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.
At the Law Office of Kevin O’Mahony, we have extensive experience and expertise representing physicians, health care 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 Johns Creek 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