then not seek to enforce the terms of the written agreements it insists be signed to consummate the deal.
Failure to communicate or failure to heed what is communicated can doom a practice acquisition. And realistic assessment of relative bargaining power and negotiating strength is crucial. Rarely will a party with greater bargaining power or negotiating strength “let the tail wag the dog,” by allowing the other party to dictate the terms or ignore terms after they’ve been agreed upon.
Ideally in physician practice investments and acquisitions, neither party feels like the “dog” or the “tail,” because post-closing, the buyer(s) and seller(s) usually need to continue working together. All parties to the transaction need to understand the deal, effectively communicate, and agree on plans for the future. Effective communication will minimize the risks of confusion, underperformance, disappointment and disputes.
Buying or Selling a Medical Practice in the Wake of COVID-19
(This section is adapted in part from an April 24, 2020 article by Jason Ruchaber, CFA, ASA of RootValuation.)
As a result of the global COVID-19 pandemic caused by the novel coronavirus, federal and state governments have taken unprecedented actions, restricting and closing large portions of the U.S. economy, and issuing stay-at-home orders in an attempt to slow the spread of the disease and “flatten the curve.” These actions have led to immediate and widespread economic damage, business closures and high unemployment. Moreover, despite several economic stimulus packages designed to bolster impacted businesses and employees, the pandemic has caused widespread economic (as well as health) damage that dramatically affects businesses in all industries, including in particular healthcare.
Consequently, physicians and medical practices contemplating sales, acquisitions, mergers or joint ventures before the COVID-19 outbreak, need to consider what effects the pandemic may have on their proposed transactions going forward. Below are several key factors to consider:
History may no longer be a good predictor of the future
Business values are derived from expectations regarding the future economic benefit that will be derived through ownership. These expectations are often developed as an extrapolation of historical performance, with adjustments made to reflect those changes that are reasonably known or knowable (for example the recent addition of a new payor contract or provider). In the wake of COVID-19, however, the expectation that practice patterns will return to normal once this has all passed may not be the case. With widespread unemployment, many will lose their access to health insurance and, due to loss of income, may forego elective and non-emergent visits or procedures. In addition, the fear and anxiety created by the pandemic may permanently alter how patients engage with the healthcare system, with many opting to limit their exposure to physician offices and medical facilities through reduced healthcare utilization or through a transition to virtual or home-based care. As a result, pricing models developed with proformas and discounted cash flow (“DCF”) analysis will need to be revisited and modified.
Pricing of risk should be carefully analyzed
In valuation, the term “risk” refers to the likelihood and magnitude that future performance will vary from expectations. Risk is priced in the form of an interest rate, or rate of return, and the corresponding value of a given set of expected cash flows is inversely related to risk (i.e., higher risk = lower value). Few could have predicted the large-scale governmental intervention to shut down the economy, and now that we have seen that this is a reality, investors must account for the possibility that future contagions may result in similar interventions. There is no model that currently prices this risk, but as institutional investors and financial markets process and analyze these new possibilities, the risk and required rates of return on equity investments will most certainly be higher.
Valuation multiples observed from transactions prior to COVID-19 are no longer appropriate in the immediate post-COVID environment. Observed valuation multiples from prior transactions reflect the expectations for future financial performance and risk that existed at the time the transaction occurred. For the reasons noted above, these expectations have changed in the wake of COVID-19, and the use of these valuation multiples is no longer a reasonable basis for establishing FMV.
Increased debt levels
Equity value is defined as the enterprise value minus debt. In response to the business interruptions caused by the coronavirus, many organizations are funding operating losses by drawing on existing lines of credit, opening new credit facilities, and/or accepting federal stimulus dollars. This additional debt burden has a dollar for dollar reduction on the value of shareholder equity even in the absence of changes to other valuation inputs. As a result, previously valued equity transactions will need to be repriced to account for higher levels of debt.
Opportunities and pitfalls
Like all sudden and unforeseen events, the economic impacts of the coronavirus outbreak will create both winners and losers. Whereas reduced expectations for growth in earnings and higher risks will reduce values for many sectors of the healthcare industry, we have already seen a massive increase in investor interest for telehealth technology and platforms, and this will spawn additional opportunities in related ancillary businesses.
Beyond the immediate and obvious opportunities, organizations that are able to respond and reposition themselves for the changing healthcare environment may also benefit from these changes. These include alternative care delivery platforms, such as care on demand and home-health, retail and drive-through clinics, and concierge medicine.
Finally, for organizations that did not have sufficient capital or technological infrastructure before the outbreak, or those unable to adapt to new modalities of care, there will be a wave of business failures that will allow well-managed and dynamic practices to emerge stronger and improve their competitive position. We help healthcare providers and businesses handle both the legal issues and opportunities the pandemic has created.
For additional details regarding the impact of the COVID-19 pandemic on healthcare transactions, please see our separate Healthcare Transactions, Litigation & Alternative Dispute Resolution webpage.
FTC & DOJ Issue Draft & Final Merger Guidelines
On July 19, 2023, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) issued draft Merger Guidelines providing notice regarding how the agencies intend to evaluate proposed mergers. The draft guidelines further the “competition agenda” that President Biden laid out in his July 2021 Executive Order.
U.S. Attorney General Merrick B. Garland said: “Unchecked consolidation threatens the free and fair markets upon which our economy is based.” “These updated Merger Guidelines respond to modern market realities and will enable the Justice Department to transparently and effectively protect the American people from the damage that anticompetitive mergers cause.” A White House fact sheet said the revised guidance “reflects an approach to antitrust enforcement that is informed by the best, most up-to-date economic evidence available. Robust enforcement can lower prices, raise wages, and promote innovation.”
