• linkedin
  • Increase Font
  • Sharebar

    Practice acquisitions: What physicians need to know

    The decision to sell a practice is a major one, and physicians must consider many factors

     

    The last few years have witnessed a resurgence in the acquisition of physician practices by hospitals or the foundations associated with them. While some critics argue this long-term trend of practice acquisition may not be sustainable, it opens up a host of considerations for physicians.  

    Chief among them is what is driving the acquisition/consolidation trend for physician practices in the first place.

    While there are a litany of economic forces at work, cost efficiencies and an improved competitive postioning lead the list. Other trends influencing practice sales include healthcare reform that encourages the formation of accountable care organizations (ACOs) and the bundled payments accompanying them, larger physician networks, more complicated compliance of government mandates, and an increasing number of physician retirements and their desire to monetize the value of their practices.

    Questions for doctors

    When considering a sale to a hospital buyer, or any other buyer, there are several issues doctors need to consider. Foremost among them are:

    • What are the goals of the selling shareholders?
    • Are they ready to retire and thus bring in a younger generation of doctors?
    • Following the transaction, will they become employees of the buyer or enter into a professional service agreement with the buyer?
    • What are the goals of the buyer and seller following the acquisition?
    • What are the attitudes of the buyer with respect to practice governance, practice finances, and operational issues?
    • What are the legal implications?
    • How does the buyer view current physician leadership and how will those roles change in the future?
    • What are the tax implications of the purchase, or, how much will the selling shareholders actually realize after taxes?

    While it’s not necessary to have answers to all these questions before entering into discussions with a buyer, it is very important to have them answered as the parties get closer to completing a transaction.

     

    Before an offer

    Even before an offer is received or the decision is made to seek offers, there are several steps physicians can take to prepare the practice for sale. Having accurate and up- to-date financial records is a must. These records should include balance sheets and income statements for both the professional component of the practice and any related ancillary services, as well as detailed productivity reports by physician.

    Efforts should be made to “spruce up” the physical appearance of the practice. Worn carpets or waiting room furniture will not make a good first impression. It’s also helpful to know what attributes are important to buyers.

    In our experience representing buyers, the following qualities make a practice an attractive acquisition candidate:

    • The practice aligns with the strategic goals of the buyer with respect to specialty, market share, and how care is delivered;
    • the practice is experienced delivering managed care and effectively managing the risks associated with managed care;
    • the practice has a good compliance program in place and follows the program;
    • the practice’s financial information is well documented;
    • key practice leaders are willing to stay following the acquisition, or a succession plan is in place;
    • productivity is high across all providers;
    • an established non-physician provider program (physician assistants or nurse practitioners) is in place;
    • when applicable, the practice has a history of providing profitable ancillary services;
    • the practice has good payer contracts; and
    • the practice has successfully installed and implemented an electronic health records system that is compatible with, or can be converted to, the buyer’s system

    While it is not necessary for a practice to exhibit all of the above characteristics, the more that are present the more likely it is that a buyer will be interested in acquiring the practice.

    Most transactions follow a similar path that begins when the idea of an acquisition is first raised. If initial discussions indicate a willingness to proceed, the parties sign a non-disclosure and/or confidentiality agreement. Under the terms of such an agreement, the parties agree not to reveal information received to any other party not involved in the transaction. After this agreement is executed a practice valuation is commissioned.

    Practice valuation

    There are several ways methods for carrying out a practice appraisal. The practice can decide to retain the appraiser. Under this scenario, it would also be advisable to discuss internally and with the appraiser steps for improving the operations and profitability of the practice.

    A second approach is for the buyer to retain and pay the appraiser. For most practices this is the most desirable approach, because it can save the practice a significant amount of  money.

    However, some practices with which we have worked express a concern over the objectivity of the appraiser when the buyer is paying. While this is a legitimate concern,  the healthcare appraisal community is aware of the possibility of a conflict of interest and makes a special effort to maintain objectivity.

    A third approach is for the buyer and the seller to retain the appraiser jointly and to split the fees. Under this scenario, the parties need to be aware that the total cost may be higher because of the need to fully explain all that is being done to both parties. Another consideration is that one party or the other may require an unequal amount of time and thus splitting the total fee may not be entirely fair.

    A final way to approach the valuation is for the buyer and the seller each to retain an appraiser. After both appraisers have completed their valuations, they meet to discuss the results and to reconcile any differences in value. This approach is always the most expensive, but it eliminates any concern the parties may have about the objectivity of the appraisal.

     

    Due diligence phase

    Following the completion of the valuation and assuming that the appraised value is acceptable to both buyer and seller, the due diligence process begins.

    Other than the information-gathering process for the valuation, this phase can be the most time-consuming for the physicians and staff. The physicians need to continue providing quality care, so the best approach is to appoint a practice team responsible for  gathering and compiling the relevant information. During this phase the buyer and the seller will confirm the financial information that was provided during the appraisal process.

    When the due diligence phase is complete, the buyer usually issues a non-binding letter of intent (LOI). The LOI generally spells out the price to be paid, the approximate timing of the transaction, any conditions precedent to closing, and addresses in broad terms how the transaction will proceed.

    surviving the due diligence phase

     

    The closing process

    Following the signing of the LOI by both parties, the buyer’s attorneys will draft the documents that will finalize the transaction.

    In most cases, there will be an asset or stock purchase agreement (depending on what is actually being purchased), a merger agreement that will spell out any post-closing adjustments, post-transaction employment agreements, lease transfer agreements, financing agreements (if applicable), and all other legal paperwork necessary to document the transaction. The review of these documents by the sellers’ attorneys is very important. Each side usually retains and bears the cost for their own attorneys. 

    After these documents have been approved, the transaction generally proceeds to closing rather quickly. If either side requires board approval, the necessary votes are taken, documents are signed, third-party assignments (if required) are obtained, and the transaction closes.

    After the closing, all post-closing adjustments are made, usually within 90 days. These adjustments can include but are not limited to the dollar amount of working capital to be transferred as part of the transaction, transfer of inventories and/or supplies, transfer of paid time off  balances, the final number of physicians accepting post-transaction employment, and settlement of any taxes due.

    Life after acquisition

    The final phase of a physician practice acquisition is integrating the newly-acquired practice into the hospital system.

    Consideration needs to be given not only to the physicians, but to the other employees of the practice. As employees of an independent practice, the employees likely had a certain amount of freedom and control over the work environment. This is equally true of the doctors. Consideration needs to be given as to how governance will work post-transaction.

    Both the buyer and the newly-acquired practice need to remain flexible to ensure a smooth transition and a successful, efficient combination. Both parties need to understand the expectations and attitudes of the other. This is best accomplished through regular communication and working to establish a culture of trust and cooperation.

    0 Comments

    You must be signed in to leave a comment. Registering is fast and free!

    All comments must follow the ModernMedicine Network community rules and terms of use, and will be moderated. ModernMedicine reserves the right to use the comments we receive, in whole or in part,in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.

    • No comments available

    Latest Tweets Follow

    Poll