Healthcare M&A: Do’s and Don’ts of Buying or Selling a Medical Practice

As medical doctors near retirement, many begin to think about selling their practice. Physicians who have a better opportunity may need to sell their medical practice. Starting physicians or physicians who are looking to expand their current practice may look to purchase an existing practice. Selling or buying a medical practice can be a strong consideration if one of the doctors wants to move to a different state or location within a state.

An experienced healthcare medical purchase attorney is needed to review the major issues.  Some of the primary issues the healthcare lawyer will analyze are:

Understanding Corporate of Medicine Prohibitions

In California, a medical practice must be run by a medical corporation.

The Moscone-Knox Professional Corporation Act governs who can invest in and own the professional medical corporation and the limits that apply to non-medical practitioners. In general, there must be a clear dividing line between the clinical operation, the practice of medicine, and the administrative side which can include investors, managed service organizations, and other non-professional managers.

Medical corporations in California are also bound by:

• The Medical Practice Act, Business and Professions Code section 2052, which provides that the unauthorized practice of medicine is illegal.
• The California Business and Professions Code section 2400 which prohibits corporations and “other artificial entities: from having “professional rights, privileges, or powers.”

What is being sold?

There are two essential parts of any business – the assets and the liabilities. Sellers usually want to sell both parts. Buyers normally prefer to purchase just the assets and avoid the liabilities. What parts (assets and liabilities or just some of the assets are sold) depends, in part, on the business structure.

In states where a partnership can own a medical practice, the considerations for the sale or purchase begin with the partnership agreement. The written partnership contract usually controls:

• Who can sell the practice
• Who has the right to buy the practice
• The value of the seller’s interest in the medical practice
• Many other factors that are predetermined by the partnership agreement

In California, where the medical practice must be a medical corporation, the starting point is that the sale must be to licensed physicians and not private investors. In corporate practices, stock sales are used to sell the entire practice. Assets sales, as mentioned, are used to sell the customer accounts, medical equipment, buildings if owned by the corporation, and other assets.

There are tax considerations which both the seller and buyer need to consider for all types of sales especially corporate sales.

Determining the Value of The Practice

Unless the fair market value of the practice has been predetermined, such as is often the case in a partnership agreement, the practitioner(s) should consult with qualified appraisers who understand how to properly value a medical practice. The starting point, as with most businesses, is what comparable sales have taken place for a similar type of practice in the same geographical area.

Another way to value the medical practice is to detail the physical assets, the good will of the business, existing business relationships, existing patient list, intellectual property, liabilities, and many other factors such as what patients need to be told about the sale.

Due Diligence & Healthcare Compliance

Buyers need to work with experienced medical practice buy and sell lawyers to understand a full range of legal, financial, and practical issues that affect the sale. These issues, which require due diligence, include:

• Healthcare Compliance. The buyers of a medical practice need to know what healthcare laws regulations apply to their business. There are many federal and state laws that regulate how business referrals work, how bills can be submitted to private insurers and public health care programs, healthcare privacy laws such as HIPAA, and many other issues. A skilled healthcare lawyer explains the impact of Stark Law, the Anti-Kickback Statute, the False Claims Act, and other federal and state laws and regulations. The medical purchase healthcare lawyer will review with the seller and/or the seller’s attorney the seller’s current compliance plan, any current or likely compliance complaints, and other compliance red flags that need to be addressed. If the compliance issues aren’t addressed before the sale, the physicians who buy the practice may find that they are liable for any open compliance issues.
• Patient notification. There are specific rules that apply to sales such as how and when to notify patients about the sale. Patients should also be informed about their right to access and control their medical records in the event of a sale. Typically, an authorization that also meets HIPAA standards) is required to transfer medical records from one medical practice to another practice. Both the seller and buyer normally want the letter to comply with the legal requirements while also helping the patient to choose the new doctors over other doctors. This type of letter must be carefully drafted so as not to unduly pressure the patient.
• Medical records. Who owns the medical records after the sale and how long those records should be kept – should be part of the agreement of sale.
• Billing and coding. Due diligence requires an understanding how the medical practice enters its bills and billing codes and how those bills are submitted. Bills that are improperly submitted may result in a complaint that the medical practice is violating the federal False Claims Act or a state false claims law. The health care purchase attorney should also review which insurance carriers and medical programs the medical practice works with, how quickly and how much of the bills those insurance carriers and programs pay and any issues that have been raised in the past or currently regarding payment. If the medical practice changes ownership, then Medicare, Medicaid, and other payors will need to be properly notified of the change.
• License requirements. Due diligence requires reviewing the current medical licensure needs of the medical practice and the current status of those licenses.
• The financial records and tax statements – normally for the past three years. This includes any judgements, liens, or claims. It also includes withholding taxes that may be due, unpaid vacation pay, the status of any worker’s compensation and unemployment compensation accounts, business and medical insurance, and many other financial issues.
• Current working relationships. The working relationship with the staff such as nurses, technicians, receptionists, and others. Just as with patient records, there may be a legal duty (and often a practical requirement) that staff be properly informed of any sale. Employees and contractors should understand what to expect when the medical practice changes ownership hands.

