Do your due diligence if considering selling to a hospital

July 5, 2012

Considering selling your practice to a hospital? Learn the typical steps to the process and the questions you'll want to ask before signing away your independence.

Las Vegas-The economics associated with the office-based practice of medicine aren’t what they used to be. Reimbursements are declining, overhead costs are increasing, and practices are facing competition from hospitals.

“Doctors are scared. They’re not sure what to do,” says Reed Tinsley, CPA, of Houston, Texas, who spoke at a recent gathering of the National Society of Certified Healthcare Business Consultants (NSCHBC).

As a result, many physicians are considering selling their practices to hospitals. Healthcare systems negatively affected in a similar trend that occurred in the 1990s, Tinsley says, are now tying productivity targets and other measures to their base salary promises.

If you are considering selling your practice to a hospital, Tinsley says the typical process works like this:

  • The parties involved in the potential transaction sign a confidentiality agreement.

  • The medical practice is valued.

  • The parties conduct due diligence.

  • The parties sign a non-binding letter of intent.

  • Draft documents are prepared.

  • The hospital board approves the purchase.

  • The parties sign transaction documents.

  • Third-party assignments and consents are obtained.

  • Physician medical staff and payers are credentialed (if they aren’t already).

  • The agreement is implemented.

 

At the due diligence stage, doctors should ask themselves the following questions, Tinsley says:

  • What would stay the same with our office, and what would not?

  • Who would handle the billing and credentialing under the new arrangement?

  • What are the termination-related clauses in the agreement? What is our guarantee period? This is the hardest thing to negotiate,”Tinsley says.

  • What would be the cost of malpractice tail insurance? How is payment going to occur, and what are the cash flow consequences? For instance, if the hospital were to add payment for the coverage to the physician’s bonus, then he or she would have to pay taxes on it.

  • What is the employment agreement length and compensation? Work relative value units (RVUs) and total RVUs? Professional services versus ancillary services? Now that the hospital will be billing for professional services instead of the physician billing for ancillary services, can the doctor get a piece of the pie?

  • What is the potential effect on referral patterns? This question applies mainly to specialists, Tinsley says.

  • How can I get the practice back if the arrangement doesn’t work out? What are the details of doing so? Do I have to buy back the practice? What happens to the employees my practice had when the hospital purchased the practice? Can I get them back? Is there a non-compete clause in the agreement? Negotiate that if the hospital terminates your employment voluntarily, then the non-complete clause becomes null and void, Tinsley recommends.

  • What are the potential effects on my practice’s employees in regard to hospital human resources policies, the compensation structure, spousal employment, their control over being moved to a different location, etc.?

  • What would happen to our office lease and lease hold improvements? Will the hospital assume these? How do I get my name off the lease? Is the lease transferrable? What are the tax issues related to the capital lease of fixed assets? What happens when the lease expires? Could I be moved to a different location that is less convenient for me? What happens if I own the building?

  • What assets would the hospital purchase, and what are the related tax consequences?

  • What can the hospital do for me that I can’t do for myself?

 

“You’re about to lose 100% of your independence. Is it going to be worth it?” Tinsley says. “I always ask doctors: What are you getting out of this?”

Tinsley says that a practice sale may make sense for some physicians, including those who have been practicing for a long time and who don’t have strategies to transition to retirement. Other doctors may find mergers with other practices beneficial. Still others may decide to remain owners, at least for now.

Medical Economics moderated a panel discussion at the recent NSCHBC meeting. Look for coverage of the event in an upcoming issue.

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