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.

Employment

While the purchase price for a medical practice is of key importance, a post-acquisition business arrangement with the hospital should also be negotiated and memorialized in writing. When a hospital purchases a medical practice, it is acquiring not just the patient base and equipment but the talent as well. In general, the hospital will either directly employ each physician via employment agreement or retain the collective services of the physicians using a professional services agreement. If a professional services agreement is utilized, the physicians are employed not by the hospital but rather by a third-party entity that contracts with the hospital to provide the professional services. In this scenario, the physicians will likely have an employment agreement with the third-party entity. Many physicians prefer the professional services agreement model because it allows them to negotiate collectively for beneficial contract terms. Additionally, professional service agreements are typically negotiated for a longer period of time. A professional services agreement often provides the physicians with a voice in hospital decisions. The agreement should also outline specific rights and powers the physicians have with regard to post-acquisition decisions. If the hospital wishes to hire a new physician for the acquired practice group, for example, the professional services agreement may give the current physicians veto power over the retention.

A Way Out

The purchase contract and post-purchase agreements, such as the professional services agreement or employment agreement, should include an exit strategy that will protect you if things don’t work out as planned. The parties to the contract may negotiate a “mutual reverse” right, whereby they can reverse the transaction to the pre-purchase status quo if the parties no longer find the arrangement desirable or fail to meet certain milestones.

Think Ahead

Selling your practice to a hospital can be advantageous for all parties involved. This type of sale is different from most, however, because you are not necessarily parting ways on the closing date. The contract terms governing the relationship post-sale are of equal or greater importance to the terms governing the sale of the practice. If you are considering embarking on this journey, be sure that it suits your current and future career goals.

Steven M. Harris, Esq., is a nationally recognized health care attorney and a member of the law firm McDonald Hopkins, LLC. He may be reached at sharris@mcdonaldhopkins.com.