Kathryn Hickner, Esq.
Kohrman, Jackson & Krantz LLP, Cleveland, OH
If you are anticipating buying or selling a practice during the coming months, you are not alone. The healthcare industry is experiencing a wave of integration. In fact, it has been occurring for several years. Many transactional healthcare attorneys have negotiated and closed dozens of these transactions for clients. They have negotiated on behalf of the sellers in some cases and the buyers in others.
Even though mergers, acquisitions and divestures involving physician practices are commonplace, physicians involved with these potential transactions, including anesthesiologists, often have questions about the best way to proceed from a practical and strategic perspective. This article is intended to provide some answers. Here are five practical tips for physicians who are buying or selling a physician practice.
1. Clearly define, communicate and remember the underlying purpose of the transaction. In order for practice leaders to negotiate the deal and attorneys to structure the transaction in the best way possible, all need a clear vision of their side's ultimate business objective. Remembering the overarching business objective helps to keep discussions on track and to ensure that negotiators focus on what really matters instead of becoming distracted by less significant issues. This is often particularly important when a party is less sophisticated and unaccustomed to deciding what is or is not material from a business perspective. Staying focused on the business objective is also particularly important to help prevent decisions from becoming clouded by emotion or ego. For example, this can occur when a retiring physician is selling a practice that represents his entire career and personal identity.
There are many reasons why a party may desire to buy or sell a physician practice. Sometimes the sale of a practice is necessary because the physician owners are retiring or relocating. Other times the physician owners desire to integrate with another provider to position themselves for greater success in a challenging industry. Perhaps the selling physicians find operating an independent practice to be too burdensome from a financial perspective. Consider, for example, flat or declining reimbursement rates, challenges collecting accounts receivable from patients and payers, and rising expenses (e.g., those related to employee benefits, electronic health records, quality reporting, etc.).
Consider, too, that larger practices often have increased influence to negotiate more favorable rates with payers, to take advantage of economies of scale and to coordinate care in a manner that allows them to thrive under the changing healthcare reimbursement regime that increasingly rewards physicians for the value (i.e., the quality and efficiency) of care provided instead of the volume alone. Larger groups also often have expanded opportunities to benefit from ancillary service lines, such as imaging and laboratory services. Lastly, selling physicians sometimes perceive that practicing as an employee of a larger group practice will afford them greater work-life balance than they would have as a physician owner.
2. Select transaction participants wisely. Negotiating a successful physician practice transaction involves much more than beautifully drafted legal documents. From a business and practical perspective, it is imperative that the buyer and seller trust one another, have compatible cultures and share similar values. This is especially true in the case of an integration transaction in which physicians on both sides of the deal will continue to work together after the closing.
Most healthcare attorneys can share stories about deals that unwound as quickly as they came together because the parties were unable to get along. Integration transactions that devolve into business divorces are often a waste of substantial resources and become emotionally draining for all involved.
Accordingly, it is advisable for the parties to conduct not only regulatory and financial due diligence, but also reputational and cultural due diligence. In the interest of efficiency, such diligence should be conducted early in the process. There is no doubt that the acquiring entity should review and analyze contracts to be assumed, determine whether the physicians to be acquired have historically had an active and robust compliance program, and review an appropriate sample of patient charts and billing records before taking on potential Medicare, Medicaid or third-party payer overpayment liability.
However, it is also important for the parties to discuss their
respective expectations regarding autonomy, managerial control,
transparency and day-to-day operational issues. Both sides have a strong
interest in confirming that they can get along and that there are no
significant personality conflicts. For example, if one party is
accustomed to an autonomous, physician- led organization and the other
expects a greater level of administrative oversight and physician
conformity, they may not be compatible.
3. Identify a strong negotiating team. Members of the
negotiating team should understand the underlying purpose and related
business considerations, be responsive and nimble through the process
and be on the same page as the governing bodies that will ultimately
need to approve the transaction.
Specifically, they need to
understand any deal breakers in the minds of their group's leadership
with respect to key terms. For example, these deal breakers may relate
to the assets, contracts, real estate leases, equipment and provider
billing numbers to be transferred; the clinical and non-clinical
personnel who will be employed postclosing, as well as their
post-closing compensation structure and employee benefits; and whether
the involved physicians will be subject to restrictive covenants such as
non-competition or non-solicitation provisions.
