Examine the pros and cons of a buyout offer

February 25, 2013

Have you had a buy-out offer from a health system? Here are some questions that you need to consider before signing on the dotted line.

Q: I’m a solo family practitioner, and I’m considering a buy-out offer from our local health system. What questions should I ask before deciding whether to take it?

A: If you’re like most independent practitioners, your reasons for selling to a hospital are a combination of 1) you hope that doing so will protect your current income, 2) you’re tired of dealing with the business aspects of medicine, and 3) you think that healthcare reform will put bigger institutions in control, so you’re better off joining them.

You also should ask why the hospital wants you. Many hospitals are looking to expand in their marketplaces and secure their referral bases. Determine whether you could potentially benefit more than one hospital, because doing so will improve your negotiating position. Other questions to ask:

What happens to your practice’s goodwill? Most medical practices have three types of assets: their accounts receivable; their furniture, fixtures, and equipment; and their goodwill, which is the practice’s value above the value of the other two categories.

Depending on your competition and your practice’s finances, goodwill might be your practice’s biggest asset. Most hospitals, however, do not purchase goodwill from primary care physicians. Instead, they allow doctors to keep their practices’ accounts receivables, and they either purchase or lease the furniture, fixtures, and equipment. At that point they effectively own the practice, including your goodwill. This leaves the question of whether your compensation with the hospital justifies the transfer of your goodwill.

How will you be compensated? The most common hospital compensation arrangements for formerly independent physicians are based on net profits of the site, work relative value units (RVUs) generated, or a combination of the two. If you are going to be paid based on the net profits of the site, then you are retaining the risk of collections and expenses and need to ask yourself whether you would be better off remaining solo.

Compensation based on RVUs means getting paid for what you do regardless of collections or expenses.  Many physicians prefer this method.

How long is your contract? Most hospital employment contracts range between 3 and 5 years, with some as long as 7 years. Most physicians usually benefit from longer contracts.

What are your working conditions? Make sure that your contract includes the facilities you will be working in, the equipment you will have access to, and your support staff. Also be sure that your contract specifies call frequency.

To whom will you report? As large institutions, hospitals usually have multiple management layers. You will want to know in advance who will be making the staffing, equipment, and scheduling decisions in your office.

What benefits will you receive? Be sure that health insurance, retirement plan contributions, and paid time off are specified in your contract, and that they at least match what you had as an independent practitioner.

How can you be fired? Most agreements have two types of termination: termination with cause (normally immediate) and termination without cause (normally 90 to 180 days). Try to limit termination with cause to very narrow issues, such as loss of license or loss of malpractice insurance.

What do you get when you leave? Many hospitals will not initially offer severance pay upon termination, but it is often possible to negotiate for some  severance when you depart as long as you don’t compete.

What restrictions will you face after leaving? Most agreements will contain one of two forms of restrictive covenant. One form restricts you from working for a competing hospital system on termination of your agreement. The other restricts you from practicing medicine in your geographic area, even in private practice. Your preference should be for no restrictive covenant, and if you can’t obtain that, settle for the restriction from working for a competing hospital while being allowed to return to private practice.

A buy-out is a major career decision, so take the time to think it through and gather as much information as you can. That way you can decide whether you’ll be happier accepting the offer or remaining independent. 

The answer to our reader’s question was provided by Michael J. Wiley, CHBC,  a certified healthcare business consultant in Bay Shore, New York, and a Medical Economics editorial consultant.Let’s hear from you! Send your financial questions to medec@advanstar.com.Also engage at: www.twitter.com/MedEconomics and

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