A Seller’s Market: How to prepare your practice for sale to a hospital

It’s 2011 and the pendulum is once again moving toward private practices selling to hospitals or affiliated foundations. Several years ago, the same phenomenon drove the medical market. Management companies and hospitals went on an acquisition frenzy, purchasing practices at breakneck speed. Soon, hospitals were dissatisfied, management companies went broke and physician practices went private again. Physicians simply proved to be less motivated and productive when employed by hospitals or affiliated with management companies.

This time the results may be different … or not.

A New Environment

There is no doubt that the state of health care in the U.S. is changing again. Many physicians are realizing that in order to keep up with these changes, key business decisions will need to be made in the near future. In fact, an increasing number of physicians are entertaining the idea of selling their medical practices to hospitals or large health systems.

Earlier this year, ABC Medical Practice (actual name withheld) was approached by a local hospital that was interested in acquiring the mid-sized otolaryngology practice. The practice’s owners were conflicted as to whether this was a route they wanted to pursue. While they had enjoyed the independence of being their own bosses for the past decade, they expressed concern that the business of medicine had changed, and it was becoming increasingly expensive to practice medicine independently. The owners also wanted to grow their practice but had had difficulty with recruitment. Furthermore, the practice had yet to adopt electronic medical records, and the owners feared the financial and logistical transition from paper to computer. Ultimately, the practice’s owners decided to sell to the interested hospital.

Whether you are selling your otolaryngology practice to other physicians, a multi-specialty practice or a hospital or a health system, the basics of the transaction are the same. These include information about the purchaser, the item being purchased, the timing of the deal and the payout. Of equal importance is the compensation formula you will need to work within the new system. When selling your practice to a hospital or health system, there are additional and unique deal points that must be negotiated.

The Bigger Picture

When considering the sale opportunity, it’s important to make an early evaluation of how your practice will fit in with the hospital’s global plans. Prior to its acquisition of ABC Medical Practice, the hospital was not well established in otolaryngology. The hospital’s primary interest in the practice was that it wanted to enhance its presence in that field of medicine and capture revenue associated with the ancillary services generated by the practice. To ABC Medical Practice, this meant that the hospital was committed to growing that practice area and would allocate resources to marketing and developing the newly acquired practice within the hospital’s community. Because this was important to ABC Medical Practice’s owners, I added provisions to the purchase agreement that outlined the hospital’s marketing commitment to growing the practice, along with specific milestones to be accomplished by the hospital.