What to know when selling your practice to a hospital

A column examining the ins and outs of contract issues

By — Posted Dec. 6, 2010.

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Here we go again. The pendulum is swinging toward private practices selling to hospitals or affiliated foundations.

Several years ago, the phenomenon drove the market. Management companies and hospitals went on a frenzy and acquired practices at breakneck speed. Soon hospitals were dissatisfied, management companies went broke, and physician practices went private again.

This time around it may be different ... or not.

There is no doubt that the state of health care in this country is changing. Many physicians realize that to keep up with these changes, key business decisions are needed.

In fact, more physicians are entertaining the idea of selling their medical practices to hospitals or large health systems.

If you're considering such a deal, what is needed in the contract?

Let's look at one practice (with its name changed for confidentiality).

This year, ABC Medical Practice was approached by a local hospital interested in acquiring the midsize, single-specialty practice. The practice's owners were conflicted about whether they wanted to pursue this route. Although the physicians had enjoyed being their own bosses for the past decade, they expressed concern that the business of medicine had changed and that it had become increasingly expensive to practice medicine independently.

The owners wanted to grow their practice, but they had difficulty with recruitment. Furthermore, the practice had yet to adopt an electronic medical records system, 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 and work for it.

Basic questions

Whether you are selling your medical practice to other physicians, a multispecialty practice, a hospital or a heath system, the basics of the transaction are the same: Who is purchasing from whom? What is being purchased? When is the deal going to occur? How much will you receive?

Of equal importance is your compensation formula. When selling your medical practice to a hospital or health system, there are additional and unique deal points that need to be negotiated.

It is important to evaluate how your practice group will fit with the hospital's global plans. Before the hospital's acquisition of ABC Medical Practice, the hospital was not well-established in the practice's specialty. The hospital wanted to enhance its presence in that field and capture revenue associated with 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 outlining the hospital's marketing commitment to growing the practice and specific milestones for the hospital to reach.

Although the purchase price for the medical practice is of key importance, the postacquisition business arrangement with the hospital also should be negotiated and put down in writing. When a hospital buys a medical practice, it is acquiring not just the patient base and equipment but the physician talent as well.

In general, the hospital either will employ each physician directly or retain the collective services of the physicians through a professional services agreement.

If a professional services agreement is used, the doctors are not employed by the hospital but by a third-party entity that contracts with the hospital to provide professional services. In this scenario, the physicians probably will 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 typically are for a longer period of time. The professional services agreement often provides physicians with a voice in hospital decisions. The agreement should outline specific rights and powers the physicians have regarding post-acquisition decisions.

For example, if the hospital wishes to hire a new physician for the acquired practice group, the professional services agreement may provide the current physicians veto power over the retention.

What about an exit strategy?

If things are not working out with the hospital, do the contracts provide for an exit strategy? This inquiry should not go unanswered. Rather, it should be included in the purchase contract and postpurchase agreements (e.g., professional services agreement, employment agreement). The parties to the contract may negotiate a "mutual reverse" right whereby the parties 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.

Selling your medical practice to a hospital can be advantageous for all involved.

However, this type of sale is different, because you are not necessarily parting ways on the closing date. The contract terms governing the relationship after the 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 it suits your current and future career goals.

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