There are many other due diligence matters an experienced health care buy and sell lawyer will review. These include:

• Any managed service organization agreements. There are corporate practice of medicine issues that should be examined – such as whether the MSO can act as a medical director. Generally, this is not allowed in California.
• All open contracts with administrators, supplies, vendors, and third-parties
• All open litigation the medical practice that is selling their business is involved with
• Any open lease or rental agreements
• All open contracts with employees and independent contractors

Not every contract is assignable. Experienced medical practice lawyers will review the existing contracts.

The Agreement of Sale

The buyer’s attorney will want the seller to warrant and represent many of the items that have been reviewed in the due diligence phase. These representations should be clear as to what the seller is agreeing to regarding the existing practice. The agreement should also clarify what the buyer’s rights and remedies are if the warranties and representations turn out to be false or deceitful.

The seller’s lawyer will likely want the buyer to make certain warranties and representations too. This can include that the buying physicians have the correct licenses for the state where the practice is located and that there are no current complaints pending or disciplinary action with the state and local medical boards.

The agreement of healthcare business or medical (or chiropractic or other clinical practice) sale will detail many basic issues starting with:

• Identifying what is being sold
• Identifying what isn’t being sold
• The professional and personal obligations of each party to the sale
• The terms of the sale. This includes the consideration and purchase price. It includes the time for the buyer to obtain financing or the terms of any payments if the seller is giving the buyer time to pay for the medical practice. The agreement of sale should make clear what happens if the buyer can’t get the necessary financing or defaults on any payments.
• The remedies on default including the right to demand arbitration

The healthcare practice or business buyer and seller in the healthcare M&A transaction also need to review, through their health care lawyers:

• Drug Enforcement Agency requirements. Normally, the DEA will not allow controlled substances to be sold with the practice. The seller should understand its duties regarding drugs in its possession when the practice is sold. The buyer normally needs to make new arrangements regarding the acquisition of new controlled medications.
• There should be an understanding as to any open insurance issues to cover medical malpractice claims, worker’s compensation claims, and other claims that may be filed after the sale date.
• The buyer will normally want the seller to list any liabilities and warrant their status and the status of any likely future claims.
• Non-compete clauses. Normally, the doctors who buy the medical practice don’t want the selling doctors to compete with them. These agreements should be in writing and clear as to their terms. Many states hesitate to strictly enforce restrictive non-compete agreements. Non-compete clauses should limit the duration of the clause and the geographical where the restrictions apply.
• Anti-Kickback & Fee-Splitting Issues. As mentioned in a discussion of the sale and purchase of urgent care centers:

“To help mitigate fee-splitting and anti-kickback issues, the MSO should be paid at fair market value (justified, documented). A flat fee should be paid for marketing services – i.e., no fees on a per-patient basis. This is sometimes trickier than it seems. Ventures come up with all sorts of “per ….” formulas, which is attractive financially but risky legally.”

Sellers normally want to review the buyer’s credit history if the seller is providing the financing or extending the financing of the purchase. This may include a security interest in the practice or in the assets of the buyer. The buyer may want to hold back some of the purchase price to cover any conditions that must be met to complete the sale – such as repairs or transfers of records (with patient consent).

The need to speak with an experienced medical practice purchase and sale lawyer begins well in advance of looking for a buyer. Skilled health care lawyers help prepare the buyer or seller by explaining and reviewing the following key legal issues:

• The corporate practice of medicine
• What due diligence is
• Health care compliance requirements
• How to determine the value of the medical practice
• Open contracts
• Employee and staff relations
• Patient lists and patient records
• Agreement of sale and related documents

With proper planning and analysis, sellers can get the right price for their practice, satisfy their legal requirements to their patients, and feel confident that the sale won’t have any after-shocks. Buyers, with the use of skilled lawyers, will be able to focus on their new medical practice while understanding their medical and legal obligations.

To speak with an experienced healthcare M&A lawyer who understands how to negotiate and plan for a sale or purchase of a medical practice or other healthcare business, contact Cohen Healthcare Law Group PC today by calling us or by using our online contact form.