The 13 revised draft guidelines were:
- Mergers should not significantly increase concentration in highly concentrated markets;
- Mergers should not eliminate substantial competition between firms;
- Mergers should not increase the risk of coordination;
- Mergers should not eliminate a potential entrant in a concentrated market;
- Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete;
- Vertical mergers should not create market structures that foreclose competition;
- Mergers should not entrench or extend a dominant position;
- Mergers should not further a trend toward concentration;
- When a merger is part of a series of multiple acquisitions, the agencies may examine the whole series;
- When a merger involves a multi-sided platform, the agencies examine competition between platforms, on a platform, or to displace a platform;
- When a merger involves competing buyers, the agencies examine whether it may substantially lessen competition for workers or other sellers;
- When an acquisition involves partial ownership or minority interests, the agencies examine its impact on competition; and
- Mergers should not otherwise substantially lessen competition or tend to create a monopoly.
The FTC and DOJ said they focused on three core goals in revising the guidelines: the guidelines should reflect the law as written by Congress and interpreted by the highest courts; they should be accessible and increase transparency and awareness; and should provide frameworks that reflect the realities of the modern economy and the best of modern economics and other analytical tools.
The draft guidelines were criticized by some for their aggressive enforcement approach. U.S. Chamber of Commerce Executive Vice President and Chief Policy Officer Neil Bradley said the draft guidelines “are designed to chill merger activity, which will deny smaller companies access to the capital and expertise they need to grow and place U.S. businesses at a disadvantage with their global competitors. Congress and the courts should continue to reject the agencies’ efforts to undo the consumer welfare standard and decades of antitrust precedent that has served the U.S. economy and consumers so well.”
The FTC and DOJ said they would accept comments on the proposed guidelines until September 18, 2023. So, stakeholders were advised to watch for further developments.
Then, on December 7, 2023, HHS, the FTC, and the DOJ announced several new actions to promote competition in healthcare and support lower prescription drug costs. The actions included launching a public inquiry into how private equity and other corporations’ increasing power and control of healthcare is affecting Americans; identifying anticompetitive “roll ups” (a strategy in which a series of small acquisitions can lead to market consolidation and contribute to worse patient outcomes); and increasing ownership transparency.
Private equity investment in health care has its proponents and detractors, with strongly held beliefs on both sides as to why their positions are “right.” The debate about private equity’s role in health care has intensified recently, as private equity investment in the global health care sector hit an all-time high in 2021 with a reported $200 billion in buyouts. Although this global figure included investments in the health care sector broadly (including, e.g., pharma, biotech, health care information technology, etc.), the largest portion of that investment has been in health care services in the U.S., including hospitals, nursing homes, and increasingly, physician practices.
On December 18, 2023, the FTC and DOJ released the final 2023 Merger Guidelines specifying the factors the agencies use in evaluating proposed mergers for compliance with federal antitrust laws. The guidelines are part of the Biden administration’s focus on improving competition as set out in the President’s July 2021 Executive Order.
The agencies said the final guidelines, which replace the prior vertical and horizontal guidelines, “reflect modern market realities, advances in economics and law, and the lived experiences of a diverse array of market participants.” According to the agencies, the draft guidelines issued in July 2023 drew more than 30,000 comments from a wide array of stakeholders including consumers, workers, academics, interest organizations, attorneys and enforcers.
Attorney General Merrick Garland said the final guidelines “provide transparency into how the Justice Department is protecting the American people from the ways in which unlawful, anticompetitive practices manifest themselves in our modern economy.” Echoing those sentiments, FTC Chair Lina Khan added that the merger guidelines “reflect the new realities of how firms do business in the modern economy and ensure fidelity to statutory text and precedent.”
The final guidelines mostly tracked the draft, with some differences, including 11 instead of 13 core “guidelines,” as follows:
- Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market.
- Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms.
- Mergers Can Violate the Law When They Increase the Risk of Coordination.
- Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market.
- Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete
- Mergers Can Violate the Law When They Entrench or Extend a Dominant Position.
- When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly.
- When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.
- When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform.
- When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers, or Other Providers.
- When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition.
In a December 18, 2023 post, U.S. Chamber of Commerce Senior Vice President for International Regulatory Affairs and Antitrust Sean Heather noted some minor improvements in the final guidelines, including less prescriptive language and “slightly soften[ing] their hostility to merger efficiencies.” But he contended that “on balance,” the guidelines ignore most of the group’s concerns and “retain the problems of the original draft.”
“[T]he final guidelines seek to rewrite decades of antitrust policy by declaring structural presumptions against mergers that increase market concentration and by downplaying the possibility of merger efficiencies,” Heather said.
The merger guidelines are not legally binding. But they offer a framework for the agencies’ enforcement decisions, which ultimately depend on the facts of a particular case and prosecutorial discretion. Please stay tuned for further developments.
How We Can Help
At the Law Office of Kevin O’Mahony, we have extensive experience and expertise representing physicians, healthcare providers and other professionals in connection with the purchase or sale of their practice or business. We are one of the few law firms in Suwanee and metro Atlanta focused exclusively on healthcare and business law. We are intimately familiar with the unique issues, regulations and laws that impact the healthcare industry.
Whether you are buying or selling a medical practice or healthcare business, we have the experience and expertise to help you structure these business transactions to ensure long-term value and success. We also advise clients regarding healthcare entity formation, provider contracts, employment and insurance issues, leases, and other business matters, including negotiation and preparation of the necessary documents. Please call or email us when you are ready to discuss your legal needs.