Kathryn (Kate) Hickner
Lessons Learned: Five Tips for Buying or Selling a Practice
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.
- 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.
- 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.
- 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.
- 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.
- 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.