It is incredibly
disappointing when the key negotiators complete the due diligence
process and finalize proposed documents with the other side only to have
their shareholders or directors withhold ultimate approval of the
transaction because of an unacceptable business term or degree of
financial or regulatory risk. Because identifying the other party to the
transaction, evaluating and comparing potential transactions and
explaining the key terms to the group's leadership requires a
substantial time commitment, many physician practices engage business
brokers to assist those leading the negotiations.
4. Include legal advisors during the initial stages of discussions.
Attorneys who are included at the outset of discussions regarding a
potential transaction are in the best position to mitigate associated
regulatory and legal risk and to ensure that the negotiations and the
transaction itself occur as efficiently as possible.
Because
financial relationships that are permissible in any other industry are
not permissible in healthcare, it is important to ensure that the
transaction and related relationships comply with applicable law (e.g.,
the federal Anti-Kickback Statute; the Stark Law; tax exempt, antitrust,
HIPAA and other laws; and state fraud and abuse, privacy, licensure,
corporate practice of medicine and other requirements. These laws often
require the sale or purchase of a physician practice to be structured in
a particular manner. Further, these laws also often require that
purchase price and compensation paid in connection with the transaction
be fair market value, as such term is defined under applicable
healthcare laws. Healthcare attorneys assist clients to understand what
the fair market value requirements mean in this context and to obtain
the opinion of a qualified, experienced, third-party healthcare
valuation consultant, when appropriate.
Attorneys further help
their clients to understand the optimal structure for the transaction
(e.g., merger, sale of assets, sale of equity, etc.) in order to achieve
the underlying business objectives and mitigate legal risk. Buyers
often desire to structure transactions as asset deals to mitigate the
potential successor liability that is otherwise present with an equity
deal. That being said, a sale of equity is sometimes desirable, for
example, in order to assume the hospital-based contracts, third-party
payer contracts or licenses, or other governmental approvals of the
entity to be acquired. In any of the structures, attorneys can assist
their clients to understand their options regarding the degree of
integration and autonomy among the participating parties.
It is
also often helpful for attorneys to prepare a Letter of Intent or
similar documents before preparing and negotiating the transaction
documents themselves. These documents typically include provisions that
protect the confidentiality of information shared during discussions,
prevent the parties from negotiating the same deal with more than one
other potential partner, set forth a timeline for conducting due
diligence and advancing the transaction, and include a clear statement
of certain key business terms. By doing so, the parties are better
protected during negotiations and able to confirm that they have a
common understanding of the most important business terms before
investing significant resources to prepare and negotiate transaction
documents.
5. Ensure that the written deal terms are clear, comprehensive and provide the desired degree of flexibility.
The parties to any integration transaction should ensure that all
important terms of the deal are clearly set forth in the written
transaction documents. A verbal promise made during negotiation of the
transaction is generally not legally enforceable. Anything that is
important should be in writing. It is also very difficult to enforce
contract terms that are overly complicated or unable to be implemented
from a practical perspective. For example, if an employment agreement
includes a significant bonus in the transaction, it should be clear to a
third party exactly how the bonus is calculated and when it must be
paid. Depending upon the circumstances, side letters and special deals
for one or more physicians can increase the risk of a post-closing
dispute about the terms that were intended or approved by the parties.
Also,
because integration transactions are sometimes unsuccessful, it is
often advisable for the transaction documents to address the terms upon
which an unwind transaction would occur. Sometimes selling parties
maintain flexibility by retaining their provider contracts, real estate,
equipment, patient records and assets, and lease them to the acquiring
practice upon closing so that the sellers may return to their practice
infrastructure in the event that their relationship with the buying
entity terminates.
Other times, the documents set forth the terms
upon which the buying entity will transfer such infrastructure back to
the selling practice upon termination of the integration. In contrast,
the buying party may have an interest in imposing a heavy exit penalty
upon any departing physician. Whether the selling practice is able to
negotiate favorable exit provisions often depends on the degree of
leverage that the selling party has during negotiations.